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| CYN > SEC Filings for CYN > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-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, including changes in consumer spending, borrowing and savings
habits; (2) the impact on financial markets and the economy of the level of U.S.
and European debt; (3) the effects of and changes in trade and monetary and
fiscal policies and laws, including the interest rate policies of the Board of
Governors of the Federal Reserve System; (4) continued delay in the pace of
economic recovery and continued stagnant or decreasing employment levels,
including the potential adverse impact on the economy generally of the pending
combination of expiring tax cuts and mandatory reductions in federal spending at
the end of 2012, referred to as the "Fiscal Cliff"; (5) the effect of the
enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 and the 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; (6) the impact of revised capital
requirements under Basel III; (7) significant changes in applicable laws and
regulations, including those concerning taxes, banking and securities;
(8) volatility in the municipal bond market; (9) changes in the level of
nonperforming assets, charge-offs, other real estate owned and provision
expense; (10) 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; (11) changes in inflation, interest rates, and market
liquidity which may impact interest margins and impact funding sources; (12)
adequacy of the Company's enterprise risk management framework; (13) the
Company's ability to attract new employees and retain and motivate existing
employees; (14) increased competition in the Company's markets and our ability
to increase market share and control expenses; (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)
soundness of other financial institutions which could adversely affect the
Company; (18) protracted labor disputes in the Company's markets; (19) the
impact of natural disasters, terrorist activities or international hostilities
on the operations of our business or the value of collateral; (20) the effect of
acquisitions and integration of acquired businesses and de novo branching
efforts; (21) changes in accounting policies or procedures as may be required by
the Financial Accounting Standards Board or regulatory agencies; (22) the impact
of cyber security attacks or other disruptions to the Company's information
systems and any resulting compromise of data or disruptions in service; and (23)
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," as updated in our subsequently filed Quarterly Reports on Form 10-Q.
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
Percent change
At or for the three months ended September 30, 2012 from
September 30, June 30, September 30, June 30, September 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 $ 59,780 $ 54,758 $ 41,398 9 % 44 %
Net income per share, basic 1.10 1.02 0.78 8 41
Net income per share, diluted 1.10 1.01 0.77 9 43
Dividends per share 0.25 0.25 0.20 - 25
At Quarter End
Assets $ 26,251,528 $ 24,801,973 $ 23,104,260 6 14
Securities 9,110,974 8,028,695 7,278,995 13 25
Loans and leases, excluding covered loans 13,724,651 13,507,209 12,164,209 2 13
Covered loans (1) 1,144,337 1,260,135 1,611,856 (9 ) (29 )
Deposits 22,512,316 21,109,052 19,909,081 7 13
Shareholders' equity 2,330,324 2,255,365 2,120,465 3 10
Book value per share 43.81 42.70 40.40 3 8
Average Balances
Assets $ 25,654,594 $ 24,362,546 $ 22,998,562 5 12
Securities 8,631,430 7,755,330 6,954,084 11 24
Loans and leases, excluding covered loans 13,587,508 13,125,867 11,796,644 4 15
Covered loans (1) 1,207,031 1,341,041 1,664,349 (10 ) (27 )
Deposits 21,940,820 20,948,246 19,724,598 5 11
Shareholders' equity 2,296,755 2,234,411 2,093,428 3 10
Total equity 2,296,755 2,234,411 2,117,249 3 8
Selected Ratios
Return on average assets (annualized) 0.93 % 0.90 % 0.71 % 3 31
Return on average shareholders' equity
(annualized) 10.35 9.86 7.85 5 32
Corporation's tier 1 leverage 6.29 6.74 6.82 (7 ) (8 )
Corporation's tier 1 risk-based capital 9.15 9.58 10.28 (4 ) (11 )
Corporation's total risk-based capital 12.42 12.91 12.88 (4 ) (4 )
Period-end shareholders' equity to
period-end assets 8.88 9.09 9.18 (2 ) (3 )
Dividend payout ratio, per share 22.63 24.57 25.70 (8 ) (12 )
Net interest margin 3.58 3.91 3.79 (8 ) (6 )
Expense to revenue ratio (2) 61.96 63.28 67.68 (2 ) (8 )
Asset Quality Ratios (3)
Nonaccrual loans to total loans and
leases 0.75 % 0.73 % 1.20 % 3 (38 )
Nonaccrual loans and OREO to total loans
and leases and OREO 0.95 0.98 1.56 (3 ) (39 )
Allowance for loan and lease losses to
total loans and leases 1.96 2.00 2.16 (2 ) (9 )
Allowance for loan and lease losses to
nonaccrual loans 259.38 273.21 180.21 (5 ) 44
Net (charge-offs) recoveries to average
total loans and leases (annualized) (0.06 ) 0.08 (0.36 ) (175 ) (83 )
At Quarter End
Assets under management (4) $ 38,043,068 $ 32,105,076 $ 33,590,547 18 13
Assets under management or administration
(4) (5) 56,671,844 50,040,119 48,507,432 13 17
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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 $19.81 billion, $18.39 billion and $16.09 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of September 30, 2012, June 30, 2012 and September 30, 2011, respectively.
(5) Assets under administration have been revised to exclude the Company's investments that are held in custody and serviced by the Company's wealth management business. Prior period balances have been reclassified to conform to current period presentation.
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 July 2, 2012, the Company acquired Rochdale Investment Management, LLC and associated entities (collectively, "Rochdale"), a New York City-based investment firm that manages assets for affluent and high-net-worth clients and their financial advisors across the nation. Rochdale had approximately $4.89 billion of assets under management at the date of acquisition.
On November 5, 2012, the Corporation announced the public offering of $175 million (excluding over-allotment shares) in 5.50 percent Non-Cumulative Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), which qualifies as Tier 1 capital. The Corporation offered 7 million depositary shares at a price of $25 per share, each representing a 1/40th interest in a share of Series C Preferred Stock. Net proceeds from the offering will be used for general corporate purposes, including debt repayment. The offering is expected to close on or about November 13, 2012, subject to customary closing conditions.
HIGHLIGHTS
† For the quarter ended September 30, 2012, consolidated net income attributable to City National Corporation ("CNC") was $59.8 million, or $1.10 per diluted share, compared to $41.4 million, or $0.77 per diluted share, for the year-earlier quarter. During the nine month period ended September 30, 2012, consolidated net income attributable to CNC was $160.8 million, or $2.97 per diluted share, compared to $128.6 million, or $2.39 per diluted share, for the year-earlier period. The growth in net income during the three months and nine months ended September 30, 2012 was primarily attributable to an increase in net interest income as a result of higher interest income from securities and loans and lower interest expense on deposits. The increase in net interest income, combined with lower provision for losses on non-covered loans, was partially offset by higher provision for losses on covered loans. Net income during the third quarter of 2012 also increased as a result of higher noninterest income. Third quarter 2012 earnings included pretax gains of $4.8 million related to investments and $1.8 million of income, net of expense, from FDIC-covered assets, excluding the base yield. Base yield is the yield on covered assets, excluding income related to covered loans that are repaid or charged off.
† Revenue, which consists of net interest income and noninterest income, was $317.2 million for the third quarter of 2012, up 9 percent from $291.2 million in the second quarter of 2012 and 18 percent from $269.0 million in the year-earlier quarter.
† Fully taxable-equivalent net interest income, including dividend income, amounted to $214.8 million for the third quarter of 2012, down 3 percent from the second quarter of 2012 and up 6 percent from the year-earlier period.
† The Company's net interest margin in the third quarter of 2012 was 3.58 percent, down from 3.91 percent in the second quarter of 2012 and 3.79 percent in the third quarter of 2011.
† Noninterest income was $107.3 million for the third quarter of 2012, up 43 percent from the second quarter of 2012 and 54 percent from the year-earlier quarter. The increases were due to the acquisition of Rochdale and FAEF, higher FDIC loss sharing income and net gains of $4.8 million from private equity and other alternative investments.
† Noninterest expense for the third quarter of 2012 was $207.9 million, up 7 percent from the second quarter of 2012 and 5 percent from the year-earlier quarter. The increases were due largely to the acquisitions of Rochdale and FAEF.
† The Company's effective tax rate was 32.6 percent for the third quarter of 2012 compared with 33.1 percent for the second quarter of 2012 and 27.7 percent from the year-earlier period.
† Total assets were $26.25 billion at September 30, 2012, up 6 percent from $24.80 billion at June 30, 2012 and 14 percent from $23.10 billion at September 30, 2011. Total average assets were $25.65 billion for the third quarter of 2012, compared to $24.36 billion for the second quarter of 2012 and $23.00 billion for the third quarter of 2011.
† Loans and leases, excluding covered loans, were $13.72 billion at September 30, 2012, an increase of 2 percent from June 30, 2012 and 13 percent from September 30, 2011. Average loans for the third quarter of 2012, excluding covered loans, were $13.59 billion, up 4 percent from the second quarter of 2012 and 15 percent from the same period of last year. Average commercial loan balances grew 5 percent from the second quarter of 2012 and 24 percent from the year-earlier period.
† Excluding covered loans, results for the third quarter of 2012 included a $2.0 million provision for loan and lease losses. The Company recorded a $1.0 million provision in the second quarter of 2012, and a $7.5 million provision in the year-earlier quarter. The allowance for loan and lease losses on non-covered loans was $268.4 million at September 30, 2012 compared with $269.5 million at June 30, 2012 and $263.3 million at September 30, 2011. The Company remains adequately reserved at 1.96 percent of total loans and leases, excluding covered loans, at September 30, 2012, compared with 2.00 percent at June 30, 2012 and 2.16 percent at September 30, 2011.
† In the third quarter of 2012, net loan charge-offs totaled $2.2 million, or 0.06 percent of average total loans and leases, excluding covered loans, on an annualized basis, compared with net recoveries of $2.7 million, or 0.08 percent, for the second quarter of 2012, and net charge-offs of $10.6 million, or 0.36 percent, in the year-earlier quarter. Nonaccrual loans, excluding covered loans, totaled $103.5 million at September 30, 2012, up from $98.7 million at June 30, 2012 and down from $146.1 million at September 30, 2011. At September 30, 2012, nonperforming assets, excluding covered assets, were $130.5 million, down from $133.3 million at June 30, 2012 and $190.7 million at September 30, 2011.
† Average securities for the third quarter of 2012 totaled $8.63 billion, up 11 percent from the second quarter of 2012 and 24 percent from the third quarter of 2011 as deposit growth outpaced loan growth.
† Period-end deposits at September 30, 2012 were $22.51 billion, up 7 percent from $21.11 billion at June 30, 2012 and 13 percent from $19.91 billion at September 30, 2011. Average deposit balances for the third quarter of 2012 grew to $21.94 billion, up 5 percent from $20.95 billion for the second quarter of 2012 and 11 percent from $19.72 billion for the third quarter of 2011. Average core deposits, which equal 97 percent of total deposit balances, were up 5 percent from the second quarter of 2012 and 12 percent from the third quarter of 2011.
† The Company's ratio of Tier 1 common shareholders' equity to risk-based assets was 9.1 percent at September 30, 2012 compared with 9.6 percent at June 30, 2012 and 10.2 percent at September 30, 2011. The change from prior periods is a reflection of both asset growth and the acquisitions of Rochdale and FAEF. 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 remains stable. This outlook reflects management's expectations for modest economic growth and loan-loss provisions as well as 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 and nine months ended September 30, 2012 and 2011:
Net Interest Income Summary
For the three months ended For the three months ended
September 30, 2012 September 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 $ 6,127,844 $ 61,191 3.97 % $ 4,927,877 $ 50,744 4.09 %
Commercial real estate
mortgages 2,463,945 27,531 4.45 1,944,554 25,976 5.30
Residential mortgages 3,864,910 39,666 4.11 3,716,650 44,041 4.74
Real estate construction 265,388 3,780 5.67 346,562 4,062 4.65
Equity lines of credit 731,009 6,463 3.52 731,040 6,545 3.55
Installment 134,412 1,525 4.51 129,961 1,619 4.94
Total loans and leases,
excluding covered loans (3) 13,587,508 140,156 4.10 11,796,644 132,987 4.47
Covered loans 1,207,031 41,995 13.92 1,664,349 44,305 10.65
Total loans and leases 14,794,539 182,151 4.90 13,460,993 177,292 5.23
Due from banks -
interest-bearing 246,983 163 0.26 641,566 474 0.29
Federal funds sold and
securities purchased under
resale agreements 105,352 74 0.28 130,148 90 0.28
Securities 8,631,430 46,603 2.16 6,954,084 42,647 2.45
Other interest-earning assets 113,711 685 2.40 129,855 683 2.09
Total interest-earning assets 23,892,015 229,676 3.82 21,316,646 221,186 4.12
Allowance for loan and lease
losses (319,074 ) (330,313 )
Cash and due from banks 184,175 203,420
Other non-earning assets 1,897,478 1,808,809
Total assets $ 25,654,594 $ 22,998,562
Liabilities and Equity
Interest-bearing deposits
Interest checking accounts $ 1,981,177 $ 462 0.09 $ 1,726,948 $ 650 0.15
Money market accounts 5,838,060 1,681 0.11 6,899,846 6,074 0.35
Savings deposits 370,858 129 0.14 329,053 243 0.29
Time deposits - under
$100,000 219,662 281 0.51 280,113 341 0.48
Time deposits - $100,000 and
over 732,316 763 0.41 801,009 1,227 0.61
Total interest-bearing
deposits 9,142,073 3,316 0.14 10,036,969 8,535 0.34
Federal funds purchased and
securities sold under
repurchase agreements 24,687 9 0.15 326 - 0.07
Other borrowings 921,913 11,521 4.97 803,503 9,041 4.46
Total interest-bearing
liabilities 10,088,673 14,846 0.59 10,840,798 17,576 0.64
Noninterest-bearing deposits 12,798,747 9,687,629
Other liabilities 470,419 352,886
Total equity 2,296,755 2,117,249
Total liabilities and equity $ 25,654,594 $ 22,998,562
Net interest spread 3.23 % 3.48 %
Fully taxable-equivalent net
interest and dividend income $ 214,830 $ 203,610
Net interest margin 3.58 % 3.79 %
Less: Dividend income
included in other income 685 683
Fully taxable-equivalent net
interest income $ 214,145 $ 202,927
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(2) Net interest income is presented on a fully taxable-equivalent basis.
(3) Includes average nonaccrual loans of $107,096 and $141,433 for 2012 and 2011, respectively.
(4) Loan income includes loan fees of $6,146 and $4,551 for 2012 and 2011, respectively.
Net Interest Income Summary
For the nine months ended For the nine months ended
September 30, 2012 September 30, 2011
Interest Average Interest Average
Average income/ interest Average income/ interest
. . .
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