City National's Management Presents at Bank of America Merrill Lynch Banking and Financial Services Conference (Transcript)

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City National Corp (NYSE:CYN)

Bank of America Merrill Lynch Banking and Financial Services Conference Call

November 13, 2012 9:40 am ET


Christopher J. Carey – Chief Financial Officer


Erika Penala – Bank of America Merrill Lynch

Erika Penala – Bank of America Merrill Lynch

We have City National presenting, which is widely accepted as one of the premier mid-size institutions in the country. So last year, egg on our face, we downgraded the stock after they presented at this conference. And this year, we have the dynamic CFO, Chris Carey, back to tell us about a company that despite margin pressure seems to be hitting on all cylinders. In other words, why I was wrong to downgrade the stock in the first place last year and now, with egg on my face, I would like to turn the stage over to Chris.

Christopher J. Carey

Thank you, Erika. Thanks to Erika and Merrill Lynch for having us here. I don't always agree with Erika, but she pulled one her quotes the other day. She is a great analyst, despite fact we don't always agree. She is right more than she is wrong by the way.

Anyway, so it’s great to be here in New York. I’m glad to see after the terrible storm, we are getting more back to normal but as soon as you say that you need someone that barely just got their power back on. But at least the city seems to be functioning pretty well. The tunnel that I came through last night apparently only had been open for a few days.

So first off I’ll be making some forward-looking statements under the protection of the Private Securities Litigation Act and you can look at the back of the presentation for more details. So this is a very brief overview of our company. I am appreciative of Erika's mentioned, we consider ourselves the premier private and business bank.

We are the 24th largest commercial bank in the country with $26 billion in assets and $2.7 billion in market cap. 78 offices, including 16 regional offices and one of the things we will talk about more is our wealth management business, which is a large business for a bank our size.

So here six themes we are going to cover today about why we think City National is a very good investment over the longer term. Part of what you will hear also today is what we don't do. These are all the strong parts of our business, but part of our story is as much what we don't do is what we do.

So I might just stop on this schedule, because it's not that often I get to get up here and talk about 44% earnings growth. It's more like a tech company. We are out in that tech area. But we had a great quarter, we are having great year and I think Erika is right, everything seems to be going the right way. It is a combination of things we've really done over the last five years, and that is more of our story. We are not working on just next year at any point in time. We continue to invest, but very strong earning growth. We did mention there were some unusual items in there, but we were still up like 30% without the unusual items.

Loan growth and deposit growth obviously 15% and 12%. And then lastly, we continue to have improvement in credit quality. We are probably getting to the end of that story, but our credit metrics are all continuing to get better. So for some people here, maybe don't understand us as well, this is probably the key slide in the presentation for just understanding what we do.

We are very focused. We are not trying to do all things for all people. So this little blue bar in the middle shows what we are going after and importantly I think see that we aren't a retail bank. That's not something we were going after. We compete against the mega-banks and the community banks in what we call the sweet spot of banking. Besides being very focused, the way that we differentiate ourselves more than anything is through service.

We spend more with staff differently, so we obviously have to have the right products and services but our differentiator is that we have a client service model, not a sales model. So we get very high levels of client satisfaction and retention. To back that up, we have a slide in here by an independent group that does a survey every year or two that shows we ranked number one in client satisfaction. We received seven excellence awards for business banking. So besides us talking about it, every year that this comes out we get recognized that we are very good at it.

So now, our clientele. While we continue to grow and spread out in different specialties throughout the country, our biggest market is still California, the world’s ninth largest economy. And I think as you can see by this slide, even though there is 38 million people in California, the 27 million of the 38 million people are aggregated along the coast in these very dense markets. And that is our business focus. Wherever we go, we are going into very, very dense markets as a business bank. I think we’ve got a slide here.

We also are in Nevada, which we have been in for about five years now. We probably went into that slightly at the wrong time. We have been in New York City for 10 years and we are for the first time opening up some branches on the ground floor. And then last year we had a very successful entry through our Entertainment business into Nashville and Atlanta and its going very well. We already have in less than a year’s time about what $100 million in deposits or core deposits and almost the $100 million in loans, mostly C&I loans.

A little more on our clientele, well 90% of our business in California that shows that LA is the second leading market to high net worth individual although we have basically almost a $2 billion in asset bank in New York, which is number one, down on the list our net biggest market really in San Francisco number eight, so this shows the number of the markets we are in and how they all rank very attractive, very good for our high net worth focus.

So now our exceptional deposit base, put a little bit of a modification on this slide in here show a little bit where all this growth is coming from, but since 2008 we’ve gone a core deposits to $9 billion somewhat of a staggering number, I think it's really a testament to our franchise it has been a fight of quality, I mean we've always been focused on gathering low-cost deposits. Unfortunately, as everybody in this room knows they are not as viable today in the short run. We still think that’s eventually going to change, eventually with our deficits rate are going to go up, and be able to really realize that value, but we've had fabulous growth, and as the slide on the right shows Entertainment is the biggest part of that. CBS which stands for commercial banking services, was the second largest part of that choice.

This slide speaks our loan growth which has been very strong this year, and particularly we focus on production numbers. The actual payoffs that happen from quarter-to-quarter kind of variable so in the second quarter we have lower production and larger net loan growth in the third quarter. We had even larger production numbers, which probably not just sustainable until we resolve this whole fiscal cliff issue, but we have less loan growth, because we had more payouts. But all in all, we're hitting record number in production and part of it is as I said we’re in international in Atlanta, and we've started some specialty businesses, but frankly we also added a lot of salespeople, which I’m going to cover a little later in the presentation.

So this slide again talks about our loan growth C&I lending which is our biggest focal point. It also again shows where some of the loan growth is coming from some of the loan growth is coming from. So Specialty Banking, which includes a lot of areas, this year, for example we have a franchise lending specialty and we added a new franchise team. We have an ABL specialty; the year before, we actually bought a portfolio and added in other team, so we continue to build out from the specialty areas that we have. We have a healthcare and a legal services specialty, and that's an area that I’m clearly has been contributing to our growth as this slide shows. Real estate has certainly come back it's mostly non-construction although there is some construction activity finally happening in California.

For now of our strong balance sheet, think this slide kind of speaks for itself all of our metrics continue to improve. You can see our NPA and charge-offs are at low levels are provision now, are at very, very low levels. And well I don't think if you go into 2013 you can kind of sustained the provision levels at these levels. We would see that our credit quality metrics pretty criticized and classified in particular, are getting to the end of the downward move which has taken lot of pressure off the need for provisions. You go into 2013 while they could get a little lower, probably not statistically significant they are such a low level already.

This is a longer term picture of net charge-offs through this cycle, the worse cycle we have all experienced other charge-offs is 39 basis points and most of that really came out of construction so pretty good story.

I think just one slide – couple of slides and capital now, we put this slide in here kind of show that if you're looking get capital this is non-accruals to Tier 1 plus allowance. Actually small is better, so that greenish color bar is City National and it's just shows when you look at it this way, because of our low-level of non-accruals I think it puts our capital levels in a more appropriate way, not just a more favorable way, putting more appropriate way.

Now, we have the famous, infamous, Basel III capital standards and try to be brief on it. We don’t agree with the proposal, respectfully. There is a couple things in there, in particular that we don’t think make sense around unused lines of credits under a year and how they want to treat interest-only mortgages. We have in our residential mortgage book, a third of it are interest-only and through the 10-year cycle their average charge-off loss was 2 basis points. In the peak of the cycle, it was around 8 or 9 basis points.

It performed almost precisely the same as our non-IO portfolio, yet the Basel rules would increase the risk-weighting on that and it decreases the risk-weighting on much of the rest of our residential portfolio, but net it adds additional risk-weighted assets. But despite the fact that we don’t agree with rules and we’ve certainly put in writing how we think the rules should be modified, because in the two cases I cite here, I think it’s just the rules are wrong. I mean there are a lot of judgments about what’s right and wrong in this area, but here I think they are just wrong. Hopefully, they’ll get changed. But even if don’t get changed, we’ve pro forma it out. We comply with the 2019 rules now. So hopefully some of these things get tweaked and made better.

So this is probably the other biggest slide in the presentation in my mind, in that we have this rich core deposit base that’s been the franchise value for this Company for the 58 years we have been in existence. Yet in this incredibly low interest rate environment, we just can’t realize the value out of it. So this just shows what happens if you get rigs back to some kind of normal level and you get a much higher growth and net interest income in, frankly, a resumption of the kind of net income and ROE levels that we have enjoyed most of the Company’s history.

So this is to deal with our risk profile. We’re happy that the regulatory reform has little impact on our Company. The capital ratios, as I just talked about, the Durbin rule change had almost no impact on us. We don’t have any putback risk from mortgages and we’ve never had any real exposure to Europe and the PIIGS.

So now to talk a little bit about growth, we use acquisitions to supplement our organic growth. It is not a strategy. It’s an opportunistic thing. We are very active, but we tell people regularly. We don’t have to make another acquisition. We don’t have to fix something in our franchise by buying something. So we don’t really do very well on auctions. We look at a lot. We bid on much fewer, and then we only win a few of those. So we’ll talk about a couple of our wins. We really would have, hopefully we’ve done more than this, but we managed last year or this year to do two acquisitions. If you are familiar with our company, Rochdale Investment Management, a nice wealth management company, headquartered here in New York in New York City, but it has distribution outlets around the countries. We brought that and its’ early of course, so you want to be too positive on things. We bought at this year, but everything is going well. It fits very well in with our bank wealth management business where we’re integrating it with.

And then we bought First American Equipment Finance a little earlier in the year, I guess April; May 1, I think we closed on it. A very standard in my mind equipment finance business. What is a little bit different about it is a very high-end client base. And their model is a lot like ours. It’s very service-driven model, that’s their value proposition. So two very nice acquisitions. They tend to be smaller. We don’t like to do really big deals. And then we mentioned that we did do a number of FDIC acquisitions and some branch acquisitions during the coming out of the downturn.

So this is to talk a little bit about our wealth business, which I just mentioned. We have Rochdale that we just purchased and we go to this next slide. Our wealth business, to try to simplify it, really has three focal points, our bank business where we’re integrating Rochdale, Lee Munder, which is headquartered in Boston, but is a national institutional business; and Convergent Wealth Advisors, which is also a national ultra-high net worth business. Those are the three operating focal points of our wealth business. We also have a very nice investment in Matthews, which is the largest U.S.-based Asian mutual fund advisor; they managed about $19 billion in assets and we have a 20% of that.

So overall we have the complete set of capabilities that we would need to deliver to any type of client whether if that person just has 1.2 million of investable assets to a person that has $1 billion in investable assets.

Another area that’s been very successful is our preferred banking strategy. We started that as a very deposit focused strategy. We now have to change that soon since we are so rich in deposits. But it’s actually generated deposits and loans, it’s been on a good growth trajectory, we have $1 billion in new money in this area, because some of this is our current clients actually also moving into the products. So we try to separate that, it’s been very successful of over $800 million in new core deposits, a little over $200 million in loan.

So it’s a product set that frankly all of the big banks have. What we do that’s different. We have a differentiated product. So if you are in this product and you have a certain amount of balances, you’ve got free ATMs at any bank in the country. What’s different from us and the larger banks is we offer a differentiated service. It’s just not a product with bells and whistles; you get a person to call that can be your personal banker and help you out, you don’t call 800 number, and I think it’s much harder for the big retail banks, even though they have this product offer a differentiated service, which is why it has been successful and we would expect it to continue to be successful. A little bit of a gap in the market there for that product.

So additional banking offices. At the end of 2009, we had 64 banking offices and today, we have 78 some of that obviously was acquired through the FDIC deals, but we’ve also recently opened up three offices in New York, Pacific Palisades, we talked about Nashville area earlier and our basic strategy is put aside, when making acquisitions, we tend not to be opening as many branches, if we’re not doing acquisitions, two to four a year as what we would typically open.

We’ve been more focused really recently and trying to build out Northern California, so we look to be opening probably two more over the next year, Northern California to get our branch total up there to ‘13. As I said earlier, we are now, if you drive around parts of New York, you can probably see a little bit of our advertising. We are opening two ground floors branches in New York one what we have an office, our main office 54th and Park and one is 44th in [six].

I view, this, and I think we view these as just an investment in our brand and we’re probably in the foreseeable future not opening more, ground floor branches where we sell as we needed at least two to really establish our brand, we didn’t have ten years.

International trade services is an another area, we’ve been investing in adding people to and if it’s clearly a growth area, we would expect when you look at fee income and some of our loan totals are impacted by, but certainly seeing some of the next couple of years, we should in that double-digit range, it’s a big opportunity you’re still getting, the world trade is expected to grow by 4.5%. We have the two biggest ports in the country. So it’s an area that we are in the right position. We have brought in some real talents that are experts in this business, and it's starting to take hold. So we are pretty optimistic about what we will see in next couple years there.

This just adds a few more of the things we do – franchise, finance, legal and healthcare industries; and then we have a little bit of a new slide on sales colleagues. It’s really hard to grow this business if you aren’t adding the sales colleagues. We do some things that are different.

We have a Chief Talent Officer that just focuses on senior talent, mostly sales, although we have a non-sales specialty position she is involved. All of our sales colleagues are required to have people pipelines. So we’ve made a lot of progress here in adding a lot of salespeople and this really does speak to why we are having the success on the loan growth front. Our loan volumes are up really significantly and that’s a better part of that story is 50% of that is coming from new clients, which is high percentage really. Typically that number would be new clients would be more a third.

New products and technology, where is my BlackBerry I didn’t turn it off, but we have mobile banking and you can get a nice little ladder icon on your BlackBerry or your iPhone or whatever and has all the capabilities, you can deposit checks and obviously it’s the future of everything today. We’ve had remote deposit capture for quite a while. We have rolled out remote deposit capture for personal clients.

We are just rolling out as we speak may be last week or early this week online mobile banking for business and we continue to invest I think some of you may know, if you know our company, we buy a software company a couple of years ago that interfaces with some of our cash management services to continue to make products for our clients that make them more efficient in processing their payments. So we are trying to stay up and invest here and I think we are at least staying with the competition; in terms of some of our regional banks, ahead of the regional banks.

So California, despite the passing of Proposition 30 we are still really feeling optimistic about California. We are just trying to get our tax rate up to New York City’s tax rate. Really California is an amazing story and frankly overall it’s doing really well and I think there is a couple of statistics in here that may surprise you. So we will go to some of them. Here is the first one. Number one in job creation, 276,000 net jobs created in the country. Despite low and no taxes in Texas we still are creating a lot of jobs here. So some of the data points.

The Bay Area, unemployment 6.9%; Orange County 7.1%, San Diego is now down to 7.4%, a tremendous job in the last year; the only really lagging one is LA County, and it's still up to 10.2%, but down from a peak of 12.4%. So lots of good things going on here. Our only other major market is really New York City, where I don’t know the number at the top of my head but its unemployment rate is probably in that 6.5% range.

So California is coming back despite some of the things going on in the political front. The weather is still nice out there and it’s actually there is a lot going on to try to make it, even though you don't always see it in the national surveys, a more business friendly state. It’s a more local effort but in LA County there is a tremendous amount going on to try to make the city that are more business friendly to attract more companies.

So this shows a little more on the job recovery. I don’t think that slide would look different than maybe Texas in many ways, other than they might doing a little better manufacturing, but every year the country is still shirking in the government sector. So I think that’s going to go on for a while and it is having an effect on GDP negatively, but perhaps overall still positive trend. So pretty good story in California.

So this brings me to my final slide, again, these are the six items that I tried to cover briefly about our company, why we think that over the long term we have had really good performance and it’s a good investment. We are not focused on just next year, the year after, there is certainly we have a longer term view. We do need rates to go up to get back to our normal ROE level, but run rate still go up, we do feel we will comfortably get back to a good ROE level. We’ve able to grow. It is a challenging environment as look forward just to 2013, but we certainly had a tremendous year this year and look that for a good investment.

So with that I’ll open it up now to question.

Question-and-Answer Session

Erika Penala – Bank of America Merrill Lynch

So mainly I can get off clear in the third quarter it's clear that more run rate of earnings adjusted you could make 4 plus annually just sort of standing still. Looking into 2013 you mentioned that the provision might not go that much lower, and clearly the margin has challenges. Of the long term growth levers that you put out on the screen, which one can healthy grow earnings in this environment for next year?

Christopher J. Carey

The thing will have the biggest impact will be growth in loans and deposits, which -- assuming the fiscal cliff gets resolve, I mean we would expect to still have a good year growing loans and deposits, I mean, there is going to be pressure for all banks on margin, because the yield curve flatten during the year. It would have been better if it had flattened on January 1. But that puts pressure incrementally on 2013. But the key drivers will be that, if could make a couple nice of acquisitions that would help too, but organically it's loan and deposits purchase, we're going to try to manage expenses tightly, we've been recently successful at this year excluding acquisitions our expense grow this year has been very well.

Erika Penala – Bank of America Merrill Lynch

So you mentioned that (inaudible) then how it could impact your pro forma capital ratios, but I thought it was always refreshing that you talked about capital and TCE, right, which is sort of the lowest common capital denominator, you clearly have better growth platform you're looking to do acquisition. In the third quarter, I think which TCE was about 6.5, so I guess could you give us a sense of how you're thinking about the balance, where your floor is, and how you sort of classifying your balance sheet growth for small acquisitions?

Christopher J. Carey

I mean, our guidelines that we can go below that if its temporary, and right now the big pressure on TCE is still from all with the positive growth, just we have a very outsize portfolio. And you look at TCE and our leverage ratio both of those we believe are distorted because of all the deposit growth, I wouldn't want to mention the TAG program that seems to be expiring and not things, I'm not sure there's anyone that's going to save that, we went for our company, and one part of it there might be some outflows, couple of our businesses although we had such strong deposit in the third quarter, we’ll not show if there an outgrowth is really going to matter, and then we clearly will probably be in a smaller way, but we’ll probably be a beneficiaries from inflow.

So it's challenging and the end of the day we have to manage to the rating agencies and the regulator, so we're going to have to keep an eye on that and if we continue grow like we have been growing particularly make some acquisitions that affect that tangible equity, we will have to raise more capital.

Erika Penala – BofA Merrill Lynch

If anybody have any questions in the room?

Unidentified Analyst


Christopher J. Carey

We are still very active, and we are focused on bringing in to our company, the best talent that’s out there in the market, I’d say on the commercial banking side we are incredibly good position for that. Our brand has come through the downturn very well and we – as you saw from that one slide, we’ve added a lot of people. In some of those specialty areas it's a little tougher, to drag them out of other banks, but at least they are always to willing to talk to us most of the time what we hear people say is, I'm not looking at all, but because it's sitting (inaudible) always talk to you guys all those people don't come over, but we’ve had a lot of success, we really work incredibly hard to have a great working environment, try that everything we can I mean, there is a job growth so we want – when we hire (inaudible) hard and put up numbers, but we are in a good spot, and its competitive don’t say me long, and there is obviously we compete against some really good banks in our markets, but we feel pretty good about our positioning there.

Unidentified Analyst


Christopher J. Carey

I would say that over the last couple of years, clearly there was a push to higher more than normal. I think that now we are probably being a little bit more selective because we’ve put on a lot of people over the last three years. But we always have an unallocated budget for talent that is available. If somebody comes in and says, oh, there is this person or this team that we’ve always wanted to hire 99% of the time we just hire them if we can. So but I think we did put a big bush. We thought the recovery was going to happen a little sooner. There has been a recovery; it's just been less of a recovery.

So I think that if you look to 2013, we have a little more pressure on the revenue side. So while we are going to be adding net sales people, there is no question about it. It might be at a slightly slower pace than it was in 2012.

Erika Penala


Erika Penala – Bank of America Merrill Lynch

Thanks, Chris. Can you talk about the risk weighted assets again just on the mortgage side. So the one-third that’s IO is that a floor, the 100% risk weighted assets and then the two-thirds that don’t have the IO attachment, under the Fed NPR what do those drop to? So what is the timing on the…

Christopher J. Carey

So the non-IO assets dropped to 33% risk weighted from 50% and the IO goes from 50% to 100%. Now none of those numbers make any sense to begin. Let’s start from there. If you look at economic capital, they should all be 25% at best. We have the numbers to prove all that over a long period of time that ours would be best at 25% risk weighting. So the combination of the decline and the increase I think in risk weighted assets is a net $300 million. And we together we think a pretty good letter as part of the midsized tank (inaudible).

We have lot of facts and details on why the IO itself is not the problem. The problem is the people that make loans to people and they don’t do the proper underwriting. It doesn’t matter whether it’s an IO or whatever it is if you underwrite it improperly. So that is part of what I think is wrong. We could do all debate the treatment of OTI. I don’t fret as much about how they treat OTI since it’s in our tangible capital anyway. So you’ve got to manage that issue. It would be nice if they change that, but they are looking to solve out the problem.

The other item for us and everyone else which I also think is wrong is that why don’t you take unused line of credit at 20% risk weighted from zero. I’m not saying it should be zero, but there is no empirical evidence at all that it should be 20%. You could make an argument but maybe it should be 5% but that's not the way the system marks it. It's zero or it's 20% or something higher than 20%. So a little maybe creative thinking could be used here.

You don’t have to make the first step to 20%. I don’t think that creativity is a specialty coming out of (inaudible). So that again I think is just wrong because there is no data to support that you would need the 20% risk-weighting. And again we provided the data on why we think that they should have risk-weighting on, but not at that level. That adds $500 million in risk-weighting assets.

Those are the only two that really impacts us. I think OTI is going to impact everyone and I think you have to manage to it. Regardless of the rule change, you have to be very aware of what’s going on there. So I’m not frankly worried about that one. And there are other things on deferred tax assets which don’t really affect us. And then you get into more complicated businesses that we are not in, thankfully, that have all sorts of other issues. Some are probably right, some are probably wrong.

Erika Penala – Bank of America Merrill Lynch

Given what was discussed on capital and your growth prospects, could you give us some insight on how the stress test will be for the banks that are under $50 billion next year? Whether it’s going to be as robust as for the CCAR banks, and whether that's something that you have to think about in terms of your capital planning or its just one more thing you have to do.

Christopher J. Carey

I think its going to be very robust and we are spending a lot of time. We’ve been going through a stress test process now for over three years. We do most of the works internally, but we think we are a little bit unique request for a regional bank to do that, but we are getting some outside help not from a bank, but from a company that’s more than experts in this area. So we are spending some time and money and taking it seriously.

I personally I’m not convinced this is going to change our capital planning that much, because what we’ve seen in the start periods, but big (inaudible) multiple thoughts just went through. Our loan portfolio ran down enough in that kind of environment and as run down in every environment that’s proceeded like that by the way. But it ended up not putting pressure on our capital levels because of decline in loans. But even though our earnings came way down and when you go forward now, the big impact on our earnings in the last downturn was construction.

So our construction portfolio is very small now. When you do a stress test that piece is so small, you save a lot of money. So you can't really be sure. I just looked at the current assumptions, I mean we expect that we are going to do a lot more work as we are and it will be more robust and thoughtful, but it’s hard to say the answer is coming out that much different. Now we may be surprised, but we are a much simpler bank than these large megabanks. We are frankly that should be a lot different process.

Unidentified Analyst

Do you think the floor for banks your size and with your business model, I agree that you are simpler right 5% for the larger bank, is it also going to be 5% pass along for…

Christopher J. Carey

It should be loyal right, (inaudible). We are thrilled that the playing field is getting leveled and they are going to have to hold as much capital. So but I don’t see the floor, I don’t see most of the regional banks getting very close to that floor when they do this trip, so we didn’t get near it with the previous structure. And it’s hard to envision, I see no assumptions, and the trick is correlating those assumptions to your loan book and that’s really what we are getting outside help and how you get that correlation if unemployment is 13%, and we don’t have the real large credit card portfolio.

And our credit card portfolio does not much only to our clients, but immediate try to correlate 13% on employment to our C&I book. So we are winning outside and how do you correlate some of these assumptions to actual losses, but it’s still hard to see you get anyway near those thresholds.

Erika Penala – Bank of America Merrill Lynch

Question from the audience?

Erika Penala – Bank of America Merrill Lynch

So one select really impressed me so far this year is on the revenue growth that the expense phase as you mentioned hasn’t grown in stair step. So as we think about 2013, how should we think about the expense growth rate, I know that you are continuing to hire and make some investments that you did mention that you are slowing that then on?

Christopher J. Carey

So here is I think as you think about expense growth for next year. First of all the covered assets, which we give a lot of detail, we believe our expense growth we exclude that. So we thought good low expense growth this year, excluding the noise that’s going on there. It’s probably going to have overall down mix here anyway what maybe it makes a looks better than anyone. But if you take that out and then I would say, we sort of adjust for when we are looking at expense growth, the acquisitions to give up into half year on this revenue in excess to that.

We think we will have low single-digit expense growth that’s what we are shooting for. Now, if we kept on acquisitions that number will exchange for that decision, but our goal is to try to manage expenses as well as retail, which means investing in other prices in a bunch of prices and hiring some people but cutting back in other areas. And it’s a challenge, but as we have revenue pressures as the whole industry does, particularly for 2013, so we are tying the guarantee expenses in tact. But what we can’t go negative, because our fundamental growth I mean we are growing loans and deposits with double-digit rate, so it’s hard to like, our people are working very hard and we know that we have the balanced approach to it.

Erika Penala – Bank of America Merrill Lynch

Question from the audience.

Unidentified Analyst


Christopher J. Carey

Sure, first of all the interest rates haven’t been that kinds of business, and that’s going to be with us for a while longer. But I mean there is a lot of metrics with the business was part of is just operating margin, which clearly has been compressed in some of the some of the business. We clearly look at net in flows to be, which we had a half in last year.

And there is clearly in some of our businesses, a churn of money that is the next-generation actually getting the money and I don’t understand why that it seems to spending some of that money. The current generation that’s created all it’s saving into them. But a lot of it is, we just look at, can they grow the top line and are they able to improve the margin maintain the margins, there is a lot of different businesses in there and have different margins and that’s who we approach it.

We look at sales production by every business line and they had a good year last year and we are expecting a lot more out of that business and Rockdale is choose to be an excellent surplus the bank business. I think the bank business actually needed for more scale. That I think it’s going to for the most part resolve that.

The other two primary businesses probably to benefit from scale, although that is the only way to get them where we want them to be, but it would be helpful. So that’s why we continue to look at acquisitions. But I think that we’re a big part, but we’re focused on for those businesses too with more sales, people get the top line growing well.

Erika Penala – Bank of America Merrill Lynch

So one more question, the one part of the industry that’s not good news for next year, it’s obviously the margin. I guess recognizing that you could do some deals and recognizing that this could take years to play out. How should we think about the bottom in your margin, if we’re going to be in this low rate environment for longer?

Christopher J. Carey

I mean part of the challenge with that question is it is dependent on deposit growth. So I think that create a scenario where starting in 2013, deposit growth is not in a loan growth. You probably bought margins for the industry. We’ll probably bought them out next year. But if you tell me that next year, deposit growth is going to be $0.5 billion more than loan growth, maybe at some point in time, we have to say no to all that deposit growth or start charging for it or something.

But at some level, if deposit growth at just loan growth, it will continue to put pressure on the margin percentage. I mean if we able to grow, it is partly a function and I don’t really unfortunately noting in with that one. We’re probably getting to the end of that story, but you think that with deposit growth.

Erika Penala – Bank of America Merrill Lynch

So I’ve been surprised about how we’re doing and it’s feels like most management team have sort of backed off and saying that how to make a difference at all in terms in deposit volume?

Christopher J. Carey

When we opted out of that, you could opt out in less cost and I think the year we opted out of it with midyear, same just like $2 million opted out. It’s a pretty easy decision. Although there was a healthy conversion of Board level that whether we should opt out or not. It has not impact.

But the belief now is that there has been an aggregation in a couple of our businesses by individuals in GTA that they were clearly, when it changes, they’re going to move that out of GTA. GTA into our money where there is a government funds. So they go from no rent. That will be an impact at all with kind of deposit growth we’ve been having is prior to figure out. So at the end of the first quarter, I will give you the answer.

Erika Penala – Bank of America Merrill Lynch

So again RSV probably doesn’t sound like that because there could be deals in the pipeline. If we think about the margin trajectory over the next two years, and I agree with you guys, it should slow significantly 14 to your point. Is 32 too optimistic of a bottom for City National or is that about right?

Christopher J. Carey

I think I’m going to hold up given a large significant thing.

Unidentified Analyst

I tried. Chris, thank you so much for your time.

Christopher J. Carey

Thank you for having us. Thanks.

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