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| CYN > SEC Filings for CYN > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-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 June 30, 2012 from
June 30, March 31, June 30, March 31, June 30,
(in thousands, except per share amounts) 2012 2012 2011 2012 2011
(Unaudited) (Unaudited) (Unaudited)
For The Quarter
Net income attributable to City National
Corporation $ 54,758 $ 46,265 $ 47,471 18 % 15 %
Net income per share, basic 1.02 0.86 0.89 19 15
Net income per share, diluted 1.01 0.86 0.88 17 15
Dividends per share 0.25 0.25 0.20 - 25
At Quarter End
Assets $ 24,801,973 $ 24,038,489 $ 22,526,089 3 10
Securities 8,028,695 7,917,912 6,473,884 1 24
Loans and leases, excluding covered
loans 13,507,209 12,747,902 11,663,123 6 16
Covered loans (1) 1,260,135 1,397,156 1,724,634 (10 ) (27 )
Deposits 21,109,052 20,787,737 19,265,120 2 10
Shareholders' equity 2,255,365 2,199,565 2,058,921 3 10
Total equity 2,255,365 2,199,565 2,084,010 3 8
Book value per share 42.70 41.77 39.24 2 9
Average Balances
Assets $ 24,362,546 $ 23,644,899 $ 22,009,749 3 11
Securities 7,755,330 7,929,312 6,224,348 (2 ) 25
Loans and leases, excluding covered
loans 13,125,867 12,432,292 11,515,989 6 14
Covered loans (1) 1,341,041 1,438,714 1,770,377 (7 ) (24 )
Deposits 20,948,246 20,217,395 18,784,448 4 12
Shareholders' equity 2,234,411 2,168,748 2,028,357 3 10
Total equity 2,234,411 2,168,748 2,053,447 3 9
Selected Ratios
Return on average assets (annualized) 0.90 % 0.79 % 0.87 % 14 3
Return on average shareholders' equity
(annualized) 9.86 8.58 9.39 15 5
Corporation's tier 1 leverage 6.74 6.98 7.09 (3 ) (5 )
Corporation's tier 1 risk-based capital 9.58 10.20 10.66 (6 ) (10 )
Corporation's total risk-based capital 12.91 12.71 13.34 2 (3 )
Period-end shareholders' equity to
period-end assets 9.09 9.15 9.14 (1 ) (1 )
Period-end equity to period-end assets 9.09 9.15 9.25 (1 ) (2 )
Dividend payout ratio, per share 24.57 28.91 22.40 (15 ) 10
Net interest margin 3.91 3.74 3.85 5 2
Expense to revenue ratio (2) 63.28 67.27 66.24 (6 ) (4 )
Asset Quality Ratios (3)
Nonaccrual loans to total loans and
leases 0.73 % 0.88 % 1.14 % (17 ) (36 )
Nonaccrual loans and OREO to total loans
and leases and OREO 0.98 1.11 1.54 (12 ) (36 )
Allowance for loan and lease losses to
total loans and leases 2.00 2.09 2.28 (4 ) (12 )
Allowance for loan and lease losses to
nonaccrual loans 273.21 235.87 200.25 16 36
Net recoveries to average total loans
and leases (annualized) 0.08 0.15 0.15 (47 ) (47 )
At Quarter End
Assets under management (4) $ 32,105,076 $ 32,535,021 $ 36,407,304 (1 ) (12 )
Assets under management or
administration (4) 57,984,361 57,837,897 58,502,035 0 (1 )
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(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 $18.39 billion, $18.48 billion and $19.54 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of June 30, 2012, March 31, 2012 and June 30, 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. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.
RECENT DEVELOPMENTS
On April 30, 2012, the Company acquired First American Equipment Finance ("FAEF"), a privately owned, full-service mid-ticket equipment leasing company. Headquartered in Rochester, New York, FAEF 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. The acquisition significantly expands the Company's equipment leasing and finance capabilities and provides a platform for future growth. FAEF operates as a wholly owned subsidiary of the Bank. Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $343.0 million in assets and assumed $325.0 million in liabilities. The Company acquired lease receivables with a fair value of $318.3 million and assumed borrowings and nonrecourse debt with a fair value of $320.9 million.
On June 20, 2012, the Bank completed an offering of $150.0 million of 10-year subordinated debt securities with a fixed interest rate of 5.375 percent. The Company will use the proceeds for general corporate purposes.
On July 2, 2012, the Company acquired Rochdale Investment Management ("Rochdale"), a New York City-based investment firm that manages $4.89 billion of assets for affluent and high-net-worth clients and their financial advisors across the nation. Rochdale will combine with City National Asset Management to become City National Rochdale Investments, a registered investment advisor which will operate as a wholly owned subsidiary of the Bank. It will offer a wide array of equity, fixed income and non-traditional investment alternatives. The Company expects the integration of the two firms to be completed early next year.
HIGHLIGHTS
† For the quarter ended June 30, 2012, consolidated net income attributable to City National Corporation was $54.8 million, or $1.01 per diluted share, compared to $47.5 million, or $0.88 per diluted share, for the year-earlier quarter. During the six month period ended June 30, 2012, consolidated net income attributable to City National Corporation was $101.0 million, or $1.87 per diluted share, compared to $87.2 million, or $1.62 per diluted share, for the year-earlier period. The growth in net income was 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. The increase in net interest income, combined with lower noninterest expense, was partially offset by lower noninterest income. Earnings for the second quarter of 2012 also included a net income statement impact of $5.9 million from the recovery of a previously charged-off loan and $2.8 million of transaction costs related to the acquisitions of Rochdale and FAEF.
† Revenue, which consists of net interest income and noninterest income, was $291.2 million for the second quarter of 2012, up 5 percent from $276.4 million in the first quarter of 2012 and 3 percent from $282.8 million in the year-earlier quarter.
† Fully taxable-equivalent net interest income, including dividend income, amounted to $221.4 million for the second quarter of 2012, up 8 percent from the first quarter of 2012 and 13 percent from the year-earlier period.
† The Company's net interest margin in the second quarter of 2012 was 3.91 percent, up from 3.74 percent in the first quarter of 2012 and 3.85 percent in the second quarter of 2011.
† Noninterest income was $74.8 million for the second quarter of 2012, down 1 percent from the first quarter of 2012 and 19 percent from the year-earlier quarter. The year-over-year decrease was due largely to lower net gains on both the sale of covered OREO and transfer of covered loans to OREO. Noninterest income for the second quarter of 2011 also included an $8.2 million gain from an FDIC-assisted acquisition.
† Noninterest expense for the second quarter of 2012 was $194.5 million, down 3 percent from the first quarter of 2012 and 8 percent from the year-earlier quarter. The year-over-year decline was due largely to lower OREO expenses and FDIC assessments. Legal and professional fees were also down due to the reimbursement of legal expenses related to a recovery of a previously charged-off loan. This decline was partly offset by transaction costs related to the acquisition of Rochdale and FAEF.
† The Company's effective tax rate was 33.1 percent for the second quarter of 2012 compared with 31.8 percent for the first quarter of 2012 and 29.8 percent from the year-earlier period.
† Total assets were $24.80 billion at June 30, 2012, up 3 percent from $24.04 billion at March 31, 2012 and 10 percent from $22.53 billion at June 30, 2011. Total average assets were $24.36 billion for the second quarter of 2012, compared to $23.64 billion for the first quarter of 2012 and $22.01 billion for the second quarter of 2011.
† Loans and leases, excluding covered loans, were $13.51 billion at June 30, 2012, an increase of 6 percent from March 31, 2012 and 16 percent from June 30, 2011. Average loans for the second quarter of 2012, excluding covered loans, were $13.13 billion, up 6 percent from the first quarter of 2012 and 14 percent from the same period of last year. Average commercial loan balances grew 10 percent from the first quarter of 2012 and 25 percent from the year-earlier period.
† Excluding covered loans, results for the second quarter of 2012 included a $1.0 million provision for loan and lease losses. The Company recorded no provision in the first quarter of 2012 and second quarter of 2011. The allowance for loan and lease losses on non-covered loans was $269.5 million at June 30, 2012, compared with $266.1 million at March 31, 2012 and $265.9 million at June 30, 2011. The Company remains adequately reserved at 2.00 percent of total loans and leases, excluding covered loans, at June 30, 2012, compared with 2.09 percent at March 31, 2012 and 2.28 percent at June 30, 2011.
† In the second quarter of 2012, net loan recoveries totaled $2.7 million, or 0.08 percent of average total loans and leases, excluding covered loans, on an annualized basis, compared with net recoveries of $4.5 million, or 0.15 percent, for the first quarter of 2012, and net recoveries of $4.2 million, or 0.15 percent, in the year-earlier quarter. Nonaccrual loans, excluding covered loans, totaled $98.7 million at June 30, 2012, down from $112.8 million at March 31, 2012 and $132.8 million at June 30, 2011. At June 30, 2012, nonperforming assets, excluding covered assets, were $133.3 million, down from $141.9 million at March 31, 2012 and $180.4 million at June 30, 2011.
† Average securities for the second quarter of 2012 totaled $7.76 billion, down 2 percent from the first quarter of 2012, but up 25 percent from the second quarter of 2011, as deposit growth outpaced loan growth.
† Period-end deposits at June 30, 2012 were $21.11 billion, up 2 percent from $20.79 billion at March 31, 2012 and 10 percent from $19.27 billion at June 30, 2011. Average deposit balances for the second quarter of 2012 grew to $20.95 billion, up 4 percent from $20.22 billion for the first quarter of 2012 and 12 percent from $18.78 billion for the second quarter of 2011. Average core deposits, which equal 97 percent of total deposit balances, were up 4 percent from the first quarter of 2012 and 13 percent from the second quarter of 2011.
† The Company's ratio of Tier 1 common shareholders' equity to risk-based assets was 9.6 percent at June 30, 2012 compared with 10.2 percent at March 31, 2012 and 10.5 percent at June 30, 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 throughout 2012, as loans and deposits continue to increase and credit quality remains stable. This outlook reflects management's expectations for modest economic growth, and low interest rates for the remainder of the year. Management also anticipates modest loan loss provisions driven primarily by loan growth.
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 and six months ended June 30, 2012 and 2011:
Net Interest Income Summary
For the three months ended For the three months ended
June 30, 2012 June 30, 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 $ 5,844,586 $ 60,333 4.15 % $ 4,693,254 $ 49,411 4.22 %
Commercial real estate
mortgages 2,294,830 26,801 4.70 1,903,480 26,909 5.67
Residential mortgages 3,815,144 40,812 4.28 3,663,003 43,805 4.78
Real estate construction 310,631 3,331 4.31 395,227 5,030 5.10
Equity lines of credit 731,105 6,417 3.53 729,885 6,540 3.59
Installment 129,571 1,559 4.84 131,140 1,597 4.88
Total loans and leases,
excluding covered loans (3) 13,125,867 139,253 4.27 11,515,989 133,292 4.64
Covered loans 1,341,041 48,648 14.51 1,770,377 38,527 8.70
Total loans and leases 14,466,908 187,901 5.22 13,286,366 171,819 5.19
Due from banks -
interest-bearing 293,272 173 0.24 526,405 407 0.31
Federal funds sold and
securities purchased under
resale agreements 136,773 96 0.28 142,398 98 0.28
Securities 7,755,330 45,927 2.37 6,224,348 41,386 2.66
Other interest-earning assets 116,861 694 2.39 134,840 703 2.09
Total interest-earning assets 22,769,144 234,791 4.15 20,314,357 214,413 4.23
Allowance for loan and lease
losses (331,090 ) (343,581 )
Cash and due from banks 148,106 184,218
Other non-earning assets 1,776,386 1,854,755
Total assets $ 24,362,546 $ 22,009,749
Liabilities and Equity
Interest-bearing deposits
Interest checking accounts $ 1,890,174 $ 456 0.10 $ 1,706,556 $ 743 0.17
Money market accounts 5,855,607 1,876 0.13 6,682,870 7,175 0.43
Savings deposits 360,222 127 0.14 327,363 263 0.32
Time deposits - under
$100,000 228,172 285 0.50 307,938 376 0.49
Time deposits - $100,000 and
over 733,029 822 0.45 833,070 1,459 0.70
Total interest-bearing
deposits 9,067,204 3,566 0.16 9,857,797 10,016 0.41
Federal funds purchased and
securities sold under
repurchase agreements 3,511 1 0.11 10,528 2 0.07
Other borrowings 797,321 9,843 4.97 854,777 9,291 4.36
Total interest-bearing
liabilities 9,868,036 13,410 0.55 10,723,102 19,309 0.72
Noninterest-bearing deposits 11,881,042 8,926,651
Other liabilities 379,057 306,549
Total equity 2,234,411 2,053,447
Total liabilities and equity $ 24,362,546 $ 22,009,749
Net interest spread 3.60 % 3.51 %
Fully taxable-equivalent net
interest and dividend income $ 221,381 $ 195,104
Net interest margin 3.91 % 3.85 %
Less: Dividend income
included in other income 694 703
Fully taxable-equivalent net
interest income $ 220,687 $ 194,401
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(2) Net interest income is presented on a fully taxable-equivalent basis.
(3) Includes average nonaccrual loans of $107,713 and $143,881 for 2012 and 2011, respectively.
(4) Loan income includes loan fees of $7,252 and $6,410 for 2012 and 2011, respectively.
Net Interest Income Summary
For the six months ended For the six months ended
June 30, 2012 June 30, 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
. . .
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