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| CYN > SEC Filings for CYN > Form 10-Q on 9-May-2012 | All Recent SEC Filings |
9-May-2012
Quarterly Report
We have made forward-looking statements in this document about the Company, for which the Company claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.
A number of factors, many of which are beyond the Company's ability to control
or predict, could cause future results to differ materially from those
contemplated by such forward looking statements. These factors include (1)
changes in general economic, political, or industry conditions and the related
credit and market conditions and the impact they have on the Company and its
customers, (2) the impact on financial markets and the economy of the level of
U.S. and European debt, (3) changes in the pace of economic recovery and related
changes in employment levels, (4) the effect of the enactment of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 and the new rules and
regulations to be promulgated by supervisory and oversight agencies implementing
the new legislation, taking into account that the precise timing, extent and
nature of such rules and regulations and the impact on the Company is uncertain,
(5) significant changes in applicable laws and regulations, including those
concerning taxes, banking and securities, (6) volatility in the municipal bond
market, (7) changes in the level of nonperforming assets, charge-offs, other
real estate owned and provision expense, (8) incorrect assumptions in the value
of the loans acquired in FDIC-assisted acquisitions resulting in greater than
anticipated losses in the acquired loan portfolios exceeding the losses covered
by the loss-sharing agreements with the FDIC, (9) the effects of and changes in
trade and monetary and fiscal policies and laws, including the interest rate
policies of the Federal Reserve Board, (10) changes in inflation, interest
rates, and market liquidity which may impact interest margins and impact funding
sources, (11) adequacy of the Company's enterprise risk management framework,
(12) the Company's ability to increase market share and control expenses, (13)
the Company's ability to attract new employees and retain and motivate existing
employees, (14) increased competition in the Company's markets, (15) changes in
the financial performance and/or condition of the Company's borrowers, including
adverse impact on loan utilization rates, delinquencies, defaults and customers'
ability to meet certain credit obligations, changes in customers' suppliers, and
other counterparties' performance and creditworthiness, (16) a substantial and
permanent loss of either client accounts and/or assets under management at the
Company's investment advisory affiliates or its wealth management division, (17)
changes in consumer spending, borrowing and savings habits, (18) soundness of
other financial institutions which could adversely affect the Company, (19)
protracted labor disputes in the Company's markets, (20) earthquake, fire or
other natural disasters affecting the condition of real estate collateral, (21)
the effect of acquisitions and integration of acquired businesses and de novo
branching efforts, (22) the impact of changes in regulatory, judicial or
legislative tax treatment of business transactions, (23) changes in accounting
policies or procedures as may be required by the Financial Accounting Standards
Board or regulatory agencies, (24) security breaches and disruptions to the
Company's information systems, and (25) the success of the Company at managing
the risks involved in the foregoing.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the statements are made, or to update earnings guidance, including the factors that influence earnings.
For a more complete discussion of these risks and uncertainties, see the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and particularly, Item 1A, titled "Risk Factors."
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
Percent change
At or for the three months ended March 31, 2012 from
March 31, December 31, March 31, December 31, March 31,
(in thousands, except per share amounts) 2012 2011 2011 2011 2011
(Unaudited) (Unaudited) (Unaudited)
For The Quarter
Net income attributable to City National
Corporation $ 46,265 $ 43,860 $ 39,692 5 % 17 %
Net income per share, basic 0.86 0.82 0.75 5 15
Net income per share, diluted 0.86 0.82 0.74 5 16
Dividends per share 0.25 0.20 0.20 25 25
At Quarter End
Assets $ 24,038,489 $ 23,666,291 $ 21,635,932 2 11
Securities 7,917,912 8,101,556 5,930,677 (2 ) 34
Loans and leases, excluding covered
loans 12,747,902 12,309,385 11,269,684 4 13
Covered loans (1) 1,397,156 1,481,854 1,766,085 (6 ) (21 )
Deposits 20,787,737 20,387,582 18,477,939 2 13
Shareholders' equity 2,199,565 2,144,849 1,985,538 3 11
Total equity 2,199,565 2,144,849 2,010,627 3 9
Book value per share 41.77 40.86 37.86 2 10
Average Balances
Assets $ 23,644,899 $ 23,694,160 $ 21,377,904 (0 ) 11
Securities 7,929,312 7,641,512 5,693,322 4 39
Loans and leases, excluding covered
loans 12,432,292 12,213,429 11,255,887 2 10
Covered loans (1) 1,438,714 1,554,223 1,810,986 (7 ) (21 )
Deposits 20,217,395 20,500,138 18,183,568 (1 ) 11
Shareholders' equity 2,168,748 2,136,215 1,972,896 2 10
Total equity 2,168,748 2,136,215 1,998,006 2 9
Selected Ratios
Return on average assets (annualized) 0.79 % 0.73 % 0.75 % 8 5
Return on average shareholders' equity
(annualized) 8.58 8.15 8.16 5 5
Corporation's tier 1 leverage 6.98 6.77 7.09 3 (2 )
Corporation's tier 1 risk-based capital 10.20 10.26 10.91 (1 ) (7 )
Corporation's total risk-based capital 12.71 12.83 13.68 (1 ) (7 )
Period-end shareholders' equity to
period-end assets 9.15 9.06 9.18 1 (0 )
Period-end equity to period-end assets 9.15 9.06 9.29 1 (2 )
Dividend payout ratio, per share 28.91 24.25 26.65 19 8
Net interest margin 3.74 3.70 3.84 1 (3 )
Expense to revenue ratio (2) 67.27 62.73 65.62 7 3
Asset Quality Ratios (3)
Nonaccrual loans to total loans and
leases 0.88 % 0.91 % 1.40 % (3 ) (37 )
Nonaccrual loans and OREO to total loans
and leases and OREO 1.11 1.16 1.89 (4 ) (41 )
Allowance for loan and lease losses to
total loans and leases 2.09 2.13 2.34 (2 ) (11 )
Allowance for loan and lease losses to
nonaccrual loans 235.87 234.37 167.32 1 41
Net recoveries/(charge-offs) to average
total loans and leases (annualized) 0.15 (0.18 ) 0.24 NM (38 )
At Quarter End
Assets under management (4) $ 32,535,021 $ 31,326,318 $ 37,852,450 4 (14 )
Assets under management or
administration (4) 57,837,897 54,492,355 60,113,143 6 (4 )
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(1) Covered loans represent acquired loans that are covered under loss-sharing agreements with the Federal Deposit Insurance Corporation ("FDIC").
(2) The expense to revenue ratio is defined as noninterest expense excluding other real estate owned ("OREO") expense divided by total revenue (net interest income on a fully taxable-equivalent basis and noninterest income).
(3) Excludes covered assets, which consist of acquired loans and OREO that are covered under loss-sharing agreements with the FDIC.
(4) Excludes $18.48 billion, $15.95 billion and $20.43 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of March 31, 2012, December 31, 2011 and March 31, 2011, respectively.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles. The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified 11 policies as being critical because they require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, contingent assets and liabilities, and revenues and expenses included in the consolidated financial statements. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Circumstances and events that differ significantly from those underlying the Company's estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.
The Company's critical accounting policies include those that address accounting for business combinations, financial assets and liabilities reported at fair value, securities, acquired impaired loans, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, OREO, goodwill and other intangible assets, noncontrolling interest, share-based compensation plans, income taxes, and derivatives and hedging activities. The Company has not made any significant changes in its critical accounting policies or its estimates and assumptions from those disclosed in its 2011 Annual Report. Mangement has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.
RECENT DEVELOPMENTS
On April 25, 2012, the Company entered into a definitive agreement to acquire Rochdale Investment Management ("Rochdale"), a $4.8 billion New York City-based investment firm that manages assets for affluent and high-net-worth clients and their financial advisors across the nation. Rochdale will be combined with City National Asset Management to create an investment management firm called City National Rochdale Investment Management. It will offer a wide array of equity, fixed income and non-traditional investment alternatives. The new firm, a wholly owned subsidiary of the Bank, will operate separately as a registered investment advisor within the Bank's wealth management group. The acquisition is expected to close in the second quarter of 2012.
On April 30, 2012, the Company acquired First American Equipment Finance, a privately owned, full-service mid-ticket equipment leasing company. Headquartered in Rochester, New York, First American Equipment Finance leases technology and office equipment nationwide. Its clients include educational institutions, hospitals and health systems, large law firms, insurance underwriters, enterprise businesses, professional service businesses and nonprofit organizations. First American Equipment Finance will operate as a wholly owned subsidiary of the Bank.
HIGHLIGHTS
† For the quarter ended March 31, 2012, consolidated net income attributable to City National Corporation was $46.3 million, or $0.86 per diluted share, compared to $39.7 million, or $0.74 per diluted share, for the year-earlier quarter. The growth in net income is primarily attributable to an increase in net interest income as a result of higher interest income from securities and covered loans and lower interest expense on deposits.
† Revenue, which consists of net interest income and noninterest income, was $276.4 million for the first quarter of 2012, down 4 percent from $288.0 million in the fourth quarter of 2011, but up slightly from $275.2 million in the year-earlier quarter.
† Fully taxable-equivalent net interest income, including dividend income, amounted to $205.4 million for the first quarter of 2012, up 11 percent from the year earlier period but virtually unchanged from the fourth quarter of 2011.
† The Company's net interest margin in the first quarter of 2012 was 3.74 percent, up from 3.70 percent in the fourth quarter of 2011 and down from 3.84 percent in the first quarter of 2011.
† Noninterest income was $75.7 million for the first quarter of 2012, down 12 percent from the fourth quarter of 2011 and 19 percent from the year-earlier quarter. The decrease from the prior quarters was due largely to lower net FDIC loss sharing income and lower gains on transfers of covered loans to OREO.
† Noninterest expense for the first quarter of 2012 was $200.7 million, up 1 percent from the fourth quarter of 2011 and 2 percent from the first quarter of 2011. The increases were due primarily to higher compensation costs and legal and professional services fees, which were offset in part by lower OREO expenses.
† The Company's effective tax rate was 31.8 percent for the first quarter of 2012 compared with 33.9 percent for the fourth quarter of 2011 and 30.5 percent from the year-earlier period.
† Total assets were $24.04 billion at March 31, 2012, up 2 percent from $23.67 billion at December 31, 2011 and 11 percent from $21.64 billion at March 31, 2011. Total average assets was $23.64 billion for the first quarter of 2012, compared to $23.69 billion for the fourth quarter of 2011 and $21.38 billion for the first quarter of 2011.
† Loans and leases, excluding covered loans, were $12.75 billion at March 31, 2012, an increase of 4 percent from December 31, 2011 and 13 percent from March 31, 2011. Average loans for the first quarter of 2012, excluding covered loans, were $12.43 billion, up 2 percent from the fourth quarter of 2011 and 10 percent from the first quarter of last year. Average commercial loan balances grew 2 percent from the fourth quarter of 2011 and 20 percent from the year-earlier period.
† Excluding covered loans, results for the first quarter of 2012 included no provision for loan and lease losses. The Company recorded no provision in the first quarter of 2011 and a $5.0 million provision in the fourth quarter of last year. The allowance for loan and lease losses on non-covered loans was $266.1 million at March 31, 2012, compared with $262.6 million at December 31, 2011 and $263.4 million at March 31, 2011. The Company remains adequately reserved at 2.09 percent of total loans and leases, excluding covered loans, at March 31, 2012, compared with 2.13 percent at December 31, 2011 and 2.34 percent at March 31, 2011.
† In the first quarter of 2012, net loan recoveries totaled $4.5 million, or 0.15 percent of average total loans and leases, excluding covered loans, on an annualized basis. The Company realized net charge-offs of $5.5 million, or 0.18 percent, in the fourth quarter of 2011 and net recoveries of $6.5 million, or 0.24 percent, in the year-earlier quarter. Nonaccrual loans, excluding covered loans, totaled $112.8 million at March 31, 2012, up slightly from $112.0 million at December 31, 2011 and down from $157.4 million at March 31, 2011. At March 31, 2012, nonperforming assets, excluding covered assets, were $141.9 million, down from $142.8 million at December 31, 2011 and $213.7 million at March 31, 2011.
† Average securities for the first quarter of 2012 totaled $7.93 billion, up 4 percent from the fourth quarter of 2011 and 39 percent from the first quarter of 2011, as deposit growth continued to outpace loan growth.
† Period-end deposits at March 31, 2012 grew to $20.79 billion, up 2 percent from $20.39 billion at December 31, 2011 and 13 percent from $18.48 billion at March 31, 2011. Average deposit balances for the first quarter of 2012 were $20.22 billion, down 1 percent from $20.50 billion for the fourth quarter of 2011 and up 11 percent from $18.18 billion for the first quarter of 2011. Average core deposits decreased 1 percent from the fourth quarter of 2011 and increased 12 percent from the first quarter of 2011. Core deposits account for 97 percent of average deposit balances.
† The Company's ratio of Tier 1 common shareholders' equity to risk-based assets was 10.2 percent at March 31, 2012 compared with 10.2 percent at December 31, 2011 and 10.7 percent at March 31, 2011. Refer to the "Capital" section of Management's Discussion and Analysis for further discussion of this non-GAAP measure.
OUTLOOK
The Company's management continues to anticipate net income growth in 2012, as loans and deposits continue to increase and credit quality improves. Although the company recorded no provision in the first quarter, management still expects to record loan-loss provisions during the remainder of the year. This outlook reflects management's expectations for moderate economic growth in 2012 and continued low interest rates for the remainder of the year.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. The following tables present the components of net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2012 and 2011:
Net Interest Income Summary
For the three months ended For the three months ended
March 31, 2012 March 31, 2011
Interest Average Interest Average
Average income/ interest Average income/ interest
(in thousands) (1) balance expense (2)(4) rate balance expense (2)(4) rate
Assets
Interest-earning assets
Loans and leases
Commercial $ 5,318,652 $ 52,071 3.94 % $ 4,437,164 $ 46,998 4.30 %
Commercial real estate
mortgages 2,165,931 26,234 4.87 1,924,463 26,367 5.56
Residential mortgages 3,777,660 41,148 4.36 3,562,525 42,875 4.81
Real estate construction 313,681 4,159 5.33 448,089 5,034 4.56
Equity lines of credit 726,964 6,463 3.58 733,128 6,460 3.57
Installment 129,404 1,580 4.91 150,518 1,786 4.81
Total loans and leases,
excluding covered loans
(3) 12,432,292 131,655 4.26 11,255,887 129,520 4.67
Covered loans 1,438,714 38,224 10.63 1,810,986 35,240 7.78
Total loans and leases 13,871,006 169,879 4.93 13,066,873 164,760 5.11
Due from banks -
interest-bearing 167,145 93 0.22 490,352 297 0.25
Federal funds sold and
securities purchased
under resale agreements 14,544 10 0.28 231,399 154 0.27
Securities 7,929,312 47,585 2.40 5,693,322 39,154 2.75
Other interest-earning
assets 120,688 690 2.30 138,972 700 2.04
Total interest-earning
assets 22,102,695 218,257 3.97 19,620,918 205,065 4.24
Allowance for loan and
lease losses (334,846 ) (328,838 )
Cash and due from banks 141,435 201,040
Other non-earning assets 1,735,615 1,884,784
Total assets $ 23,644,899 $ 21,377,904
Liabilities and Equity
Interest-bearing deposits
Interest checking
accounts $ 1,952,181 $ 525 0.11 $ 1,771,724 $ 813 0.19
Money market accounts 6,017,601 2,202 0.15 6,452,245 7,153 0.45
Savings deposits 358,094 127 0.14 302,995 257 0.34
Time deposits - under
$100,000 242,232 296 0.49 325,421 450 0.56
Time deposits - $100,000
and over 696,653 883 0.51 822,464 1,517 0.75
Total interest-bearing
deposits 9,266,761 4,033 0.18 9,674,849 10,190 0.43
Federal funds purchased
and securities sold under
repurchase agreements 166,359 31 0.08 - - 0.00
Other borrowings 696,617 8,815 5.09 858,550 9,330 4.41
Total interest-bearing
liabilities 10,129,737 12,879 0.51 10,533,399 19,520 0.75
Noninterest-bearing
deposits 10,950,634 8,508,719
Other liabilities 395,780 337,780
Total equity 2,168,748 1,998,006
Total liabilities and
equity $ 23,644,899 $ 21,377,904
Net interest spread 3.46 % 3.49 %
Fully taxable-equivalent
net interest and dividend
income $ 205,378 $ 185,545
Net interest margin 3.74 % 3.84 %
Less: Dividend income
included in other income 690 700
Fully taxable-equivalent
net interest income $ 204,688 $ 184,845
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(2) Net interest income is presented on a fully taxable-equivalent basis.
(3) Includes average nonaccrual loans of $114,688 and $171,229 for 2012 and 2011, respectively.
(4) Loan income includes loan fees of $5,039 and $4,241 for 2012 and 2011, respectively.
Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume), and mix of interest-earning assets and interest-bearing liabilities. The following table provides a breakdown of the changes in net interest income on a fully taxable-equivalent basis and dividend income due to volume and rate between the first quarter of 2012 and 2011. The impact of interest rate swaps, which affect interest income on loans and leases and interest expense on deposits and borrowings, is included in rate changes.
Changes In Net Interest Income
For the three months ended March 31, For the three months ended March 31,
2012 vs 2011 2011 vs 2010
Increase (decrease) Net Increase (decrease) Net
due to increase due to increase
(in thousands) (1) Volume Rate (decrease) Volume Rate (decrease)
Interest earned on:
Total loans and leases
(2) $ 10,850 $ (5,731 ) $ 5,119 $ (8,716 ) $ 2,746 $ (5,970 )
Securities 13,859 (5,428 ) 8,431 12,001 (6,486 ) 5,515
Due from banks -
interest-bearing (179 ) (25 ) (204 ) 184 (233 ) (49 )
Federal funds sold and
. . .
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