DBRS: City National’s 1Q14 Balance Sheet Fundamentals Remain Strong; Earnings Down Modestly QoQ

Summary:
• The Company reported net income attributable to City National of $54.5 million, down 1% from 4Q13 reflecting the impact of its covered loan portfolio.
• Average loan growth (excluding FDIC-covered loans) remains strong, primarily driven by commercial and industrial loans.
• DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) views City National Corporation’s (City National or the Company) 1Q14 results as solid, as the Company continues to deliver strong average loan growth, and is managing its expense base well even while investing for growth. Moreover, during the quarter, the balance sheet remained very liquid, capital metrics improved, and City National continues to experience net recoveries, all of which help support the rating. Excluding securities gains and losses, as well as the impact of the covered loan portfolio, adjusted pre-tax earnings were modestly higher driven by lower expenses. Overall, the Company’s net income attributable to City National was down modestly at $54.5 million.

Net interest income declined 2% sequentially despite average loan growth and net interest margin (NIM) expansion of five basis points to 3.02%. During the quarter, average loans increased, excluding FDIC-covered loans, increased a strong 3% primarily driven by commercial and industrial lending, and to a lesser extent, commercial real estate and residential mortgage growth. Management noted that they expect loan growth to more than offset modest NIM pressure in 2014 resulting in higher net interest income. Meanwhile, adjusting for the impact of covered loans and securities gains/losses, noninterest income declined by 1% sequentially, despite very solid trust and investment management fee growth.

Noninterest expenses declined 2% sequentially even with seasonally higher employer taxes, primarily reflecting lower legal and professional fees. Management reiterated their expectations for noninterest expenses to grow around 3% in 2014, but the Company would not miss chances to hire key talent, if opportunities arise.

City National’s balance sheet remains strong with declines in nonperforming assets, continued recoveries, robust core deposit funding, and sound capital, all of which support the rating. The Company estimated that its Basel III Tier 1 common equity ratio was 8.6% at quarter-end and is fully compliant with all Basel III capital requirements.

DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.