UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended March 31, 2007
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-10521
CITY NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware |
|
95-2568550 |
(State of Incorporation) |
|
(I.R.S. Employer Identification No.) |
City National Center
400 North Roxbury Drive, Beverly Hills, California, 90210
(Address of principal executive offices)(Zip Code)
(310) 888-6000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes xNo o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated filer x |
|
Accelerated filer o |
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of May 1, 2007, there were 48,773,064 shares of Common Stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
Dollars in thousands, except per share amounts |
|
2007 |
|
2006 |
|
2006 |
|
|||
|
|
(Unaudited) |
|
|
|
(Unaudited) |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Cash and due from banks |
|
$ |
494,231 |
|
$ |
423,114 |
|
$ |
457,156 |
|
Due from banks - interest-bearing |
|
77,214 |
|
60,940 |
|
48,890 |
|
|||
Federal funds sold |
|
210,000 |
|
127,000 |
|
|
|
|||
Securities available-for-sale - cost $2,951,124; $3,018,190; and $3,963,816 at March 31, 2007, December 31, 2006 and March 31, 2006, respectively |
|
2,903,546 |
|
2,954,372 |
|
3,850,173 |
|
|||
Trading account securities |
|
35,981 |
|
147,907 |
|
57,353 |
|
|||
Loans |
|
10,649,598 |
|
10,386,005 |
|
9,567,403 |
|
|||
Less allowance for loan and lease losses |
|
161,005 |
|
155,342 |
|
156,482 |
|
|||
Net loans |
|
10,488,593 |
|
10,230,663 |
|
9,410,921 |
|
|||
Premises and equipment, net |
|
103,259 |
|
94,745 |
|
84,884 |
|
|||
Deferred tax asset |
|
129,614 |
|
125,992 |
|
136,573 |
|
|||
Goodwill |
|
366,007 |
|
249,641 |
|
246,681 |
|
|||
Intangibles |
|
54,190 |
|
37,920 |
|
36,961 |
|
|||
Bank-owned life insurance |
|
70,780 |
|
70,156 |
|
68,094 |
|
|||
Affordable housing investments |
|
66,011 |
|
65,800 |
|
66,422 |
|
|||
Customers acceptance liability |
|
4,100 |
|
3,877 |
|
3,142 |
|
|||
Other assets |
|
260,521 |
|
292,254 |
|
270,996 |
|
|||
Total assets |
|
$ |
15,264,047 |
|
$ |
14,884,381 |
|
$ |
14,738,246 |
|
|
|
|
|
|
|
|
|
|||
Liabilities |
|
|
|
|
|
|
|
|||
Demand deposits |
|
$ |
5,690,413 |
|
$ |
6,002,068 |
|
$ |
5,945,485 |
|
Interest checking deposits |
|
783,846 |
|
755,098 |
|
786,513 |
|
|||
Money market deposits |
|
3,746,925 |
|
3,216,949 |
|
3,402,368 |
|
|||
Savings deposits |
|
155,825 |
|
153,417 |
|
179,376 |
|
|||
Time deposits-under $100,000 |
|
296,312 |
|
198,329 |
|
175,360 |
|
|||
Time deposits-$100,000 and over |
|
1,933,060 |
|
1,846,955 |
|
1,419,427 |
|
|||
Total deposits |
|
12,606,381 |
|
12,172,816 |
|
11,908,529 |
|
|||
Federal funds purchased and securities sold under repurchase agreements |
|
310,738 |
|
422,903 |
|
526,920 |
|
|||
Other short-term borrowings |
|
50,667 |
|
97,525 |
|
151,522 |
|
|||
Subordinated debt |
|
270,174 |
|
269,848 |
|
269,785 |
|
|||
Long-term debt |
|
224,079 |
|
217,569 |
|
213,819 |
|
|||
Reserve for off-balance sheet credit commitments |
|
17,005 |
|
16,424 |
|
15,752 |
|
|||
Other liabilities |
|
162,080 |
|
164,079 |
|
154,162 |
|
|||
Acceptances outstanding |
|
4,100 |
|
3,877 |
|
3,142 |
|
|||
Total liabilities |
|
13,645,224 |
|
13,365,041 |
|
13,243,631 |
|
|||
Minority interest in consolidated subsidiaries |
|
28,285 |
|
28,425 |
|
25,225 |
|
|||
|
|
|
|
|
|
|
|
|||
Commitments and contingencies |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Shareholders Equity |
|
|
|
|
|
|
|
|||
Preferred Stock authorized - 5,000,000; none outstanding |
|
|
|
|
|
|
|
|||
Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,802,792; 50,718,794; and 50,693,108 shares at March 31, 2007, December 31, 2006 and March 31, 2006, respectively |
|
50,803 |
|
50,719 |
|
50,693 |
|
|||
Additional paid-in capital |
|
421,990 |
|
412,248 |
|
399,974 |
|
|||
Accumulated other comprehensive loss |
|
(30,940 |
) |
(41,386 |
) |
(73,248 |
) |
|||
Retained earnings |
|
1,271,092 |
|
1,264,697 |
|
1,148,116 |
|
|||
Treasury shares, at cost - 1,769,592; 2,835,908; and 826,230 shares at March 31, 2007, December 31, 2006 and March 31, 2006, respectively |
|
(122,407 |
) |
(195,363 |
) |
(56,145 |
) |
|||
Total shareholders equity |
|
1,590,538 |
|
1,490,915 |
|
1,469,390 |
|
|||
Total liabilities and shareholders equity |
|
$15,264,047 |
|
$ |
14,884,381 |
|
$ |
14,738,246 |
|
See accompanying Notes to the Unaudited Consolidated Financial Statements.
2
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
|
|
For the three months ended |
|
||||
|
|
March 31, |
|
||||
In thousands, except per share amounts |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Interest Income |
|
|
|
|
|
||
Loans |
|
$ |
180,643 |
|
$ |
155,433 |
|
Securities available-for-sale |
|
32,120 |
|
41,850 |
|
||
Trading account |
|
787 |
|
556 |
|
||
Due from banks - interest-bearing |
|
531 |
|
213 |
|
||
Federal funds sold and securities purchased under resale agreements |
|
183 |
|
140 |
|
||
Total interest income |
|
214,264 |
|
198,192 |
|
||
Interest Expense |
|
|
|
|
|
||
Deposits |
|
50,324 |
|
27,453 |
|
||
Federal funds purchased and securities sold under repurchase agreements |
|
7,556 |
|
8,933 |
|
||
Subordinated debt |
|
4,024 |
|
3,493 |
|
||
Other long-term debt |
|
3,597 |
|
3,329 |
|
||
Other short-term borrowings |
|
1,471 |
|
2,578 |
|
||
Total interest expense |
|
66,972 |
|
45,786 |
|
||
Net interest income |
|
147,292 |
|
152,406 |
|
||
Provision for credit losses |
|
|
|
|
|
||
Net interest income after provision for credit losses |
|
147,292 |
|
152,406 |
|
||
Noninterest Income |
|
|
|
|
|
||
Trust and investment fees |
|
30,254 |
|
21,774 |
|
||
Brokerage and mutual fund fees |
|
13,780 |
|
11,684 |
|
||
Cash management and deposit transaction charges |
|
8,471 |
|
8,064 |
|
||
International services |
|
6,463 |
|
5,989 |
|
||
Bank-owned life insurance |
|
624 |
|
934 |
|
||
Gain on sale of securities |
|
269 |
|
708 |
|
||
Loss on sale of loans and other assets |
|
(46 |
) |
|
|
||
Other |
|
6,160 |
|
5,777 |
|
||
Total noninterest income |
|
65,975 |
|
54,930 |
|
||
Noninterest Expense |
|
|
|
|
|
||
Salaries and employee benefits |
|
77,984 |
|
71,616 |
|
||
Net occupancy of premises |
|
9,458 |
|
9,012 |
|
||
Legal and professional fees |
|
9,274 |
|
9,417 |
|
||
Depreciation and amortization |
|
5,000 |
|
4,660 |
|
||
Information services |
|
4,999 |
|
4,456 |
|
||
Marketing and advertising |
|
3,998 |
|
4,016 |
|
||
Office services |
|
2,747 |
|
2,691 |
|
||
Amortization of intangibles |
|
1,630 |
|
1,891 |
|
||
Equipment |
|
718 |
|
632 |
|
||
Other operating |
|
5,955 |
|
5,704 |
|
||
Total noninterest expense |
|
121,763 |
|
114,095 |
|
||
Minority interest expense |
|
2,076 |
|
1,228 |
|
||
Income before income taxes |
|
89,428 |
|
92,013 |
|
||
Income taxes |
|
32,883 |
|
34,781 |
|
||
Net income |
|
$ |
56,545 |
|
$ |
57,232 |
|
Net income per share, basic |
|
$ |
1.18 |
|
$ |
1.16 |
|
Net income per share, diluted |
|
$ |
1.15 |
|
$ |
1.12 |
|
Shares used to compute income per share, basic |
|
47,968 |
|
49,484 |
|
||
Shares used to compute income per share, diluted |
|
49,087 |
|
51,309 |
|
||
Dividends per share |
|
$ |
0.46 |
|
$ |
0.41 |
|
See accompanying Notes to the Unaudited Consolidated Financial Statements.
3
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
Additional |
|
other |
|
|
|
|
|
Total |
|
||||||
|
|
Shares |
|
Common |
|
paid-in |
|
comprehensive |
|
Retained |
|
Treasury |
|
shareholders |
|
||||||
Dollars in thousands |
|
issued |
|
stock |
|
capital |
|
income (loss) |
|
Earnings |
|
stock |
|
equity |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, December 31, 2005 |
|
50,600,943 |
|
$ |
50,601 |
|
$ |
396,659 |
|
$ |
(51,551 |
) |
$ |
1,121,474 |
|
$ |
(59,175 |
) |
$ |
1,458,008 |
|
Adjustment to initially apply Staff Accounting Bulletin No. 108 |
|
|
|
|
|
|
|
|
|
(10,174 |
) |
|
|
(10,174 |
) |
||||||
Balance, January 1, 2006 |
|
50,600,943 |
|
50,601 |
|
396,659 |
|
(51,551 |
) |
1,111,300 |
|
(59,175 |
) |
1,447,834 |
|
||||||
Net income |
|
|
|
|
|
|
|
|
|
57,232 |
|
|
|
57,232 |
|
||||||
Other comprehensive loss net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net unrealized loss on securities available-for-sale |
|
|
|
|
|
|
|
(20,817 |
) |
|
|
|
|
(20,817 |
) |
||||||
Net unrealized loss on cash flow hedges, net of reclassification of $1.2 million net loss included in net income |
|
|
|
|
|
|
|
(634 |
) |
|
|
|
|
(634 |
) |
||||||
Other net unrealized loss |
|
|
|
|
|
|
|
(246 |
) |
|
|
|
|
(246 |
) |
||||||
Total other comprehensive loss |
|
|
|
|
|
|
|
(21,697 |
) |
|
|
|
|
(21,697 |
) |
||||||
Issuance of shares for stock options |
|
68,246 |
|
68 |
|
(1,128 |
) |
|
|
|
|
6,118 |
|
5,058 |
|
||||||
Restricted stock grants |
|
23,919 |
|
24 |
|
(24 |
) |
|
|
|
|
|
|
|
|
||||||
Stock-based employee compensation expense |
|
|
|
|
|
2,680 |
|
|
|
|
|
|
|
2,680 |
|
||||||
Tax benefit from stock options |
|
|
|
|
|
1,787 |
|
|
|
|
|
|
|
1,787 |
|
||||||
Cash dividends paid |
|
|
|
|
|
|
|
|
|
(20,416 |
) |
|
|
(20,416 |
) |
||||||
Repurchased shares, net |
|
|
|
|
|
|
|
|
|
|
|
(3,088 |
) |
(3,088 |
) |
||||||
Balance, March 31, 2006 |
|
50,693,108 |
|
$ |
50,693 |
|
$ |
399,974 |
|
$ |
(73,248 |
) |
$ |
1,148,116 |
|
$ |
(56,145 |
) |
$ |
1,469,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, December 31, 2006 |
|
50,718,794 |
|
$ |
50,719 |
|
$ |
412,248 |
|
$ |
(41,386 |
) |
$ |
1,264,697 |
|
$ |
(195,363 |
) |
$ |
1,490,915 |
|
Adjustment to initially apply FASB Interpretation 48 |
|
|
|
|
|
|
|
|
|
(28,036 |
) |
|
|
(28,036 |
) |
||||||
Balance, January 1, 2007 |
|
50,718,794 |
|
50,719 |
|
412,248 |
|
(41,386 |
) |
1,236,661 |
|
(195,363 |
) |
1,462,879 |
|
||||||
Net income |
|
|
|
|
|
|
|
|
|
56,545 |
|
|
|
56,545 |
|
||||||
Other comprehensive income net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Change due to amortization of prior service cost |
|
|
|
|
|
|
|
40 |
|
|
|
|
|
40 |
|
||||||
Net unrealized gain on securities available-for-sale |
|
|
|
|
|
|
|
9,278 |
|
|
|
|
|
9,278 |
|
||||||
Net unrealized gain on cash flow hedges, net of reclassification of $1.1 million net loss included in net income |
|
|
|
|
|
|
|
1,128 |
|
|
|
|
|
1,128 |
|
||||||
Total other comprehensive income |
|
|
|
|
|
|
|
10,446 |
|
|
|
|
|
10,446 |
|
||||||
Issuance of shares for stock options |
|
|
|
|
|
(8,481 |
) |
|
|
|
|
15,286 |
|
6,805 |
|
||||||
Restricted stock grants |
|
83,998 |
|
84 |
|
(84 |
) |
|
|
|
|
|
|
|
|
||||||
Stock-based employee compensation expense |
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
||||||
Tax benefit from stock options |
|
|
|
|
|
3,577 |
|
|
|
|
|
|
|
3,577 |
|
||||||
Cash dividends paid |
|
|
|
|
|
|
|
|
|
(22,114 |
) |
|
|
(22,114 |
) |
||||||
Repurchased shares, net |
|
|
|
|
|
|
|
|
|
|
|
(18,964 |
) |
(18,964 |
) |
||||||
Issuance of shares for acquisition |
|
|
|
|
|
11,381 |
|
|
|
|
|
76,634 |
|
88,015 |
|
||||||
Balance, March 31, 2007 |
|
50,802,792 |
|
$ |
50,803 |
|
$ |
421,990 |
|
$ |
(30,940 |
) |
$ |
1,271,092 |
|
$ |
(122,407 |
) |
$1,590,538 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
For the three months ended |
|
||||
|
|
March 31, |
|
||||
Dollars in thousands |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
||
Net income |
|
$ |
56,545 |
|
$ |
57,232 |
|
Adjustments to net income: |
|
|
|
|
|
||
Provision for credit losses |
|
|
|
|
|
||
Amortization of restricted stock grants |
|
1,475 |
|
1,070 |
|
||
Amortization of intangibles |
|
1,630 |
|
1,891 |
|
||
Depreciation and amortization |
|
5,000 |
|
4,660 |
|
||
Amortization of cost and discount on long-term debt |
|
177 |
|
177 |
|
||
Stock-based employee compensation expense |
|
1,874 |
|
1,610 |
|
||
Net change in deferred income tax benefit |
|
7,533 |
|
(15,545 |
) |
||
Loss on sale of loans and other assets |
|
46 |
|
|
|
||
Gain on sales of securities |
|
(269 |
) |
(708 |
) |
||
Net change in other assets and other liabilities |
|
(11,545 |
) |
(70,397 |
) |
||
Net decrease in trading securities |
|
111,926 |
|
1,991 |
|
||
Other, net |
|
(5,515 |
) |
63,071 |
|
||
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
168,877 |
|
45,052 |
|
||
|
|
|
|
|
|
||
Cash Flows From Investing Activities |
|
|
|
|
|
||
Purchase of securities available-for-sale |
|
(41,839 |
) |
(53,276 |
) |
||
Sales of securities available-for-sale |
|
48,499 |
|
1 |
|
||
Maturities and paydowns of securities |
|
124,703 |
|
119,177 |
|
||
(Loan originations), net of principal collections |
|
127,757 |
|
(301,801 |
) |
||
Purchase of premises and equipment |
|
(7,338 |
) |
(6,676 |
) |
||
Acquisition of BBNV, net of cash acquired |
|
(50,398 |
) |
|
|
||
Other investing activities |
|
(2,752 |
) |
(942 |
) |
||
|
|
|
|
|
|
||
Net cash provided (used) by investing activities |
|
198,632 |
|
(243,517 |
) |
||
|
|
|
|
|
|
||
Cash Flows From Financing Activities |
|
|
|
|
|
||
Net decrease in deposits |
|
(7,442 |
) |
(229,943 |
) |
||
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements |
|
(112,165 |
) |
336,730 |
|
||
Net (decrease) increase in short-term borrowings, net of transfers from long-term debt |
|
(46,858 |
) |
51,522 |
|
||
Net increase (decrease) in other borrowings |
|
43 |
|
(159 |
) |
||
Proceeds from exercise of stock options |
|
6,805 |
|
5,058 |
|
||
Tax benefit from exercise of stock options |
|
3,577 |
|
1,787 |
|
||
Stock repurchases |
|
(18,964 |
) |
(3,088 |
) |
||
Cash dividends paid |
|
(22,114 |
) |
(20,416 |
) |
||
|
|
|
|
|
|
||
Net cash (used) provided by financing activities |
|
(197,118 |
) |
141,491 |
|
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
170,391 |
|
(56,974 |
) |
||
Cash and cash equivalents at beginning of year |
|
611,054 |
|
563,020 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
781,445 |
|
$ |
506,046 |
|
|
|
|
|
|
|
||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
76,985 |
|
$ |
50,534 |
|
Income taxes |
|
2,000 |
|
17,600 |
|
See accompanying Notes to the Unaudited Consolidated Financial Statements.
5
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation - City National Corporation (the Corporation) is the holding company for City National Bank (CNB) and Business Bank of Nevada (BBNV). CNB and BBNV (together the banks) deliver banking, trust and investment services through 61 offices in Southern California, the San Francisco Bay area, Nevada and New York City. As of March 31, 2007, the Corporation had a majority ownership interest in eight investment advisor subsidiaries and minority interests in one other firm. The Company also has an unconsolidated subsidiary, Business Bancorp Capital Trust I. Because the banks comprise substantially all of the business of the Corporation, references to the Company mean the Corporation and the banks together. The Corporation is approved as a financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999. The financial statements of the Company include the accounts of the Corporation, its non-bank subsidiaries, CNB, CNBs wholly-owned subsidiaries and BBNV, after the elimination of all material intercompany transactions.
2. Acquisitions - On February 28, 2007, the Company completed the acquisition of Business Bank Corporation, the parent of Business Bank of Nevada (BBNV) and an unconsolidated subsidiary, Business Bancorp Capital Trust I, in a cash and stock transaction valued at $167 million. BBNV operated as a wholly-owned subsidiary of City National Corporation until after the close of business on April 30, 2007, at which time it was merged into CNB.
On March 27, 2007, City National Corporation announced a definitive agreement to acquire Lydian Wealth Management in an all-cash transaction. Founded in 1994, Lydian Wealth Management now manages or advises on client assets totaling $7.3 billion. The firm is headquartered in Rockville, Md., and has offices in the Washington, D.C. area, New York, Philadelphia, Atlanta, Seattle and Portland. The acquisition closed on May 1, 2007 and Lydian Wealth Management became an affiliate of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003. At the same time, Lydian Wealth Management changed its name to Convergent Wealth Advisors. All of its senior executives signed employment agreements and acquired a significant minority ownership interest in their company. As of May 1, 2007, the Corporation had a majority ownership interest in nine investor advisor subsidiaries and a minority interest in one other firm.
3. Accounting Policies - Our accounting and reporting policies conform to generally accepted accounting principles (GAAP) and practices in the financial services industry. The Company is on the accrual basis of accounting for income and expense. To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and income and expenses during the reporting period. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature, and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006. The results for the 2007 interim periods are not necessarily indicative of the results expected for the full year.
During the three months ended March 31, 2007, the following accounting pronouncements were issued or became effective:
· The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on January 1, 2007. FIN 48 provides a single model for addressing uncertainty in tax positions and requires expanded annual disclosures about tax positions. Upon adoption, the Company recognized a cumulative effect adjustment as a charge to January 1, 2007 retained earnings and the contingent tax reserve of $28.0 million.
· On February 15, 2007 the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 will be effective for the Company as of January 1, 2008. The implementation may result in recognizing certain financial assets and liabilities (for which the fair value option was selected) at fair value, with the effect of the adoption recorded as a cumulative effect adjustment to beginning retained earnings. Additional disclosures will be required upon implementation. The statement is not expected to have a significant impact on the Companys financial statements.
Certain prior period balances have been reclassified to conform to the current period presentation.
6
4. Investment Securities - All securities other than trading securities are classified as available-for-sale and are valued at fair value. Unrealized gains or losses on securities available-for-sale are excluded from net income but are included as separate components of other comprehensive income net of taxes. Premiums or discounts on securities available-for-sale are amortized or accreted into income using the interest method over the expected lives of the individual securities. The value of securities is reduced when unrealized losses are considered other-than-temporary, and a new cost basis is established for the securities. Any other-than-temporary loss is included in net income. Realized gains or losses on sales of securities available-for-sale are recorded using the specific identification method. Trading securities are valued at market value with any unrealized gains or losses included in net income.
5. Equity Securities - The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2007:
|
|
|
|
|
Total number of Shares |
|
|
|
||
|
|
|
|
Average |
|
(or Units) Purchased as |
|
Maximum Number of |
|
|
|
|
Total Number of |
|
Price Paid |
|
Part of Publicly |
|
Shares that May Yet |
|
|
|
|
Shares (or Units) |
|
per Share (or |
|
Announced Plans or |
|
Be Purchased Under |
|
|
Period |
|
Purchased |
|
Unit) |
|
Programs |
|
the Plans or Programs |
|
|
03/01/07 - 03/31/07 |
|
263,000 |
|
$ |
72.11 |
|
263,000 |
|
794,700 |
|
|
|
263,000 |
|
72.11 |
|
263,000 |
(1) |
794,700 |
(1) |
|
(1) On July 6, 2006, the Companys Board of Directors authorized the Company to repurchase 1.5 million additional shares of the Companys stock following completion of its previously approved initiative. Unless terminated earlier by resolution of our Board of Directors, the program will expire when the Company has repurchased all shares authorized for repurchase thereunder. During the first quarter of 2007, the Company repurchased an aggregate of 263,000 shares of our common stock pursuant to this repurchase program and there are 794,700 shares remaining to be purchased. We received no shares in payment for the exercise price of stock options.
Basic earnings per share are based on the weighted average shares of common stock outstanding less unvested restricted shares and units. Diluted earnings per share give effect to all potential dilutive common shares, which consist of stock options and restricted shares and units that were outstanding during the period. At March 31, 2007, there were 759,937 antidilutive options compared to no antidilutive options at March 31, 2006.
6. Stock-Based Compensation - The Company applies FASB Statement No. 123 (revised), Share Based Payment, (SFAS 123R) in accounting for stock option plans. The Company uses a Black-Scholes model to determine the stock-based compensation expense for these plans. On March 31, 2007, the Company had one stock-based compensation plan, which provides for granting of stock options, restricted shares and restricted units. The compensation cost that has been charged against income for all stock-based awards was $3.4 million for the three months ended March 31, 2007, compared to $2.7 million for the three-month period ended March 31, 2006. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $1.4 million and $1.1 million for the three months ended March 31, 2007 and 2006, respectively.
Stock Option Plan
The City National Corporation Amended and Restated Omnibus Plan, (the Plan), approved by shareholders, permits the grant of stock options and restricted stock or restricted units to its employees not to exceed 3.9 million shares of common stock. The Company believes that such awards better align the interest of its employees with those of its shareholders. Employee option awards are granted with an exercise price equal to the market price of the Companys stock at the date of grant. These awards vest in four years and have 10-year contractual terms. Restricted stock awards generally vest over five years. Certain option and stock awards provide for accelerated vesting if there is a change in control (as defined in the Plan), or upon retirement, for options issued prior to January 31, 2006. All unexercised options expire 10 years from the grant date.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The Company evaluates exercise behavior and values options separately for executive and non-executive employees. Expected volatilities are based on the historical volatility of the Companys stock. The Company uses historical data to predict option exercise and employee termination behavior. The expected term of options granted is
7
derived from the historical exercise activity over the past 20 years and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is equal to the dividend yield of the Companys stock at the time of the grant.
|
For the three months ended |
|
|||
|
|
March 31, |
|
||
|
|
2007 |
|
2006 |
|
Expected volatility |
|
21.81 |
% |
25.34 |
% |
Weighted-average volatility |
|
21.83 |
% |
24.99 |
% |
Expected dividends |
|
2.52 |
% |
2.14 |
% |
Expected term (in years) |
|
6.0 |
|
6.0 |
|
Risk-free rate |
|
4.70 |
% |
4.50 |
% |
Using the Black-Scholes model, the weighted-average grant-date fair values of options granted during the three-month periods ended March 31, 2007 and 2006 were $17.13 and $19.89, respectively. The total intrinsic values of options exercised during the three-month periods ended March 31, 2007 and 2006 were $8.7 million, and $5.1 million, respectively.
A summary of option activity under the Plan as of March 31, 2007 are presented below:
|
|
|
|
|
Weighted- |
|
|
|
|||
|
|
|
|
Weighted- |
|
Average |
|
Aggregate |
|
||
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
||
|
|
Shares |
|
Exercise |
|
Contractual |
|
Value |
|
||
Options |
|
(000s) |
|
Price |
|
Term |
|
($000) |
|
||
|
|
|
|
|
|
|
|
|
|
||
Outstanding at January 1, 2007 |
|
4,295 |
|
$ |
49.54 |
|
5.14 |
|
$ |
103,349 |
|
Granted |
|
343 |
|
74.76 |
|
9.89 |
|
(397 |
) |
||
Exercised |
|
(221 |
) |
34.41 |
|
2.11 |
|
(8,673 |
) |
||
Forfeited or expired |
|
(21 |
) |
58.01 |
|
6.12 |
|
(324 |
) |
||
Outstanding at March 31, 2007 |
|
4,396 |
|
52.23 |
|
5.65 |
|
93,955 |
|
||
Exercisable at March 31, 2007 |
|
3,158 |
|
45.23 |
|
4.49 |
|
89,580 |
|
||
A summary of the changes in the Companys unvested options during the three-month period ended March 31, 2007 is presented below:
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date |
|
Unvested Shares |
|
Shares (000s) |
|
Fair Value |
|
Unvested at January 1, 2007 |
|
1,139 |
|
17.23 |
|
Granted |
|
343 |
|
17.13 |
|
Vested |
|
(228 |
) |
17.46 |
|
Forfeited |
|
(16 |
) |
16.23 |
|
Unvested at March 31, 2007 |
|
1,238 |
|
17.20 |
|
The number of shares vested during the three-month period ended March 31, 2007 was 228,089. As of March 31, 2007, there was $39.6 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.5 years.
7. Interest Rate Risk Management - As part of its asset and liability management strategies, the Company uses interest-rate swaps to reduce cash flow variability and to moderate changes in the fair value of financial instruments. In accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), the
8
Company recognizes derivatives as assets or liabilities on the balance sheet at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction.
In accordance with SFAS 133, the Company documents its hedge relationships, including identification of the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating each derivative contract as either (i) a fair value hedge which is a hedge of a recognized asset or liability, (ii) a cash flow hedge which hedges a forecasted transaction or the variability of the cash flows to be received or paid related to a recognized asset or liability or (iii) an undesignated hedge, a derivative instrument not designated as a hedging instrument whose change in fair value is recognized directly in the consolidated statement of income. All derivatives designated as fair value or cash flow hedges are linked to specific hedged items or to groups of specific assets and liabilities on the balance sheet. Effectiveness is measured retrospectively and prospectively, and the Company expects that the hedges will continue to be effective in the future. The Company did not have any undesignated hedges as of March 31, 2007 and did not have any significant undesignated hedges during 2007 or 2006.
Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in SFAS 133) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the expectation that the hedge will remain effective prospectively.
For cash flow hedges, in which derivatives hedge the variability of cash flows (interest payments) on loans that are indexed to U.S. dollar LIBOR or the Banks prime interest rate, the effectiveness is assessed prospectively at the inception of the hedge, and prospectively and retrospectively at least quarterly thereafter. Ineffectiveness of the cash flow hedges is measured on a quarterly basis using the hypothetical derivative method. For cash flow hedges, the effective portion of the changes in the derivatives fair value is not included in current earnings but is reported as other comprehensive income. When the cash flows associated with the hedged item are realized, the gain or loss included in other comprehensive income is recognized on the same line in the consolidated statement of income as the hedged item, i.e. included in interest income on loans. Any ineffective portion of the changes of fair value of cash flow hedges is recognized immediately in other noninterest income in the consolidated statement of income.
For fair value hedges, in which derivatives hedge the fair value of certain certificates of deposits, subordinated debt and other long-term debt, the interest-rate swaps are structured so that all key terms of the swaps match those of the underlying debt transactions, therefore ensuring hedge effectiveness at inception. On a quarterly basis, fair value hedges are analyzed to ensure that the key terms of the hedged items and hedging instruments remain unchanged, and the hedging counterparties are evaluated to ensure that there are no adverse developments regarding counterparty default, therefore ensuring continuous effectiveness. For fair value hedges, the effective portion of the changes in the fair value of derivatives is reflected in current earnings, on the same line in the consolidated statement of income as the related hedged item.
Fair values are determined from verifiable third-party sources that have considerable experience with the interest-rate swap market. For both fair value and cash flow hedges, the periodic accrual of interest receivable or payable on interest rate swaps is recorded as an adjustment to net interest income for the hedged items.
The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) a derivative expires or is sold, terminated, or exercised, (iii) a derivative is un-designated as a hedge, because it is unlikely that a forecasted transaction will occur; or (iv) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a derivative instrument in a fair value hedge is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged asset or liability would be subsequently accounted for in the same manner as other components of the carrying amount of that asset or liability. For interest-earning assets and interest-bearing liabilities, such adjustments would be amortized into earnings over the remaining life of the respective asset or liability. If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, related amounts reported in other comprehensive income is reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.
8. Income Taxes - The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) on January 1, 2007. Upon adoption, the Company recognized a cumulative effect adjustment as a charge to January 1, 2007 retained earnings and a reduction to the contingent tax reserve of $28.0 million, which is comprised of a $25.2 million tax liability and $2.8 million of accrued interest.
9
As previously reported, on December 31, 2003, the California Franchise Tax Board (FTB) announced that it had taken the position that certain REIT and regulated investment company (RIC) tax deductions would be disallowed. Prior to this announcement, the Company had created two REITs (one of which was formed as a RIC in 2000) to raise capital for the Bank. While company management continues to believe that the tax benefits related to the REITs are appropriate, the Company deemed it prudent to participate in the statutory Voluntary Compliance Initiative-Option 2, requiring payment of all California taxes and interest on potential tax exposures for the 2000-2002 tax years. The Company may then claim a refund for the taxes paid while avoiding potential penalties. The Company has elected to proceed with its claim for refund as allowed by law. At December 31, 2006, the Company had a state tax receivable of $43.1 million, or $28.0 million after giving effect to Federal tax benefits.
As mentioned above, in connection with the adoption of FIN 48, the Company reduced the state tax receivable balance to zero. Management continues to aggressively pursue its claims with the Franchise Tax Board for the REIT and RIC refunds for the tax years 2000 through 2004. While an outcome from the claims cannot be predicted with certainty, a potentially adverse result will not have any material impact on the Companys financial position.
The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as an income tax provision expense. For the period ended March 31, 2007, the Company recognized approximately $372,000 in interest and penalties. The Company had approximately $9.8 million and $6.6 million of accrued interest and penalties as of March 31, 2007 and December 31, 2006, respectively.
The Company is currently under examination by the Internal Revenue Service (IRS) for the tax years 2002 and 2003. The Company expects to begin IRS appeals proceedings related to certain tax positions taken in these years. The potential financial statement impact of these items range from a tax benefit of $3.6 million to a tax expense of $6.8 million.
The Company is also under examination by the Franchise Tax Board for the tax years 1998 through 2004. The Company expects to complete its Franchise Tax Board examination for the years 1998 though 2003 within the next 12 months. The potential financial statement impact resulting from the completion of the audit is not determinable at this time.
9. Retirement Plans - The Company has a profit-sharing retirement plan with an Internal Revenue Code Section 401(k) feature covering eligible employees. Contributions are made annually into a trust fund and are allocated to participants based on their salaries. For the first quarter of 2007, the Company recorded profit sharing contributions expense of $3.9 million, compared to $4.0 million for the first quarter of 2006.
The Company has a Supplemental Executive Retirement Plan (SERP) for one of its executive officers. The SERP meets the definition of a pension plan per FASB Statement No. 87, Employers Accounting for Pensions. The Company applies FASB Statement No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), in accounting for the SERP. At March 31, 2007, there was a $4.3 million unfunded pension liability. The total expense for both the first quarter of 2007 and the first quarter of 2006 was $0.2 million.
The Company does not provide any other post-retirement benefits.
10. Segment Reporting - The Company has one primary reportable segment, Commercial and Private Banking. All other subsidiaries, Wealth Management Services and the portion of corporate departments allocated to the operating segments other than Commercial and Private Banking are aggregated in a second reportable segment called Other. The factors considered in determining whether individual operating segments could be aggregated include that the operating segments (i) offer the same products and services, (ii) offer services to the same types of clients, (iii) provide services in the same manner and (iv) operate in the same regulatory environment.
The Commercial and Private Banking reportable segment is the aggregation of the Commercial and Private Banking, Real Estate, Entertainment and Core Banking operating segments. The Commercial and Private Banking segment provides banking products and services, including commercial and mortgage loans, lines of credit, deposits, cash management services, international trade finance and letters of credit to small and medium-sized businesses, entrepreneurs and affluent individuals. This segment primarily serves clients in California, New York and Nevada.
10
The Other segment includes the Banks Wealth Management Services division, all non-bank subsidiaries, including the asset management affiliates, and the portion of corporate departments, including the Treasury Department and the Asset Liability Funding Center, that have not been allocated to Commercial and Private Banking.
Business segment earnings are the primary measure of the segments performance as evaluated by management. Business segment earnings include direct revenue and expenses of the segment as well as corporate and inter-unit allocations. Allocations of corporate expenses, such as data processing and human resources, are calculated based on estimated activity levels for the fiscal year. Inter-unit support groups, such as Operational Services, are allocated based on actual expenses incurred. Capital is allocated using a methodology similar to that used for federal regulatory risk-based capital purposes. If applicable, any provision for credit losses is allocated based on various credit factors, including but not limited to, credit risk ratings, ratings migration, charge-offs and recoveries and loan growth. Income taxes are charged on unit income at the Companys statutory tax rate of 42 percent.
Exposure to market risk is managed in the Treasury department. In order to allocate interest rate risk to the units comprising the Commercial and Private Banking segment, a fund transfer pricing (FTP) model is used. The FTP model records a cost of funds or credit for funds using a combination of matched maturity funding for most assets and liabilities and a blended rate based on various maturities for the remaining assets and liabilities.
The Banks investment portfolio and unallocated equity are included in the Other segment. Core deposit intangible amortization is charged to the affected operating segments.
Operating results for the Commercial and Private Banking reportable segment are discussed in the Segment Results section of Managements Discussion and Analysis. Selected financial information for each segment is presented in the following tables.
CITY NATIONAL CORPORATION
Segment Results
|
|
Commercial |
|
Commercial |
|
|
|
|
|
|
|
|
|
||||||
|
|
& Private |
|
& Private |
|
|
|
|
|
Consolidated |
|
Consolidated |
|
||||||
(Dollars in thousands) |
|
Banking |
|
Banking |
|
Other |
|
Other |
|
Company |
|
Company |
|
||||||
Three months ended March 31, |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Earnings Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income |
|
$ |
147,262 |
|
$ |
146,949 |
|
$ |
30 |
|
$ |
5,457 |
|
$ |
147,292 |
|
$ |
152,406 |
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Noninterest income |
|
16,000 |
|
15,593 |
|
49,975 |
|
39,337 |
|
65,975 |
|
54,930 |
|
||||||
Depreciation and amortization |
|
1,560 |
|
1,428 |
|
3,440 |
|
3,232 |
|
5,000 |
|
4,660 |
|
||||||
Noninterest expense and minority interest |
|
91,300 |
|
88,872 |
|
27,539 |
|
21,791 |
|
118,839 |
|
110,663 |
|
||||||
Income before income taxes |
|
70,402 |
|
72,242 |
|
19,026 |
|
19,771 |
|
89,428 |
|
92,013 |
|
||||||
Income taxes |
|
25,124 |
|
27,186 |
|
7,759 |
|
7,595 |
|
32,883 |
|
34,781 |
|
||||||
Net income |
|
$ |
45,278 |
|
$ |
45,056 |
|
$ |
11,267 |
|
$ |
12,176 |
|
$ |
56,545 |
|
$ |
57,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Selected Average Balances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans |
|
$ |
10,457,105 |
|
$ |
9,520,055 |
|
$ |
97,839 |
|
$ |
104,961 |
|
$ |
10,554,944 |
|
$ |
9,625,016 |
|
Total Assets |
|
10,882,554 |
|
9,943,628 |
|
3,953,868 |
|
4,882,887 |
|
14,836,422 |
|
14,826,515 |
|
||||||
Deposits |
|
10,713,925 |
|
10,595,529 |
|
1,202,389 |
|
992,109 |
|
11,916,314 |
|
11,587,638 |
|
||||||
Performance measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Return on average assets |
|
1.7 |
% |
1.8 |
% |
1.2 |
% |
1.0 |
% |
1.5 |
% |
1.6 |
% |
11
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
Percent change |
|
|||||||||
|
|
At or for the three months ended |
|
March 31, 2007 from |
|
|||||||||||||
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
|
March 31, |
|
|||||||
Dollars in thousands, except per share amounts |
|
2007 |
|
2006 |
|
2006 |
|
2006 |
|
2006 |
|
|||||||
|
|
(Unaudited) |
|
|
|
(Unaudited) |
|
|
|
|
|
|||||||
For The Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
56,545 |
|
$ |
58,556 |
|
$ |
57,232 |
|
|
(3 |
)% |
|
|
(1 |
)% |
|
Net income per common share, basic |
|
1.18 |
|
1.23 |
|
1.16 |
|
|
(4 |
) |
|
|
2 |
|
|
|||
Net income per common share, diluted |
|
1.15 |
|
1.19 |
|
1.12 |
|
|
(3 |
) |
|
|
3 |
|
|
|||
Dividends per common share |
|
0.46 |
|
0.41 |
|
0.41 |
|
|
12 |
|
|
|
12 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
At Quarter End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Assets |
|
$ |
15,264,047 |
|
$ |
14,884,381 |
|
$ |
14,738,246 |
|
|
3 |
|
|
|
4 |
|
|
Securities |
|
2,939,527 |
|
3,102,279 |
|
3,907,526 |
|
|
(5 |
) |
|
|
(25 |
) |
|
|||
Loans |
|
10,649,598 |
|
10,386,005 |
|
9,567,403 |
|
|
3 |
|
|
|
11 |
|
|
|||
Deposits |
|
12,606,381 |
|
12,172,816 |
|
11,908,529 |
|
|
4 |
|
|
|
6 |
|
|
|||
Shareholders equity |
|
1,590,538 |
|
1,490,915 |
|
1,469,390 |
|
|
7 |
|
|
|
8 |
|
|
|||
Book value per common share |
|
32.73 |
|
31.39 |
|
29.66 |
|
|
4 |
|
|
|
10 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Average Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Assets |
|
$14,836,422 |
|
$ |
14,711,880 |
|
$ |
14,826,515 |
|
|
1 |
|
|
|
0 |
|
|
|
Securities |
|
2,971,386 |
|
3,171,429 |
|
3,970,440 |
|
|
(6 |
) |
|
|
(25 |
) |
|
|||
Loans |
|
10,554,944 |
|
10,244,914 |
|
9,625,016 |
|
|
3 |
|
|
|
10 |
|
|
|||
Deposits |
|
11,916,314 |
|
12,050,585 |
|
11,587,638 |
|
|
(1 |
) |
|
|
3 |
|
|
|||
Shareholders equity |
|
1,518,744 |
|
1,473,110 |
|
1,480,527 |
|
|
3 |
|
|
|
3 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Selected Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Return on average assets (annualized) |
|
1.55 |
% |
1.58 |
% |
1.57 |
% |
|
(2 |
) |
|
|
(1 |
) |
|
|||
Return on average shareholders equity (annualized) |
|
15.10 |
|
15.77 |
|
15.68 |
|
|
(4 |
) |
|
|
(4 |
) |
|
|||
Corporations tier 1 leverage |
|
8.59 |
|
8.81 |
|
8.85 |
|
|
(3 |
) |
|
|
(3 |
) |
|
|||
Corporations tier 1 risk-based capital |
|
10.62 |
|
11.09 |
|
12.26 |
|
|
(5 |
) |
|
|
(13 |
) |
|
|||
Corporations total risk-based capital |
|
13.12 |
|
13.60 |
|
15.41 |
|
|
(4 |
) |
|
|
(15 |
) |
|
|||
Period-end shareholders equity to period-end assets |
|
10.42 |
|
10.02 |
|
9.97 |
|
|
4 |
|
|
|
5 |
|
|
|||
Dividend payout ratio, per share |
|
39.11 |
|
33.55 |
|
35.65 |
|
|
17 |
|
|
|
10 |
|
|
|||
Net interest margin |
|
4.49 |
|
4.51 |
|
4.62 |
|
|
0 |
|
|
|
(3 |
) |
|
|||
Efficiency ratio (1) |
|
57.18 |
|
58.21 |
|
54.80 |
|
|
(2 |
) |
|
|
4 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Nonaccrual loans to total loans |
|
0.22 |
% |
0.20 |
% |
0.15 |
% |
|
10 |
|
|
|
47 |
|
|
|||
Nonaccrual loans and OREO to total loans and OREO |
|
0.22 |
|
0.20 |
|
0.15 |
|
|
10 |
|
|
|
47 |
|
|
|||
Allowance for loan and lease losses to total loans |
|
1.51 |
|
1.50 |
|
1.64 |
|
|
1 |
|
|
|
(8 |
) |
|
|||
Allowance for loan and lease losses to nonaccrual loans |
|
687.55 |
|
743.88 |
|
1,075.11 |
|
|
(8 |
) |
|
|
(36 |
) |
|
|||
Net recoveries/(charge-offs) to average loans (annualized) |
|
0.05 |
|
(0.11 |
) |
0.11 |
|
|
(145 |
) |
|
|
(55 |
) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
At Quarter End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Assets under management (2) |
|
$ |
27,290,505 |
|
$ |
27,859,729 |
|
$ |
19,246,286 |
|
|
(2 |
) |
|
|
42 |
|
|
Assets under management or administration (2) |
|
48,648,658 |
|
48,684,237 |
|
40,435,813 |
|
|
0 |
|
|
|
20 |
|
|
(1) The efficiency ratio is defined as noninterest expense excluding OREO expense divided by total revenue (net interest income on a fully taxable-equivalent basis and noninterest income).
(2) Excludes $9.3 billion, $9.1 billion, and $9.4 billion of assets under management for an asset manager in which City National held minority ownership interests as of March 31, 2007, December 31, 2006, and March 31, 2006, respectively.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
See Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, below relating to forward-looking statements included in this report.
Critical Accounting Policies
The Companys accounting policies are fundamental to understanding managements discussion and analysis of results of operations and financial condition. The Company has identified five policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These policies relate to the accounting for securities, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, derivatives and hedging activities, stock-based compensation plans and income taxes. The Company, with the concurrence of the Audit & Risk Committee and the Compensation, Nominating and Governance Committee, has reviewed and approved these critical accounting policies, which are further described in Managements Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) of the Notes to The Consolidated Financial Statements in the Companys Form 10-K as of December 31, 2006.
Overview
City National Corporation is the parent company of City National Bank and Business Bank of Nevada. The Corporation offers a full complement of banking, trust and investment services through 61 offices, including 15 full-service regional centers, in Southern California, the San Francisco Bay Area, Nevada and New York City. As of March 31, 2007, the Corporation had a majority ownership interest in eight investment advisor subsidiaries and minority interests in one asset management firm. The Company also has an unconsolidated subsidiary, Business Bancorp Capital Trust I.
The Corporation recorded net income of $56.5 million, or $1.15 per share, for the first quarter of 2007 compared with $57.2 million or $1.12 per share, for the first quarter of 2006, and $58.6 million, or $1.19 per share, for the fourth quarter of 2006.
Recent Developments
On February 28, 2007, the Company completed the acquisition of Business Bank Corporation, the parent of Business Bank of Nevada (BBNV) and an unconsolidated subsidiary, Business Bancorp Capital Trust I. BBNV operated as a wholly-owned subsidiary of City National Corporation until its merger into City National Bank after the close of business on April 30, 2007. This acquisition is expected to be neutral to earnings per share in 2007, and modestly accretive to earnings per share in 2008. The Companys first-quarter 2007 financial results reflect its February 28, 2007 acquisition of Business Bank of Nevada.
On May 1, 2007, the Company completed the acquisition of Lydian Wealth Management, an investment advisory firm headquartered in Rockville, Maryland, that manages or advises on clients assets of approximately $7.3 billion. Lydian Wealth Management changed its name to Convergent Wealth Advisors and became an affiliate of Convergent Capital Management, LLC which the Company acquired in 2003. As of May 1, 2007, the Company had a majority ownership interest in nine investment advisory subsidiaries and a minority interest in one other firm.
Highlights
· Revenue of $213.3 million represented a 3 percent increase from the first quarter of 2006.
· Average loans grew to $10.6 billion, up 10 percent from the first quarter of 2006. Lending rose in all major categories, and average loan balances reached $10.6 billion for the first time primarily due to organic growth but also to the acquisition of Business Bank of Nevada.
· Loan recoveries again exceeded charge-offs. Nonaccrual loans amounted to $23.4 million or 0.22 percent of total loans.
13
· Average deposits of $11.9 billion were up 3 percent from the first quarter of 2006, but down 1 percent from the fourth quarter of 2006 due to seasonal variations.
· Noninterest income totaled $66.0 million, up 20 percent from the first quarter of last year due to fee revenue generated by wealth management, international banking and cash management services as well as the May 31, 2006 acquisition of Independence Investments. At March 31, 2007, noninterest income accounted for 31 percent of City Nationals total revenue.
· Assets under direct management amounted to $27.3 billion, a 42 percent increase from the first quarter of 2006. Assets under management or administration grew 20 percent to $48.6 billion.
· Credit quality remained strong in the first quarter of 2007. The company required no provision for credit losses and remained adequately reserved at 1.51 percent of total loans.
· City Nationals first-quarter return on average equity was 15.10 percent and its return on average assets was 1.55 percent.
As disclosed in the Companys press release on first-quarter earnings, management expects earnings per share to grow at a rate of between 3 percent and 5 percent in 2007.
Net Interest Income
Fully taxable-equivalent net interest income totaled $151.3 million in the first quarter of 2007, compared to $156.1 million for the same period last year and $154.6 million in the fourth quarter of 2006. Interest income increases, primarily attributable to increases in average commercial and residential mortgage loans, were offset by higher funding costs in the first quarter of 2007.
|
For the three months ended |
|
|
|
For the three |
|
|
|
||||||
|
|
March 31, |
|
% |
|
months ended |
|
% |
|
|||||
Dollars in millions |
|
2007 |
|
2006 |
|
Change |
|
December 31, 2006 |
|
Change |
|
|||
Average Loans |
|
$ |
10,554.9 |
|
$ |
9,625.0 |
|
10 |
|
$ |
10,244.9 |
|
3 |
|
Average Total Securities |
|
2,971.4 |
|
3,970.5 |
|
(25 |
) |
3,171.4 |
|
(6 |
) |
|||
Average Earning Assets |
|
13,660.7 |
|
13,699.0 |
|
0 |
|
13,585.3 |
|
1 |
|
|||
Average Deposits |
|
11,916.3 |
|
11,587.6 |
|
3 |
|
12,050.6 |
|
(1 |
) |
|||
Average Core Deposits |
|
10,044.8 |
|
10,334.0 |
|
(3 |
) |
10,081.5 |
|
0 |
|
|||
Fully Taxable-Equivalent Net Interest Income |
|
151.3 |
|
156.1 |
|
(3 |
) |
154.6 |
|
(2 |
) |
|||
Net Interest Margin |
|
4.49 |
% |
4.62 |
% |
(3 |
) |
4.51 |
% |
(1 |
) |
|||
The Companys yield on earning assets reached 6.48 percent up from 6.35 percent in the fourth quarter of 2006 and 5.98 percent in the first quarter of 2006. The banks prime rate was 8.25 percent on March 31, 2006, unchanged from December 31, 2006 and up 50 basis points from 7.75 percent on March 31, 2006.
First-quarter average loan balances reached $10.6 billion, up 10 percent over the same period last year and 3 percent from the fourth quarter of 2006. The commercial lending portfolio grew 9 percent over the first quarter of 2006 and 5 percent from the fourth quarter of 2006. Residential mortgage loans grew 9 percent from the first quarter of last year and 2 percent from the fourth quarter of last year. Commercial real estate mortgage loans were 5 percent and 3 percent higher than the first and fourth quarters of 2006, respectively. Real estate construction loans increased 28 percent from the same period a year ago and 2 percent from the fourth quarter of 2006.
14
The Companys average deposits totaled $11.9 billion in the first quarter of 2007, a 3 percent increase from the first quarter of 2006, due in part to the acquisition of Business Bank of Nevada, but 1 percent lower than the fourth quarter of 2006, due to seasonal variations.
As part of its long-standing asset and liability management strategies, the Company uses plain vanilla interest rate swaps to hedge loans, deposits, and borrowings. The notional value of these swaps was $1.2 billion at March 31, 2007, down $0.4 billion from March 31, 2006, and $0.2 billion lower than December 31, 2006. The following table presents the impact of fair value and cash-flow hedges on net interest income:
|
First Quarter |
|
Fourth Quarter |
|
First Quarater |
|
||||
Dollars in millions |
|
2007 |
|
2006 |
|
2006 |
|
|||
Fair value Hedges |
|
$ |
(0.3 |
) |
$ |
(0.3 |
) |
$ |
0.9 |
|
Cash-flow Hedges |
|
(1.9 |
) |
(2.6 |
) |
(2.1 |
) |
|||
Total |
|
$ |
(2.2 |
) |
$ |
(2.9 |
) |
$ |
(1.2 |
) |
The expense from existing swaps of loans qualifying as cash-flow hedges expected to be recorded in net interest income within the next 12 months is $3.5 million. Both the expense for the quarter and the projected expense for the next 12 months should be viewed in context with the benefit the Company has and will receive from increases in interest rates.
Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. The following table presents the components of net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2007 and 2006.
15
Net Interest Income Summary
|
|
For the three months ended |
|
For the three months ended |
|
||||||||||||
|
|
March 31, 2007 |
|
March 31, 2006 |
|
||||||||||||
|
|
|
|
Interest |
|
Average |
|
|
|
Interest |
|
Average |
|
||||
|
|
Average |
|
income/ |
|
interest |
|
Average |
|
income/ |
|
interest |
|
||||
Dollars in thousands |
|
Balance |
|
expense (1)(4) |
|
rate |
|
Balance |
|
expense (1)(4) |
|
rate |
|
||||
Assets (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial |
|
$ |
4,145,574 |
|
$ |
74,142 |
|
7.25 |
% |
$ |
3,813,133 |
|
$ |
62,230 |
|
6.62 |
% |
Commercial real estate mortgages |
|
1,894,271 |
|
35,056 |
|
7.51 |
|
1,808,537 |
|
32,887 |
|
7.37 |
|
||||
Residential mortgages |
|
2,899,138 |
|
39,235 |
|
5.41 |
|
2,665,791 |
|
35,101 |
|
5.27 |
|
||||
Real estate construction |
|
1,031,176 |
|
22,130 |
|
8.70 |
|
806,444 |
|
16,781 |
|
8.44 |
|
||||
Equity lines of credit |
|
393,952 |
|
7,631 |
|
7.86 |
|
334,027 |
|
5,904 |
|
7.17 |
|
||||
Installment |
|
190,833 |
|
3,594 |
|
7.64 |
|
197,084 |
|
3,602 |
|
7.41 |
|
||||
Total loans (3) |
|
10,554,944 |
|
181,788 |
|
6.98 |
|
9,625,016 |
|
156,505 |
|
6.59 |
|
||||
Due from banks - interest-bearing |
|
72,431 |
|
531 |
|
2.97 |
|
43,587 |
|
213 |
|
1.98 |
|
||||
Federal funds sold and securities purchased under resale agreements |
|
13,858 |
|
183 |
|
5.36 |
|
13,150 |
|
140 |
|
4.32 |
|
||||
Securities available-for-sale |
|
2,917,110 |
|
34,261 |
|
4.70 |
|
3,926,174 |
|
43,885 |
|
4.47 |
|
||||
Trading account securities |
|
54,276 |
|
815 |
|
6.09 |
|
44,266 |
|
574 |
|
5.26 |
|
||||
Other interest-earning assets |
|
48,047 |
|
706 |
|
5.96 |
|
46,806 |
|
603 |
|
5.23 |
|
||||
Total interest-earning assets |
|
13,660,666 |
|
218,284 |
|
6.48 |
|
13,698,999 |
|
201,920 |
|
5.98 |
|
||||
Allowance for loan losses |
|
(157,429 |
) |
|
|
|
|
(155,118 |
) |
|
|
|
|
||||
Cash and due from banks |
|
422,564 |
|
|
|
|
|
438,693 |
|
|
|
|
|
||||
Other non-earning assets |
|
910,621 |
|
|
|
|
|
843,941 |
|
|
|
|
|
||||
Total assets |
|
$ |
14,836,422 |
|
|
|
|
|
$ |
14,826,515 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest checking accounts |
|
$ |
749,092 |
|
$ |
880 |
|
0.48 |
|
$ |
808,466 |
|
$ |
451 |
|
0.23 |
|
Money market accounts |
|
3,419,390 |
|
25,131 |
|
2.98 |
|
3,387,860 |
|
15,111 |
|
1.81 |
|
||||
Savings deposits |
|
154,879 |
|
180 |
|
0.47 |
|
178,577 |
|
162 |
|
0.37 |
|
||||
Time deposits - under $100,000 |
|
231,913 |
|
2,334 |
|
4.08 |
|
180,098 |
|
1,242 |
|
2.80 |
|
||||
Time deposits - $100,000 and over |
|
1,871,499 |
|
21,799 |
|
4.72 |
|
1,253,613 |
|
10,487 |
|
3.39 |
|
||||
Total interest-bearing deposits |
|
6,426,773 |
|
50,324 |
|
3.18 |
|
5,808,614 |
|
27,453 |
|
1.92 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Federal funds purchased and securities sold under repurchase agreements |
|
581,681 |
|
7,556 |
|
5.27 |
|
808,801 |
|
8,933 |
|
4.48 |
|
||||
Other borrowings |
|
599,459 |
|
9,092 |
|
6.15 |
|
748,982 |
|
9,400 |
|
5.09 |
|
||||
Total interest-bearing liabilities |
|
7,607,913 |
|
66,972 |
|
3.57 |
|
7,366,397 |
|
45,786 |
|
2.52 |
|
||||
Noninterest-bearing deposits |
|
5,489,541 |
|
|
|
|
|
5,779,024 |
|
|
|
|
|
||||
Other liabilities |
|
220,224 |
|
|
|
|
|
200,567 |
|
|
|
|
|
||||
Shareholders equity |
|
1,518,744 |
|
|
|
|
|
1,480,527 |
|
|
|
|
|
||||
Total liabilities and shareholders equity |
|
$ |
14,836,422 |
|
|
|
|
|
$ |
14,826,515 |
|
|
|
|
|
||
Net interest spread |
|
|
|
|
|
2.91 |
% |
|
|
|
|
3.46 |
% |
||||
Fully taxable-equivalent net interest and dividend income |
|
|
|
$ |
151,312 |
|
|
|
|
|
$ |
156,134 |
|
|
|
||
Net interest margin |
|
|
|
|
|
4.49 |
% |
|
|
|
|
4.62 |
% |
||||
Less: Dividend income included in other income |
|
|
|
706 |
|
|
|
|
|
603 |
|
|
|
||||
Fully taxable-equivalent net interest income |
|
|
|
$ |
150,606 |
|
|
|
|
|
$ |
155,531 |
|
|
|
(1) Net interest income is presented on a fully taxable-equivalent basis.
(2) Certain prior period balances have been reclassified to conform to the current period presentation.
(3) Includes average nonaccrual loans of $20,894 and $13,777 for 2007 and 2006, respectively.
(4) Loan income includes loan fees of $3,195 and $3,669 for 2007 and 2006, respectively.
16
Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume), and mix of interest-earning assets and interest-bearing liabilities. The following table shows changes in net interest income on a fully taxable-equivalent basis between the first quarter 2007 and the first quarter of 2006, as well as between the first quarter of 2006 and the first quarter of 2005.
Changes In Net Interest Income
|
|
For the three months ended March 31, |
|
For the three months ended March 31, |
|
||||||||||||||
Dollars in thousands |
|
2007 vs 2006 |
|
2006 vs 2005 |
|
||||||||||||||
|
|
Increase (decrease) |
|
Net |
|
Increase (decrease) |
|
Net |
|
||||||||||
|
|
due to |
|
increase |
|
due to |
|
increase |
|
||||||||||
|
|
Volume |
|
Rate |
|
(decrease) |
|
Volume |
|
Rate |
|
(decrease) |
|
||||||
Interest earned on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans |
|
$ |
15,679 |
|
$ |
9,604 |
|
$ |
25,283 |
|
$ |
16,471 |
|
$ |
13,682 |
|
$ |
30,153 |
|
Securities available-for-sale |
|
(11,729 |
) |
2,105 |
|
(9,624 |
) |
(1,674 |
) |
1,475 |
|
(199 |
) |
||||||
Due from banks - interest-bearing |
|
181 |
|
137 |
|
318 |
|
(84 |
) |
82 |
|
(2 |
) |
||||||
Trading account securities |
|
142 |
|
99 |
|
241 |
|
46 |
|
307 |
|
353 |
|
||||||
Federal funds sold and securities purchased under resale agreements |
|
8 |
|
35 |
|
43 |
|
(167 |
) |
96 |
|
(71 |
) |
||||||
Other interest-earning assets |
|
16 |
|
87 |
|
103 |
|
1 |
|
59 |
|
60 |
|
||||||
Total interest-earning assets |
|
4,297 |
|
12,067 |
|
16,364 |
|
14,593 |
|
15,701 |
|
30,294 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest paid on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest checking deposits |
|
(36 |
) |
465 |
|
429 |
|
(12 |
) |
281 |
|
269 |
|
||||||
Money market deposits |
|
142 |
|
9,878 |
|
10,020 |
|
(801 |
) |
6,819 |
|
6,018 |
|
||||||
Savings deposits |
|
(23 |
) |
41 |
|
18 |
|
(18 |
) |
58 |
|
40 |
|
||||||
Time deposits |
|
6,677 |
|
5,727 |
|
12,404 |
|
1,901 |
|
3,982 |
|
5,883 |
|
||||||
Other borrowings |
|
(4,926 |
) |
3,241 |
|
(1,685 |
) |
8,171 |
|
4,181 |
|
12,352 |
|
||||||
Total interest-bearing liabilities |
|
1,834 |
|
19,352 |
|
21,186 |
|
9,241 |
|
15,321 |
|
24,562 |
|
||||||
|
|
$ |
2,463 |
|
$ |
(7,285 |
) |
$ |
(4,822 |
) |
$ |
5,352 |
|
$ |
380 |
|
$ |
5,732 |
|
The impact of interest rate swaps which affect interest income on loans and interest expense on deposits and borrowings, is included in rate changes.
Provision for Credit Losses
The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses and provision for credit losses. The provision is the expense recognized in the income statement to adjust the allowance and the reserve for off balance sheet credit commitments to the level deemed appropriate by management, as determined through application of the Companys allowance methodology procedures (see Critical Accounting Policies on page 29 of the Companys Form 10-K for the year ended December 31, 2006).
The Company made no provision for credit losses in the quarter ended March 31, 2007. The provision for credit losses primarily reflects managements ongoing assessment of the credit quality and growth of the loan and commitment portfolios as well as the levels of net loan (charge-offs)/recoveries and nonaccrual loans, and changes in the economic environment during the period. For the three months ended March 31, 2007, December 31, 2006, and March 31, 2006, net (charge-offs)/recoveries totaled $1.2 million, ($2.9) million, and $2.7 million, respectively. For these periods, nonaccrual loans at period end totaled $23.4 million, $20.9 million, and $14.6 million, respectively.
Noninterest Income
First-quarter 2007 noninterest income of $66.0 million was 20 percent higher than the first quarter of 2006 due primarily to continuing growth of the Companys wealth management revenues, including the acquisition of Independence Investments in the second quarter of 2006. Noninterest income was 31 percent of total revenue in the first quarter of 2007, compared to 26 percent for the first quarter of 2006 and 30 percent for the fourth quarter of 2006.
17
Wealth Management
Trust and investment fees increased 39 percent over the first quarter of 2006, primarily due to an increase in assets under management or administration. Assets under direct management grew 42 percent from the same period last year, largely as the result of the acquisition of Independence Investments in 2006, new business, a strong relative investment performance and higher market values. Increases in market values are reflected in fee income primarily on a trailing-quarter basis. Not including the acquisition of Independence Investments and the fourth quarter disposition of an asset management affiliate, the Companys trust and investment fee income in the first quarter of 2007 grew 9 percent from the same period last year.
|
|
At or for the |
|
|
|
At or for the |
|
|
|
|||||
|
|
March 31, |
|
% |
|
ended |
|
% |
|
|||||
Dollars in millions |
|
2007 |
|
2006 |
|
Change |
|
December 31, 2006 |
|
Change |
|
|||
Trust and Investment Fee Revenue |
|
$ |
30.3 |
|
$ |
21.8 |
|
39 |
|
$ |
30.8 |
|
(2 |
) |
Brokerage and Mutual Fund Fees |
|
13.8 |
|
11.7 |
|
18 |
|
13.3 |
|
4 |
|
|||
Assets Under Management (1) |
|
27,290.5 |
|
19,246.3 |
|
42 |
|
27,859.7 |
|
(2 |
) |
|||
Total Assets Under Management or Administration (1) |
|
48,648.7 |
|
40,435.8 |
|
20 |
|
48,684.2 |
|
0 |
|
|||
(1) Excludes $9.3 billion, $9.4 billion, and $9.1 billion of assets under management for an asset manager in which City National held a minority ownership interest as of March 31, 2007, March 31, 2006, and December 31, 2006, respectively.
Other Noninterest Income
First-quarter cash management and deposit transaction fees grew 5 percent from the same period last year and 7 percent from the fourth quarter of 2006, due largely to the sale of additional services to new and existing clients.
International service fees for the first quarter of 2007 grew 8 percent from the same period last year, reflecting increased demand for both foreign exchange services and letters of credit, but were essentially unchanged from the fourth quarter of 2006. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection and other fee income. International services fees are recognized when earned, except for the fees on commercial and standby letters of credit, which are deferred and recognized in income over the terms of the letters of credit.
Other noninterest income for the first quarter of 2007 amounted to $6.8 million, up $0.1 million or 1 percent, from the same period one year ago.
Noninterest Expense
First-quarter 2007 noninterest expense amounted to $123.8 million, up 7 percent from the same period last year but down 2 percent from the fourth quarter of 2006. Excluding the acquisitions of Independence Investments and Business Bank of Nevada, noninterest expense grew less than 2 percent from the first quarter of last year.
Staffing expenses for the quarter amounted to $78.0 million, up 9 percent from one year ago largely due to the acquisitions of Independence Investments and Business Bank of Nevada.
Legal and professional fees fell 2 percent from the first quarter of 2006 as the first quarter of 2006 included certain expenses to strengthen compliance with the Bank Secrecy Act and the USA Patriot Act. Legal and professional fees declined 7 percent from the fourth quarter of 2006 as certain annual contract expenses were paid in December 2006.
The Companys first-quarter efficiency ratio was 57.18 percent compared with 54.80 percent for the first quarter of 2006, and 58.21 percent for the fourth quarter of 2006. The increase from the first quarter of 2006 was due primarily to pressure on
18
core deposits, modest revenue growth and the continued expansion of City Nationals fee-based businesses, including the addition of Independence Investments.
Stock-Based Compensation Expense
The Company applies FASB Statement No. 123 (revised), Share Based Payment, (SFAS 123R) in accounting for stock option plans. A Black-Scholes valuation model is used to determine the fair value of options granted.
On March 31, 2007, the Company had one stock-based compensation plan, which provides for granting of stock options, restricted shares and restricted units. The compensation cost that has been charged against income for all stock-based awards was $3.4 million for the three months ended March 31, 2007, compared to $2.7 million for the three-month period ended March 31, 2006. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $1.4 million and $1.1 million for the three months ended March 31, 2007 and 2006, respectively. See the disclosures in Note 6 for a description of the stock option plan and method of estimating the fair value of option awards.
As of March 31, 2007 there was $39.6 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total number of shares vested during the three months ended March 31, 2007 was 228,089.
Minority Interest
Minority interest expense consists of preferred stock dividends on the Banks real estate investment trust subsidiaries as well as the minority ownership share of earnings of the Corporations majority-owned asset management firms.
Segment Results
Our reportable segments are Commercial and Private Banking and Other. For a more complete description of our segments, including summary financial information, see Note 10 to the Unaudited Financial Statements.
Commercial and Private Banking
Net income of $45.3 million in the first quarter of 2007 for the Commercial and Private Banking segment increased $0.2 million, or 0.4 percent, from the $45.1 recorded in first quarter of 2006. Total revenue of $163.3 million in the first quarter of 2007 increased 0.4 percent over the first quarter of 2006. The increase in revenue for the quarter was driven by strong loan growth, primarily in commercial and industrial and residential mortgage loans, offset by higher funding costs due to a change in the mix of deposits and an overall increase in deposit rates. Average loans were $10.5 billion in the first quarter of 2007, up 9.8 percent from $9.5 billion in the first quarter of 2006. Average deposits were $10.7 billion in the first quarter of 2007, an increase of 1.1 percent from the same period last year. Noninterest income increased 2.6 percent in the first quarter of 2007 compared to the first quarter of 2006 primarily due to higher cash management and deposit transaction charges and higher international service fees. Noninterest expense was $2.4 million, or 2.7 percent, higher during the first three months of 2007 compared to the first three months of 2006, due to the acquisition of BBNV, expenses associated with new branches opened in 2006 and higher salary and benefits costs.
Other
Net income for the Other segment declined $0.9 million, or 7.5 percent, in the first quarter of 2007, compared to the prior year. Although we had strong revenue and earnings growth in our Wealth Management and asset management affiliates, including the impact of the acquisition of Independence Investments in the second quarter of 2006, it was more than offset by activity related to the Asset Liability Funding Center, particularly higher funding costs and lower prepayment fees. Total revenue for the Other segment increased 11.6 percent, or $5.2 million, for the first quarter of 2007 compared to the first quarter of 2006 primarily as a result of the acquisition of Independence Investments. Noninterest expense increased 26.4 percent for the first quarter of 2007 compared to the first quarter of 2006, again primarily related to the acquisition of Independence Investments.
19
The first-quarter 2007 effective tax rate was 36.8 percent, compared with 37.8 percent in the first quarter of last year. The lower rate is a result of changes in estimates and a true-up of prior year tax adjustments. The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including state taxes, tax benefits from investments in affordable housing partnerships and tax-exempt income, including interest on bank-owned life insurance.
The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as an income tax provision expense. For the period ended March 31, 2007, the Company recognized approximately $372,000 in interest and penalties. The Company had approximately $9.8 million and $6.6 million of accrued interest and penalties as of March 31, 2007 and December 31, 2006, respectively.
The Company is currently under examination by the Internal Revenue Service (IRS) for the tax years 2002 and 2003. The Company expects to begin IRS appeals proceedings related to certain tax positions taken in these years. The potential financial statement impact of these items range from a tax benefit of $3.6 million to a tax expense of $6.8 million.
The Company is also under examination by the Franchise Tax Board for the tax years 1998 through 2004. The Company expects to complete its Franchise Tax Board examination for the years 1998 though 2003 within the next 12 months. The potential financial statement impact resulting from the completion of the audit is not determinable at this time.
BALANCE SHEET ANALYSIS
Total assets were $15.3 billion at March 31, 2007 compared to $14.7 billion at March 31, 2006, and $14.9 billion at December 31, 2006. Average assets for the first quarter of 2007 were unchanged from the first quarter of 2006 as the increase in average loans was offset by the planned decline in average securities.
Total average interest-earning assets for the first quarter of 2007 were $13.7 billion, essentially unchanged from the first quarter of 2006 and an increase of 0.7 percent from average interest-earning assets for the fourth quarter of 2006 of $13.6 billion.
Securities
Comparative period-end securities portfolio balances are presented below:
Securities Available-for-Sale
|
|
March 31, |
|
December 31, |
|
March 31, |
|
||||||||||||
|
|
2007 |
|
2006 |
|
2006 |
|
||||||||||||
Dollars in thousands |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||||
U.S. Treasury |
|
$ |
50,634 |
|
$ |
50,625 |
|
$ |
49,937 |
|
$ |
49,938 |
|
$ |
91,864 |
|
$ |
91,199 |
|
Federal Agency |
|
261,233 |
|
257,924 |
|
263,227 |
|
258,778 |
|
723,932 |
|
707,847 |
|
||||||
CMOs |
|
1,223,749 |
|
1,200,265 |
|
1,247,161 |
|
1,215,397 |
|
1,550,623 |
|
1,497,877 |
|
||||||
Mortgage-backed |
|
951,283 |
|
923,779 |
|
1,017,409 |
|
983,917 |
|
1,206,516 |
|
1,156,565 |
|
||||||
State and Municipal |
|
380,005 |
|
382,251 |
|
360,759 |
|
362,318 |
|
339,571 |
|
339,048 |
|
||||||
Total debt securities |
|
2,866,904 |
|
2,814,844 |
|
2,938,493 |
|
2,870,348 |
|
3,912,506 |
|
3,792,536 |
|
||||||
Equity securities |
|
84,220 |
|
88,702 |
|
79,697 |
|
84,024 |
|
51,310 |
|
57,637 |
|
||||||
Total securities |
|
$ |
2,951,124 |
|
$ |
2,903,546 |
|
$ |
3,018,190 |
|
$ |
2,954,372 |
|
$ |
3,963,816 |
|
$ |
3,850,173 |
|
At March 31, 2007, securities available-for-sale totaled $2.9 billion, a decrease of $0.9 billion compared with holdings at March 31, 2006. At March 31, 2007, the portfolio had a net unrealized loss of $47.6 million compared with net unrealized losses of $63.8 million at December 31, 2006 and $113.6 million at March 31, 2006. There is no other-than-temporary impairment as the unrealized losses are only due to changes in interest rates and the Company has the ability and intent to hold the securities until their maturities. The average duration of total available-for-sale securities at March 31, 2007 was 3.4 years. This duration compares with 3.3 years at December 31, 2006 and 3.1 years at March 31, 2006. Duration provides a measure of fair value sensitivity to changes in interest rates. The average duration is within the investment guidelines set by the Companys Asset/Liability Committee and the interest-rate risk guidelines set by the Board of Directors. See Asset/Liability Management for a discussion of the Companys interest rate position.
20
The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities included in the securities portfolio as of March 31, 2007, except for mortgage-backed securities which are allocated according to final maturities. Final maturities will differ from contractual maturities because mortgage debt issuers may have the right to repay obligations prior to contractual maturity. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.
Debt Securities Available-for-Sale
|
|
One year |
|
Over 1 year |
|
Over 5 years |
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
or less |
|
thru 5 years |
|
thru 10 years |
|
Over 10 years |
|
Total |
|
|||||||||||||||
|
|
|
|
Yield |
|
|
|
Yield |
|
|
|
Yield |
|
|
|
Yield |
|
|
|
Yield |
|
|||||
Dollars in thousands |
|
Amount |
|
(%) |
|
Amount |
|
(%) |
|
Amount |
|
(%) |
|
Amount |
|
(%) |
|
Amount |
|
(%) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. Treasury |
|
$ |
50,625 |
|
5.01 |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
50,625 |
|
5.01 |
|
Federal Agency |
|
133,407 |
|
3.58 |
|
124,517 |
|
3.85 |
|
|
|
|
|
|
|
|
|
257,924 |
|
3.71 |
|
|||||
CMOs |
|
97,270 |
|
5.34 |
|
933,699 |
|
4.40 |
|
169,296 |
|
5.25 |
|
|
|
|
|
1,200,265 |
|
4.59 |
|
|||||
Mortgage-backed |
|
|
|
|
|
725,045 |
|
4.19 |
|
188,472 |
|
4.54 |
|
10,262 |
|
5.52 |
|
923,779 |
|
4.28 |
|
|||||
State and Municipal |
|
36,912 |
|
4.25 |
|
105,748 |
|
4.05 |
|
197,832 |
|
3.86 |
|
41,759 |
|
3.94 |
|
382,251 |
|
3.96 |
|
|||||
Total debt securities |
|
$ |
318,214 |
|
4.42 |
|
$ |
1,889,009 |
|
4.26 |
|
$ |
555,600 |
|
4.51 |
|
$ |
52,021 |
|
4.25 |
|
$ |
2,814,844 |
|
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Amortized cost |
|
$ |
319,327 |
|
|
|
$ |
1,932,773 |
|
|
|
$ |
555,934 |
|
|
|
$ |
58,870 |
|
|
|
$ |
2,866,904 |
|
|
|
Dividend income included in interest income on securities in the Unaudited Consolidated Statements of Income for the first quarter of 2007 and 2006 was $1.4 million and $1.0 million, respectively.
Loan Portfolio
A comparative period-end loan table is presented below:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
Dollars in thousands |
|
2007 |
|
2006 |
|
2006 |
|
|||
Commercial |
|
$ |
3,806,940 |
|
$ |
3,865,420 |
|
$ |
3,566,457 |
|
Commercial real estate mortgages |
|
1,926,687 |
|
1,801,390 |
|
1,819,856 |
|
|||
Residential mortgages |
|
2,935,729 |
|
2,869,775 |
|
2,700,966 |
|
|||
Real estate construction |
|
1,173,854 |
|
1,024,681 |
|
820,357 |
|
|||
Equity lines of credit |
|
388,279 |
|
404,657 |
|
339,348 |
|
|||
Installment |
|
194,448 |
|
201,125 |
|
188,262 |
|
|||
Lease financing |
|
223,661 |
|
218,957 |
|
132,157 |
|
|||
Total loans, gross |
|
10,649,598 |
|
10,386,005 |
|
9,567,403 |
|
|||
Less allowance for loan and lease losses |
|
(161,005 |
) |
(155,342 |
) |
(156,482 |
) |
|||
Total loans, net |
|
$ |
10,488,593 |
|
$ |
10,230,663 |
|
$ |
9,410,921 |
|
Total gross loans at March 31, 2007 were 3 percent and 11 percent higher than at December 31, 2006 and March 31, 2006, respectively. The growth from the first quarter of 2006 was primarily in commercial, residential mortgages and construction lending, and is due primarily to organic growth, augmented by the acquisition of BBNV.
As reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, the federal banking regulatory agencies issued final guidance on December 6, 2006 on risk management practices for financial institutions with high or increasing concentrations of commercial real estate (CRE) loans on their balance sheets. The regulatory guidance provides for
21
an increased level of regulatory oversight and monitoring for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific type of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: total reported loans for construction, land development and other land represent 100 percent of the institutions total risk-based capital; total CRE loans represent 300 percent or more of the institutions total risk-based capital and the institutions CRE loan portfolio has increased 50 percent or more within the last 36 months. City National is within the thresholds specified by the guidance. As of March 31, 2007 total loans for construction, land development and other land represented 8 percent of total risk-based capital; total CRE loans represented 223 percent of total risk-based capital and the total portfolio of loans for construction, land development, other land and CRE increased 25 percent over the last 36 months.
The following table presents information concerning nonaccrual loans, Other Real Estate Owned (OREO), loans which are contractually past due 90 days or more as to interest or principal payments and still accruing, and restructured loans. Company policy requires that a loan be placed on nonaccrual status if either principal or interest payments are 90 days past due, unless the loan is both well secured and in process of collection, or if full collection of interest or principal becomes uncertain, regardless of the time period involved.
|
Nonaccrual Loans and OREO |
|
||||||||
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
Dollars in thousands |
|
2007 |
|
2006 |
|
2006 |
|
|||
Nonaccrual loans: |
|
|
|
|
|
|
|
|||
Commercial |
|
$ |
7,024 |
|
$ |
2,977 |
|
$ |
5,642 |
|
Commercial real estate morgtages |
|
4,783 |
|
4,849 |
|
923 |
|
|||
Residential mortgages |
|
|
|
|
|
|
|
|||
Real estate construction |
|
11,199 |
|
12,678 |
|
7,492 |
|
|||
Equity lines of credit |
|
362 |
|
|
|
|
|
|||
Installment |
|
49 |
|
379 |
|
498 |
|
|||
Total |
|
23,417 |
|
20,883 |
|
14,555 |
|
|||
OREO |
|
|
|
|
|
|
|
|||
Total nonaccrual loans and OREO |
|
$ |
23,417 |
|
$ |
20,883 |
|
$ |
14,555 |
|
|
|
|
|
|
|
|
|
|||
Total nonaccrual loans as a percentage of total loans |
|
0.22 |
% |
0.20 |
% |
0.15 |
% |
|||
Total nonaccrual loans and OREO as a percentage of total loans and OREO |
|
0.22 |
|
0.20 |
|
0.15 |
|
|||
Allowance for loan and lease losses to total loans |
|
1.51 |
|
1.50 |
|
1.64 |
|
|||
Allowance for loan and lease losses to nonaccrual loans |
|
687.55 |
|
743.88 |
|
1,075.11 |
|
|||
Loans past due 90 days or more on accrual status: |
|
|
|
|
|
|
|
|||
Commercial |
|
$ |
43 |
|
$ |
|
|
$ |
|
|
Other |
|
156 |
|
337 |
|
|
|
|||
Total |
|
$ |
199 |
|
$ |
337 |
|
$ |
|
|
At March 31, 2007, there were $21.7 million of impaired loans included in nonaccrual loans, with an allowance allocation of $2.3 million. On a comparable basis, at December 31, 2006, there were $19.0 million of impaired loans, which had an allowance allocation of $0.5 million, while at March 31, 2006 impaired loans were $13.0 million with an allowance allocation of $2.5 million. The assessment for impairment occurs when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market price of the debt may be used to assess impairment. Impaired loans with commitments of less than $500,000 are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment allowance is recognized by creating or adjusting the existing allocation of the allowance for loan and lease losses. The Companys policy is to record cash receipts on impaired loans first as reductions in principal and then as interest income.
22
The following table summarizes the changes in nonaccrual loans for the three months ending March 31, 2007 and 2006.
Changes in Nonaccrual Loans
|
For the three months ended |
|
|||||
|
|
March 31, |
|
||||
Dollars in thousands |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Balance, beginning of period |
|
$ |
20,883 |
|
$ |
14,400 |
|
Loans placed on nonaccrual |
|
6,854 |
|
3,820 |
|
||
Loans from acquisitions |
|
50 |
|
- |
|
||
Charge-offs |
|
(177 |
) |
(561 |
) |
||
Loans returned to accrual status |
|
(120 |
) |
(24 |
) |
||
Repayments (including interest applied to principal) |
|
(4,073 |
) |
(3,080 |
) |
||
Balance, end of period |
|
$ |
23,417 |
|
$ |
14,555 |
|
In addition to loans in nonaccrual status disclosed above, management has also identified $6.2 million of credits to 17 borrowers where the ability to comply with the present loan repayment terms in the future is questionable. However, the inability of the borrowers to comply with repayment terms was not sufficiently probable to place the loans on nonaccrual status at March 31, 2007. This amount was determined based on analysis of information known to management about the borrowers financial condition and current economic conditions.
Managements classification of credits as nonaccrual or problems does not necessarily indicate that the principal is uncollectible in whole or in part.
Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments
At March 31, 2007, the allowance for loan and lease losses was $161.0 million or 1.51 percent of outstanding loans and the reserve for off-balance sheet credit commitments was $17.0 million. The process used in the determination of the adequacy of the reserve for off-balance sheet credit commitments is consistent with the process for the allowance for loan and lease losses.
The following tables summarize the changes in the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments for the three months ended March 31, 2007 and 2006.
23
Changes in Allowance for Loan and Lease Losses
|
For the three months ended |
|
|||||
|
|
March 31, |
|
||||
Dollars in thousands |
|
2007 |
|
2006 |
|
||
Loans outstanding |
|
$ |
10,649,598 |
|
$ |
9,567,403 |
|
Average amount of loans outstanding |
|
$ |
10,554,944 |
|
$ |
9,625,016 |
|
Balance of allowance for loan and lease losses, beginning of period |
|
155,342 |
|
153,983 |
|
||
Loans charged-off: |
|
|
|
|
|
||
Commercial |
|
(1,649 |
) |
(1,035 |
) |
||
Residential first mortgage |
|
|
|
|
|
||
Commercial real estate mortgage |
|
|
|
(94 |
) |
||
Real estate construction |
|
|
|
|
|
||
Equity lines of credit |
|
|
|
|
|
||
Installment |
|
(53 |
) |
(20 |
) |
||
Total loans charged-off |
|
(1,702 |
) |
(1,149 |
) |
||
Recoveries of loans previously charged-off: |
|
|
|
|
|
||
Commercial |
|
2,897 |
|
2,828 |
|
||
Residential first mortgage |
|
|
|
|
|
||
Commercial real estate mortgage |
|
|
|
937 |
|
||
Real estate construction |
|
18 |
|
16 |
|
||
Equity lines of credit |
|
|
|
|
|
||
Installment |
|
26 |
|
24 |
|
||
Total recoveries |
|
2,941 |
|
3,805 |
|
||
Net loans recovered |
|
1,239 |
|
2,656 |
|
||
Provision for credit losses |
|
|
|
|
|
||
Transfers to reserve for off-balance sheet credit commitments |
|
(89 |
) |
(157 |
) |
||
Allowance of acquired institution |
|
4,513 |
|
|
|
||
Balance, end of period |
|
$ |
161,005 |
|
$ |
156,482 |
|
|
|
|
|
|
|
||
Net recoveries to average loans (annualized) |
|
0.05 |
% |
0.11 |
% |
||
Ratio of allowance for loan and lease losses to total period-end loans |
|
1.51 |
% |
1.64 |
% |
Changes in Reserve for Off-balance Sheet Credit Commitments
24
Other Assets
Other assets include the following:
|
March 31, |
|
December 31, |
|
March 31, |
|
||||
Dollars in thousands |
|
2007 |
|
2006 |
|
2006 |
|
|||
Accrued interest receivable |
|
$ |
75,192 |
|
$ |
74,534 |
|
$ |
66,171 |
|
Other accrued income |
|
20,497 |
|
22,938 |
|
13,100 |
|
|||
Claim in receivership |
|
|
|
|
|
11,042 |
|
|||
Deferred compensation insurance assets |
|
44,145 |
|
35,396 |
|
32,672 |
|
|||
Income tax receivable |
|
|
|
43,133 |
|
43,133 |
|
|||
PML assets |
|
6,738 |
|
13,716 |
|
17,699 |
|
|||
Other |
|
113,949 |
|
102,537 |
|
87,179 |
|
|||
Total other assets |
|
$ |
260,521 |
|
$ |
292,254 |
|
$ |
270,996 |
|
Deposits
Deposits totaled $12.6 billion at March 31, 2007, an increase of 6 percent compared with $11.9 billion at March 31, 2006, and 3 percent from $12.2 billion at December 31, 2006.
Core deposits, which continued to provide substantial benefits to the Banks cost of funds, were 83 percent of total deposits at March 31, 2007, and increased $0.3 billion since December 31, 2006. Included in core deposits are Specialty Deposits. Average Specialty Deposits, primarily from title and escrow companies, were $1.2 billion for the three-month period ended March 31, 2007, compared with $1.3 billion for the three months ended December 31, 2006 and $1.2 billion for the three months ended March 31, 2006. These deposits fluctuate with conditions in the real estate market. At March 31, 2007 quarterly average Specialty Deposits accounted for 10 percent of total quarterly average deposits.
Borrowings
Borrowings of $0.9 billion at March 31, 2007 reflect a decrease of $306 million from March 31, 2006, and $152 million from December 31, 2006 as a result of deposit growth and lower loan volume. The decrease is primarily in Federal Funds Purchased and other short-term borrowings.
Off Balance Sheet
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the consolidated balance sheet. Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each clients creditworthiness on a case-by-case basis.
The Company had off-balance sheet credit commitments aggregating $5.0 billion at March 31, 2007, compared with $5.0 billion at December 31, 2006 and $4.6 billion at March 31, 2006. In addition, the Company had $684.5 million outstanding in bankers acceptances and letters of credit of which $656.9 million related to standby letters of credit at March 31, 2007. At December 31, 2006, the Company had $662.0 million in outstanding bankers acceptances and letters of credit of which $650.6 million related to standby letters of credit. Substantially all of the Companys loan commitments are on a variable-rate basis and are comprised of real estate and commercial loan commitments.
As of March 31, 2007, the Company had private equity fund commitments of $45.7 million, of which $18.7 million was funded. As of December 31, 2006 and March 31, 2006, the Company had private equity fund commitments of $44.7 million and $45.7 million, respectively, of which $15.8 million and $12.7 million was funded. In addition, the Company had unfunded affordable housing fund commitments of $32.0 million, $36.3 million, and $34 million as of March 31, 2007, December 31, 2006, and March 31, 2006, respectively.
25
In connection with the liquidation of an investment acquired in a previous bank merger, the Company has an outstanding long-term guarantee. The maximum liability under the guarantee is $17.9 million, but the Company does not expect to make any payments under the terms of this guarantee.
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for well capitalized institutions and the capital ratios for the Corporation and CNB at March 31, 2007, December 31, 2006, and March 31, 2006.
|
Regulatory |
|
|
|
|
|
|
|
|
|
|
Well-Capitalized |
|
March 31, |
|
December 31, |
|
March 31, |
|
|
|
Standards |
|
2007 |
|
2006 |
|
2006 |
|
City National Corporation |
|
|
|
|
|
|
|
|
|
Tier 1 leverage |
|
N/A% |
|
8.59 |
% |
8.81 |
% |
8.85 |
% |
Tier 1 risk-based capital |
|
6.00 |
|
10.62 |
|
11.09 |
|
12.26 |
|
Total risk-based capital |
|
10.00 |
|
13.12 |
|
13.60 |
|
15.41 |
|
|
|
|
|
|
|
|
|
|
|
City National Bank |
|
|
|
|
|
|
|
|
|
Tier 1 leverage |
|
5.00 |
|
8.41 |
|
9.04 |
|
9.19 |
|
Tier 1 risk-based capital |
|
6.00 |
|
10.71 |
|
11.38 |
|
12.70 |
|
Total risk-based capital |
|
10.00 |
|
13.25 |
|
13.89 |
|
15.83 |
|
Tier 1 capital ratios at March 31, 2007 reflect the impact of the acquisition of BBNV as well as the cumulative effect of adopting FIN 48 as of January 1, 2007. Tier 1 capital also includes the impact of $25.4 million of preferred stock issued by real estate investment trust subsidiaries of the Bank, which is included in minority interest in consolidated subsidiaries, and $5.2 million of trust preferred securities issued by an unconsolidated capital trust subsidiary of the holding company.
Shareholders equity to assets as of March 31, 2007 was 10.42 percent, compared with 9.97 percent at March 31, 2006 and was 10.02 percent as of December 31, 2006.
The accumulated other comprehensive loss, primarily related to available-for-sale securities and interest rate swaps, was $30.9 million at March 31, 2007 compared with $73.2 million at March 31, 2006 and $41.4 million at December 31, 2006.
The following table provides information about purchases by the Company during the three months ended March 31, 2007 of equity securities that are registered by the Company pursuant of Section 12 of the Exchange Act.
|
|
|
|
|
Total number of Shares |
|
|
|
||
|
|
|
|
Average |
|
(or Units) Purchased as |
|
Maximum Number of |
|
|
|
|
Total Number of |
|
Price Paid |
|
Part of Publicly |
|
Shares that May Yet |
|
|
|
|
Shares (or Units) |
|
per Share (or |
|
Announced Plans or |
|
Be Purchased Under |
|
|
Period |
|
Purchased |
|
Unit) |
|
Programs |
|
the Plans or Programs |
|
|
03/01/07 - 03/31/07 |
|
263,000 |
|
$ |
72.11 |
|
263,000 |
|
794,700 |
|
|
|
263,000 |
|
72.11 |
|
263,000 |
(1) |
794,700 |
(1) |
|
(1) On July 6, 2006, the Companys Board of Directors authorized the Company to repurchase 1.5 million additional shares of the Companys stock following completion of its previously approved initiative. Unless terminated earlier by resolution of our Board of Directors, the program will expire when the Company has repurchased all shares authorized for repurchase thereunder. We received no shares in payment for the exercise price of stock options.
26
LIQUIDITY MANAGEMENT
The Company continues to manage its liquidity through the combination of core deposits, certificates of deposits, short-term federal funds purchased, sales of securities under repurchase agreements, collateralized borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco and a portfolio of securities available-for-sale. Liquidity is also provided by maturities and pay downs on securities and loans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
Market risk results from the variability of future cash flows and earnings due to changes in the financial markets. These changes may also impact the fair values of loans, securities and borrowings. The values of financial instruments may change because of interest rate changes, foreign currency exchange rate changes or other market changes. The Companys asset/liability management process entails the evaluation, measurement and management of interest rate risk, market risk and liquidity risk. The principal objective of asset/liability management is to optimize net interest income subject to margin volatility and liquidity constraints over the long term. Margin volatility results when the rate reset (or repricing) characteristics of assets are materially different from those of the Companys liabilities. The Board of Directors approves asset/liability policies and sets limits within which the risks must be managed. The Asset/Liability Management Committee (ALCO), which is comprised of senior management and key risk management individuals, sets risk management guidelines within the broader limits approved by the Board, monitors the risks and periodically reports results to the Board.
A quantitative and qualitative discussion about market risk is included on pages 44 to 48 of the Corporations Form 10-K for the year ended December 31, 2006.
Net Interest Simulation: As part of its overall interest rate risk management process, the Company performs stress tests on net interest income projections based on a variety of factors, including interest rate levels, changes in the relationship between the prime rate and short-term interest rates, and the shape of the yield curve. The Company uses a simulation model to estimate the severity of this risk and to develop mitigation strategies, including interest-rate hedges. The magnitude of the change is determined from historical volatility analysis. The assumptions used in the model are updated periodically and reviewed and approved by ALCO. In addition, the Board of Directors has adopted limits within which interest rate exposure must be contained. Within these broader limits, ALCO sets management guidelines to further contain interest rate risk exposure.
The Company is naturally asset-sensitive due to its large portfolio of rate-sensitive commercial loans that are funded in part by rate-stable core deposits. As a result, if there are no significant changes in the mix of assets and liabilities, the net interest margin increases when interest rates increase and decreases when interest rates decrease. The Company uses on and off-balance sheet hedging vehicles to manage this risk. Over time, as interest rates have risen, the Company has moved to a more neutral position. Increased reliance on wholesale funding sources and other changes in the mix of the balance sheet have also moved the Company to a more neutral position. Based on the balance sheet at March 31, 2007, and assuming no changes in deposit mix, the Companys net interest income simulation model indicates that net interest income would be slightly impacted by changes in interest rates. Assuming a static balance sheet, a gradual 100-basis-point parallel decline in the yield curve over a twelve-month horizon would result in a decrease in projected net interest income of approximately 0.4 percent. This compares to a decrease in projected net interest income of 0.3 percent at December 31, 2006, and an increase of 0.5 percent at March 31, 2006, respectively. A gradual 100-basis-point parallel increase in the yield curve over the next twelve-month period, assuming no changes in deposit mix, would result in an increase in projected net interest income of approximately 0.7 percent. This compares to an increase in projected net interest income of 0.9 percent at December 31, 2006, and a decrease of 0.2 percent at March 31, 2006.
Present Value of Equity: The simulation model indicates that the Present Value of Equity (PVE) is impacted by a sudden and substantial increase in interest rates. As of March 31, 2007, a 200-basis-point increase in interest rates results in a 3 percent decline in PVE. This compares to declines of 3 percent at both December 31, 2006 and March 31, 2006.
The following table presents the notional amount and fair value of the Companys interest rate swap agreements according to the specific asset or liability hedged:
27
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
||||||||||||||||||||||||
|
|
Notional |
|
Fair |
|
|
|
Notional |
|
Fair |
|
|
|
Notional |
|
Fair |
|
|
|
||||||||||||
Dollars in millions |
|
Amount |
|
Value |
|
Duration |
|
Amount |
|
Value |
|
Duration |
|
Amount |
|
Value |
|
Duration |
|
||||||||||||
Fair Value Hedge Receive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Certificate of deposit |
|
$ |
75.0 |
|
$ |
|
|
|
|
|
|
$ |
175.0 |
|
$ |
(0.1 |
) |
|
0.2 |
|
|
$ |
115.0 |
|
$ |
(0.2 |
) |
|
0.7 |
|
|
Long-term and suboridinated debt |
|
490.9 |
|
(1.0 |
) |
|
3.5 |
|
|
490.9 |
|
(2.5 |
) |
|
3.8 |
|
|
490.9 |
|
(5.9 |
) |
|
4.3 |
|
|
||||||
Total fair value hedge swaps |
|
565.9 |
|
(1.0 |
) |
|
3.0 |
|
|
665.9 |
|
(2.6 |
) |
|
2.8 |
|
|
605.9 |
|
(6.1 |
) |
|
3.6 |
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash Flow Hedge Receive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Fixed Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
US Dollar LIBOR based loans |
|
250.0 |
|
(0.7 |
) |
|
0.6 |
|
|
325.0 |
|
(1.8 |
) |
|
0.6 |
|
|
525.0 |
|
(6.7 |
) |
|
0.7 |
|
|
||||||
Prime based loans |
|
350.0 |
|
(2.3 |
) |
|
0.5 |
|
|
375.0 |
|
(3.1 |
) |
|
0.6 |
|
|
425.0 |
|
(5.6 |
) |
|
1.5 |
|
|
||||||
Total cash flow hedge swaps |
|
600.0 |
|
(3.0 |
) |
|
0.5 |
|
|
700.0 |
|
(4.9 |
) |
|
0.6 |
|
|
950.0 |
|
(12.3 |
) |
|
1.1 |
|
|
||||||
Fair Value and Cash Flow Hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest Rate Swaps |
|
$ |
1,165.9 |
|
$ |
(4.0) |
(1) |
|
1.8 |
|
|
$ |
1,365.9 |
|
$ |
(7.5 |
) |
|
1.7 |
|
|
$ |
1,555.9 |
|
$ |
(18.4 |
) |
|
2.0 |
|
|
(1) Net fair value is the estimated net gain (loss) to settle derivative contracts. The net fair value is the sum of the mark-to-market asset (if applicable) and mark-to-market liablity.
Credit exposure represents the cost to replace, on a present value basis and at current market rates, the net positive value of all contracts for the Company and its subsidiaries with each counterparty that were outstanding at the end of the period, taking into consideration legal right of offset. In the normal course of business, the Companys swap agreements require collateral to mitigate the amount of credit risk if certain market value thresholds are exceeded. At March 31, 2007 the Bank had received securities with a market value of $0.7 million as margin for swaps with a positive replacement value of $3.8 million. For the same period, the Corporation had delivered securities with market value of $6.6 million as margin for swaps with a negative replacement value of $6.6 million.
ITEM 4. CONTROL AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a 15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Companys internal control over financial reporting that occurred during the registrants last fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
28
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We have made forward-looking statements in this document that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of our management, and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business and earnings outlook and statements preceded by, followed by, or that include the words will, believes, expects, anticipates, intends, plans, estimates, or similar expressions.
Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on the forward-looking statements, since they are based on current expectations. Actual results may differ materially from those currently expected or anticipated.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Many of the factors described below that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur as of the date the statements are made or to update earnings guidance including the factors that influence earnings.
A number of factors, some of which are beyond the Companys ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. These factors include (1) changes in interest rates, (2) significant changes in banking laws or regulations, (3) increased competition in the Companys markets, (4) other-than-expected credit losses due to business losses, real estate cycles or other economic events, (5) earthquake or other natural disasters affecting the condition of real estate collateral, (6) the effect of acquisitions and integration of acquired businesses and de novo branching efforts, (7) the impact of changes in regulatory, judicial or legislative tax treatment of business transactions, (8) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies, and (9) general business and economic conditions, including movements in interest rates, the slope of the yield curve, the impact of an entertainment industry strike and changes in business formation and growth, commercial real estate development and real estate prices. Additional factors that may cause future results to differ materially from forward-looking statements are discussed in Part I, Item 1A Risk Factors in the Companys Annual Report on Form 10-K as of December 31, 2006, to which reference is hereby made. There is no assurance that any list of risks and uncertainties or risk factors is complete.
29
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described under Item 1A of the Companys 2006 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchaser.
The information required by subsection (c) of this item regarding purchases by the Company during the quarter ended March 31, 2007 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act is incorporated by reference from that portion of Part I, Item 1 of the report under Note 5.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporations Annual Shareholders Meeting was held on Wednesday, April 25, 2007, in Beverly Hills, California, at which the shareholders were asked to vote on the following matters:
1. Election of nominees to serve on the Corporations Board of Directors.
Votes regarding the election of four Class II directors to serve for a term of three years or until their successors have been duly elected and qualified are as follows:
|
For |
|
Withheld |
|
|
Russell Goldsmith |
|
40,936,277 |
|
773,096 |
|
Linda Griego |
|
39,527,500 |
|
2,181,873 |
|
Michael Meyer |
|
40,778,020 |
|
931,353 |
|
Ronald Olsen |
|
39,436,715 |
|
2,272,658 |
|
2. Ratification of the selection of KPMG LLP as the Corporations independent auditors for the fiscal year ending December 31, 2007.
For |
|
Against |
|
Withheld |
|
39,902,793 |
|
1,764,235 |
|
42,345 |
|
30
ITEM 6. EXHIBITS
No. |
|
|
|
|
|
31.1 |
|
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.0 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
31
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
CITY NATIONAL CORPORATION |
||
|
(Registrant) |
||
|
|
|
|
DATE: May 9, 2007 |
/s/ Christopher J. Carey |
|
|
|
|
|
|
|
CHRISTOPHER J. CAREY |
||
|
Executive Vice President and |
||
|
Chief Financial Officer |
||
|
(Authorized Officer and |
||
|
Principal Financial Officer) |
||
32