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CYN > SEC Filings for CYN > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CITY NATIONAL CORP

Form 10-Q for CITY NATIONAL CORP


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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;
(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) the Company's ability to attract new employees and retain and motivate existing employees; (13) increased competition in the Company's markets and our ability to increase market share and control expenses; (14) changes in the financial performance and/or condition of the Company's customers, or changes in the performance or creditworthiness of our customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit obligations; (15) 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; (16) soundness of other financial institutions which could adversely affect the Company; (17) protracted labor disputes in the Company's markets; (18) the impact of natural disasters, terrorist activities or international hostilities on the operations of our business or the value of collateral; (19) the effect of acquisitions and integration of acquired businesses and de novo branching efforts; (20) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; (21) 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 (22) 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, 2013 and particularly, Item 1A, titled "Risk Factors."


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                           CITY NATIONAL CORPORATION

                              FINANCIAL HIGHLIGHTS



                                                                                                        Percent change
                                                       At or for the three months ended               June 30, 2014 from
                                                  June 30,         March 31,        June 30,       March 31,      June 30,
(in thousands, except per share amounts) (1)        2014             2014             2013            2014          2013
                                                 (Unaudited)      (Unaudited)      (Unaudited)
For The Quarter
Total revenue                                   $     320,201    $     301,046    $     285,128             6 %          12 %
Net income attributable to City National
Corporation                                            66,701           54,511           59,741            22            12
Net income available to common shareholders            62,607           50,417           57,335            24             9
Net income per common share, basic                       1.13             0.91             1.05            24             8
Net income per common share, diluted                     1.11             0.90             1.04            23             7
Dividends per common share                               0.33             0.33             0.25             -            32

At Quarter End
Assets                                          $  30,819,092    $  29,738,252    $  27,379,502             4            13
Securities                                          8,832,942        8,651,359        8,597,199             2             3
Loans and leases, excluding covered loans          18,474,788       17,751,385       15,819,252             4            17
Covered loans (2)                                     605,770          673,294          867,996           (10 )         (30 )
Deposits                                           26,651,525       25,731,766       23,651,757             4            13
Common shareholders' equity                         2,585,537        2,528,344        2,374,848             2             9
Total shareholders' equity                          2,853,153        2,795,960        2,544,768             2            12
Book value per common share                             47.38            46.38            44.16             2             7

Average Balances
Assets                                          $  29,978,947    $  29,426,360    $  27,469,581             2             9
Securities                                          8,668,011        8,585,220        8,866,911             1            (2 )
Loans and leases, excluding covered loans          17,959,191       17,338,419       15,434,102             4            16
Covered loans (2)                                     643,690          696,163          909,728            (8 )         (29 )
Deposits                                           25,912,081       25,371,598       23,118,818             2            12
Common shareholders' equity                         2,562,555        2,512,775        2,412,148             2             6
Total shareholders' equity                          2,830,171        2,780,392        2,582,068             2            10

Selected Ratios
Return on average assets (annualized)                    0.89 %           0.75 %           0.87 %          19             2
Return on average common equity (annualized)             9.80             8.14             9.53            20             3
Corporation's tier 1 leverage                            7.43             7.41             7.00             0             6
Corporation's tier 1 risk-based capital                 10.00            10.18             9.74            (2 )           3
Corporation's total risk-based capital                  12.81            13.08            12.78            (2 )           0
Period-end common equity to period-end
assets                                                   8.39             8.50             8.67            (1 )          (3 )
Period-end equity to period-end assets                   9.26             9.40             9.29            (1 )          (0 )
Common dividend payout ratio                            29.26            36.15            23.81           (19 )          23
Net interest margin                                      3.21             3.02             3.24             6            (1 )
Expense to revenue ratio (3)                            68.48            69.73            71.51            (2 )          (4 )

Asset Quality Ratios (4)
Nonaccrual loans to total loans and leases               0.35 %           0.40 %           0.48 %         (13 )         (27 )
Nonaccrual loans and OREO to total loans and
leases and OREO                                          0.37             0.45             0.61           (18 )         (39 )
Allowance for loan and lease losses to total
loans and leases                                         1.68             1.72             1.83            (2 )          (8 )
Allowance for loan and lease losses to
nonaccrual loans                                       480.50           429.21           378.12            12            27
Net (charge-offs) recoveries to average
total loans and leases (annualized)                     (0.08 )           0.10             0.20          (180 )        (140 )

At Quarter End
Assets under management (5)                     $  47,123,652    $  46,374,203    $  41,256,549             2            14
Assets under management or
administration (5)                                 65,780,023       66,399,813       59,755,285            (1 )          10



(1) Certain prior period amounts have been reclassified to conform to the current period presentation.
(2) Covered loans represent acquired loans that are covered under loss-sharing agreements with the Federal Deposit Insurance Corporation ("FDIC").
(3) The expense to revenue ratio is defined as noninterest expense excluding other real estate owned ("OREO") expense divided by total net interest income on a fully taxable-equivalent basis and noninterest income.
(4) Excludes covered assets, which consist of acquired loans and OREO that are covered under loss-sharing agreements with the FDIC.
(5) Excludes $27.85 billion, $26.09 billion and $25.11 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of June 30, 2014, March 31, 2014 and June 30, 2013, respectively.


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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 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 2013 Annual Report other than the adoption of new accounting pronouncements and other authoritative guidance that became effective for the Company on or after January 1, 2014. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to the Unaudited Consolidated Financial Statements for further discussion. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

HIGHLIGHTS

Consolidated net income attributable to City National Corporation ("CNC") was $66.7 million for the second quarter of 2014, up 12 percent from $59.7 million in the year-ago period and up 22 percent from $54.5 million for the first quarter of 2014. For the second quarter of 2014, consolidated net income available to common shareholders was $62.6 million, or $1.11 per diluted share. Net income available to common shareholders was $57.3 million, or $1.04 per diluted share, for the year-earlier quarter and $50.4 million, or 0.90 per diluted share for the quarter ended March 31, 2014.

Revenue, which consists of net interest income and noninterest income, was $320.2 million for the second quarter of 2014, up 12 percent from $285.1 million in the year-earlier quarter and up 6 percent from $301.0 million in the first quarter of 2014.

Fully taxable-equivalent net interest income, including dividend income, amounted to $226.1 million for the second quarter of 2014, up 9 percent from the second quarter of 2013 and 10 percent higher from the first quarter of 2014.

The Company's net interest margin in the second quarter of 2014 was 3.21 percent, down from 3.24 percent in the second quarter of 2013, but up from 3.02 percent in the first quarter of 2014. The increase from the first quarter of 2014 was primarily due to higher income on covered loans that were paid off or fully-charged off in the second quarter of 2014.

Noninterest income was $101.1 million for the second quarter of 2014, up 23 percent from the second quarter of 2013 and down slightly from the first quarter of 2014. The increase from the year-earlier quarter was primarily attributable to higher wealth management fee income and lower FDIC loss-sharing expense, as well as a higher net gain on the disposal of assets. The decrease from the first quarter was due largely to higher FDIC loss-sharing expense offset by higher wealth management fee income and higher net gain on disposal of assets. Results for the second quarter of 2014 also included a $5.1 million net gain on securities, compared to a $5.6 million net gain in the second quarter of 2013 and a $2.1 million net gain in the first quarter of 2014.

Trust and investment fee income grew to $54.6 million in the second quarter of 2014, up 10 percent from the year-earlier quarter and up 2 percent from the first quarter of 2014. Assets under management or administration totaled $65.8 billion, up 10 percent from the second quarter of 2013, but down 1 percent from the first quarter of 2014.

Noninterest expense for the second quarter of 2014 was $225.6 million, up 7 percent from the second quarter of 2013 and 5 percent higher from the first quarter of 2014. The increase from the year-ago period largely reflects higher compensation costs, as well as an increase in legal and professional fees. Legal and professional fees for the second


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quarter of 2014 included sub-advisory expense related to the merger of two funds. These costs were offset in part by lower other real estate owned expenses and FDIC assessments.

The base yield on the covered loan portfolio generated net interest income of $12.4 million in the second quarter of 2014, compared to $16.7 million for the year-earlier quarter and $12.5 million in the first quarter of 2014. Base yield is the yield on covered loans, excluding income from covered loans that were paid off or fully charged-off. The Company recognizes other components of other income and expense related to its covered assets including income from covered loans that were paid off or fully charged-off, net impairment charges and other covered assets income and expenses. These components fluctuate from period to period. When aggregated, the impact of those items to the income statement, excluding the base yield, was total net expense of $2.8 million for the second quarter of 2014, compared to net expense of $2.0 million for the second quarter of 2013 and $3.6 million for the first quarter of 2014. Refer to the "Net Interest Income," "Provision for Credit Losses" and "Covered Assets" sections included elsewhere in this report for further discussion.

The Company's effective tax rate was 30.7 percent for the second quarter of 2014, compared with 29.7 percent for the year-earlier period and 32.3 percent for the first quarter of 2014.

Total assets were $30.82 billion at June 30, 2014, up 13 percent from $27.38 billion at June 30, 2013 and up 4 percent from $29.74 billion at March 31, 2014. Total average assets were $29.98 billion for the second quarter of 2014, up 9 percent from $27.47 billion for the second quarter of 2013 and up 2 percent from $29.43 billion for the first quarter of 2014.

Loans and leases, excluding covered loans, grew to $18.47 billion at June 30, 2014, an increase of 17 percent from $15.82 billion at June 30, 2013 and 4 percent from $17.75 billion at March 31, 2014. Average loan and lease balances, excluding covered loans, were $17.96 billion for the second quarter of 2014, up 16 percent from the same period of last year and 4 percent from the first quarter of 2014. Average commercial loan balances were up 18 percent from the year-earlier period and 4 percent from the first quarter of 2014. Average commercial real estate balances increased 18 percent from the second quarter of 2013 and 3 percent from the first quarter of 2014.

Excluding covered loans, second quarter 2014 results included a $1.0 million reversal of provision for loan and lease losses. The Company recorded no provisions or provision reversal in either the second quarter of 2013 or first quarter of 2014. The allowance for loan and lease losses on non-covered loans was $311.3 million at June 30, 2014, compared with $289.9 million at June 30, 2013 and $305.8 million at March 31, 2014. The Company remains appropriately reserved at 1.68 percent of total loans and leases, excluding covered loans, at June 30, 2014, compared with 1.83 percent at June 30, 2013 and 1.72 percent at March 31, 2014.

In the second quarter of 2014, net loan charge-offs totaled $3.6 million, or 0.08 percent of average total loans and leases, excluding covered loans, on an annualized basis, compared with net recoveries of $7.5 million, or 0.20 percent, in the year-earlier quarter, and net recoveries of $4.2 million, or 0.10 percent, for the first quarter of 2014. Nonaccrual loans, excluding covered loans, totaled $64.8 million at June 30, 2014, down from $76.7 million at June 30, 2013 and $71.2 million at March 31, 2014. At June 30, 2014, nonperforming assets, excluding covered assets, were $69.1 million, down from $96.3 million at June 30, 2013 and $80.7 million at March 31, 2014.

Average securities for the second quarter of 2014 totaled $8.67 billion, down 2 percent from the second quarter of 2013, but up 1 percent from the first quarter of 2014.

Period-end deposits at June 30, 2014 were $26.65 billion, up 13 percent from $23.65 billion at June 30, 2013 and 4 percent from $25.73 billion at March 31, 2014. Deposit balances for the second quarter of 2014 averaged $25.91 billion, up 12 percent from $23.12 billion for the second quarter of 2013 and 2 percent from $25.37 billion for the first quarter of 2014. Average core deposits, which equal 98 percent of total deposit balances for the second quarter of 2014, were up 14 percent from the second quarter of 2013 and 2 percent from the first quarter of 2014.

The Company remains well capitalized. The ratio of Tier 1 common shareholders' equity to risk-based assets was 8.8 percent at June 30, 2014, compared with 8.8 percent at June 30, 2013 and 8.9 percent at March 31, 2014. Refer to the "Capital" section included elsewhere in this report for further discussion of this non-GAAP measure. All of the Company's pro-forma capital ratios are above the Basel III rules, which were approved by the Federal Reserve on July 2, 2013. These rules are expected to be fully implemented by January 1, 2019.


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OUTLOOK

Management expects moderate net income growth in 2014. Loan and deposit balances are expected to continue to increase, and credit quality should remain strong, though rising loan balances are expected to require a loan-loss provision later this year. Low interest rates and competitive loan pricing continue to put pressure on the Company's net interest margin. This outlook reflects management's expectations for moderate economic growth throughout the remainder of 2014. This does not take into account the effect that any changes in monetary policy could have on short-term interest rates, which are not expected to rise this 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 table presents the components of net interest income on a fully taxable-equivalent basis for the three and six months ended June 30, 2014 and 2013:


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                          Net Interest Income Summary



                                     For the three months ended                   For the three months ended
                                           June 30, 2014                                June 30, 2013
                                                Interest       Average                       Interest       Average
                               Average          income/        interest     Average          income/        interest
(in thousands) (1)             balance       expense (2)(3)      rate       balance       expense (2)(3)      rate
Assets
Interest-earning assets
Loans and leases
Commercial                   $  8,605,421   $         74,969       3.49 % $  7,300,447   $         65,156       3.58 %
Commercial real estate
mortgages                       3,354,672             29,838       3.57      2,847,979             28,397       4.00
Residential mortgages           4,715,528             41,359       3.51      4,083,044             37,927       3.72
Real estate construction          418,353              3,915       3.75        352,775              3,733       4.24
Home equity loans and
lines of credit                   697,178              6,411       3.69        704,418              6,315       3.60
Installment                       168,039              1,820       4.34        145,439              1,702       4.69
Total loans and leases,
excluding covered loans
(4)                            17,959,191            158,312       3.54     15,434,102            143,230       3.72
Covered loans                     643,690             31,061      19.30        909,728             32,610      14.34
Total loans and leases         18,602,881            189,373       4.08     16,343,830            175,840       4.32
Due from banks -
interest-bearing                  577,591                378       0.26        236,119                158       0.27
Federal funds sold and
securities purchased under
resale agreements                 355,747              1,477       1.67        277,019              1,555       2.25
Securities                      8,668,011             46,924       2.17      8,866,911             43,829       1.98
Other interest-earning
assets                             72,166              1,165       6.47         96,004              1,073       4.48
Total interest-earning
assets                         28,276,396            239,317       3.39     25,819,883            222,455       3.46
Allowance for loan and
lease losses                     (327,820 )                                   (325,043 )
Cash and due from banks           187,710                                      128,489
Other non-earning assets        1,842,661                                    1,846,252
Total assets                 $ 29,978,947                                 $ 27,469,581

Liabilities and Equity
Interest-bearing deposits
Interest checking accounts   $  2,327,248   $            327       0.06 % $  2,173,015   $            390       0.07 %
Money market accounts           6,617,913              1,142       0.07      5,758,428              1,645       0.11
Savings deposits                  462,316                 68       0.06        414,478                 99       0.10
Time deposits - under
$100,000                          169,455                 86       0.20        192,550                178       0.37
Time deposits - $100,000
and over                          451,197                437       0.39        707,980                678       0.38
Total interest-bearing
deposits                       10,028,129              2,060       0.08      9,246,451              2,990       0.13

Federal funds purchased
and securities sold under
repurchase agreements                 934                  -       0.07        374,571                123       0.13
Other borrowings                  737,159             11,163       6.07        927,829             10,963       4.74
Total interest-bearing
liabilities                    10,766,222             13,223       0.49     10,548,851             14,076       0.54
Noninterest-bearing
deposits                       15,883,952                                   13,872,367
Other liabilities                 498,602                                      466,295
Total equity                    2,830,171                                    2,582,068
Total liabilities and
equity                       $ 29,978,947                                 $ 27,469,581

Net interest spread                                                2.90 %                                       2.92 %
Fully taxable-equivalent
net interest and dividend
income                                      $        226,094                             $        208,379
Net interest margin                                                3.21 %                                       3.24 %
Less: Dividend income
included in other income                               1,165                                        1,073
Fully taxable-equivalent
net interest income                         $        224,929                             $        207,306



(1) Certain prior period balances have been reclassified to conform to the . . .
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