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

(Registrant’s 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, CNB’s 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 Company’s 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 159’s 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 Company’s 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 Company’s Board of Directors authorized the Company to repurchase 1.5 million additional shares of the Company’s 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 Company’s 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 Company’s 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 Company’s 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

 

(000’s)

 

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 Company’s unvested options during the three-month period ended March 31, 2007 is presented below:

 

 

 

Weighted-Average

 

 

 

 

 

Grant-Date

 

Unvested Shares

 

Shares (000’s)

 

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 Bank’s 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 Company’s 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 Bank’s 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 segment’s 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 Company’s 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 Bank’s 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 Management’s 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

)

 

Corporation’s tier 1 leverage

 

8.59

 

8.81

 

8.85

 

 

(3

)

 

 

(3

)

 

Corporation’s tier 1 risk-based capital

 

10.62

 

11.09

 

12.26

 

 

(5

)

 

 

(13

)

 

Corporation’s 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.     MANAGEMENT’S 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.

RESULTS OF OPERATIONS

Critical Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  The Company has identified 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 Management’s Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) of the Notes to The Consolidated Financial Statements in the Company’s 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 Company’s 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 National’s 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 National’s first-quarter return on average equity was 15.10 percent and its return on average assets was 1.55 percent.

Outlook

As disclosed in the Company’s 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 Company’s 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 bank’s 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 Company’s 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 Company’s allowance methodology procedures (see “Critical Accounting Policies” on page 29 of the Company’s 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 management’s 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 Company’s 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 Company’s trust and investment fee income in the first quarter of 2007 grew 9 percent from the same period last year.

 

 

At or for the
three months ended

 

 

 

At or for the
three months

 

 

 

 

 

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 Company’s 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 National’s 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 Bank’s real estate investment trust subsidiaries as well as the minority ownership share of earnings of the Corporation’s 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




Income Taxes

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 Company’s Asset/Liability Committee and the interest-rate risk guidelines set by the Board of Directors.  See “Asset/Liability Management” for a discussion of the Company’s 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 Company’s 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 institution’s total risk-based capital; total CRE loans represent 300 percent or more of the institution’s total risk-based capital and the institution’s 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 Company’s 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.

Management’s 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

 

For the three months ended

 

 

 

March 31,

 

Dollars in thousands

 

2007

 

2006

 

Balance at beginning of period

 

$

16,424

 

$

15,596

 

Reserve of acquired institution

 

492

 

 

Provision for credit losses/transfers

 

89

 

157

 

Balance at end of period

 

$

17,005

 

$

15,753

 

 

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 Bank’s 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 client’s 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 Company’s 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 Company’s Board of Directors authorized the Company to repurchase 1.5 million additional shares of the Company’s 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 Company’s 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 Company’s 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 Corporation’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s disclosure controls and procedures were effective.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in the Company’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s 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 Company’s ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements.  These factors include (1) changes in interest rates, (2) significant changes in banking laws or regulations, (3) increased competition in the Company’s 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 Company’s 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 Company’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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




SIGNATURES

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