City National Corp. reported first-quarter 2013 earnings of 90 cents per share, marginally lagging the Zacks Consensus Estimate of 92 cents. However, earnings compared favorably with the prior-quarter earnings of 86 cents.
City National’s lower-than-expected results were primarily attributable to rising expenses on the back of Rochdale Investment Management and First American acquisitions. However, increased revenues and a strong balance sheet were the positives in the quarter.
Net income came in at $51.5 million, up 11% from $46.3 million in the year-ago quarter.
Performance in Detail
City National’s total revenue was $309.3 million, up 7% from the prior-year quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $300.0 million.
Net interest income, on a fully taxable-equivalent basis, remained almost unchanged compared with the year-ago quarter at $206.3 million. First-quarter net interest income included $15.6 million from the FDIC-covered loans that were repaid or charged off during the quarter compared with $15.7 million in the year-ago quarter. However, net interest margin dropped 53 basis points from the last-year quarter to 3.21%.
Non-interest income stood at $93.5 million, surging 24% from the prior-year quarter. The rise was attributable to the acquisitions of Rochdale Investment Management and First American in 2012, and higher cash management income.
Non-interest expense was $211.3 million, 5% higher than $200.7 million in the prior-year quarter. The rise was a result of higher salaries and employee benefits expenses and FDIC assessments, partially mitigated by lower other real estate owned (OREO) expenses, legal and professional fees and other expenses. Excluding the costs associated with Rochdale Investment Management and First American acquisitions, non-interest expense fell 2% from the prior-year quarter.
City National’s credit quality continued to improve. Net recoveries were reported at $4.8 million or 0.13% of total loans and leases on an annualized basis compared with $4.5 million or 0.15% in the prior-year quarter.
As of Mar 31, 2013, the company’s allowance for loan and lease losses totaled $282.3 million, or 1.86% of total loans and leases compared with $266.1 million, or 2.09% as of Mar 31, 2012.
Non-performing assets were $103.1 million or 0.68% of the company's total loans and leases and OREO compared with $141.9 million or 1.11% as of Mar 31, 2012.
Non-accrual loans were $83.3 million compared with $112.8 million as of Mar 31, 2012.
Loans and Deposits
City National witnessed a surge in its loan portfolio in the reported quarter. Loans and leases, excluding covered loans, were $14.8 billion, up 19% year over year.
Average deposits for the quarter climbed 11% year over year to $22.4 billion. Moreover, core deposits jumped 12% year over year to $21.8 billion.
City National’s Tier 1 common shareholders' equity ratio stood at 8.7% compared with 10.2% as of Mar 31, 2012. The decline from the prior-year quarter was attributable to both asset growth and acquisitions of Rochdale Investment Management and First American Equipment Finance.
Total risk-based capital and Tier 1 risk-based capital ratios as of Mar 31, 2013 were 12.72% and 9.64%, respectively, compared with 12.71% and 10.20% as of Mar 31, 2012.
Tier 1 leverage ratio was 6.72% versus 6.98% 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 very flat yield curve. Loan and deposit balances are anticipated to increase, and credit quality will likely remain healthy, but the rising loan balances may require a somewhat higher loan-loss provision. This outlook reflects management's expectations for the continuation of moderate economic growth through 2013.
We believe that City National remains well positioned for loan and deposit growth given its well diversified portfolio. We also expect strong organic growth, especially from new clients, to drive income growth in the near future.
However, the prevailing low interest rate environment, sluggish economic growth and stringent regulatory pressures are major areas of concern.
City National currently retains a Zacks Rank #3 (Hold). Other banking stocks in the West that are performing better than City National are BofI Holding, Inc. (BOFI - Snapshot Report), CU Bancorp (CUNB - Snapshot Report) and BBCN Bancorp, Inc. (BBCN - Snapshot Report), each carrying a Zacks Rank #2 (Buy).