UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 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  x No  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 November 1, 2007, there were 48,118,951 shares of Common Stock outstanding.

 

 



 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

 

 

 

September 30,

 

December 31,

 

September 30,

 

Dollars in thousands, except per share amounts

 

2007

 

2006

 

2006

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

462,151

 

$

423,114

 

$

457,396

 

Due from banks - interest-bearing

 

95,047

 

60,940

 

65,323

 

Federal funds sold

 

 

127,000

 

3,300

 

Securities available-for-sale - cost $2,605,499; $3,018,190; and $3,248,003 at September 30, 2007, December 31, 2006 and September 30, 2006, respectively

 

2,565,754

 

2,954,372

 

3,175,230

 

Trading account securities

 

192,162

 

147,907

 

116,870

 

Loans and leases

 

11,190,080

 

10,386,005

 

10,020,358

 

Less allowance for loan and lease losses

 

152,018

 

155,342

 

159,063

 

Net loans

 

11,038,062

 

10,230,663

 

9,861,295

 

Premises and equipment, net

 

110,779

 

94,745

 

88,582

 

Deferred tax asset

 

125,824

 

125,992

 

117,055

 

Goodwill

 

428,308

 

249,641

 

255,340

 

Intangibles, net

 

89,088

 

37,920

 

43,131

 

Bank-owned life insurance

 

71,560

 

70,156

 

69,457

 

Affordable housing investments

 

67,891

 

65,800

 

63,660

 

Customers’ acceptance liability

 

7,983

 

3,877

 

4,124

 

Other assets

 

292,946

 

292,254

 

294,856

 

Total assets

 

$

15,547,555

 

$

14,884,381

 

$

14,615,619

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Demand deposits

 

$

5,538,107

 

$

6,002,068

 

$

5,639,811

 

Interest checking deposits

 

769,112

 

755,098

 

722,976

 

Money market deposits

 

3,748,518

 

3,216,949

 

3,186,455

 

Savings deposits

 

142,742

 

153,417

 

159,382

 

Time deposits-under $100,000

 

227,981

 

198,329

 

192,860

 

Time deposits-$100,000 and over

 

1,754,054

 

1,846,955

 

1,990,533

 

Total deposits

 

12,180,514

 

12,172,816

 

11,892,017

 

Federal funds purchased and securities sold under repurchase agreements

 

664,970

 

422,903

 

506,962

 

Other short-term borrowings

 

326,041

 

97,525

 

72,426

 

Subordinated debt

 

270,066

 

269,848

 

270,522

 

Long-term debt

 

225,598

 

217,569

 

217,323

 

Reserve for off-balance sheet credit commitments

 

20,072

 

16,424

 

15,652

 

Other liabilities

 

189,246

 

164,079

 

159,970

 

Acceptances outstanding

 

7,983

 

3,877

 

4,124

 

Total liabilities

 

13,884,490

 

13,365,041

 

13,138,996

 

Minority interest in consolidated subsidiaries

 

29,148

 

28,425

 

28,578

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Preferred Stock authorized - 5,000,000; none outstanding

 

 

 

 

Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,813,339; 50,718,794; and 50,728,705 shares at September 30, 2007, December 31, 2006 and September 30, 2006, respectively

 

50,813

 

50,719

 

50,729

 

Additional paid-in capital

 

421,755

 

412,248

 

404,163

 

Accumulated other comprehensive loss

 

(22,631

)

(41,386

)

(46,400

)

Retained earnings

 

1,345,337

 

1,264,697

 

1,225,784

 

Treasury shares, at cost - 2,349,903; 2,835,908; and 2,690,196 shares at September 30, 2007, December 31, 2006 and September 30, 2006, respectively

 

(161,357

)

(195,363

)

(186,231

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,633,917

 

1,490,915

 

1,448,045

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

15,547,555

 

$

14,884,381

 

$

14,615,619

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

2



 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

In thousands, except per share amounts

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

197,468

 

$

172,408

 

$

570,494

 

$

494,297

 

Securities available-for-sale

 

30,647

 

34,993

 

94,747

 

115,105

 

Trading account

 

1,082

 

695

 

2,779

 

2,084

 

Due from banks - interest-bearing

 

770

 

280

 

1,781

 

620

 

Federal funds sold and securities purchased under resale agreements

 

136

 

56

 

639

 

799

 

Total interest income

 

230,103

 

208,432

 

670,440

 

612,905

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

58,288

 

46,394

 

166,046

 

110,375

 

Federal funds purchased and securities sold under repurchase agreements

 

8,458

 

5,320

 

22,204

 

20,969

 

Subordinated debt

 

4,094

 

4,057

 

12,166

 

11,255

 

Other long-term debt

 

3,759

 

2,820

 

11,077

 

9,345

 

Other short-term borrowings

 

1,741

 

1,034

 

4,740

 

5,673

 

Total interest expense

 

76,340

 

59,625

 

216,233

 

157,617

 

Net interest income

 

153,763

 

148,807

 

454,207

 

455,288

 

Provision for credit losses

 

 

 

 

(610

)

Net interest income after provision for credit losses

 

153,763

 

148,807

 

454,207

 

455,898

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Trust and investment fees

 

37,488

 

30,002

 

102,565

 

76,685

 

Brokerage and mutual fund fees

 

15,546

 

13,096

 

43,284

 

37,049

 

Cash management and deposit transaction charges

 

8,801

 

7,967

 

25,744

 

23,722

 

International services

 

7,995

 

6,829

 

22,020

 

19,688

 

Bank-owned life insurance

 

645

 

685

 

2,030

 

2,296

 

Gain on sale of other assets

 

6,023

 

268

 

5,977

 

268

 

Loss on sale of securities

 

(2,516

)

(362

)

(1,381

)

(370

)

Other

 

7,251

 

6,218

 

20,630

 

18,806

 

Total noninterest income

 

81,233

 

64,703

 

220,869

 

178,144

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

84,057

 

75,318

 

242,945

 

220,652

 

Net occupancy of premises

 

11,837

 

10,207

 

31,657

 

28,679

 

Legal and professional fees

 

8,614

 

8,416

 

25,925

 

25,671

 

Information services

 

6,024

 

5,636

 

17,325

 

15,994

 

Depreciation and amortization

 

5,275

 

4,832

 

15,397

 

14,154

 

Marketing and advertising

 

5,079

 

4,495

 

14,860

 

13,501

 

Office services

 

3,287

 

2,623

 

8,972

 

7,863

 

Amortization of intangibles

 

2,852

 

(37

)

7,105

 

3,828

 

Equipment

 

867

 

514

 

2,382

 

1,769

 

Other operating

 

7,331

 

6,857

 

20,954

 

18,804

 

Total noninterest expense

 

135,223

 

118,861

 

387,522

 

350,915

 

Minority interest expense

 

2,211

 

1,808

 

6,612

 

4,249

 

Income before income taxes

 

97,562

 

92,841

 

280,942

 

278,878

 

Income taxes

 

37,469

 

33,847

 

105,151

 

103,911

 

Net income

 

$

60,093

 

$

58,994

 

$

175,791

 

$

174,967

 

Net income per share, basic

 

$

1.24

 

$

1.23

 

$

3.64

 

$

3.59

 

Net income per share, diluted

 

$

1.22

 

$

1.20

 

$

3.56

 

$

3.47

 

Shares used to compute income per share, basic

 

48,345

 

47,919

 

48,331

 

48,786

 

Shares used to compute income per share, diluted

 

49,408

 

49,318

 

49,447

 

50,424

 

Dividends per share

 

$

0.46

 

$

0.41

 

$

1.38

 

$

1.23

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

3



 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

For the nine months ended

 

 

 

September 30,

 

Dollars in thousands

 

2007

 

2006

 

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

175,791

 

$

174,967

 

Adjustments to net income:

 

 

 

 

 

Provision for credit losses

 

 

(610

)

Amortization of intangibles

 

7,105

 

3,828

 

Depreciation and amortization

 

15,397

 

14,154

 

Amortization of cost and discount on long-term debt

 

531

 

530

 

Stock-based employee compensation expense

 

10,520

 

9,162

 

Gain on sale of other assets

 

(5,977

)

(268

)

Loss on sales of securities

 

1,381

 

370

 

Other, net

 

7,323

 

12,187

 

Net change in:

 

 

 

 

 

Trading securities

 

(44,255

)

(57,526

)

Deferred income tax benefit

 

11,323

 

3,972

 

Other assets and other liabilities, net

 

(19,112

)

(36,470

)

Net cash provided by operating activities

 

160,027

 

124,296

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of securities available-for-sale

 

(161,032

)

(133,171

)

Sales of securities available-for-sale

 

196,329

 

415,486

 

Maturities and paydowns of securities

 

442,126

 

498,107

 

Loan originations, net of principal collections

 

(420,611

)

(761,576

)

Purchase of premises and equipment

 

(24,083

)

(19,868

)

Acquisition of BBNV, net of cash acquired

 

(53,787

)

 

Acquisition of CWA, net of cash acquired

 

(101,283

)

 

Other investing activities

 

(6,714

)

(13,777

)

Net cash used by investing activities

 

(129,055

)

(14,799

)

Cash Flows From Financing Activities

 

 

 

 

 

Net decrease in deposits

 

(433,414

)

(246,455

)

Net increase in federal funds purchased and securities sold under repurchase agreements

 

242,067

 

316,772

 

Net increase (decrease) in short-term borrowings, net of transfers from long-term debt

 

228,516

 

(27,574

)

Net decrease in other borrowings

 

(61

)

(280

)

Proceeds from exercise of stock options

 

20,953

 

12,913

 

Tax benefit from exercise of stock options

 

7,201

 

3,877

 

Stock repurchases

 

(82,975

)

(145,269

)

Cash dividends paid

 

(67,115

)

(60,482

)

Net cash used by financing activities

 

(84,828

)

(146,498

)

Net decrease in cash and cash equivalents

 

(53,856

)

(37,001

)

Cash and cash equivalents at beginning of year

 

611,054

 

563,020

 

Cash and cash equivalents at end of period

 

$

557,198

 

$

526,019

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

230,220

 

$

148,727

 

Income taxes

 

59,595

 

113,243

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

4



 

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

 

 

 

 

 

174,967

 

 

174,967

 

Other comprehensive income net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available-for-sale, net of reclassification

 

 

 

 

 

 

 

 

of $3.2 million for net loss

 

 

 

 

 

 

 

 

included in net income

 

 

 

 

2,869

 

 

 

2,869

 

Net unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cash flow hedges, net of reclassification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of $4.6 million net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income.

 

 

 

 

2,528

 

 

 

2,528

 

Other net unrealized loss

 

 

 

 

(246

)

 

 

(246

)

Total other comprehensive income

 

 

 

 

5,151

 

 

 

5,151

 

Issuance of shares for stock options

 

68,246

 

68

 

(5,368

)

 

 

18,213

 

12,913

 

Restricted stock grants, net of cancellations

 

59,516

 

60

 

(60

)

 

 

 

 

Stock-based employee compensation expense

 

 

 

9,055

 

 

 

 

9,055

 

Tax benefit from stock options

 

 

 

3,877

 

 

 

 

3,877

 

Cash dividends paid

 

 

 

 

 

(60,483

)

 

(60,483

)

Repurchased shares, net

 

 

 

 

 

 

(145,269

)

145,269

 

Balance, September 30, 2006

 

50,728,705

 

$

50,729

 

$

404,163

 

$

(46,400

)

$

1,225,784

 

$

(186,231

)

$

1,448,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

175,791

 

 

175,791

 

Other comprehensive income net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

163

 

 

 

163

 

Net unrealized gain on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available-for-sale, net of reclassification

 

 

 

 

 

 

 

 

of $2.5 million for net loss

 

 

 

 

 

 

 

 

included in net income

 

 

 

 

13,866

 

 

 

13,866

 

Net unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cash flow hedges, net of reclassification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of $2.7 million net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

 

 

 

4,726

 

 

 

4,726

 

Total other comprehensive income

 

 

 

 

18,755

 

 

 

18,755

 

Issuance of shares for stock options

 

 

 

(15,924

)

 

 

36,877

 

20,953

 

Restricted stock grants, net of cancellations

 

94,545

 

94

 

(94

)

 

 

 

 

Stock-based employee compensation expense

 

 

 

10,413

 

 

 

 

10,413

 

Tax benefit from stock options

 

 

 

7,201

 

 

 

 

7,201

 

Cash dividends paid

 

 

 

 

 

(67,115

)

 

(67,115

)

Repurchased shares, net

 

 

 

 

 

 

(82,975

)

(82,975

)

Issuance of shares for acquisition

 

 

 

7,911

 

 

 

 

 

80,104

 

88,015

 

Balance, September 30, 2007

 

50,813,339

 

$

50,813

 

$

421,755

 

$

(22,631

)

$

1,345,337

 

$

(161,357

)

$

1,633,917

 

 

See accompanying Notes to 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 (the “Bank”).  City National Bank delivers banking, trust and investment services through 62 offices in Southern California, the San Francisco Bay area, Nevada and New York City.  As of September 30, 2007, the Corporation had a majority ownership interest in nine investment advisor subsidiaries and a minority interest in one other firm.  The Corporation also has an unconsolidated subsidiary, Business Bancorp Capital Trust I.  Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank 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, the Bank, and the Bank’s wholly-owned subsidiaries, after the elimination of all material intercompany transactions.  Certain prior period balances have been reclassified to conform to the current period presentation.

 

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 the Bank.

 

On May 1, 2007, the Corporation completed the acquisition of Lydian Wealth Management in an all-cash transaction.   The investment advisory firm is headquartered in Rockville, Maryland and now manages or advises on client assets totaling $8.2 billion.  Lydian Wealth Management changed its name to Convergent Wealth Advisors (“CWA”) and became a subsidiary of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003.  All of the senior executives of CWA signed employment agreements and acquired a significant minority ownership interest in CWA.

 

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, unless otherwise disclosed in this Form 10-Q, 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 nine months ended September 30, 2007, the following significant 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 irrevocable option to report eligible financial assets and liabilities at fair value on an instrument-by-instrument basis.  Unrealized gains and losses on instruments for which the fair value option has been elected will be reported in earnings at each subsequent reporting date. 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 Company is evaluating the guidance contained in SFAS 159 and has not yet determined which assets and liabilities, if any, will be selected for the fair value option under the statement.

 

6



 

                  On April 30, 2007 the FASB issued Staff Position, (“FSP”) FIN 39-1, which amends certain aspects of FASB Interpretation Number 39, Offsetting of Amounts Related to Certain Contracts—an interpretation of APB Opinion No. 10 and FASB Statement No. 105 (“FIN 39”). The FSP amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts, including amounts that approximate fair value, recognized for derivative instruments executed with the same counterparty under the same master netting arrangement.  Derivative instruments permitted to be netted for the purposes of the FSP include those instruments that meet the definition of a derivative in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, including those that are not included in the scope of Statement 133.  The FSP only impacts the presentation of the derivative’s fair value and the related collateral on the balance sheet. The FSP will be effective for the Company as of January 1, 2008. The decision to apply the guidance in the FSP is an accounting policy decision that the Company is currently evaluating.  The FSP is not expected to have a significant impact on the Company’s financial statements.

 

                  EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” , ratified by the EITF on June 14, 2007, provides that realized income tax benefits from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options are to be recognized as an increase to additional paid-in capital.  The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards are to be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards.  The EITF is effective for the Company as of January 1, 2008. The Company currently recognizes the tax benefit associated with dividend payments on unvested shares as a reduction of income tax expense.  The EITF is not expected to have a significant impact on the Company’s financial statements.

 

In addition, there is one previously issued accounting pronouncement:

 

                  On September 15, 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 defines fair value for financial reporting purposes, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements where fair value is required or permitted. This statement is effective for the Company on January 1, 2008.  The Company is currently evaluating the guidance contained in SFAS 157 to determine the effect of adoption on the Company’s financial statements.

 

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 a separate component 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. On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis.   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 fair value with any unrealized gains or losses included in net income.

 

7



 

5.               Shareholders’ Equity - 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 September 30, 2007:

 

Period

 

Total Number of 
Shares (or Units) 
Purchased

 

Average 
Price Paid 
per Share (or 
Unit)

 

Total number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs

 

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

 

07/1/07 - 07/31/07

 

295,000

 

$

72.86

 

295,000

 

483,200

 

08/1/07 - 08/31/07

 

510,000

 

$

70.78

 

510,000

 

973,200

(1)

09/1/07 - 09/30/07

 

53,400

 

$

69.43

 

53,400

 

919,800

 

 

 

858,400

 

$

71.41

 

858,400

(1)

919,800

(1)

 


(1)          On August 7, 2007, the Company’s Board of Directors authorized the Company to repurchase 1 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 there under.  During the third quarter of 2007, the Company repurchased an aggregate of 858,400 shares of our common stock pursuant to its repurchase programs and there are 919,800 shares remaining to be purchased.  The Company received no shares in payment for the exercise price of stock options during the third quarter of 2007.

 

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 September 30, 2007, there were 858,606 antidilutive options compared to 922,987 antidilutive options at September 30, 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 September 30, 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 September 30, 2007, and $10.5 million for the nine months ended September 30, 2007, compared to $3.1 million and $9.2 million for the three and nine-month periods ended September 30, 2006, respectively.  The Company received $21.0 million and $12.9 million in cash for the exercise of stock options during the nine month periods ended September 30, 2007 and September 30, 2006, respectively.  These shares had a corresponding tax benefit of $7.2 million and $3.9 million for the nine month periods ended September 30, 2007 and September 30, 2006, respectively.

 

Plan Description

 

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.  At September 30, 2007 there were 2.0 million shares available for future grants.  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, during which time the holder receives dividends and has full voting rights.  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 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.

 

8



 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Expected volatility

 

20.20

%

23.95

%

21.33

%

24.62

%

Weighted-average volatility

 

21.14

%

24.50

%

21.91

%

23.99

%

Expected dividends

 

2.66

 

2.59

 

2.56

 

2.24

 

Expected term (in years)

 

6.02

 

5.96

 

6.04

 

6.06

 

Risk-free rate

 

4.76

%

5.07

%

4.73

%

4.70

%

 

Using the Black-Scholes model, the weighted-average grant-date fair values of options granted during the nine-month periods ended September 30, 2007 and 2006 were $17.15 and $19.61, respectively.  The total intrinsic values of options exercised during the nine-month periods ended September 30, 2007 and 2006 were $16.3 million, and $8.7 million, respectively.

 

A summary of option activity under the Plan during the nine-month period ended September 30, 2007 is presented below:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual

 

Value

 

Options

 

Shares

 

Price

 

Term

 

(In the Money)

 

 

 

(000)

 

 

 

 

 

($ 000)

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2007

 

4,295

 

$

49.54

 

4.65

 

$

88,917

 

BBNV acquisition

 

109

 

10.77

 

3.81

 

6,431

 

Granted

 

497

 

74.54

 

9.43

 

1

 

Exercised

 

(535

)

39.12

 

3.23

 

(16,286

)

Forfeited or expired

 

(116

)

67.72

 

7.62

 

(534

)

Outstanding at September 30, 2007

 

4,250

 

$

52.28

 

5.28

 

$

78,529

 

Exercisable at September 30, 2007

 

3,149

 

$

45.16

 

4.14

 

$

76,675

 

 

A summary of the changes in the Company’s unvested options during the nine-month period ended September 30, 2007 is presented below:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant-Date

 

Unvested Shares

 

Shares (000)

 

Fair Value

 

Unvested at January 1, 2007

 

1,139

 

17.23

 

Granted

 

497

 

17.15

 

Vested

 

(424

)

14.96

 

Forfeited

 

(111

)

17.14

 

Unvested at September 30, 2007

 

1,101

 

17.55

 

 

The number of shares vested during the nine-month period ended September 30, 2007 was 424,235.  The total fair value of shares vested during the nine-month period ended September 30, 2007 was $6.3 million.  As of September 30, 2007, there was $27.3 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 3.2 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 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.

 

9



 

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.  The Company did not have any significant undesignated hedges as of September 30, 2007 or 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 using the hypothetical derivative method described in Derivatives Implementation Group Issue G7.  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, the Company uses interest-rate swaps to hedge the fair value of certain certificates of deposits, subordinated debt and other long-term debt.  The certificates of deposit are single maturity, fixed-rate, non-callable, negotiable certificates of deposit that pay interest only at maturity and contain no compounding features.  The certificates cannot be redeemed early except in the case of the holder’s death.  The interest-rate swaps are executed at the time the deposit transactions are negotiated.  The subordinated debt and other long-term debt consists of City National Bank ten-year subordinated notes with a face value of $115.9 million due on January 15, 2008, City National Bank ten-year subordinated notes with a face value of $150.0 million due on September 1, 2011, and City National Corporation senior notes with a face value of $225.0 million due on February 15, 2013.  Interest-rate swaps are structured so that all key terms of the swaps match those of the underlying deposit or debt transactions, therefore ensuring there is no hedge ineffectiveness at inception.  The Company ensures that the interest-rate swaps meet the requirements for utilizing the short cut method in accordance with paragraph 68 of SFAS 133 and maintains appropriate documentation for each interest-rate swap.  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, thus ensuring continuous effectiveness.  For these 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.

 

The Company also offers various derivatives products to clients and enters into derivatives transactions in due course.  These transactions are not linked to specific Company assets or liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting.  They are carried at fair value with changes in fair value recorded as part of other noninterest income in the income statement.

 

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 fair value hedge derivative instrument 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 cash flow hedge

 

10



 

derivative instrument is terminated or the hedge designation is removed, related amounts reported in other comprehensive income are 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, an interpretation of FASB Statement No. 109, (“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, net of taxes.

 

Although the Company reduced the state tax receivable balance to zero in connection with the adoption of FIN 48  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 potential accrued interest and penalties relating to unrecognized tax benefits as an income tax expense.   For the nine-month period ended September 30, 2007, the Company accrued approximately $0.9 million in potential interest and penalties associated with uncertain tax positions.  In conjunction with the adoption of FIN 48, the Company reduced accrued interest and penalties by $4.5 million.  The Company had approximately $5.9 million and $9.4 million of accrued interest and penalties as of September 30, 2007 and December 31, 2006, respectively.

 

The Company and its subsidiaries file a consolidated federal income tax return and also file income tax returns in various state jurisdictions.  The Company is currently under examination by the Internal Revenue Service (“IRS”) for the tax years 2002 and 2003.  The Company is currently in IRS appeals proceedings related to certain tax positions taken in these years.  The Company does not expect the final settlement of these matters to materially vary from the Company's current tax accrual for these matters as of September 30, 2007.

 

The Company is also under examination by the Franchise Tax Board for the tax years 1998 through 2004.  The Company expects the Franchise Tax Board to complete its 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.  The Company recorded profit sharing contributions expense of $4.1 million and $12.1 million for the three-month and nine-month periods ended September 30, 2007, compared to $4.5 million and $13.2 million for the three-month and nine-month periods ended September 30, 2006, respectively.

 

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 September 30, 2007, there was a $4.6 million unfunded pension liability related to the SERP.  The total expense for both the third quarter of 2007 and the third quarter of 2006 was $0.2 million. The total expense was $0.6 million for both the nine-month periods ended September 30, 2007 and September 30, 2006.

 

The Company does not provide any other post-retirement benefits.

 

10.         Guarantees - 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, and accordingly has not accrued for any portion of this guarantee.

 

11.            Variable Interest Entities -The Company holds variable interests in certain special-purpose entities formed to provide affordable housing.  The Company is not required to consolidate these entities.  The Company initially records its investment in these entities at cost, which approximates the maximum exposure to loss as a result of its involvement with these unconsolidated entities. Subsequently the carrying value is amortized over the stream of available tax credits and benefits.  The Company expects to recover its investments over time, primarily through realization of federal low-income housing tax credits.  The balance of the investments in these entities was $67.9 million, $65.8 million and $63.7 million at September 30, 2007, December 31, 2006, and September 30, 2006, respectively, is included in the affordable housing investments balance in the balance sheet.  The Company also has

 

11



 

ownership interests in several private equity investment funds that are variable interest entities.   The Company is not required to consolidate these variable interest entities.  The Company carries its investment in these entities at cost, which approximates the maximum exposure to loss as a result of its involvement with these entities.  The Company expects to recover its investments over time, primarily through the allocation of fund income or loss, gains or losses on the sale of fund assets, dividends, or interest income.  The balance in these entities was $18.3 million, $11.8 million and $9.9 million at September 30, 2007, December 31, 2006, and September 30, 2006 respectively, and is included in the other assets balance in the balance sheet.  In addition, CWA is the administrative manager of the Barlow Long-Short Equity Fund, a hedge fund which is a variable interest entity.  CWA is not required to consolidate this entity.

 

12.            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 management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies.  If the management structure and/or the allocation process changes, allocations, transfers and assignments may change.

 

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.

 

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.  Interest rate risk is removed from the units comprising the Commercial and Private Banking segment to the Funding Center through a fund transfer pricing (“FTP”) model.  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.

 

12



 

CITY NATIONAL CORPORATION

Segment Results

 

 

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

& Private

 

& Private

 

 

 

 

 

Consolidated

 

Consolidated

 

 

 

Banking

 

Banking

 

Other

 

Other

 

Company

 

Company

 

(Dollars in thousands)

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

157,957

 

$

148,106

 

$

(4,194

)

$

701

 

$

153,763

 

$

148,807

 

Provision for credit losses

 

 

 

 

 

 

 

Noninterest income

 

18,011

 

16,465

 

63,222

 

48,238

 

81,233

 

64,703

 

Depreciation and amortization

 

1,685

 

1,474

 

3,590

 

3,358

 

5,275

 

4,832

 

Noninterest expense and minority interest

 

96,266

 

88,768

 

35,893

 

27,069

 

132,159

 

115,837

 

Income before income taxes

 

78,017

 

74,329

 

19,545

 

18,512

 

97,562

 

92,841

 

Income taxes

 

24,287

 

26,775

 

13,182

 

7,072

 

37,469

 

33,847

 

Net income

 

$

53,730

 

$

47,554

 

$

6,363

 

$

11,440

 

$

60,093

 

$

58,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

11,074,554

 

$

9,908,404

 

$

116,563

 

$

104,705

 

$

11,191,117

 

$

10,013,109

 

Total Assets

 

11,466,378

 

10,336,468

 

4,128,604

 

4,208,136

 

15,594,982

 

14,544,604

 

Deposits

 

11,209,041

 

10,362,885

 

1,233,147

 

1,542,174

 

12,442,188

 

11,905,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

1.9

%

1.8

%

0.6

%

1.1

%

1.5

%

1.6

%

 

CITY NATIONAL CORPORATION

Segment Results

 

 

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

& Private

 

& Private

 

 

 

 

 

Consolidated

 

Consolidated

 

 

 

Banking

 

Banking

 

Other

 

Other

 

Company

 

Company

 

(Dollars in thousands)

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

463,001

 

$

445,429

 

$

(8,794

)

$

9,859

 

$

454,207

 

$

455,288

 

Provision for credit losses

 

 

(610

)

 

 

 

(610

)

Noninterest income

 

51,758

 

48,649

 

169,111

 

129,495

 

220,869

 

178,144

 

Depreciation and amortization

 

4,843

 

4,326

 

10,554

 

9,828

 

15,397

 

14,154

 

Noninterest expense and minority interest

 

282,920

 

267,718

 

95,817

 

73,292

 

378,737

 

341,010

 

Income before income taxes

 

226,996

 

222,644

 

53,946

 

56,234

 

280,942

 

278,878

 

Income taxes

 

77,158

 

82,146

 

27,993

 

21,765

 

105,151

 

103,911

 

Net income

 

$

149,838

 

$

140,498

 

$

25,953

 

$

34,469

 

$

175,791

 

$

174,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

10,812,339

 

$

9,740,866

 

$

108,965

 

$

107,561

 

$

10,921,304

 

$

9,848,427

 

Total Assets

 

11,210,080

 

10,172,939

 

4,087,360

 

4,543,892

 

15,297,440

 

14,716,831

 

Deposits

 

11,081,793

 

10,504,583

 

1,229,612

 

1,304,463

 

12,311,405

 

11,809,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

1.8

%

1.8

%

0.8

%

1.0

%

1.5

%

1.6

%

 

13



 

CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

 

 

 

 

 

 

 

 

 

Percent change

 

 

 

At or for the three months ended

 

September 30, 2007 from

 

 

 

September 30,

 

June 30,

 

September 30,

 

June 30,

 

September 30,

 

Dollars in thousands, except per share amounts

 

2007

 

2007

 

2006

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Quarter

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,093

 

$

59,153

 

$

58,994

 

2

%

2

%

Net income per common share, basic

 

1.24

 

1.22

 

1.23

 

2

 

1

 

Net income per common share, diluted

 

1.22

 

1.19

 

1.20

 

3

 

2

 

Dividends per common share

 

0.46

 

0.46

 

0.41

 

0

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

At Quarter End

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

15,547,555

 

$

15,796,096

 

$

14,615,619

 

(2

)

6

 

Securities

 

2,757,916

 

2,915,994

 

3,292,100

 

(5

)

(16

)

Loans and leases

 

11,190,080

 

11,018,834

 

10,020,358

 

2

 

12

 

Deposits

 

12,180,514

 

13,130,405

 

11,892,017

 

(7

)

2

 

Shareholders’ equity

 

1,633,917

 

1,621,450

 

1,448,045

 

1

 

13

 

Book value per common share

 

33.99

 

33.21

 

30.40

 

2

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

15,594,982

 

$

15,452,580

 

$

14,544,604

 

1

 

7

 

Securities

 

2,831,687

 

2,945,091

 

3,244,896

 

(4

)

(13

)

Loans and leases

 

11,191,117

 

11,010,860

 

10,013,109

 

2

 

12

 

Deposits

 

12,442,188

 

12,569,934

 

11,905,059

 

(1

)

5

 

Shareholders’ equity

 

1,622,962

 

1,603,837

 

1,435,998

 

1

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

1.53

%

1.54

%

1.61

%

(1

)

(5

)

Return on average shareholders’ equity (annualized)

 

14.69

 

14.79

 

16.30

 

(1

)

(10

)

Corporation’s tier 1 leverage

 

7.80

 

7.97

 

8.58

 

(2

)

(9

)

Corporation’s tier 1 risk-based capital

 

9.57

 

9.82

 

11.09

 

(3

)

(14

)

Corporation’s total risk-based capital

 

12.01

 

12.28

 

14.12

 

(2

)

(15

)

Period-end shareholders’ equity to period-end assets

 

10.51

 

10.26

 

9.91

 

2

 

6

 

Dividend payout ratio, per share

 

37.26

 

38.22

 

33.64

 

(3

)

11

 

Net interest margin

 

4.42

 

4.47

 

4.53

 

(1

)

(2

)

Efficiency ratio (1)

 

57.67

 

57.73

 

55.65

 

(0

)

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

0.23

%

0.20

%

0.19

%

15

 

21

 

Nonaccrual loans and OREO to total loans and OREO

 

0.23

 

0.20

 

0.19

 

15

 

21

 

Allowance for loan and lease losses to total loans

 

1.36

 

1.43

 

1.59

 

(5

)

(14

)

Allowance for loan and lease losses to nonaccrual loans

 

579.63

 

707.58

 

847.03

 

(18

)

(32

)

Net (charge-offs)/recoveries to average loans (annualized)

 

(0.13

)

(0.08

)

0.08

 

63

 

(263

)

 

 

 

 

 

 

 

 

 

 

 

 

At Quarter End

 

 

 

 

 

 

 

 

 

 

 

Assets under management (2)

 

$

37,145,161

 

$

35,849,921

 

$

27,167,972

 

4

 

37

 

Assets under management or administration (2)

 

59,243,503

 

57,328,627

 

48,275,716

 

3

 

23

 

 


(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 $12.1 billion, $10.5 billion, and $7.8 billion of assets under management for an asset manager in which City National held a minority ownership interest as of September 30, 2007, June 30, 2007, and September 30, 2006, respectively.

 

14



 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 for the year ended December 31, 2006.

 

Overview

 

City National Corporation is the parent company of City National Bank. The Corporation offers a full complement of banking, trust and investment services through 62 offices, including 15 full-service regional centers, in Southern California, the San Francisco Bay Area, Nevada and New York City. As of September 30, 2007, the Corporation had a majority ownership interest in nine investment advisor subsidiaries and a minority interest in one asset management firm. The Company also has an unconsolidated subsidiary, Business Bancorp Capital Trust I.

 

The Corporation recorded net income of $60.1 million, or $1.22 per share, for the third quarter of 2007 compared with $59.0 million or $1.20 per share, for the third quarter of 2006 and $59.2 million, or $1.19 per share, for the second quarter of 2007. Net income for the third quarter of 2007 includes a $5.1 million gain on the recovery of an investment in liquidation, partially offset by a $2.5 million loss on the sale of securities and $1.2 million in additional income tax expense related to the pending settlement of two federal income tax matters.

 

Recent Developments

 

U.S. financial markets have experienced significant disruptions in recent months, due largely to a downturn in the housing market.  Interest rates on many subprime mortgage loans have reset, causing borrowers to delay payments or default on their loans.  Housing prices have declined in the face of excess supply.  As a result, many investors have pulled back from buying mortgage-backed securities, triggering a liquidity crisis for some mortgage lenders.

 

City National Bank does not make subprime loans.  Nor does the Company hold any subprime loans or subprime collateralized debt obligations in its loan or securities portfolios.

 

Highlights

 

                  Third quarter 2007 revenue of $235.0 million represented a 10 percent increase from the third quarter of 2006.

 

                  Average loans and leases grew to $11.2 billion, up 12 percent from the third quarter of 2006. Lending rose in all major categories, primarily due to organic growth but also due to the effect of the February 28, 2007 acquisition of Business Bank of Nevada (“BBNV”). Average loans and leases increased 2 percent from the second quarter of 2007.

 

                  Average deposits of $12.4 billion were up 5 percent from the third quarter of 2006. Average deposits decreased 1 percent from the second quarter of this year.

 

                  Noninterest income totaled $81.2 million, up 26 percent from the third quarter of last year primarily due to fee revenue generated by wealth management, international banking and cash management services. At September 30, 2007, noninterest income accounted for 35 percent of City National’s total revenue.

 

                  Assets under direct management amounted to $37.1 billion, a 37 percent increase from the third quarter of 2006. Assets under management or administration grew 23 percent to $59.2 billion over the same period.

 

 

15



 

                  Credit quality remained sound in the third quarter of 2007. The company required no provision for credit losses and remained adequately reserved at 1.36 percent of total loans and leases.

 

                  City National’s third-quarter return on average equity was 14.69 percent and its return on average assets was 1.53 percent.

 

Outlook

 

In light of its third-quarter performance, the Company’s management continues to expect earnings per share to grow at a rate of between 3 percent and 5 percent this year as compared with 2006.

 

Net Interest Income

 

Fully taxable-equivalent net interest and dividend income totaled $158.1 million in the third quarter of 2007, compared with $152.8 million for the same period last year and $157.4 million in the second quarter of 2007.

 

 

 

For the three months ended

 

 

 

For the three

 

 

 

 

 

September 30,

 

%

 

months ended

 

%

 

Dollars in millions

 

2007

 

2006

 

Change

 

June 30, 2007

 

Change

 

Average Loans and Leases

 

$

11,191.1

 

$

10,013.1

 

12

 

$

11,010.9

 

2

 

Average Total Securities

 

2,831.7

 

3,244.9

 

(13

)

2,945.1

 

(4

)

Average Earning Assets

 

14,199.6

 

13,368.9

 

6

 

14,129.5

 

0

 

Average Deposits

 

12,442.2

 

11,905.2

 

5

 

12,569.9

 

(1

)

Average Core Deposits

 

10,388.0

 

9,905.8

 

5

 

10,503.4

 

(1

)

Fully Taxable-Equivalent Net Interest and Dividend Income

 

158.1

 

152.8

 

4

 

157.4

 

0

 

Net Interest Margin

 

4.42

%

4.53

%

(2

)

4.47

%

(1

)

 

The Company’s yield on earning assets reached 6.55 percent up from 6.54 percent in the second quarter of 2007 and 6.30 percent in the third quarter of 2006. The bank’s prime rate was 7.75 percent on September 30, 2007, a decrease of 50 basis points from both June 30, 2007 and September 30, 2006. The net interest margin for the third quarter of 2007 was 4.42 percent, down five basis points from the second quarter of 2007 due primarily to loan growth and a decline in demand deposits related to the title and escrow business. The net interest margin declined 11 basis points from the third quarter of 2006 primarily as a result of higher deposit and short-term borrowing costs.

 

Third-quarter average loan and lease balances reached $11.2 billion, up 12 percent over the same period last year and 2 percent from the second quarter of 2007. The commercial lending portfolio grew 18 percent over the third quarter of 2006 and 1 percent from the second quarter of 2007. Residential mortgage loans grew 9 percent from the third quarter of last year and 3 percent from the second quarter of this year. Commercial real estate mortgage loans decreased 2 percent from both the third quarter of 2006 and second quarter of 2007. Real estate construction loans increased 25 percent from the same period one year ago and 9 percent from the second quarter of 2007. In the last 12 months the real estate construction portfolio grew $295 million. Of this amount $101 million, or 34 percent, is due to the acquisition of BBNV. The remainder was from internal growth distributed among several property types including, but not limited to, industrial, commercial, office buildings, for sale housing, apartments and shopping centers.

 

The Company’s average deposits totaled $12.4 billion in the third quarter of 2007, a 5 percent increase from the third quarter of 2006 due to the acquisition of BBNV and the growth of money market and time deposits. Average deposits decreased 1 percent from the second quarter of 2007, primarily as a result of a decline in title and escrow deposit balances.

 

As part of its long-standing asset and liability management strategies, the Company uses interest rate swaps to hedge loans, deposits, and borrowings. The swaps had a notional value of $1.0 billion at September 30, 2007, down $0.5 billion from September 30, 2006, and $0.1 billion lower than the second quarter of this year. The following table presents the impact of fair value and cash flow hedges on net interest income:

 

 

 

Third Quarter

 

Second Quarter

 

Third Quarter

 

Dollars in millions

 

2007

 

2007

 

2006

 

Fair value Hedges

 

$

(0.2

)

$

(0.1

)

$

(0.2

)

Cash-flow Hedges

 

(1.2

)

(1.6

)

(3.1

)

Total

 

$

(1.4

)

$

(1.7

)

$

(3.3

)

 

16



 

Recent decreases in interest rates are expected to reduce interest income on variable rate loans. This reduction will be partially offset by the income from existing swaps of loans qualifying as cash flow hedges. The net interest accrual on these swaps over the next 12 months is projected to be $0.4 million based on current market conditions. Both the expense for the third quarter and the projected income for the next 12 months should be viewed in context with the increase or decrease in interest income resulting from changes 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- and nine- months ended September 30, 2007 and 2006.

 

17



 

 

 

Net Interest Income Summary

 

 

 

For the three months ended

 

For the three months ended

 

 

 

September 30, 2007

 

September 30, 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

 

$

4,303,498

 

$

80,520

 

7.42

%

$

3,636,933

 

$

64,314

 

7.02

%

Commercial real estate mortgages

 

1,896,667

 

34,924

 

7.31

 

1,935,121

 

36,326

 

7.45

 

Residential mortgages

 

3,062,898

 

42,766

 

5.59

 

2,801,163

 

37,653

 

5.38

 

Real estate construction

 

1,344,169

 

29,172

 

8.61

 

1,071,184

 

24,170

 

8.95

 

Equity lines of credit

 

405,933

 

7,808

 

7.63

 

374,863

 

7,469

 

7.91

 

Installment

 

177,952

 

3,299

 

7.35

 

193,845

 

3,703

 

7.58

 

Total loans (3)

 

11,191,117

 

198,489

 

7.04

 

10,013,109

 

173,635

 

6.88

 

Due from banks - interest-bearing

 

98,106

 

770

 

3.12

 

61,358

 

280

 

1.81

 

Federal funds sold and securities purchased under resale agreements

 

10,171

 

137

 

5.33

 

3,135

 

56

 

7.13

 

Securities available-for-sale

 

2,747,378

 

32,910

 

4.79

 

3,190,583

 

37,076

 

4.65

 

Trading account securities

 

84,309

 

1,112

 

5.23

 

54,313

 

715

 

5.22

 

Other interest-earning assets

 

68,524

 

1,062

 

6.15

 

46,428

 

637

 

5.45

 

Total interest-earning assets

 

14,199,605

 

234,480

 

6.55

 

13,368,926

 

212,399

 

6.30

 

Allowance for loan and lease losses

 

(157,385

)

 

 

 

 

(158,487

)

 

 

 

 

Cash and due from banks

 

433,673

 

 

 

 

 

427,543

 

 

 

 

 

Other non-earning assets

 

1,119,089

 

 

 

 

 

906,622

 

 

 

 

 

Total assets

 

$

15,594,982

 

 

 

 

 

$

14,544,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking accounts

 

$

778,082

 

$

1,339

 

0.68

 

$

705,647

 

$

638

 

0.36

 

Money market accounts

 

3,747,808

 

29,832

 

3.16

 

3,223,908

 

20,892

 

2.57

 

Savings deposits

 

145,792

 

180

 

0.49

 

163,178

 

168

 

0.41

 

Time deposits - under $100,000

 

232,109

 

2,368

 

4.05

 

183,576

 

1,727

 

3.73

 

Time deposits - $100,000 and over

 

2,054,148

 

24,569

 

4.75

 

1,999,406

 

22,969

 

4.56

 

Total interest-bearing deposits

 

6,957,939

 

58,288

 

3.32

 

6,275,715

 

46,394

 

2.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under repurchase agreements

 

672,449

 

8,458

 

4.99

 

401,396

 

5,320

 

5.26

 

Other borrowings

 

619,598

 

9,594

 

6.14

 

557,504

 

7,911

 

5.63

 

Total interest-bearing liabilities

 

8,249,986

 

76,340

 

3.67

 

7,234,615

 

59,625

 

3.27

 

Noninterest-bearing deposits

 

5,484,249

 

 

 

 

 

5,629,465

 

 

 

 

 

Other liabilities

 

237,785

 

 

 

 

 

244,526

 

 

 

 

 

Shareholders’ equity

 

1,622,962

 

 

 

 

 

1,435,998

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

15,594,982

 

 

 

 

 

$

14,544,604

 

 

 

 

 

Net interest spread

 

 

 

 

 

2.88

%

 

 

 

 

3.03

%

Fully taxable-equivalent net interest and dividend income

 

 

 

$

158,140

 

 

 

 

 

$

152,774

 

 

 

Net interest margin

 

 

 

 

 

4.42

%

 

 

 

 

4.53

%

Less: Dividend income included in other income

 

 

 

1,062

 

 

 

 

 

637

 

 

 

Fully taxable-equivalent net interest income

 

 

 

$

157,078

 

 

 

 

 

$

152,137

 

 

 

 


(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 $25,548 and $16,016 for 2007 and 2006, respectively.

(4)          Loan income includes loan fees of $3,687 and $2,977 for 2007 and 2006, respectively.

 

18



 

 

 

Net Interest Income Summary

 

 

 

For the nine months ended

 

For the nine months ended

 

 

 

September 30, 2007

 

September 30, 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

 

$

4,241,821

 

$

233,166

 

7.35

%

$

3,764,100

 

$

192,059

 

6.82

%

Commercial real estate mortgages

 

1,863,132

 

102,447

 

7.35

 

1,824,620

 

101,794

 

7.46

 

Residential mortgages

 

2,975,001

 

122,557

 

5.49

 

2,734,575

 

109,097

 

5.32

 

Real estate construction

 

1,253,403

 

81,906

 

8.74

 

976,062

 

63,719

 

8.73

 

Equity lines of credit

 

401,445

 

23,208

 

7.73

 

353,878

 

20,077

 

7.59

 

Installment

 

186,502

 

10,467

 

7.50

 

195,192

 

11,051

 

7.57

 

Total loans (3)

 

10,921,304

 

573,751

 

7.02

 

9,848,427

 

497,797

 

6.76

 

Due from banks - interest-bearing

 

86,761

 

1,781

 

2.74

 

50,541

 

621

 

1.64

 

Federal funds sold and securities purchased under resale agreements

 

16,100

 

639

 

5.31

 

22,286

 

799

 

4.79

 

Securities available-for-sale

 

2,845,173

 

101,353

 

4.75

 

3,545,977

 

121,283

 

4.56

 

Trading account securities

 

70,371

 

2,869

 

5.45

 

50,212

 

2,141

 

5.70

 

Other interest-earning assets

 

58,849

 

2,716

 

6.17

 

46,553

 

1,866

 

5.36

 

Total interest-earning assets

 

13,998,558

 

683,109

 

6.52

 

13,563,996

 

624,507

 

6.16

 

Allowance for loan and lease losses

 

(158,945

)

 

 

 

 

(156,806

)

 

 

 

 

Cash and due from banks

 

433,713

 

 

 

 

 

436,236

 

 

 

 

 

Other non-earning assets

 

1,024,114

 

 

 

 

 

873,405

 

 

 

 

 

Total assets

 

$

15,297,440

 

 

 

 

 

$

14,716,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking accounts

 

$

777,110

 

$

3,334

 

0.57

 

$

756,773

 

$

1,600

 

0.28

 

Money market accounts

 

3,630,499

 

83,727

 

3.08

 

3,320,617

 

53,779

 

2.17

 

Savings deposits

 

149,810

 

539

 

0.48

 

171,856

 

494

 

0.38

 

Time deposits - under $100,000

 

246,035

 

7,301

 

3.97

 

179,767

 

4,339

 

3.23

 

Time deposits - $100,000 and over

 

1,998,063

 

71,145

 

4.76

 

1,637,776

 

50,163

 

4.10

 

Total interest-bearing deposits

 

6,801,517

 

166,046

 

3.26

 

6,066,789

 

110,375

 

2.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under repurchase agreements

 

580,440

 

22,204

 

5.11

 

583,943

 

20,969

 

4.80

 

Other borrowings

 

610,367

 

27,983

 

6.13

 

652,173

 

26,273

 

5.39

 

Total interest-bearing liabilities

 

7,992,324

 

216,233

 

3.62

 

7,302,905

 

157,617

 

2.89

 

Noninterest-bearing deposits

 

5,509,888

 

 

 

 

 

5,742,257

 

 

 

 

 

Other liabilities

 

212,999

 

 

 

 

 

214,933

 

 

 

 

 

Shareholders’ equity

 

1,582,229

 

 

 

 

 

1,456,736

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

15,297,440

 

 

 

 

 

$

14,716,831

 

 

 

 

 

Net interest spread

 

 

 

 

 

2.90

%

 

 

 

 

3.27

%

Fully taxable-equivalent net interest and dividend income

 

 

 

$

466,876

 

 

 

 

 

$

466,890

 

 

 

Net interest margin

 

 

 

 

 

4.46

%

 

 

 

 

4.60

%

Less: Dividend income included in other income

 

 

 

2,716

 

 

 

 

 

1,866

 

 

 

Fully taxable-equivalent net interest income

 

 

 

$

464,160

 

 

 

 

 

$

465,024

 

 

 

 


(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 $23,162 and $14,574 for 2007 and 2006, respectively.

(4)          Loan income includes loan fees of $9,906 and $10,005 for 2007 and 2006, respectively.

 

19



                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 third quarter and first nine months of 2007 and the third quarter and first nine months of 2006, as well as between the third quarter and first nine months of 2006 and the third quarter and first nine months of 2005.

 

 

 

Changes In Net Interest Income

 

 

 

For the three months ended September 30,

 

For the three months ended September 30,

 

 

 

2007 vs 2006

 

2006 vs 2005

 

 

 

Increase (decrease)

 

Net

 

Increase (decrease)

 

Net

 

 

 

due to

 

increase

 

due to

 

increase

 

Dollars in thousands

 

Volume

 

Rate

 

(decrease)

 

Volume

 

Rate

 

(decrease)

 

Interest earned on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

20,752

 

$

4,102

 

$

24,854

 

$

17,682

 

$

12,601

 

$

30,283

 

Securities available-for-sale

 

(5,275

)

1,109

 

(4,166

)

(15,966

)

9,732

 

(6,234

)

Due from banks - interest-bearing

 

222

 

268

 

490

 

161

 

18

 

179

 

Trading account securities

 

396

 

1

 

397

 

206

 

141

 

347

 

Federal funds sold and securities purchased under resale agreements

 

98

 

(17

)

81

 

(844

)

296

 

(548

)

Other interest-earning assets

 

335

 

90

 

425

 

1

 

72

 

73

 

Total interest-earning assets

 

16,528

 

5,553

 

22,081

 

1,240

 

22,860

 

24,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking deposits

 

72

 

629

 

701

 

(34

)

400

 

366

 

Money market deposits

 

3,705

 

5,235

 

8,940

 

(992

)

10,381

 

9,389

 

Savings deposits

 

(19

)

31

 

12

 

(27

)

53

 

26

 

Time deposits

 

1,213

 

1,028

 

2,241

 

8,599

 

7,392

 

15,991

 

Other borrowings

 

4,650

 

171

 

4,821

 

1,741

 

3,716

 

5,457

 

Total interest-bearing liabilities

 

9,621

 

7,094

 

16,715

 

9,287

 

21,942

 

31,229

 

 

 

$

6,907

 

$

(1,541

)

$

5,366

 

$

(8,047

)

$

918

 

$

(7,129

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

For the nine months ended September 30,

 

 

 

2007 vs 2006

 

2006 vs 2005

 

 

 

Increase (decrease)

 

Net

 

Increase (decrease)

 

Net

 

 

 

due to

 

increase

 

due to

 

increase

 

Dollars in thousands

 

Volume

 

Rate

 

(decrease)

 

Volume

 

Rate

 

(decrease)

 

Interest earned on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

56,135

 

$

19,819

 

$

75,954

 

$

52,831

 

$

41,524

 

$

94,355

 

Securities available-for-sale

 

(24,784

)

4,854

 

(19,930

)

(44,417

)

35,550

 

(8,867

)

Due from banks - interest-bearing

 

599

 

561

 

1,160

 

282

 

(35

)

247

 

Trading account securities

 

826

 

(98

)

728

 

389

 

861

 

1,250

 

Federal funds sold and securities purchased under resale agreements

 

(239

)

79

 

(160

)

(1,098

)

535

 

(563

)

Other interest-earning assets

 

541

 

309

 

850

 

 

184

 

184

 

Total interest-earning assets

 

33,078

 

25,524

 

58,602

 

7,987

 

78,619

 

86,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking deposits

 

44

 

1,690

 

1,734

 

(62

)

1,031

 

969

 

Money market deposits

 

5,451

 

24,497

 

29,948

 

(2,457

)

25,369

 

22,912

 

Savings deposits

 

(69

)

114

 

45

 

(61

)

152

 

91

 

Time deposits

 

14,074

 

9,870

 

23,944

 

15,902

 

17,254

 

33,156

 

Other borrowings

 

(1,766

)

4,711

 

2,945

 

14,174

 

12,076

 

26,250

 

Total interest-bearing liabilities

 

17,734

 

40,882

 

58,616

 

27,496

 

55,882

 

83,378

 

 

 

$

15,344

 

$

(15,358

)

$

(14

)

$

(19,509

)

$

22,737

 

$

3,228

 

 

The impact of interest rate swaps which affect interest income on loans and interest expense on deposits and borrowings, is included in rate changes.

 

20



 

Provision for Credit Losses

 

The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses, reserve for off-balance sheet credit commitments 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 September 30, 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 September 30, 2007, December 31, 2006, and September 30, 2006, net (charge-offs)/recoveries totaled ($3.6 million), ($2.9 million), and $1.9 million, respectively. For these periods, nonaccrual loans at period end totaled $26.2 million, $20.9 million, and $18.8 million, respectively.

 

Noninterest Income

 

Third-quarter 2007 noninterest income of $81.2 million was 26 percent higher than the third quarter of 2006. Excluding the acquisition of Convergent Wealth Advisors (“CWA”) and the previously disclosed disposition of another investment affiliate in December 2006, third-quarter noninterest income grew 15 percent from the third quarter of 2006. Noninterest income was 35 percent of total revenue in the third quarter of 2007, compared to 30 percent for the third quarter of 2006 and 32 percent for the second quarter of 2007.

 

Wealth Management

 

Trust and investment fees increased 25 percent over the third quarter of 2006, due to the acquisition of CWA and increases in assets under management or administration in our Wealth Management group and other asset management affiliates. Assets under direct management grew 37 percent from the same period last year due largely to the acquisition of CWA during the second quarter of 2007. Not including the acquisition of CWA and the above-mentioned disposition of an asset management affiliate, the Company’s trust and investment fee income in the third quarter of 2007 grew 2 percent from the same period last year.

 

 

 

At or for the
three months ended
September 30,

 

%

 

At or for the
three months
ended

 

%

 

Dollars in millions

 

2007

 

2006

 

Change

 

June 30, 2007

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and Investment Fee Revenue

 

$

37.5

 

$

30.0

 

25

 

$

34.8

 

8

 

Brokerage and Mutual Fund Fees

 

15.5

 

13.1

 

19

 

14.0

 

11

 

Assets Under Management (1)

 

37,145.2

 

27,168.0

 

37

 

35,849.9

 

4

 

Total Assets Under Management or Administration (1)

 

59,243.5

 

48,275.7

 

23

 

57,328.6

 

3

 

 


(1) Excludes $12.1 billion, $7.8 billion, and $10.5 billion of assets under management for an asset manager in which City National held a minority ownership interest as of September 30, 2007, September 30, 2006, and June 30, 2007, respectively.

 

Other Noninterest Income

 

Third-quarter cash management and deposit transaction fees grew 10 percent from the same period last year, due largely to the addition of new clients, the sale of additional services to existing clients and a decline in the earnings credit rate on compensating deposit balances. These fees increased 4 percent from the second quarter of 2007.

 

International service fees for the third quarter of 2007 grew 17 percent from the same period last year and 6 percent from the second quarter of this year, reflecting increased demand for both foreign exchange services and letters of credit. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection

 

21



 

and other fee income. International services fees are recognized when earned, except for the fees on commercial and standby letters of credit, which are generally deferred and recognized in income over the terms of the letters of credit.

 

Other service charges and fees for the third quarter of 2007 amounted to $7.3 million, up $1.1 million or 17 percent, from the same period one year ago, primarily due to higher debit and credit card fees. These fees were unchanged from second quarter of 2007. The $6.0 million gain on sale of other assets for third quarter 2007 includes a $5.1 million gain from the recovery of an investment in liquidation as well as a $0.6 million gain on the sale of a life insurance policy. The $2.5 million loss on the sale of securities relates to the sale of $148.7 million of securities to reduce borrowings, improve liquidity and reduce prepayment risk.

 

Noninterest and Minority Interest Expense

 

Third-quarter 2007 noninterest and minority interest expense amounted to $137.4 million, up 14 percent from the same period last year and 3 percent from the second quarter of this year. Excluding the acquisitions of CWA and BBNV, noninterest expense grew 5 percent from the third quarter of last year.

 

Staffing expenses for the quarter amounted to $84 million, up 12 percent from one year ago and up 4 percent from the second quarter of this year due largely to the acquisitions mentioned above.

 

Legal and professional fees grew 2 percent from the third quarter of 2006 and were unchanged from the second quarter of 2007.

 

Minority interest expense consists of preferred stock dividends paid by the Bank’s real estate investment trust subsidiaries as well as the minority ownership share of the earnings of the Corporation’s majority-owned asset management firms.

 

The Company’s third-quarter efficiency ratio was 57.67 percent compared with 55.65 percent for the third quarter of 2006, and 57.73 percent for the second quarter of 2007. The year-over-year increase was due primarily to higher core deposit costs, and the continued expansion of City National’s fee-based businesses, including the addition of CWA.

 

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.

 

The compensation cost that has been charged against income for all stock-based awards was $3.4 million for the three months ended September 30, 2007, and $10.5 million for the nine months ended September 30, 2007, compared to $3.1 million and $9.2 million for the three- and nine-month periods ended September 30, 2006, respectively. The Company received $21.0 million and $12.9 million in cash for the exercise of stock options during the nine month periods ended September 30, 2007 and September 30, 2006, respectively. These shares had a corresponding tax benefit of $7.2 million and $3.9 million for the nine month periods ended September 30, 2007 and September 30, 2006, respectively. See the disclosures in Note 6 for a description of the stock-based compensation plan and method of estimating the fair value of option awards.

 

As of September 30, 2007 there was $27.3 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 3.2 years. The total number of shares vested during the nine months ended September 30, 2007 was 424,235.

 

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 12 to the Unaudited Financial Statements.

 

22



 

Commercial and Private Banking

 

Net income of $53.7 million in the third quarter of 2007 for the Commercial and Private Banking segment increased $6.2 million, or 13 percent, from the $47.5 million recorded in third quarter of 2006. For the first nine months of 2007, net income increased 7 percent to $149.8 million compared to the same period in 2006. Total revenue grew to $176.0 million in the third quarter of 2007, a 7 percent increase over the third quarter of 2006. Year-to-date (“YTD”), revenue for the Commercial and Private Banking segment increased 4 percent to $514.8 million. The increase in revenue for the quarter and YTD was driven by strong loan growth as well as the acquisition of BBNV. Loan growth was primarily in commercial and industrial and construction loans, the effect of which was partially offset by higher funding costs due to a change in the mix of deposits and increases in deposit rates. Average loans and leases were $11.1 billion in the third quarter of 2007, up 12 percent from $9.9 billion in the third quarter of 2006. Average deposits were $11.2 billion in the third quarter of 2007, an increase of 8 percent from the same period last year, primarily related to the acquisition of BBNV and the growth of money market and time deposits. Noninterest income increased 9 percent in the third quarter of 2007 compared to the third quarter of 2006, and 6 percent during the first nine months of 2007 compared to the first nine months of 2006, primarily due to higher cash management and deposit transaction charges and higher international service fees. Noninterest expense, excluding depreciation and amortization, was $7.5 million, or 8 percent, higher for the third quarter of 2007 compared to the third quarter of 2006. YTD noninterest expense (excluding depreciation and amortization) was 6 percent higher in 2007 than in 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 $5.1 million, or 44 percent, in the third quarter of 2007 compared to the third quarter of 2006, and $8.5 million, or 25 percent, YTD compared to the prior year. Although the Company had strong revenue and earnings growth in our Wealth Management and asset management affiliates, it was more than offset by higher funding costs and lower prepayment fees in the Asset Liability Funding Center. Total revenue for the Other segment increased 21 percent to $59.0 million for the third quarter of 2007 compared to the third quarter of 2006 primarily as a result of the acquisition of CWA. Total revenue for the year increased 15 percent in 2007 to $160.3 million. Excluding the acquisition of CWA, noninterest income grew 21 percent during the first nine months of 2007 compared to the first nine months of 2006. Total noninterest expense for the third quarter of 2007 increased 33 percent over the third quarter of 2006, and YTD total noninterest expense increased 31 percent over the same period in 2006, again primarily related to the acquisition mentioned above.

 

Income Taxes

 

The third-quarter 2007 effective tax rate was 38.4 percent, compared with 36.5 percent in the third quarter of last year. 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 increase in the third-quarter effective tax rate is primarily due to additional tax expense related to the expected resolution of two pending Federal income tax matters, constituting a 0.8 percent increase in the effective tax rate. The Company expects a normalized tax rate of 37.6 percent for the remainder of the year.

 

The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as an income tax provision expense. For the nine-month period ended September 30, 2007, the Company recognized approximately $0.9 million in interest and penalties. In conjunction with the adoption of FIN 48, the Company reduced accrued interest and penalties by $4.5 million during the nine-month period ended September 30, 2007. The Company had approximately $5.9 million and $9.4 million of accrued interest and penalties as of September 30, 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 $3.9 million to a tax expense of $6.7 million.

 

The Company is also under examination by the Franchise Tax Board for the tax years 1998 through 2004. The Company expects the Franchise Tax Board to complete its 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.

 

23



 

BALANCE SHEET ANALYSIS

 

Total assets were $15.5 billion at September 30, 2007 compared to $14.9 billion at December 31, 2006 and $14.6 billion at September 30, 2006. The 4 percent and 6 percent increase in total assets compared to December 31, 2006 and September 30, 2006, respectively, is primarily attributable to loan growth as well as the acquisitions of BBNV and CWA.

 

Total average assets for the third quarter of 2007 increased 7 percent from the third quarter of 2006. Total average interest-earning assets for the third quarter of 2007 were $14.2 billion, a 6 percent increase from the third quarter of 2006 and slightly higher than the average interest-earning assets for the second quarter of 2007 of $14.1 billion.

 

Securities

 

Comparative period-end securities portfolio balances are presented below:

 

 

 

Securities Available-for-Sale

 

 

 

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

Dollars in thousands

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

U.S. Treasury

 

$

59,916

 

$

59,988

 

$

49,937

 

$

49,938

 

$

35,664

 

$

35,591

 

Federal Agency

 

100,994

 

100,616

 

263,227

 

258,778

 

363,216

 

356,383

 

CMO’s

 

1,079,423

 

1,058,578

 

1,247,161

 

1,215,397

 

1,364,080

 

1,328,037

 

Mortgage-backed

 

855,126

 

829,195

 

1,017,409

 

983,917

 

1,061,761

 

1,025,646

 

State and Municipal

 

390,004

 

390,841

 

360,759

 

362,318

 

343,104

 

347,390

 

Total debt securities

 

2,485,463

 

2,439,218

 

2,938,493

 

2,870,348

 

3,167,825

 

3,093,047

 

Equity securities

 

120,036

 

126,536

 

79,697

 

84,024

 

80,178

 

82,183

 

Total securities

 

$

2,605,499

 

$

2,565,754

 

$

3,018,190

 

$

2,954,372

 

$

3,248,003

 

$

3,175,230

 

 

At September 30, 2007, securities available-for-sale totaled $2.6 billion, a decrease of $0.6 billion compared with the balance at September 30, 2006. At September 30, 2007, the portfolio had a net unrealized loss of $39.7 million compared with net unrealized losses of $63.8 million at December 31, 2006 and $72.8 million at September 30, 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 recovery. The mortgage-backed securities and collateralized mortgage obligations (“CMOs”) in the Company’s portfolio are all issued by GNMA, FNMA, Freddie Mac or AAA-rated private issuers.

 

The average duration of securities available-for-sale at September 30, 2007 was 3.4 years. This duration compares with 3.3 years at December 31, 2006 and 3.3 years at September 30, 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.

 

The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities included in the securities portfolio as of September 30, 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.

 

24



 

 

 

Debt Securities Available-for-Sale

 

 

 

One year
or less

 

Over 1 year
thru 5 years

 

Over 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

 

$

59,988

 

5.02

 

$

 

 

$

 

 

$

 

 

$

59,988

 

5.02

 

Federal Agency

 

80,782

 

3.57

 

19,834

 

4.01

 

 

 

 

 

100,616

 

3.66

 

CMO’s

 

92,322

 

5.33

 

825,646

 

4.43

 

140,610

 

5.36

 

 

 

1,058,578

 

4.63

 

Mortgage-backed

 

2,072

 

5.29

 

643,484

 

4.24

 

174,345

 

4.46

 

9,294

 

5.46

 

829,195

 

4.30

 

State and Municipal

 

37,445

 

4.40

 

114,989

 

3.96

 

178,429

 

3.86

 

59,978

 

3.97

 

390,841

 

3.96

 

Total debt securities

 

$

272,609

 

4.61

 

$

1,603,953

 

4.32

 

$

493,384

 

4.50

 

$

69,272

 

4.17

 

$

2,439,218

 

4.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

272,679

 

 

 

$

1,642,187

 

 

 

$

500,524

 

 

 

$

70,073

 

 

 

$

2,485,463

 

 

 

 

Dividend income included in interest income on securities in the Unaudited Consolidated Statements of Income for the third quarter of 2007 and 2006 was $2.1 million and $1.5 million, respectively.

 

Loans and Leases

 

A table comparing period-end loan and lease balances is presented below:

 

 

 

Loans and Leases

 

Dollars in thousands

 

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,969,688

 

$

3,612,255

 

$

3,394,450

 

Commercial real estate mortgages

 

1,894,753

 

1,681,476

 

1,943,142

 

Residential mortgages

 

3,114,335

 

2,869,775

 

2,830,761

 

Real estate construction

 

1,391,034

 

1,397,760

 

1,095,672

 

Equity lines of credit

 

404,869

 

404,657

 

384,830

 

Installment

 

169,041

 

201,125

 

197,871

 

Lease financing

 

246,360

 

218,957

 

173,632

 

Total loans and leases, gross

 

11,190,080

 

10,386,005

 

10,020,358

 

Less allowance for loan and lease losses

 

(152,018

)

(155,342

)

(159,063

)

Total loans and leases, net

 

$

11,038,062

 

$

10,230,663

 

$

9,861,295

 

 

Total gross loans and leases at September 30, 2007 were 8 percent and 12 percent higher than at December 31, 2006 and September 30, 2006, respectively. The growth from the third quarter of 2006 was primarily in commercial, residential mortgages and construction lending, and is due to organic growth augmented by the acquisition of BBNV.

 

The real estate construction portfolio includes loans to develop, construct or sell single-family residences. These loans represent less than 5 percent of the Company’s $11.2 billion loan portfolio and a vast majority of the loans have guarantees.  In addition, included in the commercial loan portfolio is $133 million of loans to borrowers related to the for-sale housing industry.

 

25



 

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 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 September 30, 2007 total loans for construction, land development and other land represented 95 percent of total risk-based capital; total CRE loans represented 205 percent of total risk-based capital and the total portfolio of loans for construction, land development, other land and CRE increased 49 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. The Company had no OREO as of September 30, 2007, December 31, 2006, or September 30, 2006.

 

 

 

Nonaccrual Loans and OREO

 

Dollars in thousands

 

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

$

7,673

 

$

2,977

 

$

10,416

 

Commercial real estate mortgages

 

1,970

 

4,849

 

8,094

 

Residential mortgages

 

394

 

 

 

Real estate construction

 

15,513

 

12,678

 

 

Equity lines of credit

 

502

 

 

 

Installment

 

175

 

379

 

269

 

Total

 

26,227

 

20,883

 

18,779

 

OREO

 

 

 

 

Total nonaccrual loans and OREO

 

$

26,227

 

$

20,883

 

$

18,779

 

 

 

 

 

 

 

 

 

Total nonaccrual loans as a percentage of total loans

 

0.23

%

0.20

%

0.19

%

Total nonaccrual loans and OREO as a percentage of total loans and OREO

 

0.23

 

0.20

 

0.19

 

Allowance for loan and lease losses to total loans

 

1.36

 

1.50

 

1.59

 

Allowance for loan and lease losses to nonaccrual loans

 

579.63

 

743.88

 

847.03

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more on accrual status

 

$

 

$

337

 

$

27

 

Total

 

$

 

$

337

 

$

27

 

 

At September 30, 2007, there were $22.7 million of impaired loans included in nonaccrual loans, with an allowance allocation of $2.7 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 September 30, 2006 impaired loans were $16.6 million with an allowance allocation of $4.0 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.

 

26



 

The following table summarizes the changes in nonaccrual loans for the three and nine months ending September 30, 2007 and 2006.

 

Changes in Nonaccrual Loans

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

Dollars in thousands

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

22,308

 

$

15,001

 

$

20,883

 

$

14,400

 

Loans placed on nonaccrual

 

12,622

 

10,299

 

23,222

 

19,870

 

Loans from acquisitions

 

 

 

50

 

 

Charge-offs

 

(3,724

)

(326

)

(7,351

)

(954

)

Loans returned to accrual status

 

(2,635

)

(220

)

(2,755

)

(701

)

Repayments (including interest applied to principal)

 

(2,344

)

(5,975

)

(7,822

)

(13,836

)

Balance, end of period

 

$

26,227

 

$

18,779

 

$

26,227

 

$

18,779

 

 

In addition to loans in nonaccrual status disclosed above, management has also identified $46.3 million of credits to 15 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 September 30, 2007. This amount was determined based on analysis of information known to management about the borrowers’ financial condition and current economic conditions. Of the potential problem loans identified, a significant portion consist of extensions of credit to borrowers that develop, construct and/or sell single-family residences.

 

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 September 30, 2007, the allowance for loan and lease losses was $152.0 million or 1.36 percent of outstanding loans and leases, and the reserve for off-balance sheet credit commitments was $20.1 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.

 

27


 


 

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 and nine months ended September 30, 2007 and 2006.

 

Changes in Allowance for Loan and Lease Losses

 

 

 

For the three months ended
September 30

 

For the nine months ended
September 30

 

Dollars in thousands

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Loans and leases outstanding

 

$

11,190,080

 

$

10,020,358

 

$

11,190,080

 

$

10,020,358

 

Average amount of loans and leases outstanding

 

$

11,191,117

 

$

10,013,109

 

$

10,921,304

 

$

9,848,426

 

Balance of allowance for loan and lease losses, beginning of period

 

$

157,849

 

$

157,580

 

$

155,342

 

$

153,983

 

Loans charged-off:

 

 

 

 

 

 

 

 

 

Commercial

 

(996

)

(430

)

(6,411

)

(2,239

)

Residential first mortgage

 

 

 

 

 

Commercial real estate mortgage

 

(297

)

 

(297

)

(94

)

Real estate construction

 

(2,672

)

 

(2,672

)

 

Equity lines of credit

 

 

(11

)

 

(11

)

Installment

 

(13

)

(24

)

(132

)

(62

)

Total loans charged-off

 

(3,978

)

(465

)

(9,512

)

(2,406

)

Recoveries of loans previously charged-off:

 

 

 

 

 

 

 

 

 

Commercial

 

364

 

2,342

 

4,808

 

7,066

 

Residential first mortgage

 

 

 

 

 

Commercial real estate mortgage

 

2

 

 

2

 

949

 

Real estate construction

 

18

 

18

 

53

 

50

 

Equity lines of credit

 

 

 

 

 

Installment

 

3

 

34

 

35

 

87

 

Total recoveries

 

387

 

2,394

 

4,898

 

8,152

 

Net loans (charged-off)/recovered

 

(3,591

)

1,929

 

(4,614

)

5,746

 

Provision for credit losses

 

 

 

 

(610

)

Transfers to reserve for off-balance sheet credit commitments

 

(2,240

)

(446

)

(3,223

)

(56

)

Allowance of acquired institution

 

 

 

4,513

 

 

Balance, end of period

 

$

152,018

 

$

159,063

 

$

152,018

 

$

159,063

 

 

 

 

 

 

 

 

 

 

 

Net (charge-offs)/recoveries to average loans and leases (annualized)

 

(0.13

)%

0.08

%

(0.06

)%

0.08

%

Ratio of allowance for loan and lease losses to total period-end loans and leases

 

1.36

%

1.59

%

1.36

%

1.59

%

 

Changes in Reserve for Off-balance Sheet Credit Commitments

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

Dollars in thousands

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

17,832

 

$

15,206

 

$

16,424

 

$

15,596

 

Recovery of prior charge-off

 

 

 

(67

)

 

Reserve of acquired institution

 

 

 

492

 

 

Provision for credit losses/transfers

 

2,240

 

446

 

3,223

 

56

 

Balance at end of period

 

$

20,072

 

$

15,652

 

$

20,072

 

$

15,652

 

 

 

28



 

Other Assets

 

Other assets include the following:

 

 

 

 

September 30,

 

December 31,

 

September 30,

 

Dollars in thousands

 

2007

 

2006

 

2006

 

Accrued interest receivable

 

$

76,769

 

$

74,534

 

$

72,494

 

Other accrued income

 

24,340

 

22,938

 

20,736

 

Deferred Compensation Fund assets

 

49,153

 

35,396

 

33,963

 

Stock in government agencies

 

48,431

 

46,963

 

46,553

 

Income tax receivable

 

 

43,133

 

43,133

 

Private Equity fund investments

 

22,135

 

14,983

 

13,052

 

PML assets

 

4,211

 

13,716

 

16,740

 

Other

 

67,907

 

40,591

 

48,185

 

Total other assets

 

$

292,946

 

$

292,254

 

$

294,856

 

 

Deposits

 

Deposits totaled $12.2 billion at September 30, 2007, an increase of 2 percent compared with $11.9 billion at September 30, 2006, and unchanged from December 31, 2006. Core deposits, which continued to provide substantial benefits to the Bank’s cost of funds, were 86 percent of total deposits at September 30, 2007, and increased $0.1 billion since December 31, 2006.

 

Average deposits totaled $12.4 billion for the third quarter of 2007, an increase of 5 percent from the third quarter of 2006, due primarily to the acquisition of BBNV as well as growth in money market and time deposits. Average deposits declined 1 percent from the second quarter of 2007. Average non-interest bearing deposits fell 3 percent from the third quarter of 2006 and 1 percent from the second quarter of 2007, due to a decline in title and escrow deposit balances. With the slowdown in housing sales, average title and escrow deposits were $1.18 billion, $1.26 billion, and $1.25 billion for the three-month periods ended September 30, 2007, June 30, 2007 and September 30, 2006, respectively. Title and escrow deposits represent 9.5 percent of total quarterly average deposits.

 

Borrowings

 

Borrowed funds increased to $1.5 billion at September 30, 2007 from $1.0 billion at December 31, 2006 and $1.1 billion at September 30, 2006. The increase reflects higher federal funds purchased and other short-term borrowings to fund loan growth.

 

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 $5.5 billion at September 30, 2007, compared with $5.0 billion at December 31, 2006 and $4.9 billion at September 30, 2006. In addition, the Company had $804.7 million outstanding in bankers’ acceptances and letters of credit of which $780.4 million related to standby letters of credit at September 30, 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.

 

 

29



 

As of September 30, 2007, the Company had private equity fund commitments of $50.7 million, of which $22.5 million was funded. As of both December 31, 2006 and September 30, 2006, the Company had private equity fund commitments of $44.7 million, of which $15.8 million and $13.9 million was funded, respectively. In addition, the Company had unfunded affordable housing fund commitments of $26.4 million, $36.3 million, and $32.8 million as of September 30, 2007, December 31, 2006, and September 30, 2006, respectively.

 

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 September 30, 2007, December 31, 2006, and September 30, 2006.

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

Well-Capitalized

 

September 30,

 

December 31,

 

September 30,

 

 

 

Standards

 

2007

 

2006

 

2006

 

City National Corporation

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

N/A

%

7.80

%

8.81

%

8.58

%

Tier 1 risk-based capital

 

6.00

 

9.57

 

11.09

 

11.09

 

Total risk-based capital

 

10.00

 

12.01

 

13.60

 

14.12

 

 

 

 

 

 

 

 

 

 

 

City National Bank

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

5.00

 

7.84

 

9.04

 

9.05

 

Tier 1 risk-based capital

 

6.00

 

9.61

 

11.38

 

11.64

 

Total risk-based capital

 

10.00

 

12.04

 

13.89

 

14.67

 

 

Tier 1 capital ratios at September 30, 2007 reflect the impact of the acquisitions of BBNV and CWA 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 September 30, 2007 was 10.51 percent, compared with 9.91 percent at September 30, 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 $22.6 million at September 30, 2007 compared with $46.4 million at September 30, 2006 and $41.4 million at December 31, 2006.

 

The following table provides information about purchases by the Company during the nine months ended September 30, 2007 of equity securities that are registered by the Company pursuant of Section 12 of the Exchange Act.

 

Period

 

Total Number
of Shares (or
Units)
Purchased

 

Average
Price Paid
per Share
(or Unit)

 

Total number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

 

03/01/07 - 03/31/07

 

263,000

 

$

72.11

 

263,000

 

794,700

 

06/01/07 - 06/30/07

 

16,500

 

$

74.78

 

16,500

 

778,200

 

07/1/07 - 07/31/07

 

295,000

 

$

72.86

 

295,000

 

483,200

 

08/1/07 - 08/31/07

 

510,000

 

$

70.78

 

510,000

 

973,200

(1)

09/1/07 - 09/30/07

 

53,400

 

$

69.43

 

53,400

 

919,800

 

 

 

1,137,900

 

$

71.62

 

1,137,900

(1)

919,800

(1)

 

 

30



 


(1)         On August 7, 2007, the Company’s Board of Directors authorized the Company to repurchase 1 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 there under. The Company received 935 shares in payment for the exercise price of stock options.

 

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 guidelines 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 targets 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 neutral position. Increased reliance on wholesale funding sources and other changes in the mix of the balance sheet have also moved the Company toward a neutral position. Based on the balance sheet at September 30, 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 0.5 percent. This compares to a decrease in projected net interest income of 0.3 percent at December 31, 2006, and an increase of 0.1 percent at September 30, 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 1.1 percent. This compares to an increase in projected net interest income of 0.9 percent at December 31, 2006, and an increase of 0.6 percent at September 30, 2006.

 

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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 September 30, 2007, a 200-basis-point increase in interest rates results in a 3.4 percent decline in PVE. This compares to declines of 3.0 percent and 2.7 percent at December 31, 2006 and September 30, 2006, respectively.

 

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:

 

 

 

September 30, 2007

 

December 31, 2006

 

September 30, 2006

 

Dollars in millions

 

Notional
Amount

 

Fair
Value

 

Duration

 

Notional
Amount

 

Fair
Value

 

Duration

 

Notional
Amount

 

Fair
Value

 

Duration

 

Fair Value Hedge Receive Fixed Interest Rate Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

20.0

 

$

0.5

 

2.8

 

$

175.0

 

$

(0.1

)

0.2

 

$

175.0

 

$

(0.2

)

0.4

 

Long-term and subordinated debt

 

490.9

 

0.1

 

3.1

 

490.9

 

(2.5

)

3.8

 

490.9

 

(1.9

)

3.9

 

Total fair value hedge swaps

 

510.9

 

0.6

 

3.1

 

665.9

 

(2.6

)

2.8

 

665.9

 

(2.1

)

3.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedge Receive Fixed Interest Rate Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Dollar LIBOR based loans

 

150.0

 

1.9

 

1.7

 

325.0

 

(1.8

)

0.6

 

350.0

 

(3.3

)

0.4

 

Prime based loans

 

300.0

 

(0.2

)

0.3

 

375.0

 

(3.1

)

0.6

 

425.0

 

(3.6

)

0.8

 

Total cash flow hedge swaps

 

450.0

 

1.7

 

0.8

 

700.0

 

(4.9

)

0.6

 

775.0

 

(6.9

)

0.6

 

Fair Value and Cash Flow Hedge Interest Rate Swaps (1)

 

$

960.9

 

$

2.3

 

2.0

 

$

1,365.9

 

$

(7.5

)

1.7

 

$

1,440.9

 

$

(9.0

)

1.7

 

 


(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 liability.

 

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 September 30, 2007 the Corporation had delivered securities with a market value of $6.7 million as margin for swaps with a negative replacement value of $5.2 million. For the same period in 2006, the Bank had received securities with market value of $1.0 million as margin for swaps with a positive replacement value of $7.3 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.

 

32



 

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.

 

33



 

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 September 30, 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

 

None.

34



 

ITEM 6.                                               EXHIBITS

 

No.

 

 

3 (c)

 

City National Corporation Bylaws, as amended (this Exhibit is incorporated by reference from the Registrant’s Report of Unscheduled Material Events on Form 8-K filed September 21, 2007.)

 

 

 

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

 

35



 

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: November 9, 2007

/s/ Christopher J. Carey

 

 

 

 

CHRISTOPHER J. CAREY

 

Executive Vice President and

 

Chief Financial Officer

 

(Authorized Officer and

 

Principal Financial Officer)

 

 

36