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Executives

Cary Walker - SVP and Manager of Corporate Communications

Russell Goldsmith - President and CEO

Chris Carey - CFO

Analysts

Steven Alexopoulos - JPMorgan

Joe Morford - RBC Capital Markets

Brian Klock - Keefe, Bruyette & Woods

John Pancari - Evercore Partners

Jennifer Demba - SunTrust Robinson Humphrey

Aaron Deer - Sandler O’Neill & Partners

Brett Rabatin - Sterne Agee

Steve Scinicariello - UBS Securities

Connor Fitzgerald - Bank of America-Merrill Lynch

Gary Tenner - D.A. Davidson

Brian Klock - Keefe, Bruyette & Woods

City National Corporation (CYN) F4Q11 Earnings Call January 19, 2011 5:00 PM ET

Operator

Good afternoon. My name is Stephanie and I will be your conference operator today. I would like to welcome everyone to this discussion of City National Corporation’s Fourth Quarter and year end 2011 Financial Results. 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’d like to turn the call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.

Cary Walker

Good afternoon. Here to discuss City National’s fourth quarter and year end 2011 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, commitments 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, 2010.

This afternoon, City National issued a news release outlining its fourth quarter and year end 2011 financial results. To take a copy please visit our website at cnb.com. After comments by management today we we’ll open up your call to questions.

And now I'll turn the call over to our CEO, Russell Goldsmith.

Russell Goldsmith

Thank you very much and good afternoon. We appreciate everybody joining us for this quarterly call. As you know, City National just announced a very solid result for 2011. We are very pleased with the performance of City National both in the fourth quarter and throughout 2011. Despite the continuing very low interest rates in the country, continuing margin pressure and they are still slow growing economy, earnings for the fourth quarter at City National grew to $43.9 million or $0.82 a share which is up 11% from the fourth quarter of 2010 on a year-over-year basis, and net income for the year increased quite strongly by 37% to $172 million.

I am happy to tell you that assets, revenue and deposits all reached record levels for City National. Loan growth picked up in the second half of the year and credit quality continued to show very strong improvement. You know, sitting here at the end of the year, reflecting back on where City National and the country were just three years ago, we are particularly pleased with how City National has emerged from what has certainly been the worst economy in my lifetime.

City National today is bigger, better, safer and stronger than ever before, which I am not sure that everybody would have predicted three years ago. Since the financial crisis began in earnest in the fall of 2008, City National has added on a net basis, 17 banking offices and grown its deposits more than 60% by about $7.7 billion. And of that, our core deposit base is now 96% of our total deposit base, which is quite unusual.

We have essentially taken almost all of the construction risk out of our loan portfolio. We have added 267 colleagues on a net basis, which is almost 10% of our colleague base. Certainly we have added thousands of new clients and grown our capital. We bought four banks from the FDIC, repositioned and strengthened our private bank and our wealth management businesses, grown our physical and digital platforms substantially.

Through all of this, City National has had a consistent set of lending practices. We have been open for business in supporting and lending to our clients through this whole period. And we have grown our earning assets by more than 40% over these past three years.

And in every quarter of those three years, City National has been profitable. In fact, City National has been profitable in every quarter of the past 19 years. So, we have strengthened our balance sheet, enhanced our reputation, increased our market share, improved what we do for our clients, our shareholders, our colleagues and our communities.

Importantly over the past three years and going forward into 2012, City National remains unencumbered by many of the challenges still facing so many banks, especially the very largest ones. City National never loaded up on sub-prime loans, never bought broker mortgages or exotic derivatives. Nor did we fund mortgage backed securities.

We do not face foreclosure related legal challenges and we have no exposure to European debt. City National is highly personalized relationship driven client centric value proposition as the private and business bank, our broad product and service offering and the exceptional service, scale and relationships that are 3300 colleagues provide, continue to distinguish City National from other financial institutions, as they have for almost 60 years.

This year, this was recognized once again by industry expert Greenwich Associates, which released the results of its 2011 small and midsize business banking survey, just this month. And again by Barron’s magazine which ranked City National for the 11 consecutive year among the nation’s top wealth management companies.

Let me talk a bit about the highlights from the fourth quarter and then Chris Carey will give you some more of the important details. Loan balances grew for the third consecutive quarter. Excluding our FDIC covered assets loans increased $145 million on a net basis between September 30 and the end of the year.

C&I lending accounted for a majority of the fourth quarter increase. It is actually worth noting that average commercial loans increased 19% year-over-year. But we also saw good loan growth in our commercial real estate portfolio of finished properties.

Loan production in the quarter was again very strong, growing by about $645 million, which is actually just a little bit below the strong growth we had in the third quarter. And we expect based on our good-looking loan pipeline to see good loan growth continue in 2012.

Turning to deposits at the end of the year, they had grown nearly $480 million from the end of the third quarter to $20.4 billion, higher than our deposit levels have been at any time in the 58 year history of City National. Deposit costs at the same time actually came down. Interest-bearing deposits declined slightly for the second straight quarter, which is actually good because there were more than offset by increases in non-interest-bearing deposits.

Our average core deposits grew 10% year-over-year. And as I said, they represent a remarkable 96% of City National’s total 20 plus billion dollar deposit base. Very importantly, our improving credit quality clearly contributed significantly to City National’s substantial growth in earnings in 2011.

And by nearly every measure of credit quality continues to get better in the fourth quarter. That charge-offs fell by nearly half from the previous quarter, nonperforming assets went down, 42% from a year earlier. And classified loans continued their steady decline.

We did record a fourth quarter loan loss provision of just $5 million. That was, in fact, largely a reflection of loan growth and about our total for the year to $12.5 million as a provision, which is clearly a very dramatic and encouraging drop from 2010. Nonetheless, City National remains well reserved.

At the same time, as we produced these results, City National in 2011 added a net total of six bank branches last year, bringing our total to 79 offices. We expanded into Nashville and Atlanta. And we added two locations here in Los Angeles and added one more both in New York City and in San Jose. The new offices support our growth strategy, our long-standing growth strategy of focusing on densely populated economically strong and growing urban markets. And in particular, three of these new locations expand our reach for the entertainment industry, which is obviously one of our key specialties.

In 2011, of course, we made many other investments as we continue to invest for the long-term. Among other things we purchased an asset based portfolio of loans to high-quality national companies. Adding $170 million to our loan portfolio and some very talented colleagues who are building this profitable business, which has more loans outstanding today than when we acquired that portfolio. We completed the integration of our last and fourth FDIC acquisition Nevada Commerce Bank. And as a result of that and two other FDIC acquisitions in Nevada, we have added net two new branches in Nevada while consolidating a lot of deposits and loans into our existing offices.

At the same time, we have been rightsizing our Nevada team so that our nine branch Nevada bank is profitably and effectively serving both Las Vegas area and northern Nevada. Nevada represents by the way about 3% of the bank’s total assets today. Also in 2011 we enhanced our Trust Business and continue to expand our Wealth Management Advisory capabilities and personnel, to make it more available and effective for our clients throughout our bank footprint.

We also made strong progress this past year with a series of ongoing initiatives, including the expansion of our international trade services and the growth of our preferred banking program in our 79 bank branches. In just three years, this preferred banking program has brought in nearly $1 billion in new loans, deposits and investment assets. We also made selective additions of outstanding personnel to our base of talented colleagues, while at the same time, continuing to fine tune the size and productivity of our organization.

And of course, we added a number of new clients, grew our market share, enhanced our product capabilities, expanded our marketing, and continue to build out our state-of-the-art technology.

I’m happy to say that City National’s capital levels continue to be strong. At yearend City National had more than $2 billion in total equity and a tier one common ratio of 10.2%. Given all of these strong results City National is increasing its quarterly dividend by 25% to $0.25 a share per quarter. This is in line with our long-standing and traditional dividend formula of returning to our shareholders roughly 30 to 35% of the previous year’s earnings.

Turning to 2012, City National expects to grow its net income again. We anticipate loans, deposits and capital ratios to increase. Credit quality should continue to improve as well, though we expect, because of loan growth to see somewhat higher loan loss provisions. We are anticipating that interest rates will continue to stay low all year.

Of course, as you know new offices and new personnel and investments take time to become profitable. But if we expect that even with all of the investments we made in 2011 and with our continuing investments this year in technology, a few new offices and some additional personnel, nonetheless, we expect to increase our expense base only modestly in 2012 due to significant work by our organization to generate greater productivity and efficiency.

Despite the continuing sluggish nature of economic growth in this country, we are optimistic about the year ahead. So all in all, we are very pleased with City National’s performance in 2011 and its performance over the past three years. We believe City National has emerged extremely well-positioned for 2012 and the years ahead. Even with a modestly growing 2012 economy and continuing very low interest rates.

Now let me turn this call over to our CFO, Chris Carey, before we take some questions. And he will give you some more detail about our performance in the last quarter of the year.

Chris Carey

Thank you, Russell. Good afternoon to all. I’m going to add a few words about net interest margin, non-interest income, covered assets and expense growth. First the margin, healthy price competition and lower mortgage rates drove down loan yields in the fourth quarter and the flat yield growth continue to put pressure on the company’s securities portfolio. Still, net interest income grew from both the third quarter of this year in the fourth quarter of 2010. We may see some continuing pressure on loan yields in 2012 but we expect the securities portfolio yields to stabilize or even do better.

Looking at non-interest income, the decline in and trust and investment fees in the fourth quarter of last year reflects the deconsolidation of one of our investment management affiliates and the divestiture of some institutional assets by another affiliate. Total assets under management at year end were $31.3 billion. Now a word about covered assets, the good news is this quarter the impact from the impairment was close to zero.

You can see more detail on page 14 of the financial schedules that I distributed with our news release. We added the schedule last quarter in order to more clearly explain changes to our covered asset portfolio and their impact on the income statement. We also added this quarter three summary categories that should help everyone better understand the impact that cover assets had on our financials in the quarter.

Finally I’ll talk about expenses. They were up just slightly from the third quarter but down 3% from the fourth quarter of 2010. The full-year increase was due mostly to higher cost of compensation, REO, marketing and legal and professional services. About 90% of the 2011 REO expenses are related to cover assets and a lot of these costs are being reimbursed by the FDIC and reflected in our non-interest income. Also, FDIC assessments continue to decline to 4.5 million in the fourth quarter and that’s about the run rate for 2012 if there weren’t any deposit growth, and we certainly expect some deposit growth.

All in all, the fourth quarter was very solid. Deposits continue to grow and loan production was strong, 645 this quarter versus 680 last quarter. Although the production was impacted by lower line usage and early payoffs this quarter, we do not view that as any kind of trend. Credit quality improved across the board and the company held expenses in check.

We feel very good about what the company accomplished in 2011 and we’re looking forward to another solid year in 2012. Today’s low interest rate environment continues to pressure earnings, but we’re cautiously optimistic about the near-term and convinced that over the long-term, we offer shareholders a very attractive upside.

Now Russell and I’ll be happy to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos - JPMorgan

Maybe I will start on the loan growth. How much of the loan growth is coming from market share gains rather than existing customers? And then roughly how much of that would be coming from entertainment?

Russell Goldsmith

I will take the first part of that. About 55% of this is coming from our current client base. And I don’t have an entertainment number handy. I mean, I had another solid quarter, I don’t know that number of the top of my head Steve.

Steven Alexopoulos - JPMorgan

Okay. And then just on the deposits, I know that non-interest-bearing are usually up seasonally in the fourth quarter. This growth seems even beyond that increase. One, where are these deposits coming from? And then secondly, for your customers that are borrowing, what are you seeing from them on the deposit side of it? Are they just leaving the liquidity? Are they starting to use it at all?

Russell Goldsmith

Well, I think the answer is going to be kind of all of the above Steve. I mean, you’re seeing some of it is people putting more deposits in the bank to cover charges that they would otherwise receive given the relatively low value of deposits today.

Obviously, we are adding new clients and so we’re picking up deposits there. You also see it as people move money out of money market funds and/or full out of investments for one reason or another. You are right that we do traditionally get us seasonal lift in deposits towards the end of the year and we anticipate that that’s a factor as well.

You know, obviously we are all looking for signs, which I think your second question is about in terms of where our clients in terms of rising optimism willingness to spend, willingness to borrow. I think it's too early to declare a big trend. But I think we are seeing some small positive signs as people. We are seeing greater appetite to invest in real estate, to do some hiring to build some inventory. But it's still I think tentative.

Operator

Your second question comes from Joe Morford with RBC Capital Markets.

Russell Goldsmith

Joe, good to hear from you. Figured you would be heading out to candlestick any minute.

Joe Morford - RBC Capital Markets

Getting a little less here but minor fever is hitting San Francisco for sure.

Russell Goldsmith

We are conflicted here Joe, because I had entertainments that because of our New York office, we have to root for both teams.

Joe Morford - RBC Capital Markets

I guess a couple things. First, just excluding your OREO expense, you have done an impressive job of holding cost flat the past four quarters, especially the comp line. And you talked about modest expense growth in 2012. Just talking a bit more about how you can do that, how you can limit the growth, balancing the ongoing investments you are making in new offices and people and sounds like technology as well?

Russell Goldsmith

Well, I think it is a balance. We believe strongly in rewarding our organization for doing a very good job. And so compensation increases to our personnel are very competitive and well deserved. And we are attracting new talent.

At the same time, as I alluded to, we are looking at areas where we can right size or fine tune. We consolidated some branches; we reduced some staffing in certain areas. We redeployed people. A classic example would be having more people in the digital space which we continue to invest in. And having some trims in the core system as branch utilization declines nationally for the industry. Obviously, as Chris touched on, we are getting reductions in our FDIC assessments and doing other things to work our expense dollars hard, but without sacrificing competitive compensation and the range of investments that you here us making.

Joe Morford - RBC Capital Markets

Okay. And then I guess the other question was just maybe for Chris on the margin. Recognizing it sounds like you may start to see you security yields plateau or perhaps even increase. What should we expect for the margin in the next few quarters? Should the pace of the decline start to moderate a bit? And how the impact of competitive loan pricing weighs in on that too?

Chris Carey

Well I guess, everybody likes to focus on the margin percentage. And there is a mix in that. It depends what happens to deposit growth and loan growth. But we still think the percentage will be under pressure, we are trying to grow our balance sheet overall and grow net interest income.

I don't want to try to start doing forecasts by quarter, since we’re not even going to give the margin forecast for the year, but the percentage will be under pressure, but our goal here is to grow net interest income and that's one of our many goals for 2012.

Operator

Your next question comes from Brian Klock with Keefe, Bruyette & Woods.

Brian Klock - Keefe, Bruyette & Woods

I guess another quick question Chris on the margin. I guess looking at loan yields and you talked about how competitive the pressure is. Maybe it’s a two part question. One, commercial loan yields went down to 389, to down 20 basis point sequentially. Fairly down 18 basis points. You were able to mitigate that pretty well this quarter with your money market accounts.

You dropped those from 35 basis points to 18. So I guess is there any other sort of if you feel the pressures is still going to be there, is there any way to offset that on the funding side? Or is there any other way to mitigate any of that loan pricing pressure going forward?

Chris Carey

Well other then I think that in the industry deposit cost are going to still come down. We don't have anything that we can really pay off of any substance. We have some senior debt coming due next year but it's not that large of an amount than it is hard to buy any meaningful amount of it back. So on the funding side, the only real thing is that I think in general, deposit loss will continue to tick down and will be aided by that like everyone will. As long as rates stay flat which we expect them to be for the year.

Brian Klock - Keefe, Bruyette & Woods

Okay. Just a quick follow-up on the asset quality, you guys are still, your asset quality is very clean. I noticed that you had a big recovery on the construction side. Your commercial charge-offs were at 96 basis points. Can you maybe talk about what was in there?

Chris Carey

Yes, we had one lumpy item in there. I think in some ways it was a little bit operational. And we hope we can get some potential recovery from it. But we don’t see any particular trend there at all. What’s, the underlying asset quality and our commercial portfolio is still very good. And overall classified and criticized we’re down nicely in the quarter to boot. And so, you know, the general when you look at all the details, more of which will be in our queue the things were looking good.

Operator

Your next question comes from John Pancari with Evercore Partners.

John Pancari - Evercore Partners

Can you give us where the margin came in for through the quarter on a monthly basis? Just want to get a little bit of color on how that trended through the quarter?

Russell Goldsmith

Yeah, we don’t really give our monthly results John. So I’ll pass on that one.

John Pancari - Evercore Partners

Okay. I guess then all on the same lines, can you give a little bit more color on the stabilization, the securities yield that you expect over the next couple of quarters? What’s really driving that and preventing some added reinvestment downside risk?

Russell Goldsmith

Yes, what’s happening there is as I think many people know, we really have two portfolios once we started getting all this liquidity, a short term portfolio and sort of a core portfolio. And we are shifting more into the core portfolio which is a three duration portfolio, from the short term portfolio which is long-duration. So the core portfolio over the year will grow and the yield on that is higher. And that’s how we can stabilize the yield and perhaps get it up a little bit.

John Pancari - Evercore Partners

Okay. And then the income on the paid-off FDIC loans of 18.9 million this quarter. I know that was essentially stable with last quarter up a little bit. Can you give us a little bit of color on where that could go going forward? I know you mentioned to us last quarter that you thought the third quarter was abnormally high, so want to get some color there.

Russell Goldsmith

Well, I mean, we continue to forecast it's going to go down from these high levels that we’ve had in the last couple of quarters. And I still think that number will trend down next year, although there is largely an offsetting affect in net interest income and non-interest income for that. So I do think we’re, I mean, this quarter it was at least very similar to last quarter. It had been really increasing at a rapid rate. So I would expect to see that trend down. But much of it gets offset in non-interest income. So it doesn’t affect the bottom line as much as it sometimes appears to.

Operator

Your next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

Jennifer Demba - SunTrust Robinson Humphrey

Thank you. Good evening. You’ve had very low net charge-offs over the last several quarters. Just wondering what your expectations are as we now get into maybe perhaps a more normal environment?

Russell Goldsmith

Yes look I think that we probably, and I think the industry probably still has another year of relatively low charge-offs. Now some of that will depend on how strong the economy gets eventually. But we can’t predict how much or what recoveries again we’re going to get, but we’re going to get some more recovers. So overall, I think we’ve all got another year where generally charge-offs will be on the lower side.

And then I think 2013 probably gets to a more normal charge off levels.

Jennifer Demba - SunTrust Robinson Humphrey

Okay. And you said before you opened six offices last year. What are the plans for new offices this year?

Russell Goldsmith

Well, we do have some plans for new offices. I would say a handful of new offices. But in the footprint that we are already in. In particular, we are looking to expand our presence in Northern California and have one or two other ideas in mind. But we haven’t announced that yet.

Operator

Your next question comes from Aaron Deer with Sandler O’Neill & Partners.

Aaron Deer - Sandler O’Neill & Partners

Going back to the loan outlook, you sounded fairly optimistic with respect to the pipeline. I know you don’t provide any metrics in what that pipeline is. But can you give us a sense of where it stands currently or where it stood at year end relative to the past two quarters?

Russell Goldsmith

Well, I’d say, maybe if you looked at it year-over-year, from where we were a year ago, the pipeline looks better than it did in January of 2011. We’ve started to do some lending in real estate a year ago. And that’s kind of picked up. Mainly in finished properties and starting to look at and do a little for kind of top rate infill multifamily where things have been very strong and you are seeing some quality development.

But beyond that, I would say it really runs throughout the loan portfolio which is good to see, even seeing towards the end of the year, some improvement in the appetite for lending in small business. And some of our lower middle market clients, some of our entrepreneurs.

No big dramatic leaps, but obviously you can see in our production numbers in the second half of the year, whether it is existing clients or new clients, there is some pickup in the willingness of entrepreneurs across the industries that we're in to borrow and invest to some degree and assuming no big shocks to the economy, and no major gaps in Washington, then I think that trend in our view seems likely to not only continue at this pace, but probably build on itself the strong auto sales and a pickup in hiring. These are all good things.

At the same time I don’t think there are very many companies that have seen a dramatic lift in their revenue in the past year other than some of the auto dealers and some of the tech companies and some other specifics. But it's certainly not across the board yet.

Aaron Deer - Sandler O’Neill & Partners

Okay. And then you’ve spent some time discussing how the rate environment has impacted or it will continue to impact the margin. If you could also comment on how the low rate environment is affecting some of your fee income businesses in terms of waivers for fee services and that sort of thing; has the impact that it's having on your non-interest income, is that sort of played out at this point or going to be more compression there as well?

Chris Carey

I think mercifully it played out at this point. I don’t think it can get any worse.

Operator

Your next question comes from the line of Brett Rabatin with Sterne Agee.

Brett Rabatin - Sterne Agee

It's Sterne Agee. I wanted to just ask, I think it may be a little too early for much open bank M&A, but I’m guessing you might have more appetite for asset managers in the near term and so that does start to happen. Can you give us some color around that?

Russell Goldsmith

I think as we have demonstrated over the past 16 years, City National believes that selectively carefully chosen acquisitions, whether it's banks or asset managers, or as we showed this past year, loan portfolios done right, with the right people and the right focus, at the right price can help build shareholder value and enhance our capabilities.

And we do think that the FDIC Bank acquisitions are pretty much played out for us, although we never lose hope that there might be another opportunity that makes sense.

But, we have been saying for a while that we think that the pressure that's on smaller banks in the country with low interest rates, with suppressed demand for loans, with the depressed equity values and homes, with the rising costs of compliance and regulatory matters and a very slow growing economy, I think there is just no question that that's putting pressure on smaller banks in the United States and we fully expect that there will be banks in that size range under $1 billion, $2 billion, maybe even higher that will realize that they're better off merging with the right partner and getting the benefits of some scale that a bank like City National can provide.

So we obviously haven’t done anything like that but think that those banks should be and would be priced on a basis that would make some sense. Obviously, premiums and multiples are going to be much lower than what we were seeing back in the 07 period.

So we are waiting, watching, looking for opportunities like that in our footprint that would make sense, potentially for us. And at the same time, you're right that we have used acquisitions in our asset management business. In fact Lee Munder, just announced this week a very modest acquisition, but an important one, bringing in a terrific team of small cap investors that somewhat like being in a small bank are going to benefit from being on the larger platform with larger capabilities that Lee Munder provides.

So we will, be as we have been for quite some time, actively monitoring and looking and sifting through, being very selective, looking for things that fit with our stated focus and our price on a basis where we think we can build shareholder value.

Operator

Your next question comes from Steve Scinicariello with UBS Securities.

Steve Scinicariello - UBS Securities

Just a couple of quick one's for you. Definitely just want to follow up on the solid commercial loan growth that we saw and I know you said that 55% is coming from your existing clients.

Just kind of curious, two things. One, what would you say is kind of the current utilization level of that current client base? And then secondly, on that other 45% that you are taking share, where is it really coming from?

Russell Goldsmith

Well the utilization rate has actually come down just a little bit from what it was in the third quarter and its back to kind of where it was at the end of the second quarter.

So utilization rates are still at very low levels historically for our client base, which I think is one of the probably not well understood opportunities for our company.

At some point we should see some kind of a snapback to more normal utilization rates and that would generate a significant amount of interest income relatively quickly. So we’re looking forward to that. But the way we’ve primarily driven loan growth has been by attracting new clients. And there I’d say it’s really across the board.

As everybody knows there are a lot of people in this country who are not happy with the biggest banks in the country for any number of reasons. And so they find themselves coming to City National because we give great service, we don’t have the headline grabbing issues that have angered so many people and yet we’re big enough at $23 billion in assets and given our focus is a private business bank we can really exceed their expectations in terms of lending, deposit, wealth management, treasury management, banking services of one sort or another.

And at the same time, you’ve seen the clients of smaller banks who’ve been shaken by the uncertainties of the last few years that want a bank that still gives them a great service, still is a local bank that understands California and Nevada, the industry they’re in, whether it's in New York or Nashville or San Francisco but has the safety and strength of a bank with our capital levels, the breadth and depth of products and services.

So really, we are kind of in that sweet spot in the hourglass where we can draw our clients both from small banks and big banks or we can draw our investment clients and our investment sales of new clients, new revenue picked up this past year and somewhat similarly drawing from big firms where they don’t feel they're getting the kind of focused customized investment portfolio that meets their needs and risk tolerances and also, get away from the smaller less capable investment advisors and brokers that maybe have been underperforming for them in this choppy environment.

So really, we like our position and think that that’s contributing to our ability to attract clients really from across the spectrum. If they are looking for private banking, business banking, investment management, and even in our very high end retail which we call preferred banking, as I mentioned earlier, that’s been a very strong add to our client base in the last few years.

Steve Scinicariello - UBS Securities

And then just one for Chris maybe. And just given the huge amount of excess liquidity that you guys have on the balance sheet, I'm glad to hear you talking about migrating some of that short-term portfolio to the core portfolio. I was just kind of wondering how we should think about their interplay in terms of like how much potential migration could we see there, if you could quantify them out.

Chris Carey

Well our portfolio keeps on getting larger than we thought it would be. But I think the conservative number is $1.5 billion to $2 billion.

Operator

Your next question comes from Erika Penala with Bank of America - Merrill Lynch.

Connor Fitzgerald - Bank of America-Merrill Lynch

Hi, this is Connor Fitzgerald for Erika. Just quickly on capital return. Obviously you’ve increased your dividend this quarter, but considering your excess capital position, would you consider going beyond your typical 30% to 35% payout ratio, either through a larger dividend or buybacks?

Chris Carey

For some of the reasons I just described a few minutes ago we think there are going to be a number of opportunities both in terms of M&A and intentionally portfolio's personnel to invest that capital in opportunities where we think we can produce strong benefits for our shareholders.

And at the same time we think holding the kind of strong capital levels that we are holding are important because we’re growing our deposits and loans at a meaningful clip.

So we like the flexibility and the ability to act that having these levels of capital give us. And I think being strong in this environment as we've demonstrated over the past three years, really enables you to take advantage of opportunities that may present itself and I think our shareholders are pleased to be getting, I know some very well and they're pleased to see the dividend back up at $1 a year but also want to see this company continue to make the kind of investments that build long term shareholder value more effectively.

Operator

Your next question comes from Gary Tenner with D.A. Davidson.

Gary Tenner - D.A. Davidson

I just had a couple questions. First off on the covered loan portfolio, the run-off there has been around $100 million a quarter or so. Do you have any sense of whether that pace kind of stays where it is, whether it starts to slowdown and where you think that portfolio you may stabilize over the next year or so?

Russell Goldsmith

I think that it will slow down. It's hard to predict whether that will happen in the near term or not. So I'm trying to be cautious. I think it will slowdown but I would expect at least for a couple of more quarters it's going to be at the higher rate that it's been at.

Gary Tenner - D.A. Davidson

Okay. And Chris, you had mentioned that you expected the provision expense to be a little bit higher this year as you've pulled it down a little bit and then you, I guess are presuming some loan growth. To what degree do you think there is the kind of balance between pulling the reserve down a little bit more and then putting some into the reserve for growth? You have any sort of target in mind in terms of where that reserve goes?

Chris Carey

No. We don’t really have a target. We have, like I think pretty much all regional banks have a similar complex methodology that's driven by asset quality and really charge-offs and loan growth. So you don’t necessarily have a target out of that.

And mix is a big factor. I mean, we happen to have our mortgage portfolio that doesn’t require a lot of reserve. So frankly those are the three biggest factors. If you have growth and asset quality stays level or improves or gets worse and then charge-offs.

So it's not a black box at all because you can see how you get to the answer. But it's not the kind of thing that gives you a target to get at. It's really what is happening with your balance sheet. Our philosophy is to be conservative and stay well reserved. But we have a methodology that we think helps us do that.

Operator

Your next question is from Brian Klock with Keefe, Bruyette & Woods.

Brian Klock - Keefe, Bruyette & Woods

I just had a quick follow-up. I know that there is a few questions about capital deployment and excess capital. How should we think about it is Chris? Your Tier 1 comment is at 10.2% but as you guys just talked about with the covered loan book running down, putting more commercial loans on, your risk weighted assets are going to go up. So we should see that come down towards that TCE ratio, even though a TCE ratio of 7.

So if you're actually thinking about acquisitions, are you guys, how low would you go on a TCE ratio? Or is there a target Tier 1 comment you are get to? May be you can kind of help us, how do you guys think about when you are looking at it?

Chris Carey

I will tell you what, we are sort of in a new normal. So you should take everything with a minor grain of salt. But typically, we said we want to keep our TCE revenue ratio around 7 but we are very comfortable going down to 6 as long as we think the skies are clear and we can grow it back up.

So when you look at it that way, we have room and we obviously feel like we have good earnings power to build capital that way. But it's not a pure science either. A big thing is we do things that are opportunities organically and from an acquisition standpoint so we want to have room for that.

Brian Klock - Keefe, Bruyette & Woods

And if you're thinking about, what markets are you focusing on the most? You guys just talked about the bay area in the past, but are you thinking about for bank acquisitions that is, does New York or the New England area, does that look attractive to you guys? You just don’t want to stick to the bay area as another place to kind of build out the franchise?

Russell Goldsmith

Well Brian, we really like the geographies that we are in right now and I think that's really our principal focus for the foreseeable future.

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

Well I want to just thank those of you that are left on the call for joining the call today. As I said at the outset, we're very pleased about our results for 2011 and appreciate your interest in what our organization has done. Chris and I look forward to talking with you again at the end of the first quarter. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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