City National Corp. reported second-quarter 2013 earnings of $1.04 per share, beating the Zacks Consensus Estimate of 96 cents. Moreover, this compared favorably with $1.01 earned in the prior-year quarter.
Better-than-expected results were primarily attributable to a rise in non-interest income. However, a decline in revenues due to reduced net interest income and rising expenses was a negative.
Net income came in at $59.7 million, up 9% from $54.8 million in the year-ago quarter.
Performance in Detail
City National’s total revenue was $285 million, down 2% from the prior-year quarter. Moreover, it lagged the Zacks Consensus Estimate of $298.0 million.
Net interest income, on a fully taxable-equivalent basis, was $208.4 million, down 6% from the prior-year quarter. Second-quarter net interest income included $15.9 million from FDIC-covered loans that were repaid or charged off during the quarter. This compares unfavorably with $27.4 million in the second quarter of 2012. Additionally, net interest margin fell 67 basis points (bps) from the prior-year quarter to 3.24%.
Non-interest income was $82.2 million, surging 10% from the prior-year quarter. The increase was mainly due to City National’s acquisition of Rochdale.
Non-interest expense was $211.4 million, 9% higher from the prior-year quarter. Excluding the acquisitions of Rochdale and First American Equipment Finance, non-interest expense was up 2% year over year.
City National’s credit quality continued to improve. Net recoveries were reported at $7.5 million or 0.20% of total loans and leases on an annualized basis, compared with $2.7 million or 0.08% in the prior-year quarter.
As of Jun 30, 2013, the company’s allowance for loan and lease losses totaled $289.9 million, or 1.83% of total loans and leases compared with $269.5 million, or 2.00% as of Jun 30, 2012.
Nonperforming assets were $96.3 million or 0.61% of the company's total loans and leases and other real estate owned (OREO), compared with $133.3 million or 0.98% as of Jun 30, 2012.
Non-accrual loans were $76.7 million, compared with $98.7 million as of Jun 30, 2012.
Loans and Deposits
City National witnessed a surge in its loan portfolio in the reported quarter. Loans and leases, excluding covered loans, were $15.4 billion, up 18% year over year.
Average deposits for the quarter climbed 10% year over year to $23.1 billion. Moreover, core deposits jumped 11% year over year to $22.4 billion.
City National’s Tier 1 common shareholders' equity ratio was 8.8% as of Jun 30, 2013, compared with 9.6% as of Jun 30, 2012. The decline was due to growth in assets and the acquisition of Rochdale.
Total risk-based capital and Tier 1 risk-based capital ratios as of Jun 30, 2013, were 12.9% and 9.6%, respectively.
Tier 1 leverage ratio was 7.00% versus 6.74% in the year-ago quarter.
Management expects net income to grow moderately in 2013. However, the company’s net interest margin will be under pressure due to low interest rates and a relatively flat yield curve. Loan and deposit balances will likely increase, while credit quality is expected to remain healthy. However, rising loan balances may require a somewhat higher loan-loss provision. This outlook indicates management's expectations of a continued economic growth through 2013.
We believe that City National remains well poised for loan and deposit growth, given its well-diversified portfolio. We also expect strong organic growth, especially from new clients, to drive income in the near future.
However, the prevailing low interest rate environment, sluggish economic growth and stringent regulatory pressures are matters of concern.
City National currently carries a Zacks Rank #3 (Hold). Among other banking stocks in the West, Bridge Capital Holdings is expected to announce its earnings on Jul 25, while Zions Bancorp. (ZION - Analyst Report) and Wilshire Bancorp Inc. (WIBC - Snapshot Report) will report on Jul 22.