City National Corp.’s shares slid 5.7% in the trading session on Jan 24, following the company’s fourth-quarter 2013 earnings release after the close of trading on Jan 23. Adjusted earnings per share of $1.00 lagged the Zacks Consensus Estimate of $1.06. However, the reported figure was above 87 cents earned in the prior-year quarter.
For 2013, the company reported earnings of $3.99, which exceeded the Zacks Consensus Estimate of $3.94. Further, results compared favorably with the prior-year figure of $3.87.
Lower-than-expected results primarily resulted from a decline in revenues. However, a decline in expenses and significantly improved credit quality were positives for the quarter.
Including net securities losses in the said quarter, net income available to common shareholders was $52.7 million, up 12% from $47.2 million in the year-ago quarter.
For 2013, net income was $230.0 million, rising 11% from $208.0 million in 2012.
Performance in Detail
City National’s total revenue was $309.3 million, down 3% from the prior-year quarter. Revenues surpassed the Zacks Consensus Estimate of $306.0 million.
For 2013, total revenue was $1.2 billion, down 0.7% year over year. Additionally, revenues were in line with the Zacks Consensus Estimate.
Net interest income, on a fully taxable-equivalent basis, was $211.2 million, up 1% from the prior-year quarter. Net interest income for the quarter included $13.7 million from FDIC-covered loans that were repaid or charged off, compared with $17.5 million in the fourth quarter of 2012. Additionally, net interest margin fell 33 basis points (bps) year over year to 2.97%.
Non-interest income was $90.5 million, down 9% from the year-ago quarter. The decline was due to higher FDIC loss-sharing expense, which was partly offset by rise in wealth management fee income. Non-interest income for the quarter included a net loss on securities, compared with a marginal net gain in the fourth quarter of 2012.
However, non-interest expense was $219.0 million, down 1% on a year-over-year basis.
City National’s credit quality considerably improved in the quarter. Net recoveries were reported at $14.7 million or 0.35% of total loans and leases on an annualized basis, compared with $2.0 million or 0.06% in the prior-year quarter.
As of Dec 31, 2013, the company’s allowance for loan and lease losses amounted to $302.6 million or 1.76% of total loans and leases, compared with $277.9 million or 1.88% as of Dec 31, 2012.
Nonperforming assets were $81.3 million or 0.47% of the company's total loans and leases as well as other real estate owned (OREO), compared with $120.8 million or 0.81% as of Dec 31, 2012.
Provision for credit losses was nil in the reported quarter compared with $7 million in the year-ago quarter.
Loans and Deposits
City National witnessed growth in its loan portfolio in the reported quarter. Loans and leases, excluding covered loans, were $16.8 billion, up 20% year over year.
Average deposits for the quarter climbed 11% year over year to $25.9 billion. Moreover, core deposits rose 12% year over year to $25.4 billion.
City National’s Tier 1 common shareholders' equity ratio was 8.8% as of Dec 31, 2013, compared with 8.5% as of Dec 31, 2012. Under Basel III rules, City National’s estimated Tier 1 common equity ratio was 8.5%.
Total risk-based capital and Tier 1 risk-based capital ratios as of Dec 31, 2013, were 12.5% and 9.4% respectively, as against 12.4% and 9.1% as of Dec 31, 2012.
Tier 1 leverage ratio was 7.2% versus 6.6% in the year-ago quarter.
Along with the earnings release, City National’s board of directors increased the company’s quarterly common share dividend by 32% to $0.33 per share. The dividend will be paid on Feb 19, 2014 to shareholders of record on Feb 5, 2014.
Management expects modest net income growth in 2014, even as low short-term interest rates continue to weigh on the company’s net interest margin. The company anticipates continued solid growth in loans, deposits, and wealth management assets. While rising loan balances will likely require some loan-loss provisions, credit quality is expected to be stable. This outlook reflects management’s expectations for continued moderate U.S. economic growth in 2014.
Performance of Other Banks
Even though City National lagged expectations, other West banks like Umpqua Holdings Corp. (UMPQ - Snapshot Report) , Webster Financial Corp. (WBS - Snapshot Report) and SVB Financial Group (SIVB - Analyst Report) reported fourth quarter and full-year earnings, which beat the Zacks Consensus Estimate.
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 prevalent low interest rate environment, sluggish economic growth and regulatory pressure are concerns.
Currently, City National has a Zacks Rank #3 (Hold).