Executives
Cary Walker - Senior Vice President and Manager, Corporate Communications
Russell Goldsmith - President and Chief Executive Officer
Chris Carey - Chief Financial Officer
Analysts
Steven Alexopoulos - JPMorgan
Steve Scinicariello - UBS
Joe Morford - RBC Capital Markets
John Pancari - Evercore Partners
Dave Rochester - Deutsche Bank
Erika Penala - Bank of America
Jennifer Demba – SunTrust
Ken Zerbe - Morgan Stanley
Casey Haire - Jefferies
Brett Rabatin - Sterne Agee
Gaston Ceron - Morningstar Equity
Herman Chan - Wells Fargo Security
Lana Chan - BMO Capital Markets
Tim Coffey - FIG Partners
Aaron Deer - Sandler O’Neill
City National Corporation (CYN) Q4 2012 Earnings Conference Call January 24, 2013 5:00 PM ET
Operator
Good afternoon. I would like to welcome everyone to this discussion of City National Corporation’s Fourth Quarter and Year End 2012 Financial Results. My name is Nan and I will be your coordinator for today. At this time, all participants are in listen-only mode. After the speakers’ remarks, there will be a question-and-answer period for analysts and investors. (Operator Instructions) This call is being recorded and will be available shortly after it is completed on City National’s website at cnb.com.
Now, I will turn the call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.
Cary Walker - Senior Vice President and Manager, Corporate Communications
Thank you. Good afternoon. Here to discuss City National’s fourth quarter and year end 2012 highlights are Russell Goldsmith, our President and Chief Executive Officer; and Chris Carey, our Chief Financial Officer.
This call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the company’s future operating results and financial position. These statements involve risks and uncertainties and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from expected results, see the company’s Annual Report on Form 10-K for the year ended December 31, 2011. This afternoon, City National issued a news release outlining its fourth quarter and year end 2012 financial results. To obtain a copy, please visit our website at cnb.com.
After comments by management today, we’ll open up this call to your questions. And now, I will turn it over to our CEO, Russell Goldsmith.
Russell Goldsmith - President and Chief Executive Officer
Good afternoon and thank you for joining us today. As you know, City National just announced its very strong financial results both for the fourth quarter and the full year of 2012. As we detailed in that press release, we put out about an hour ago, City National finished 2012 with double-digit growth in loans and deposits and net income was up 21% to $208 million. That also means that City National has now been profitable for just one quarter shy of 20 consecutive years.
In addition for the very first time, City National’s assets exceed $28 billion, a 21% increase as well from the prior year. In the fourth quarter, net income grew to $47.2 million or $0.87 a share. These strong results primarily reflect continuing gains in market share growth across all of our businesses really, the successful addition of new businesses and personnel, a more diversified revenue stream, and continued strong credit quality. As a result of this and more, City National today is obviously bigger and better, safer and stronger, more capable than ever before. Our relationship-driven value proposition is the premier private and business bank, our increasingly broad product and service offerings, our expanding geographic base and the exceptional service and financial solutions that our outstanding team of now 3,400 colleagues provide everyday all of these things and more continue to foster City National’s success and growth.
Our 2012 results point to a number of positive elements, but loan growth certainly has to be the headline. Between September 30 and year end, we added a record $1.1 billion to City National’s loan portfolio. And that comes after very strong loan growth in the earlier quarters of the year. Originations came to $1.4 billion in the quarter, the fourth quarter, bringing our 2012 total to $4 billion, which is also a new record for City National. In the fourth quarter, loans really grew across the board. The increases were especially strong in our entertainment and specialty banking divisions. Certainly some of the increased C&I borrowings reflect year-end tax planning and transactions. As a result, we anticipate that some perhaps 20% of that growth will be repaid in the first quarter of 2013. Much of the loan growth was from new clients, but at the same time it was good to see commercial line utilization increase for the second straight quarter topping 60% for the first time since the end of 2010. We also saw our commercial real estate and residential mortgage lending grow as well.
Deposits grew by nearly $1 billion and at the end of the fourth quarter they stood at $23.5 billion, higher than at any time in the history of City National. Average core deposits grew 15% year-over-year and they still represent 97% of City National’s total deposit base. Of course a portion of this growth was also driven by year-end tax and transaction activities, some of which were tied to changes anticipated in the tax laws as well as some traditional seasonality. So, a portion of this growth in deposits will also run-off in January.
Credit quality as I mentioned remained quite strong. In the fourth quarter net recoveries totaled $2 million compared to net charge-offs of $2.2 million in the third quarter. Non-performing assets fell just about $10 million from the third quarter and classified loans also continued their decline. Our fourth quarter addition to our loan loss reserve of $7 million, which excludes covered loans is actually good news because it reflects the strong loan growth that I talked about just a moment ago. And it brought our total provision for the year to $10 million. City National of course remains well reserved with its allowances for loan and lease losses at 188 basis points of total loans.
I’m happy to say that the company grew its net income 21% without sacrificing our commitment to invest strategically in new capabilities, offices and people. We made two important acquisitions in the middle of 2012. Rochdale Investment Management has added depth, scale, talent and expertise to our City National asset management – wealth management unit. And those two units will formally be merged at the end of this quarter. Meanwhile the other key acquisition, First American Equipment Finance has dramatically strengthened and expanded our equipment leasing business. Both of these new businesses for us serve clients nationwide and have continued to perform well since we acquired them. Both also contributed nicely to our growth in net income in the second half of 2012.
In that year, we also introduced state-of-the-art mobile banking capabilities and through City National online, our individual clients can now view all of their personal accounts with us, loans, deposits, wealth management, brokerage, they can see all of that on one screen through our new state-of-the-art City National portal.
Turning to capital, City National’s balance sheet remains strong. In the fourth quarter, we issued $175 million of 5.5% preferred stock which adds to our Tier 1 capital. At year-end, City National had more than $2.5 billion in total shareholders’ equity and a Tier 1 common ratio of 8.5%. In light of our strong earnings in 2012 and our strong capital position, in December, City National paid an accelerated quarterly common stock cash dividend of $0.25 a share, plus an additional $0.25 as a special common stock cash dividend.
While we have an increasing number of clients across the country, let me share a few facts on the economy of California where most of our clients certainly are. In California, economic conditions continued to improve in the past year. Even the state government has shown improvement for a variety of reasons and is actually forecasting a balanced budget for the first time in quite some time. Unemployment is still too high in the state, but in November it fell below 10%. Private sector payrolls are up about 2.5% in the state. Technology, of course, continues to be very strong, both in Northern and Southern California. Entertainment and professional services are doing well. International trade had a record year and is up 4% at the ports of Los Angeles and Long Beach.
Particularly noteworthy improvement can again be seen in California’s housing market. The median home price in Southern California, for example, is up 20% year-over-year and home inventories are shrinking. Gains can be seen across the state, but some of the biggest home sales increases and price increases have been in the more expensive coastal regions, such as Orange County and the San Francisco Bay area, where we are focused in particular. The multi-family space, of course, continues to be very strong. Manufacturing is up. Tourism is up. Speaking of tourism and housing, we are also seeing some positive signs in Las Vegas.
Turning to the year ahead and coming off a particularly strong year in 2012, we expect to grow net income very modestly in this New Year even though we expect significant loan growth. Credit quality will likely remain strong, but we do expect to provision somewhat more for that loan growth. We also anticipate meaningful additional deposit growth. Of course, a soft economy, low interest rates, and a flat yield curve will continue to put pressure on the company’s net interest margin as we grow loans. Most banks we have seen reporting are predicting the same interest margin headwinds as I am sure you guys know.
The good news is City National is also adding new sources of revenue like First American and our Equipment Finance business, our expanding bank specialty segments, and the fees that come from expanding and deepening our relationships with our existing and growing client base. We also will continue to invest prudently in the additional capabilities, colleagues and resources that will help City National deliver solid growth for the long-term. All-in-all, we are very pleased with City National’s performance in 2012, and in fact our progress over the past four years through this challenging economy. As we begin 2013, we believe City National is extremely well-positioned for the New Year and the years ahead for a number of reasons. Let me just say some of them for a minute.
First, we begin 2013 with $2.5 billion more in loans than we had a year ago, $3 billion more in deposits, and 22% more in client assets under management at around $38 billion. As that growth across the board demonstrates, we have an outstanding team of 3,400 colleagues who are performing well. We also have more resources, more capabilities, and an enhanced reputation. In 2013, we’ll do a number of things for the first time. We will expand our bank, which has been in New York for a decade by opening two ground floor branch offices in Manhattan, one at our headquarters on Park Avenue, and another near Broadway at 6th and 44th. We also plan to open two more offices in the San Francisco Bay area and expand and upgrade and move our Palo Alto office, which will bring our total number of branch offices to 80 after we consolidate a couple of older offices. By the way, all five of the new offices will launch our new next generation branch office design and focus.
2013 will also mark our first full year of operation with First American Equipment Finance, Rochdale’s merger with City National Asset Management, our expanded franchise finance business, and the start of our new mortgage warehouse team. We also expect to grow our technology banking business with the recent addition of two outstanding experienced bankers in the Silicon Valley. We will further strengthen our product array and build on the momentum we have achieved with our new credit card products, mobile banking, our new software from our Datafaction unit, and the new online portal, I mentioned a moment ago. And of course a highlight coming up in the next couple of weeks will be the Forty Niners’ victory in the Super Bowl. Another triumph for a great California franchise. And most of all, we will remain very committed to our long-standing values and our focus on our clients as the premier private and business bank.
Now, let me turn the call over to our very dynamic CFO, Chris Carey for some more facts about our results.
Chris Carey - Chief Financial Officer
Thanks Russell. Good afternoon, all. Well, as I mentioned at the last quarter call, third quarter earnings included a few unusual positive items. This quarter we have a few going in the other direction. We have a $5 million higher provision although in many ways really going farthest, it’s a positive item, because it’s experiencing some very strong loan growth. Also higher expenses, though including $4.7 million of legal expenses related to the resolution of a legal claim and some seasonal run up of year end accruals including personnel, occupancy, marketing and legal expenses.
Now, I am going to mention just a few words about the margin, non-interest income and expense. First, the margin, at quarter end it stood at 327 basis points. The decline from last quarter was due to $4.6 million in lower income from covered loans, which we had predicted would sooner or later start to come down and it has. These were loans that were repaid or charged off early. Strong growth in loans and deposits and continuing pressure on loans securities yields. Despite compression all year, we managed to grow net interest income 7% in 2012.
I know how focused, almost all of you are on margin pressure and its impact on the industry in general. And there is no doubt that growing loans and deposits is putting more pressure on margin. But it does add to net interest income now, additionally when rates rise, these loans and deposits will provide large margin expansion for companies like ours.
Turning to non-interest income, there is a fair amount of noise in this line because it takes into account to the FDIC loss share and increment expense and a few other acquisition related items. But it’s worth noting the trust and investment fees grew in the fourth quarter and in every quarter of 2012. We continued to get a boost from the acquisition of Rochdale, which provides wealth management service to financial advisors and other intermediaries. Those of you who know City National are familiar with the success we have had in serving business managers in the entertainment industry, will appreciate the fact that Rochdale’s business model gives us a similar opportunity with a broader clientele. Our international services business also gave us a lift. Fee income in the foreign exchange services and letters of credits increased 16% in the third quarter as some clients started selling into new markets.
Finally, a few words about expenses, they grew just 2% from 2011. This also includes overcoming and absorbing two acquisitions that aren’t comparable to the two years. The increase in third quarter mostly reflects the settlement of legal claim and some fourth quarter end of year accruals which I mentioned earlier. Looking forward we continue to see the results of our ongoing focus on expense management and expect expense growth to be very low in 2013. All-in-all we’re very pleased with the company’s results in 2012, loans and deposits grew at record levels, credit quality was strong, we held expenses in check and took a number of important steps to grow the company.
The flattening yield curve that took place during 2012 will no doubt make it harder for banks to grow earnings in 2013. But its impacts subside as the year goes on. And by 2014 we should be looking at a more normal business environment for growth. One thing with City National’s strong balance sheet an exceptional deposit base will stand out. What our company is doing today should create for shareholders a very attractive upside in the year to come.
Now, Russ and I’ll be happy to take your questions and go (indiscernible).
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Steven Alexopoulos with JPMorgan.
Steven Alexopoulos - JPMorgan
Hey everyone. Regarding the strong C&I loan growth, I know it’s tough to know exactly how much growth came from borrowers positioning for higher taxes in 2013, but could you give us some color of what you’re seeing on the loan pipeline here early in the year?
Russell Goldsmith
Well, Steve, hi. We think we have a feel for the first part of what you were saying and that’s why I threw out that we think it’s roughly maybe around 20% of that growth, because these are all clients, these are people we have relationships with, we talk to them, we know what the timeframe is and the purpose. So, we will see how that plays out, but that’s about what we expect. So, taking that out as I said, we were very pleased with the very strong loan growth we had in the fourth quarter, particularly coming after all the loan growth we have had this year.
As you would expect, there was a certain amount of front loading that went on. A lot of people felt compelled for a variety of reasons to get transactions done in the fourth quarter even if it wasn’t something that was going to payoff in the first quarter. So, we have seen a bit of softening in the pipelines between the transition and the tax laws, but I also think things like the fiscal cliff, the uncertainty in Washington, I know anecdotally talking to a lot of clients and talking to a lot of my colleagues who talk to even more clients, that a lot of people have been kind of sitting on their hands for sometime waiting to see how things sort out in Washington. So, I think with the cliff behind us and the debt ceiling at least delayed as an issue and hopefully put to rest, I think we’ll see some pickup as business kind of gets back to business. But right now, the pipelines are in decent shape, but a little bit softer than you would have seen understandably 60 days ago.
Steven Alexopoulos - JPMorgan
Okay, that’s helpful. And just one other question regarding the cash that you invested in the securities portfolio, Chris could you talk about the average rate you are able to invest the cash or what you invested in?
Chris Carey
It’s all a ballot, but from a low of 20 basis points to in the low 3s.
Russell Goldsmith
I think one of the points that’s worth noting is that the average duration in our portfolio is relatively conservative. And we have deliberately tried to be conservative with it, just find the balance between getting a decent yield but not locking the company in to rates for the long-term that we would regret a few years out.
Steven Alexopoulos - JPMorgan
Okay, thanks for the color.
Russell Goldsmith
Thank you.
Operator
Your second question comes from Steve Scinicariello with UBS.
Steve Scinicariello - UBS
Afternoon everyone.
Russell Goldsmith
Hi Steve.
Chris Carey
Hi Steve.
Steve Scinicariello - UBS
Just a couple of quick ones for you, so just as we think about kind of the expense kind of run-rate going forward, I know Chris you mentioned there is a couple of seasonal and kind of run-up factors, just kind of curious to kind of maybe quantify some of those things as we think ahead?
Chris Carey
Well, I guess a couple of things. I mean, overall I would expect our expenses to be down a little in the first quarter and I did try to say I think our expense growth is going to be very low for the whole year. We also have just off, so some of these items, particularly the legal expense most notably we had some things that will shift back down, but we also do have higher FICA cost in the first quarter, so that offset some of it, but with that said, we’d still expect to see lower expense in the first quarter.
Steve Scinicariello - UBS
And then it just seemed like you have too much liquidity flowing in this quarter and just kind of as you look ahead in terms of deploying it, what do you see if you are able to kind of manage the expense growth like you say a very low level, I am assuming that’s just a couple of percent. Does operating leverage still improve in 2013? Does net interest income still go up? Does operating leverage still go up?
Russell Goldsmith
I would just say that forecasting all the line items, I think we can get some improvement in operating leverage.
Steve Scinicariello - UBS
Great, thanks very much.
Operator
Your next question comes from Joe Morford with RBC Capital Markets.
Joe Morford - RBC Capital Markets
Thanks. Good afternoon guys and thanks for the shout out for our Forty Niners.
Russell Goldsmith
Yeah, you are going down there Joe?
Joe Morford - RBC Capital Markets
No, I am not, but I will be watching. It’s been exciting here with although I feel spoiled after the great run the Giants had too.
Russell Goldsmith
Turning it into capital of America.
Joe Morford - RBC Capital Markets
That’s right. I guess, just first a follow-up on the loan growth activity in the quarter. Was there any notable increase in mine utilization rates and any color you can share on some of the activity in your various niches, be it entertainment, technology or the equipment finance?
Russell Goldsmith
Well, we actually did see a slight uptick in line utilization for the second quarter. We are up around 60%. So, I don’t know if I declare a trend yet, but two quarters is a nice set of steps. And I think that we saw a little more optimism particularly in the entertainment space. Equipment finance has been kind of spot-on with what we had anticipated and our team is doing a great job there. So, I think as this economic recovery continues and as people started to anticipate after the election that the fiscal cliff would may be get resolved and then it did get resolved and now as I say the debt ceiling at least kick down the road a little bit if not put to bed.
I think, you’re seeing a little pickup in optimism in some areas, not across the board, let’s say entertainment, technology have been particularly stronger. But beyond that I don’t know that I would try to draw any particular trend. Real estate is a little bit stronger this year for sure than last year. Certain pockets like multi-family as I said particularly strong. Obviously the housing numbers I gave out, you’re seeing strength there. So, probably real estate would be third in that queue if I were to try to stack-rank it.
Joe Morford - RBC Capital Markets
Okay. And anymore color on what we might expect in terms of the provision and I know you said it will be up even this quarter you had net recoveries, you’ve increased the provision, yet the reserve is arguably still pretty healthy it operates at upwards of 1.9%, just kind of run rate might we see there?
Russell Goldsmith
Well, I think we’re trying to strike a balance between putting additional reserves and given the just very significant loan growth that we’re having. And at the same time as economic conditions are better and the quality of the portfolio continues to improve and the problems continue to draw down, you’re also seeing as a percentage the reserve very slowly, very prudently come down a bit. And I think we’d see those trends continuing at this point.
Joe Morford - RBC Capital Markets
Okay. Thanks Russell.
Russell Goldsmith
Thanks.
Operator
Your next question comes from John Pancari with Evercore Partners.
John Pancari - Evercore Partners
Good afternoon.
Chris Carey
Hi John.
Russell Goldsmith
Hi.
John Pancari - Evercore Partners
On the CRV book again, is the bulk of that increased in the end of the period balances all the multi-family strengths that you mentioned?
Chris Carey
It’s I mean we really two areas or three areas that are feeding our bread and butter commercial real estate with dozen more industrial and infill in our dense markets. But we also have owner occupied and private client in our regular commercial banking group, but most of it is owner occupied. So, we have really kind of three groups that’s primarily feet it.
John Pancari - Evercore Partners
Okay. And then also on the loan front, you might have already alluded to this stuff, I missed it, but the difference in the end of period growth – in the period balances versus the averages that are notable in the quarter. And just, if you can comment on that and then, is that an indicator in terms of the go forward?
Chris Carey
Yeah, it is a good indicator. I mean there is a $640 million, $700 million difference which is unusual, but we just had. And then we had somewhat of a weak October, okay November and had a very strong December. So, I just, we don’t have much of the real impact of that in the numbers, because the way it came in, so it does help us a little bit going forward. And we’ll have a little bit of that payoff because some of that is very transactional as Russell mentioned but, even excluding that, you get the net loan growth is very high.
John Pancari - Evercore Partners
Okay, all right. And then lastly on the margin, I just want to get some additional color on your expectation there as just what pace of compression should we expect as we move through 2013 and could it be similar to the type of impression you saw here as the acquired loans, the benefit of accretion there is paring back?
Chris Carey
Yeah, so our expectations based on our view of what will happen with their balance sheets that there will be compression, but only substantially less than you saw in the fourth quarter. Part of that was just extraordinary in terms of the loan and deposit growth. So, our expectation is while they’ll still be compression, but it will be substantially less.
John Pancari - Evercore Partners
Okay and then one more thing if I could, if you don’t mind. The occupancy level, is that also likely to pair back next quarter given the high up-tick in fourth quarter?
Chris Carey
That might come down a little bit, but we have added more space, we are expanding and opening more branches and you have a run-rate, where you have to rent the space in advance before you occupying it. So, it might come back a little bit, but it’s still moving to a higher level.
John Pancari - Evercore Partners
Okay, thanks Chris.
Russell Goldsmith
Unfortunately, the places where we want to expand New York and the San Francisco Bay area, other people have discovered them. So, rental rates are kind of high.
John Pancari - Evercore Partners
Alright, thank you.
Operator
Your next question comes from Dave Rochester with Deutsche Bank.
Dave Rochester - Deutsche Bank
Hey. Good afternoon, guys.
Russell Goldsmith
Hi Dave.
Dave Rochester - Deutsche Bank
You talked about your expectations for stronger loan and deposit growth or I guess strong loan and deposit growth, I was just wondering if there is going to be stronger than what we saw in 2012 on a dollar basis or something roughly in line just curious on the magnitude?
Chris Carey
Well, we are hoping the loan growth that keeps up with what we did in 2012. I think its deposit growth, we continue to be pleasantly surprised at the strength of deposit growth, so it wouldn’t surprise if deposit growth doesn’t grow as significantly in 2013 as it is in ‘12.
Dave Rochester - Deutsche Bank
Got you. Thanks. And just switching to the funding side and the borrowings, I noticed the short-term funding was up a little bit, were you guys pre-funding securities purchases in anticipation of stronger growth this quarter in deposits or was there another reason for that?
Chris Carey
No, it’s really just managing the activities from our declines frankly in the month of December. There was a fair amount of flows significant as we have ever seen. So, we were making sure that we have liquid assets around to take care of those flows. So, I mean, if you look at the average for that line item, it’s like $15 million versus $1.4 billion, sorry, $1.2 billion. So, you should expect to see that come down notably in the first quarter.
Operator
Your next question is from Erika Penala with Bank of America.
Erika Penala - Bank of America
Good afternoon.
Chris Carey
Hi Erika.
Russell Goldsmith
Hi.
Erika Penala - Bank of America
So, just wanted to put everything together, you mentioned that loan growth is going to continue to be strong, deposit growth may not be as strong as last year, you have accretable income that’s going to be lower than last year and causing the name to come down. Last year, you are able to grow 8%, NII 8% in a difficult environment, can you do the same? Are you expecting to do the same in 2013?
Chris Carey
No, I mean last year we have net income of 21% and high net interest income, but I don’t think anybody can get that kind of growth that has a balance sheet like ours with flattening yield curves. So, that’s what’s translating into our outlook, where we say overall, we’ll have very modest net interest income growth, net income growth. So now, we can’t do that kind of number at all.
Erika Penala - Bank of America
And just a follow-up on the top line, I noticed that the international services line was very strong quarter-over-quarter, is that $11 million a good run-rate for next year, because I noticed it was a little bit lower if you look back the past three quarters?
Chris Carey
No, there is always some seasonality in that. So, I am not going to say it is there or it isn’t, but I know we have some seasonality in that. I mean the best way to look at it is over a whole year. So, I would be hesitant, it could be at that level in the first quarter, I am not saying it won’t be, but there does tend to be some seasonality there, particularly in one business that generates a lot of it. But I will say this that we have been expanding our international business and expanding our client base that uses our international capability. So, we think the longer term trend is that we will continue to grow our international income.
Operator
Your next question is from Jennifer Demba with SunTrust.
Jennifer Demba – SunTrust
Good afternoon. I noticed in your press release, it said you added a mortgage warehouse lending team, just wondering what if you could give us some more color on that and talk about your aspirations for that business?
Russell Goldsmith
Sure. Thanks Jennifer. As you know, because you’ve followed us for a long time, City National has become a company that capital is attracted to and that looks to attract talent. And Ally Bank, the former GMAC for a variety of reasons was shutting down their mortgage warehouse unit. And so the talent that was doing a very good job there was going to become available and we connected with them and we’re very pleased that they’ve joined City National, they’re on board now, they’re getting step-up. And we think this is the business that fits nicely into the kinds of things we do. We have been in this business in the past. We’ve kind of set up for it in terms of our systems and have a lot of confidence in the fellows that have joined us. So, we think, it’ll take a few months to get it, that’s been going, but we think that’s going to add a bit to income in 2013.
Jennifer Demba – SunTrust
So, that would be a national business?
Russell Goldsmith
Yes.
Jennifer Demba – SunTrust
Okay. Thank you very much.
Russell Goldsmith
Thank you, Jennifer.
Operator
Your next question is from Ken Zerbe with Morgan Stanley.
Ken Zerbe - Morgan Stanley
Hi. Great. Thanks. Russell, you did mention during your remarks that you expect meaningful deposit growth next year. I guess my question really is, why, like what is it that I understand that you continue to operate, but I guess something if the economy improves businesses, certainly lending more as they grow, but they’re also shirking their deposit base, are their deposits that they have with the bank, are you running the risk of being overly optimistic with deposit growth or is there something else involved that should materially grow your deposits in the coming year?
Russell Goldsmith
Well, I think that if you look at our track record over the last number of years. We’ve been successfully attracting clients and attracting deposits partly in our system, people use deposits to pay for our financial services and obviously the value of deposits keeps declining. So, part of what happens is people increase their deposits to cover the cost of in many cases a growing array of financial products and services that they’re buying from us. And obviously, I think, we’re going to continue to add clients and obviously that brings in more deposits. As we said it in the press release, everything that we’re talking about in our outlook for this year is premised on our current view of the economy and our current economy doesn’t call for a robustly growing economy, but a modestly growing economy with the interest rates staying kind of down at these levels. So, that’s also an environment where I think a lot of cash will continue to sit on the side lines and accumulate. Because City National has seen and has increasingly been recognized as a very safe, strong place, stable place, a bank that didn’t do a lot of the things that people are angry about understandably.
We attract clients more and more. We attract their deposits. So, I think in this environment, plus the expansion of our various businesses that we’ve been talking about. And I know from our budget and our goals, our colleagues are very motivated to grow deposits and believe they can grow deposits. So, I think all-in-all, we will grow deposits probably not at the cliff that we’ve done this past year which frankly exceeded our expectations. But look it would be great, if the economy grew at a much faster cliff than we expect because we’ve got plenty of deposits to lend out. So, if we’re wrong on the deposit side, it probably means we’re going to be surprised on the positive side, on the lending side which would actually be preferable from our point of view at this point. So, I think, whichever way it turns out it looks good for City National.
Ken Zerbe - Morgan Stanley
Alright, great. Thank you.
Operator
Your next question comes from Casey Haire with Jefferies.
Casey Haire - Jefferies
Hey guys, how are you doing?
Chris Carey
Hi Casey.
Russell Goldsmith
Hi.
Casey Haire - Jefferies
So, just one more question on the margin, but the core loan yield. I’m just, I know it varies quarter-to-quarter it depends a lot on mix. But this quarter, where was the average yield on incremental production this quarter versus that 4% existing?
Chris Carey
I don’t have that number handy, but – Casey, but I’m sure it’s down below our average. I mean you’re still getting the impacts of the flight in yield curve on all new loans that you booked, particularly mortgages and certainly securities. So, I mean, so I varies category, but it’s large.
Casey Haire - Jefferies
Okay. And then just last one on the covered book just could you give us an update in terms of what kind of runoffs you expect in that bucket, down $500 million last year, is it more or less going forward?
Russell Goldsmith
It’s going to be less than that. The percentage might be similar or a little bit less. I think the growth, the runoff, it’s going to steadily run down, but I think it will start to slow a little bit as we got out through the next couple of years. So, the dollar amount will be less, because the balances are small and the growth rate will probably be less too, but still 20% plus decline.
Operator
Your next question comes from Brett Rabatin with Sterne Agee.
Brett Rabatin - Sterne Agee
Good afternoon. I wanted to ask somewhat of a follow-up to that question and just that I am just curious to hear if you guys were seeing competition on rate or structure on loans more in the past 90 days than maybe you have?
Russell Goldsmith
Yeah, I don’t think there is some change in the 90 days. And I mean most of the real pressure of course is on the pricing inside, there is some pressure on the structure. I am not worried about what we are doing here at all, but there is always some pressure on in this kind of environment, but the big issue is the pricing side of it, but...
Brett Rabatin - Sterne Agee
Okay.
Russell Goldsmith
But there is not a change in the last 90 days this has been tough all year.
Brett Rabatin - Sterne Agee
Okay. And then the other question I have was just sort of around your guidance for ‘13 and how we were thinking about your improving net income and if I understood correctly, it was a function of maybe spread revenue is not growing much, but you get operating leverage as you grow fee income and expenses don’t do that much. Is that a right way to think about 2013?
Chris Carey
Yeah, that’s a right way to think about.
Brett Rabatin - Sterne Agee
Okay. Great, thank you.
Operator
Your next question comes from Gaston Ceron with Morningstar Equity.
Gaston Ceron - Morningstar Equity
Hi, good afternoon. Thanks for taking my questions.
Russell Goldsmith
Sure.
Gaston Ceron - Morningstar Equity
Little new to the story and still getting ramped up here on the story, but looking over the quarter’s results and your comments and forgive me if you mentioned this earlier and I missed it somehow. But I was wondering following the Rochdale deal, what you might say in regards to your appetite for further acquisitions, I believe that’s something that you’ve said in the past that you are going to continue to look for? And with regards to your general M&A philosophy, can you say anything about what kind of areas or gaps you might be interested in filling, now that this deal is behind you?
Russell Goldsmith
Sure. As I think you have seen we continue to look for acquisitions that fit well within our focus as premier private and business bank. 2012 is an excellent example and we are very pleased about the two deals that we have made. You mentioned Rochdale, obviously we have got an asset management business now that has about $60 billion in client assets that we manage or administer. And we saw Rochdale is a perfect fit with our City National asset management unit which at the time had about $14 billion under management, Rochdale had about five strong in equity, strong national focus. So, there was a good fit, similar focus, it’s very complementary, lot of benefits to putting the two organizations together.
We continue to actively look in the wealth management area for opportunities that fit principally as wealth management businesses that would fit with our existing entities. I think City National Rochdale is going to be fully occupied this year, integrating and getting fully up to speed in the new emerged entity. We have other entities like Lee Munder Capital that I know is always looking for potential units that they might pull in. I don’t see us adding an additional leg to the wealth management table, but we keep our eyes open in case there is an opportunity, but in general we have been kind of concentrating on Lee Munder for Institutional City National Rochdale, City National Securities, our Convergent Wealth unit, and then we have some other affiliates we are pleased about, but probably won’t add to that unless something extremely compelling comes along.
On the bank side, we look on an ongoing basis for banks that would be terrific fits that share our focuses relationship driven private and business bank. We tend to be kind of fuzzy about who we think would be the right fit and we’re disciplined on price. But we’ll continue to look for opportunities and occasionally if there is an opportunity that makes sense and we want to be there when that happens.
The other thing you saw us do this year with the First American agreement was to add a specialized finance unit to our capabilities. We like the equipment finance space very much. We got a terrific management team and they are headed by Bill Oakley. We merged our strong unit into that and so that’s an area where we’re going to look for opportunities as well as other possibilities that may develop that are somewhat like that. So, I think that kind of captures what we’re doing. We don’t need to make any acquisitions. Our forecast, our budget, our plans for 2013 assume no acquisitions just as we made that assumption for 2012, but we continue to look vigilantly for opportunities. I think we’ve got a terrific team and occasionally we can add to our portfolio with something that builds shareholder value and enhances our capabilities for our clients and so we’ll continue o be energetic in that regard.
Operator
Your next question comes from Herman Chan with Wells Fargo Security.
Herman Chan - Wells Fargo Security
Thanks. Questions for Chris, you’ve talked about the slightly occurred as having a detrimental effect on the margin, has the recent performance in the tenure been helpful or do you need to see a more sustained trend?
Russell Goldsmith
We need to see a more sustained trend. I like the movement, but we like it higher and have it stay there. For some people that are forecasting them to be a lot higher sometime this year, I’m not quite there yet, but that would be helpful.
Herman Chan - Wells Fargo Security
Got it. And could you provide some comments on potential pipeline for team list out similar to the mortgage warehouse team, any sense of activity there?
Russell Goldsmith
Well, we wouldn’t give the specifics, we are always, we almost seem to always have something in the queue. I don’t know how much we would have right now, it’s not something we talk about, but we will lift out normally and pay nothing for them, our favorite kind of deal. So we would expect to do some in 2013, we’ve done a number of them in 2012, and we hope we have the opportunity to do some more. We always have a budgeted contingency for them. We have announced that if things come along we have dollars that we set aside in their budgets specifically for that and one off just hiring of talent.
Operator
Your next question comes from Lana Chan with BMO Capital Markets.
Lana Chan - BMO Capital Markets
Hi, good afternoon.
Chris Carey
Hi Lana.
Lana Chan - BMO Capital Markets
I had a two questions, one on the tight program, have you seen any impact since on deposit since as they expired?
Russell Goldsmith
Yeah, we’ve seen a little, it’s a little bit too earlier to see what’s going to have more the tag and we also tend to have a run out at the end of the first quarter for a tax season, but certainly there has been some outflow, but we also have some normal outflow in January. So I think that there will be some impact but it’s likely it will be modest.
Lana Chan - BMO Capital Markets
Thank you. And my second question was on capital with the strong growth this quarter and the capital return to the dividends, you tend to become an equity ratios declined to 5.9% and I think it’s lower than, I think, where you used to target around 7%, how do you look at that and does that limit your flexibility going forward in term of growth?
Chris Carey
Yeah. So I think it’s very low at the year-end because we had $1.2 billion of that’s unsold, just to balance our book with all the activity. And that came really at the end of the month. We would expect that number to be up to certainly 610, 615, 620, when we forecast out at the end of the first quarter. The other thing I would just say is that, it’s certainly a key guideline if we look at rating agencies and look at but we feel slightly different about it because our balance sheet is kind of roadmap above the deposits and I would had to took them into the risk of our balance sheet is at in all-time low when you look at our level deposits and loans. So and our liquidity is stronger than it’s ever been. So we’re keeping an eye on it, but I don’t think it’s going to impact anything at the moment that we plan on doing for 2013.
Operator
Your next question comes from Tim Coffey with FIG Partners.
Tim Coffey - FIG Partners
Hi, afternoon gentlemen.
Russell Goldsmith
Hi.
Tim Coffey - FIG Partners
Hey, Russell you’ve got a pretty good advocator for banks and some of the sizes of City National to the regulators and talking about the some of the proposed rules. Is there anything you can share with us about the feedback you’ve gotten from them?
Russell Goldsmith
Well, I appreciate what you’re saying I think there is a recognition among regulators that what we call mid-sized banks, banks anywhere from $10 billion to $50 billion, really present a different profile than $1 trillion banks are too big to fail banks. And so, what you’ve seen happen with the mid-size bank collation is a growing number of mid-size banks wanting to be sure that not only the regulators understand the important nature of mid-size banks, tend to be like City National, the largest local bank in their communities. But, the regulators have got to implement Dodd-Frank as we all know and coming out of Dodd-Frank there is also growing recognition among mid-size banks that policy makers on Capitol Hill and in the executive branch, probably didn’t have a clear enough view that there is a strong group, an important group of mid-size banks that have to be considered if you will as a third Tier of banks in addition to community banks and the mega bank.
So I think the regulators do understand it and appreciate hearing from us and trying to think through how to apply Dodd-Frank and the regulations that they’ve got to put in place, with some sensitivity to the nuances that the law allows and that the mid-size banks present. I think on Capitol Hill, we’re making some headway, but have more work to do, so that we’re not tarred with a brush as if all banks are the same because they’re not. So, we’re making some progress. I think there is some receptivity, but there is more work to be done. And it’s done in the context of the Dodd-Frank framework which as you may know does have some places in it where it recognizes different treatment for banks under $50 billion and that’s a policy that we need to see extended more broadly through the policy making and regulation of banks in this country.
Operator
Your next question is from Aaron Deer with Sandler O’Neill.
Aaron Deer - Sandler O’Neill
Alright. I thought I had pulled myself out at queue. I think actually most of my questions have been answered, but I guess, as long as you mind I just have one question about the mortgage warehouse business, how quickly do you anticipate the debt business can ramp up and what kind of profitability do you expect of that?
Russell Goldsmith
Well, I think it’d be fair to say, we expect to get more and full operation by beginning sometime in the second quarter and we do expect to be profitable for the year or probably go beyond that.
Chris Casey
It’s not going to be a huge factor in 2013, but we think it will add to our profitability.
Aaron Deer - Sandler O’Neill
Okay, great. Thank you.
Russell Goldsmith
Thanks Aaron.
Operator
At this time, there are no more questions in the audio queue. So, I would like to turn the call back over to Mr. Goldsmith.
Russell Goldsmith - President and Chief Executive Officer
Thank you, operator. And I want to thank everyone. We had a very strong turnout for today’s call and I want to thank everyone for joining us on the call today. We genuinely appreciate the interest that all you have in City National Corporation. Chris and I look forward to speaking with you again hopefully at the end of the first quarter of the New Year. Thank you very much and we’ll talk to you there.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
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