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TABLE OF CONTENTS
PART IV
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2010 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-10521
CITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State of incorporation) |
95-2568550 (I.R.S. Employer Identification No.) |
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City National Plaza 555 South Flower Street, Los Angeles, California, 90071 (Address of principal executive offices) (Zip Code) |
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Registrant's telephone number, including area code (213) 673-7700 |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
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| Common Stock, $1.00 par value | New York Stock Exchange |
No securities are registered pursuant to Section 12(g) of the Act
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý
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 such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of June 30, 2010, the aggregate market value of the registrant's common stock ("Common Stock") held by non-affiliates of the registrant was approximately $2,340,261,042 based on the June 30, 2010 closing sale price of Common Stock of $51.23 per share as reported on the New York Stock Exchange.
As of January 31, 2011, there were 52,874,073 shares of Common Stock outstanding (including unvested restricted shares).
Documents Incorporated by Reference
The information required to be disclosed pursuant to Part III of this report either shall be (i) deemed to be incorporated by reference from selected portions of City National Corporation's definitive proxy statement for the 2010 annual meeting of stockholders, if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
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General
City National Corporation (the "Corporation"), a Delaware corporation organized in 1968, is a bank holding company and a financial holding company under the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "GLB Act"). The Corporation provides a wide range of banking, investing and trust services to its clients through its wholly-owned banking subsidiary, City National Bank (the "Bank" and together with the Corporation, its subsidiaries and its asset management affiliates the "Company"). The Bank, which has conducted business since 1954, is a national banking association headquartered in Los Angeles, California and operating through 76 offices, including 17 full-service regional centers, in Southern California, the San Francisco Bay area, Nevada and New York City. As of December 31, 2010, the Corporation had seven consolidated asset management affiliates in which it held a majority ownership interest and a noncontrolling interest in two other firms. The Corporation also had two unconsolidated subsidiaries, Business Bancorp Capital Trust I and City National Capital Trust I, as of December 31, 2010. At year-end 2010, the Company had consolidated total assets of $21.35 billion, total loan balances of $13.18 billion, and assets under management or administration (excluding the two unconsolidated asset managers) of $58.47 billion. The Company focuses on providing affluent individuals and entrepreneurs, their businesses and their families with complete financial solutions. The organization's mission is to provide this banking and financial experience through an uncommon dedication to extraordinary service, proactive advice and total financial solutions.
On February 28, 2007, the Company completed the acquisition of Business Bank Corporation ("BBC"), 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 wealth and investment advisory firm is headquartered in Rockville, Maryland and manages or advises on client assets totaling $14.58 billion as of December 31, 2010. Lydian Wealth Management changed its name to Convergent Wealth Advisors and became a subsidiary of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003.
On July 21, 2009, the Company acquired an approximate 57 percent majority interest in Lee Munder Capital Group, LLC ("LMCG"), a Boston-based investment firm that manages assets for corporations, pensions, endowments and affluent households. LMCG had approximately $3.36 billion of assets under management at the date of acquisition and manages or advises on client assets totaling $4.93 billion as of December 31, 2010. LMCG was merged with Independence Investments, a Boston-based institutional asset management firm in which the Company held a majority interest. The combined entity is the Company's primary institutional asset management affiliate, with more than $4 billion of assets under management at acquisition date. It is operated under the Lee Munder Capital Group name and as an affiliate of Convergent Capital Management LLC.
On December 18, 2009, the Company acquired the banking operations of Imperial Capital Bank ("ICB") in a purchase and assumption agreement with the Federal Deposit Insurance Corporation ("FDIC"). Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $3.26 billion in assets, $2.38 billion in loans and $2.08 billion in deposits. On May 7, 2010, the Bank acquired the banking operations of 1st Pacific Bank of California ("FPB") in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting
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adjustments, the Bank acquired approximately $318.6 million in assets and assumed $264.2 million in liabilities. On May 28, 2010, the Bank acquired the banking operations of Sun West Bank ("SWB") in Las Vegas, Nevada in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $340.0 million in assets and assumed $310.1 million in liabilities. In connection with each of the ICB, FPB and SWB acquisitions, the Company entered into a loss sharing agreements with the FDIC with respect to acquired loans ("covered loans") and other real estate owned ("covered other real estate owned" or "covered OREO") (collectively, "covered assets").
Refer to Note 3, Business Combinations, of the Notes to Consolidated Financial Statements for further details regarding these acquisitions.
On November 21, 2008, the Corporation entered into a letter agreement with the United States Department of the Treasury ("Treasury") pursuant to which the Corporation agreed to issue and sell 400,000 shares of the Corporation's Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $1.00 per share ("Series B Preferred Stock") and a warrant to purchase 1,128,668 shares of the Corporation's common stock, par value $1.00 per share, at an exercise price of $53.16 per share, for an aggregate purchase price of $400 million in cash. On December 30, 2009, the Corporation repurchased $200 million or 200,000 shares of the Series B Preferred Stock that it had originally sold to Treasury, and on March 3, 2010, the Corporation repurchased the remaining $200 million or 200,000 shares of Series B Preferred stock from Treasury. In April 2010, the Corporation repurchased the warrant in full for $18.5 million. See below under "Supervision and Regulation" and "Management's Discussion and Analysis" for further details regarding this investment.
The Company has three reportable segments, Commercial and Private Banking, Wealth Management, and Other. All investment advisory affiliates and the Bank's Wealth Management Services are included in the Wealth Management segment. All other subsidiaries, the unallocated portion of corporate departments and inter-segment eliminations are included in the Other segment. Information about the Company's segments is provided in Note 22 of the Notes to Consolidated Financial Statements as well as in the "Management's Discussion and Analysis" beginning on page 40 of this report. In addition, the following information is provided to assist the reader in understanding the Company's business segments:
The Bank's principal client base consists of small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. The Bank serves its clients through relationship banking. The Bank's value proposition is to provide the ultimate banking experience through depth of expertise, breadth of resources, focus and location, dedication to complete solutions, a relationship banking model and an integrated team approach. Through the use of private and commercial banking teams, product specialists and investment advisors, the Bank facilitates the use by the client, where appropriate, of multiple services and products offered by the Company. The Company offers a broad range of lending, deposit, cash management, international banking, equipment financing, and other products and services. The Company also lends, invests, and provides services in accordance with its Community Reinvestment Act ("CRA") commitments.
The Bank's wealth management division and the Corporation's asset management subsidiaries make available the following investment advisory and wealth management resources and expertise to the Company's clients:
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The Bank also advises and makes available mutual funds under the name of CNI Charter Funds. The Corporation's asset management subsidiaries and the Bank's wealth management division provide both proprietary and nonproprietary products to offer a full spectrum of asset classes and investment styles, including fixed-income instruments, mutual funds, domestic and international equities and alternative investments, such as hedge funds. Investment services are provided to institutional as well as individual clients.
At December 31, 2010, the Company had 3,178 full-time equivalent employees.
Competition
There is significant competition among commercial banks and other financial institutions in the Company's market areas. California, New York and Nevada are highly competitive environments for banking and other financial organizations providing private and business banking and wealth management services. The Bank faces competitive credit and pricing pressure as it competes with other banks and financial organizations. The Company's performance is also significantly influenced by California's economy. As a result of the GLB Act, the Company also competes with other providers of financial services such as money market mutual funds, securities firms, credit unions, insurance companies and other financial services companies. Furthermore, interstate banking legislation has promoted more intense competition by eroding the geographic constraints on the financial services industry.
Our ability to compete effectively is due to our provision of personalized services resulting from management's knowledge and awareness of its clients' needs and its market areas. We believe this relationship banking approach and knowledge provide a business advantage in providing high client satisfaction and serving the small to mid-sized businesses, entrepreneurs, professionals and other affluent individuals that comprise the Company's client base. Our ability to compete also depends on our ability to continue to attract and retain our senior management and other key colleagues. Further, our ability to compete depends in part on our ability to continue to develop and market new and innovative products and services and to adopt or develop new technologies that differentiate our products and services.
Economic Conditions, Government Policies, Legislation, and Regulation
The Company's earnings and profitability, like most financial institutions, are highly sensitive to general business and economic conditions. These conditions include the yield curve, inflation, available money supply, the value of the U.S. dollar as compared to foreign currencies, fluctuations in both debt and equity markets, and the strength of the U.S. economy and the local economies in which we conduct business. The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the States of California, Nevada, and New York and in the United States as a whole. The Company is subject to the effects of the economic downturn which has affected our market in the last year. A continued decline in commercial real estate and home values in the Company's markets could have a further negative effect on the results of operations.
In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on its interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the Company's control, such as inflation, recession, and unemployment. Energy and commodity prices and the value of the dollar are additional primary sources of risk and
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volatility. The impact that future changes in domestic and foreign economic conditions might have on the Company cannot be predicted. See Item 1A—Risk Factors.
The Company's business and earnings are affected by the monetary and fiscal policies of the federal government and its agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Federal Reserve regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve are its open-market operations in U.S. Government securities, including adjusting the required level of reserves for depository institutions subject to its reserve requirements, and varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. Changes in the policies of the Federal Reserve may have an effect on the Company's business, results of operations and financial condition.
Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently introduced in the U.S. Congress, in the state legislatures, and before various regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they may have on the Company cannot be determined at this time.
Supervision and Regulation
General
The Corporation, the Bank and the Corporation's non-banking subsidiaries are subject to extensive regulation under both federal and state law. This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the protection of shareholders of the Corporation. Set forth below is a summary description of the significant laws and regulations applicable to the Corporation and the Bank. The description is qualified in its entirety by reference to the applicable laws and regulations.
Regulatory Agencies
The Corporation is a legal entity separate and distinct from the Bank and its other subsidiaries. As a financial holding company and a bank holding company, the Corporation is regulated under the Bank Holding Company Act of 1956 (the "BHC Act"), and is subject to supervision, regulation and inspection by the Federal Reserve. The Corporation is also under the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, each administered by the SEC. The Corporation is listed on the New York Stock Exchange ("NYSE") under the trading symbol "CYN" and is subject to the rules of the NYSE for listed companies.
The Bank, as a national banking association, is subject to broad federal regulation and oversight extending to all its operations by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and also by the Federal Reserve and the FDIC.
The Corporation's non-bank subsidiaries are also subject to regulation by the Federal Reserve and other federal and state agencies, including for those non-bank subsidiaries that are investment advisors, the SEC under the Investment Advisors Act of 1940. City National Securities, Inc. is regulated by the SEC, the Financial Industry Regulatory Authority and state securities regulators.
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The Corporation
The Corporation is a bank holding company and a financial holding company. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. As a result of the GLB Act, which amended the BHC Act, bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the OCC) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined solely by the Federal Reserve). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and agency, and making merchant banking investments.
Currently, if a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies, (i) all of its depository institution subsidiaries must be "well capitalized" and "well managed" and (ii) it must file a declaration with the Federal Reserve that it elects to be a financial holding company. A depository institution subsidiary is considered to be "well capitalized" if it satisfies the requirements for this status discussed in the section captioned "Capital Adequacy and Prompt Corrective Action," included elsewhere in this item. A depository institution subsidiary is considered "well managed" if it received a composite rating and management rating of at least "satisfactory" in its most recent examination. In addition, the subsidiary depository institution must have received a rating of at least "satisfactory" in its most recent examination under the Community Reinvestment Act. (See the section captioned "Community Reinvestment Act" included elsewhere in this item.) Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), effective July 21, 2011, bank holding companies, as well as their depository institution subsidiaries, will also be required to be "well capitalized" and "well managed" in order to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies.
Financial holding companies that do not continue to meet all of the requirements for such status will, depending on which requirement they fail to meet, face not being able to undertake new activities or acquisitions that are financial in nature, or losing their ability to continue those activities that are not generally permissible for bank holding companies. In addition, failure to satisfy conditions prescribed by the Federal Reserve to comply with any such requirements could result in orders to divest banking subsidiaries or to cease engaging in activities other than those closely related to banking under the BHC Act.
The BHC Act, the Federal Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition of control of a commercial bank or its parent holding company, whether by (i) the acquisition of 25 percent or more of any class of voting securities; (ii) controlling the election of a majority of the directors; or (iii) the exercise of a controlling influence over the management or policies of the banking organization, which can include the acquisition of as little as 5 percent of any class of voting securities together with other factors. Under the Federal Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant's performance record under the Community Reinvestment Act (see the section captioned "Community Reinvestment Act" included elsewhere in this item), fair housing laws and the effectiveness of the subject organizations in combating money laundering
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activities. Under the Dodd-Frank Act, bank regulatory authorities will also review the potential risks of the transaction to the stability of the U.S. banking system or financial system.
Source of Strength Doctrine
Federal Reserve policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and does not permit a bank holding company to conduct its operations in an unsafe or unsound manner. Under this "source of strength doctrine," a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment of deposits and to certain other indebtedness of such subsidiary banks. The BHC Act provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. In addition, under the National Bank Act, if the capital stock of the Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the Corporation. If the assessment is not paid within three months, the OCC could order a sale of the Bank stock held by the Corporation to make good the deficiency. Furthermore, the Federal Reserve has the right to order a bank holding company to terminate any activity that the Federal Reserve believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. The Dodd-Frank Act codifies the "source of strength doctrine".
The Bank
The OCC has extensive examination, supervision and enforcement authority over all national banks, including the Bank. If, as a result of an examination of a bank, the OCC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the OCC. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank's deposit insurance.
The OCC, as well as other federal banking agencies, has adopted regulations and guidelines establishing safety and soundness standards, including but not limited to such matters as loan underwriting and documentation, risk management, internal controls and audit systems, interest rate risk exposure, asset quality and earnings and compensation and other employee benefits.
Various other requirements and restrictions under the laws of the United States affect the operations of the Bank. Statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements.
Recent Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, and will result in fundamental changes to the system of supervision and regulation described herein. The Dodd-Frank Act requires
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various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and, as a result, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act expands the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.
The Dodd-Frank Act establishes a new Bureau of Consumer Financial Protection ("CFPB") with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and gives state attorneys general the ability to enforce federal consumer protection laws.
In addition, the Dodd-Frank Act, among other things:
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The environment in which banking organizations will operate after the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Corporation and the Bank could require the Corporation and the Bank to seek other sources of capital in the future.
Anti-Money Laundering and OFAC Regulation
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 ("BSA") and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 ("Patriot Act") significantly expanded the anti-money laundering ("AML") and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including "Know Your Customer" and "Enhanced Due Diligence" practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing. The Patriot Act also applies BSA procedures to broker-dealers. An institution subject to the Patriot Act must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The OCC continues to issue regulations and new guidance with respect to the application and requirements of BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by Treasury's Office of Foreign Assets Control ("OFAC"), these are typically known as the "OFAC" rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned
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country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Dividends and Other Transfers of Funds
The Corporation is a legal entity separate and distinct from the Bank. Dividends from the Bank constitute the principal source of cash revenues to the Corporation. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan and lease losses. In addition, federal bank regulatory authorities can prohibit the Bank from paying dividends, depending upon the Bank's financial condition and compliance with capital and non-capital safety and soundness standards established under the Federal Deposit Insurance Act, as described below. Federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. See Note 13 of Notes to Consolidated Financial Statements for additional information.
Federal law limits the ability of the Bank to extend credit to the Corporation or its other affiliates, to invest in stock or other securities thereof, to take such securities as collateral for loans, and to purchase assets from the Corporation or other affiliates. These restrictions prevent the Corporation and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Corporation or to or in any other affiliate are limited individually to 10 percent of the Bank's capital stock and surplus and in the aggregate to 20 percent of the Bank's capital stock and surplus. See Note 13 of Notes to Consolidated Financial Statements for additional information.
Federal law also provides that extensions of credit and other transactions between the Bank and the Corporation or one of its non-bank subsidiaries must be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions involving other non-affiliated companies, or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.
Capital Adequacy and Prompt Corrective Action
Each federal banking regulatory agency has adopted risk-based capital regulations under which a banking organization's capital is compared to the risk associated with its operations for both transactions reported on the balance sheet as assets as well as transactions that are off-balance sheet items, such as letters of credit and recourse arrangements. Under the capital regulations, the nominal dollar amounts of assets and the balance sheet equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for asset
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categories with low credit risk, such as certain Treasury securities, to 100 percent for asset categories with relatively high credit risk, such as commercial loans.
In addition to the risk-based capital guidelines, federal banking regulatory agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated composite 1 under the "Composite Uniform Financial Institutions Rating System ("CAMELS")" for banks, which indicates the lowest level of supervisory concern of the five categories used by the federal banking agencies to rate banking organizations ("5" being the highest level of supervisory concern), the minimum leverage ratio is 3 percent. For all banking organizations other than those rated composite 1 under the CAMELS system, the minimum leverage ratio is 4 percent. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios above the minimum levels. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
At December 31, 2010, the Corporation and the Bank each exceeded the required risk-based capital ratios for classification as "well capitalized" as well as the required minimum leverage ratios. See "Management's Discussion and Analysis—Balance Sheet Analysis—Capital" of this report.
The Federal Deposit Insurance Act (FDICIA) requires federal bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank's assets at the time it become "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
The existing U.S. federal bank regulatory agencies' risk-based capital guidelines are based upon the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision ("BIS"). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply.
For several years, the U.S. bank regulators have been preparing to implement a new framework for risk-based capital adequacy developed by the Basel Committee on Banking Supervision, sometimes referred to as "Basel II." In July 2007, the U.S. bank regulators announced an agreement reflecting their then-current plan for implementing the most advanced approach under Basel II for the largest, most internationally active financial institutions. The agreement also provides that the regulators will propose rules permitting other financial institutions, such as the Corporation, to choose between the current method of calculating risked-based capital ("Basel I") and the "standardized" approach under Basel II. The standardized approach under Basel II would lower risk weightings for certain categories of assets (including mortgages) from the weightings reflected in Basel I, but would also require an
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explicit capital charge for operational risk, which is not required by Basel I. In connection with comments received on the prior proposal, in July 2008, the U.S. bank regulators proposed a new rule, which includes the previously mentioned methods to calculate risked-based capital, but for institutions using the "standardized" framework, modifies the method for determining the leverage ratio requirement.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the BIS, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. When fully phased in, Basel III will increase the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and establish a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7%. This capital conservation buffer also will effectively increase the minimum Tier 1 capital ratio from 6% to 8.5% and the minimum total capital ratio from 8% to 10.5%. In addition, Basel III introduces a countercyclical capital buffer of up to 2.5% of common equity or other loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity standards. The Basel III capital and liquidity standards will be phased in over a period of several years. The final package of Basel III reforms was endorsed by G20 leaders on November 12, 2010, and then will be subject to individual adoption by member nations, including the United States. Banking regulators will likely implement changes to the capital adequacy standards applicable to the Corporation and the Bank in light of Basel III.
At this time, the Corporation cannot predict the final form the Basel II standardized framework will take, when it will be fully implemented, the effect that it might have on the Bank's financial condition or results of its operations, or how these effects might impact the Corporation. Basel III represents both an addition to, and a revision of, the approach of Basel II. As Basel III has not yet been finalized and implemented by the federal banking agencies, the Corporation cannot be certain as to how Basel III will impact the Corporation or the Bank. The Corporation cannot be certain how the regulators will implement requirements of the Dodd-Frank Act that are similar to Basel III.
Premiums for Deposit Insurance
The Bank's deposits are insured to applicable limits by the FDIC. The Dodd-Frank Act permanently increased the maximum deposit insurance amount from $100,000 to $250,000 retroactive to January 1, 2009. On October 13, 2008, the FDIC established a Temporary Liquidity Guarantee Program under which the FDIC fully guaranteed all non-interest-bearing transaction accounts until December 31, 2010 (the "Transaction Account Guarantee Program") and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009 that matures prior to December 31, 2012 (the "Debt Guarantee Program"). The Bank participated in the Transaction Account Guarantee Program and did not participate in the Debt Guarantee Program. Under the Transaction Account Guarantee Program, the Bank paid a 10 basis point fee (annualized) on the balance of each covered account in excess of $250,000 through December 31, 2009, and for 2010 paid an increased fee of 15 basis points. The Dodd-Frank Act extended the unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.
The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution's weighted ranking in one of four risk categories based on their examination ratings, capital ratios, asset quality ratios and long-term debt issuer rating. Well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and, until 2009, were assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment rate for an individual institution determined according to a formula based on a weighted average of the institution's individual CAMELS component ratings plus either five financial ratios or the average
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ratings of its long-term debt. Institutions in Risk Categories II, III and IV were assessed at annual rates of 10, 28, and 43 basis points, respectively.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the "Reform Act"), as amended by the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.35% and 1.5% of estimated insured deposits.
Effective April 1, 2009 the FDIC set the base annual assessment rate for institutions in Risk Category I to between 12 and 16 basis points and the base annual assessment rates for institutions in Risk Categories II, III and IV at 22, 32, and 45 basis points, respectively. An institution's assessment rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions based on the ratio of certain amounts of Tier 1 capital to deposits. The assessment rate may be adjusted for Risk Category I institutions that have a high level of brokered deposits and have experienced higher levels of asset growth (other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk Categories II, III, and IV whose ratio of brokered deposits to deposits exceeds 10% of assets. Reciprocal deposit arrangements like Certificate of Deposit Account Registry Service (CDARS) were treated as brokered deposits for Risk Category II, III, and IV institutions but not for institutions in Risk Category I. An institution's base assessment rate would also be increased if an institution's ratio of secured liabilities (including FHLB advances and repurchase agreements) to deposits exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories I, II, III and IV would be 8, 11, 16, and 22.5 basis points, respectively, provided that the adjustment may not increase an institution's base assessment rate by more than 50%.
The FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009 payable on September 30, 2009 and reserved the right to impose additional special assessments. In lieu of further special assessments, on November 12, 2009 the FDIC approved a final rule to require all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009. For purposes of estimating future assessments, an institution would assume 5% annual growth in the assessment base and a three basis point increase in the current assessment rate for 2011 and 2012. The prepaid assessment would be applied against the actual assessment until exhausted. Any funds remaining after June 30, 2013 would be returned to the institution. If the prepayment would impair an institution's liquidity or otherwise create significant hardship, it could apply for an exemption.
The Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act and to make other changes to the deposit insurance assessment system applicable to insured depository institutions with over $10 billion in assets, such as the Bank. Among other things, the final rule eliminates risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments, and instead implements a scorecard method, combining CAMELS ratings and certain forward-looking financial measures to assess the risk an institution poses to the Deposit Insurance Fund. The final rule also revises the assessment rate schedule for large institutions and highly complex institutions to provide assessments ranging from 2.5 to 45 basis points.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates, which are determined quarterly, averaged .0105% of insured deposits on an annualized basis for fiscal year 2010. These assessments will continue until the FICO bonds mature in 2017.
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Depositor Preference
The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institutions, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Act permits banks and bank holding companies from any state to acquire banks located in any other state, subject to certain conditions, including certain nationwide and state-imposed concentration limits. The Company also has the ability, subject to certain restrictions, to acquire branches outside its home state by acquisition or merger. Under the Dodd-Frank Act, the establishment of new interstate branches is currently permitted. The Corporation has established or acquired banking operations outside its home state of California in the states of New York and Nevada.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 ("CRA"), the Bank has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities and to take that record into account in its evaluation of certain applications by such institution, such as applications for charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions or engage in certain activities pursuant to the GLB Act. An unsatisfactory rating may be the basis for denying the application. Based on its most recent examination report from July 2009, the Bank received an overall rating of "satisfactory." In arriving at the overall rating, the OCC rated the Bank's performance levels under CRA with respect to lending (high satisfactory), investment (outstanding) and service (high satisfactory).
Consumer Protection Laws
The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and establishes the CFPB, as described above.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of "opt out" or "opt in" authorizations. Pursuant to the GLB Act and certain state
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laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
U.S. Treasury's TARP Capital Purchase Program
On November 21, 2008, the Corporation issued 400,000 shares of preferred stock and a warrant to purchase its common stock to the U.S. Treasury as a participant in the TARP Capital Purchase Program. In December 2009, the Corporation repurchased 200,000 shares of the TARP preferred stock that it had issued to the U.S. Treasury and on March 3, 2010, the Corporation repurchased the remaining 200,000 shares of TARP preferred stock. In April 2010, the Corporation repurchased the warrant in full for $18.5 million. During the period that the U.S. Treasury owned the preferred stock, the Corporation was subject to additional regulations including compensation restrictions and additional corporate governance standards. Following the repurchase of the preferred stock, the Corporation is no longer subject to these regulations other than certain reporting and certification obligations related to activities during 2010.
Securities and Exchange Commission
Pursuant to the Sarbanes-Oxley Act of 2002 ("SOX"), publicly-held companies such as the Corporation have significant requirements, particularly in the area of external audits, financial reporting and disclosure, conflicts of interest, and corporate governance at public companies. The Dodd-Frank Act has added new corporate governance and executive compensation requirements, including mandated resolutions for public company proxy statements such as an advisory vote on executive compensation, expanding disclosures for all public companies soliciting proxies and new stock exchange listing standards. The Company, like other public companies, has reviewed and reinforced its internal controls and financial reporting procedures in response to the various requirements of SOX and implementing regulations issued by the SEC and the New York Stock Exchange and will continue to do so with regard to the Dodd-Frank Act. The Company has emphasized best practices in corporate governance in compliance with SOX and will continue to do so in compliance with the Dodd-Frank Act.
The SEC regulations applicable to the Company's investment advisers cover all aspects of the investment advisory business, including compliance requirements, limitations on fees, record-keeping, reporting and disclosure requirements and general anti-fraud prohibitions.
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Executive Officers of the Registrant
Shown below are the names and ages of all executive officers of the Corporation and officers of the Bank who are deemed to be executive officers of the Corporation as of February 1, 2011, with indication of all positions and offices with the Corporation and the Bank.
Name
|
Age | Present principal occupation and principal occupation during the past five years | |||
|---|---|---|---|---|---|
Russell Goldsmith (1) |
60 | President, City National Corporation since May 2005; Chief Executive Officer, City National Corporation and Chairman of the Board and Chief Executive Officer, City National Bank since October 1995; Vice Chairman of City National Corporation October 1995 to May 2005. | |||
Bram Goldsmith |
87 |
Chairman of the Board, City National Corporation |
|||
Christopher J. Carey |
56 |
Executive Vice President and Chief Financial Officer, City National Corporation and City National Bank since July 2004. |
|||
Christopher J. Warmuth |
56 |
Executive Vice President, City National Corporation and President, City National Bank since May 2005; Executive Vice President and Chief Credit Officer, City National Bank June 2002 to May 2005. |
|||
Michael B. Cahill |
57 |
Executive Vice President, Corporate Secretary and General Counsel, City National Bank and City National Corporation since June 2001; Manager, Legal and Compliance Division since 2005. |
|||
Brian Fitzmaurice |
50 |
Executive Vice President and Chief Credit Officer, City National Bank since February 2006; Senior Risk Manager, Citibank West, FSB successor to California Federal Bank, FSB, November 2002 to February 2006. |
|||
Richard Gershen |
56 |
Executive Vice President, Wealth Management Services, City National Corporation and City National Bank since February 2009; Executive Managing Director, Business Management and Strategy, Evergreen Investments, a division of Wachovia, April 2000 to February 2009. |
|||
Olga Tsokova |
37 |
Senior Vice President and Chief Accounting Officer, City National Corporation and City National Bank since July 2008 and SOX 404 Manager since March 2005; Controller, City National Bank, July 2008 to September 2008. |
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Available Information
The Company's home page on the Internet is www.cnb.com. The Company makes its web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.
The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for its annual shareholder meetings, as well as any amendment to those reports, available free of charge through the Investor Relations page of its web site as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. More information about the Company can be obtained by reviewing the Company's SEC filings on its web site. Information about the Corporation's Board of Directors (the "Board") and its
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committees and the Company's corporate governance policies and practices is available on the Corporate Governance section of the Investor Relations page of the Company's web site. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including the Corporation. Materials filed with the SEC are also available at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300.
Forward-Looking Statements
This report and other reports and statements issued by the Company and its officers from time to time contain forward-looking statements 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 information concerning our possible or assumed future results of operations, 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. By their nature, forward-looking statements are subject to risks, uncertainties, and assumptions. These statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made or to update earnings guidance including the factors that influence earnings. A number of factors, many 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, without limitation, the significant factors set forth below.
Factors That May Affect Future Results
General business and economic conditions may significantly affect our earnings. Our business and earnings are sensitive to general business and economic conditions. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in volatility, inflation or interest rates; political unrest, acts of war, terrorism, natural disasters; or a combination of these or other factors. A political, economic or financial disruption in a country or region could adversely impact our business by increasing volatility in financial markets generally.
The United States recently faced a severe economic crisis including a major recession from which it is slowly recovering. Business activity across a wide range of industries and regions remains reduced and local governments and many businesses have experienced financial difficulty. Unemployment levels remain elevated. There can be no assurance when these conditions will improve. The resulting economic pressure on consumers and lack of confidence in the financial market could adversely affect our business, financial condition and results of operations.
The Corporation's financial performance generally, and the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Corporation operates and in the United States as a whole. Declines in home values in the Company's markets in California, Nevada and
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New York, have adversely impacted results of operations. Further decline in home values in the Company's markets could have a further negative effect on results of operations, and a significant decline in home values would likely lead to increased delinquencies and credit quality issues in the Company's residential mortgage loan portfolio and home-equity loan portfolio. In addition, economic conditions coupled with elevated unemployment and reduced consumer spending could have a further negative effect on results of the Company's operations through higher credit losses in the commercial loan, commercial real estate loan and commercial real estate construction loan portfolios.
Recent legislation regarding the financial services industry may have a significant adverse effect on our operations. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to as the Dodd-Frank Act, was signed into law. The Dodd-Frank Act implements a variety of far-reaching changes and has been called the most sweeping reform of the financial services industry since the 1930s. Many of the provisions of the Dodd-Frank Act will directly affect our ability to conduct our business, including, among other things:
Many provisions in the Dodd-Frank Act remain subject to regulatory rule-making and implementation, the effects of which are not yet known, including mandates requiring the Federal Reserve to establish compensation guidelines covering regulated financial institutions. The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional legislative or regulatory changes may impact the profitability of our business activities, may require that we change certain of our business practices, may materially affect our business model or affect retention of key personnel, may require us to raise additional regulatory capital and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to
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invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.
Further significant changes in banking laws or regulations and federal monetary policy could materially affect our business. The banking industry is subject to extensive federal and state regulation, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially. Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements. A material change in these conditions would affect our results. Parts of our business are also subject to federal and state securities laws and regulations. Significant changes in these laws and regulations would also affect our business. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. For further discussion of the regulation of financial services, see "Supervision and Regulation" and the discussion under Item 1, Business, "Economic Conditions, Government Policies, Legislation and Regulation."
We cannot predict the substance or impact of any change in regulation, whether by regulators or as a result of legislation, or in the way such statutory or regulatory requirements are interpreted or enforced. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business practices, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.
We may be subject to more stringent capital requirements. As discussed above, the Dodd-Frank Act creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital requirements as companies grow in size and complexity, requires that the OCC seek to make countercyclical its capital requirements for national banks and applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will, after a three-year phase-in period which begins January 1, 2013, remove trust preferred securities as a permitted component of a holding company's Tier 1 capital. These requirements, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our results of operations or financial condition.
In addition, on September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. When fully phased in, Basel III will increase the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and establish a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7%. This capital conservation buffer also will effectively increase the minimum Tier 1 capital ratio from 6% to 8.5% and the minimum total capital ratio from 8% to 10.5%. In addition, Basel III introduces a countercyclical capital buffer of up to 2.5% of common equity or other loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity standards. The Basel III capital and liquidity standards will be phased in over a period of several years. The final package of Basel III reforms was endorsed by G20 leaders on November 12, 2010, and then will be subject to individual adoption by member nations, including the United States.
Banking regulators will likely implement changes to the capital adequacy standards applicable to the Corporation and the Bank in light of Basel III. The ultimate impact of the new capital and liquidity standards cannot be determined at this time and will depend on a number of factors, including treatment and implementation by the U.S. banking regulators.
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Changes in interest rates affect our profitability. We derive our income mainly from the difference or "spread" between the interest we earn on loans, securities, and other interest-earning assets, and interest we pay on deposits, borrowings, and other interest-bearing liabilities. In general, the wider this spread, the more we earn. When market rates of interest change, the interest we earn on our assets and the interest we pay on our liabilities fluctuate. This causes our spread to increase or decrease and affects our net interest income. Although we actively manage our asset and liability positions, we will periodically experience "gaps" in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this "gap" would work against us, and our earnings may be negatively affected. In addition, interest rates affect how much money we lend, and changes in interest rates may negatively affect deposit growth.
Our results may be adversely affected if we continue to suffer higher than expected losses on our loans due to a slow economy, real estate cycles or other economic events which could require us to increase our allowance for loan and lease losses. We assume credit risk from the possibility that we will suffer losses because borrowers, guarantors, and related parties fail to perform under the terms of their loans. We try to minimize and monitor this risk by adopting and implementing what we believe are effective underwriting and credit policies and procedures, including how we establish and review the allowance for loan and lease losses. We assess the likelihood of nonperformance, track loan performance, and diversify our credit portfolio. Those policies and procedures may still not prevent unexpected losses that could adversely affect our results. The Company continually monitors changes in the economy, particularly housing prices and unemployment rates. There are inherent risks in our lending activities, including flat or volatile interest rates and changes in the economic conditions in the markets in which we operate. Continuing weak economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of collateral securing those loans. If the value of real estate in the Company's market declines materially, a significant portion of the loan portfolio could become under-collateralized which could have a further negative effect on results of operations. We monitor the value of collateral, such as real estate, for loans made by us. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company's control, may require an increase in the allowance for loan and lease losses. See the section captioned "Loan and Lease Portfolio" and "Asset Quality" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to our loan portfolio and our process for determining the appropriate level of the allowance for possible loan losses.
We may experience further impairments of loans covered under loss-sharing agreements with FDIC ("covered loans") that could negatively impact our earnings. The Company updates its cash flow projections for covered loans on a quarterly basis. If the expected cash flows decrease due to an anticipated deterioration of performance of covered loans and/or the timing of cash flows and credit losses, a provision expense and an allowance for loan losses could be recognized.
A portion of the income generated by our wealth management division and asset management affiliates is subject to market valuation risks. A substantial portion of trust and investment fee income is based on equity, fixed income and other market valuations. As a result, volatility in these markets can positively or negatively impact noninterest income. In addition, because of the low interest rate environment, the off-balance sheet money market funds managed by our wealth management business may be at a greater risk of being moved by our clients to another company or to the Bank's on-balance sheet money market funds. As a result, this may have an unfavorable impact overall on our earnings. However, this could enhance the Company's overall liquidity position.
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We may experience further write downs of our financial instruments and other losses related to volatile and illiquid market conditions. Market volatility, illiquid market conditions and disruptions in the credit markets have made it extremely difficult to value certain of our securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require us to take further write downs in the value of our securities portfolio, which may have an adverse impact on our results of operations in future periods.
Bank clients could move their money to alternative investments causing us to lose a lower cost source of funding. Demand deposits can decrease when clients perceive alternative investments, such as those available in our wealth management business, as providing a better risk/return tradeoff. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts offered by other financial institutions or non-bank service providers. When clients move money out of bank demand deposits and into other investments, we lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income.
Increased competition from financial service companies and other companies that offer banking and wealth management services could negatively impact our business. Increased competition in our market may result in reduced loans, deposits and/or assets under management. Many competitors offer the banking services and wealth management services that we offer in our service area. These competitors, both domestic and foreign, include national, regional, and community banks. We also face intense competition from many other types of financial institutions, including, without limitation, savings and loans, finance companies, brokerage firms, insurance companies, credit unions, private equity funds, mortgage banks, and other financial intermediaries. Banks, trust companies, investment advisors, mutual fund companies, multi-family offices and insurance companies compete with us for trust and asset management business. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that were traditionally offered only by banks.
We also face intense competition for talent. Our success depends, in large part, on our ability to hire and retain key people. Competition for the best people in most businesses in which we engage can be intense. If we are unable to attract and retain talented people, our business could suffer. The Dodd-Frank Act includes mandates requiring the Federal Reserve to establish compensation guidelines covering regulated financial institutions. Restrictions on executive compensation could have an adverse effect on our ability to hire or retain our talent.
Our controls and procedures could fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our business, results of operations and financial condition.
Changes in accounting standards or tax legislation. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the Financial Accounting Standards Board ("FASB") and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements or elected
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representatives approve changes to tax laws. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
Acquisition risks. We have in the past and may in the future seek to grow our business by acquiring other businesses. We cannot predict the frequency, size or timing of our acquisitions, and we typically do not comment publicly on a possible acquisition until we have signed a definitive agreement. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the time required to complete the integration; the amount of longer-term cost savings; continued growth; or the overall performance of the acquired company or combined entity. Integration of an acquired business can be complex and costly. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected.
Impairment of goodwill or amortizable intangible assets associated with acquisitions would result in a charge to earnings. Goodwill is evaluated for impairment at least annually, and amortizable intangible assets are evaluated for impairment annually or when events or circumstances indicate that the carrying value of those assets may not be recoverable. We may be required to record a charge to earnings during the period in which any impairment of goodwill or intangibles is determined.
Operational risks. The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technology and information systems, operational infrastructure, and relationships with third parties and our colleagues in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key colleagues or failure on the part of key colleagues to perform properly.
Negative public opinion could damage our reputation and adversely affect our earnings. Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including activities in our private and business banking operations and investment and trust operations; our management of actual or potential conflicts of interest and ethical issues; and our protection of confidential client information. Negative public opinion can adversely affect our ability to keep and attract clients and can expose us to litigation and regulatory action. We take steps to minimize reputation risk in the way we conduct our business activities and deal with our clients, communities and vendors.
The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.
Item 1B—Unresolved Staff Comments
The Company has no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2010 fiscal year and that remain unresolved.
22
The Bank leases approximately 391,000 rentable square feet of commercial office space in downtown Los Angeles in the office tower located at 555 S. Flower Street ("City National Plaza"). City National Plaza serves as both the Corporation's and the Bank's headquarters. In addition, City National Plaza houses the Company's Downtown Los Angeles Regional Center, offering extensive private and business banking and wealth management capabilities.
As of December 31, 2010, the Bank owned five banking office properties in Beverly Hills, Riverside and Sun Valley, California and in North Las Vegas and Minden, Nevada. In addition to the properties owned, the Company maintained operations in 70 banking offices for a total of 75 banking offices and 9 other operations and general office properties as of December 31, 2010.
The non-owned banking offices and other properties are leased by the Bank. Total annual net rental payments (exclusive of operating charges and real property taxes) are approximately $30 million, with lease expiration dates for office facilities ranging from 2011 to 2022, exclusive of renewal options.
The wealth management affiliates lease a total of 18 offices (excluding offices that are being subleased). Total annual net rental payments (exclusive of operating charges and real property taxes) for all affiliates are approximately $5.1 million.
The Corporation and its subsidiaries are defendants in various pending lawsuits. Based on present knowledge, management, including in-house counsel, does not believe that the outcome of such lawsuits will have a material adverse effect upon the Company.
The Corporation is not aware of any material proceedings to which any director, officer, or affiliate of the Corporation, any owner of record or beneficially of more than 5 percent of the voting securities of the Corporation as of December 31, 2010, or any associate of any such director, officer, affiliate of the Corporation, or security holder is a party adverse to the Corporation or any of its subsidiaries or has a material interest adverse to the Corporation or any of its subsidiaries.
23
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Corporation's common stock is listed and traded principally on the New York Stock Exchange under the symbol "CYN." Information concerning the range of high and low sales prices for the Corporation's common stock, and the dividends declared, for each quarterly period within the past two fiscal years is set forth below.
Quarter Ended
|
High | Low | Dividends Declared |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
2010 |
||||||||||
March 31 |
$ | 54.86 | $ | 45.81 | $ | 0.10 | ||||
June 30 |
64.13 | 51.23 | 0.10 | |||||||
September 30 |
58.00 | 47.91 | 0.10 | |||||||
December 31 |
62.91 | 51.57 | 0.10 | |||||||
2009 |
||||||||||
March 31 |
$ | 47.76 | $ | 22.83 | $ | 0.25 | ||||
June 30 |
44.14 | 31.87 | 0.10 | |||||||
September 30 |
43.80 | 33.13 | 0.10 | |||||||
December 31 |
47.32 | 36.59 | 0.10 | |||||||
The Company's common stock is traded on the New York Stock Exchange (ticker symbol CYN). As of January 31, 2011, the closing price of the Corporation's stock was $57.79 per share. As of that date, there were approximately 1,824 holders of record of the Corporation's common stock. On January 20, 2011, the Board of Directors authorized a regular quarterly cash dividend on its common stock at a rate of $0.20 per share payable on February 16, 2011 to all shareholders of record on February 2, 2011.
For a discussion of dividend restrictions on the Corporation's common stock, see the Dividends and Other Transfers of Funds section of Part I and Note 13 of the Notes to Consolidated Financial Statements.
On January 24, 2008, the Company's Board of Directors authorized the Corporation to repurchase 1 million additional shares of the Corporation's stock following the completion of its previously approved initiative. Unless terminated earlier by resolution of the Board of Directors, the program will expire when the Corporation has repurchased all shares authorized for repurchase thereunder. There were no issuer repurchases of the Corporation's common stock as part of its repurchase plan in the fourth quarter of the year ended December 31, 2010. As of December 31, 2010, there were 1,140,400 shares remaining to be purchased. The Corporation received no shares in payment for the exercise price of stock options.
Item 6. Selected Financial Data
The information required by this item appears on page 39 under the caption "Selected Financial Information," and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item appears on pages 40 through 107, under the caption "Management's Discussion and Analysis," and is incorporated herein by reference.
24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item appears on pages 67 through 73, under the caption "Management's Discussion and Analysis," and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears on page 107 under the captions "2010 Quarterly Operating Results" and "2009 Quarterly Operating Results," and on page A-4 through A-82 and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls 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
Management's Report on Internal Control over Financial Reporting.
Management's Report on Internal Control Over Financial Reporting appears on page A-1 of this report. The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of the Company's internal control over financial reporting. That report appears on page A-2.
Changes in Internal Controls
There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter that has materially affected, or was reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
25
Item 10. Directors and Executive Officers of the Registrant
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G (3).
The additional information required by this item will appear in the Corporation's definitive proxy statement for the 2011 Annual Meeting of Stockholders (the "2011 Proxy Statement"), and such information either shall be (i) deemed to be incorporated herein by reference from that portion of the 2011 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
Item 11. Executive Compensation
The information required by this item will appear in the 2011 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2011 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table summarizes information, as of December 31, 2010, relating to equity compensation plans of the Company pursuant to which equity securities of the Company are authorized for issuance.
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders |
4,939,349 | (1)(2) | $ | 51.75 | (2) | 1,543,926 | (3) | |||
Equity compensation plans not approved by security holders |
427,857 | $ | 47.71 | — | ||||||
Total |
5,367,206 | (2) | $ | 51.38 | (2) | 1,543,926 | (3) | |||
26
In March 2001, the Board of Directors adopted the 2001 Stock Option Plan (the "2001 Plan"), which is a broadly-based stock option plan under which options were only granted to employees of the Corporation and subsidiaries who are neither directors or executive officers. The 2001 Plan contains a change of control provision similar to other stockholder approved plan. The 2001 Plan was not submitted to the stockholders for their approval. No further awards can be issued under the 2001 Plan.
Other information required by this item will appear in the 2011 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2011 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
Item 13. Certain Relationships and Related Transactions
The information required by this item will appear in the 2011 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2011 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period. Also see Note 7 to Notes to Consolidated Financial Statements.
Item 14. Principal Accountant Fees and Services.
The information required by this item will appear in the 2011 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2011 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Corporation's most recently completed fiscal year, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A not later than the end of such 120 day period.
27
Item 15. Exhibits and Financial Statement Schedules
1. |
Financial Statements: |
|||||
|
Management's Report on Internal Control Over Financial Reporting |
A-1 |
||||
|
Report of Independent Registered Public Accounting Firm |
A-2 | ||||
|
Report of Independent Registered Public Accounting Firm |
A-3 | ||||
|
Consolidated Balance Sheets at December 31, 2010 and 2009 |
A-4 | ||||
|
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2010 |
A-5 | ||||
|
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2010 |
A-6 | ||||
|
Consolidated Statements of Changes in Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2010 |
A-7 | ||||
|
Notes to Consolidated Financial Statements |
A-8 | ||||
2. |
All other schedules and separate financial statements of 50 percent or less owned companies accounted for by the equity method have been omitted because they are not applicable. |
|||||
3. |
Exhibits |
|||||
Exhibit No.
|
Description | Location | ||
|---|---|---|---|---|
| 2.1 | Purchase and Assumption Agreement—Whole Bank—All Deposits, among the Federal Deposit Insurance Corporation, Receiver of Imperial Capital Bank, La Jolla, California, the Federal Deposit Insurance Corporation and City National Bank, dated as of December 18, 2009. | Incorporated by reference from the Registrant's Current Report on Form 8-K filed December 22, 2009. | ||
3.1 |
Restated Certificate of Incorporation. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K filed March 1, 2010. |
||
3.2 |
Form of Certificate of Designations of Series A Junior Participating Cumulative Preferred Stock. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K filed March 1, 2010. |
||
3.3 |
Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 24, 2008. |
||
3.4 |
Bylaws, as amended to date. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed December 22, 2009. |
||
4.1 |
Specimen Common Stock Certificate for Registrant. |
Filed herewith. |
28
| 4.2 | 6.75 percent Subordinated Notes Due 2011 in the principal amount of $150.0 million. | Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006. | ||
4.3 |
Indenture dated as of February 13, 2003 between Registrant and U.S. Bank National Association, as Trustee pursuant to which Registrant issued its 5.125 percent Senior Notes due 2013 in the principal amount of $225.0 million and form of 5.125 percent Senior Note due 2013. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
4.4 |
Indenture, dated as of September 13, 2010 between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee pursuant to which Registrant issued its 5.250 percent Senior Notes due 2020 in the principal amount of $300.0 million and form of 5.250 percent Senior Note due 2020. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed on September 14, 2010. |
||
4.5 |
Certificate of Amendment of Articles of Incorporation of CN Real Estate Investment Corporation Articles of Incorporation. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
4.6 |
CN Real Estate Investment Corporation Bylaws. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006. |
||
4.7 |
CN Real Estate Investment Corporation Servicing Agreement. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006. |
||
4.8 |
CN Real Estate Investment Corporation II Articles of Amendment and Restatement. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
4.9 |
CN Real Estate Investment Corporation II Amended and Restated Bylaws. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
10.1* |
Employment Agreement made as of May 15, 2003, by and between Bram Goldsmith, and the Registrant and City National Bank. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.2* |
Amendment to Employment Agreement dated as of May 15, 2005 by and between Bram Goldsmith, Registrant, and City National Bank. |
Filed herewith. |
29
| 10.3* | Second Amendment to Employment Agreement for Bram Goldsmith dated as of May 15, 2007, among Bram Goldsmith, Registrant and City National Bank. | Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. | ||
10.4* |
Third Amendment to Employment Agreement, dated as of March 3, 2008, by and between Bram Goldsmith, Registrant and City National Bank. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. |
||
10.5* |
Fourth Amendment to Employment Agreement, dated as of December 22, 2008, by and between Bram Goldsmith, Registrant and City National Bank. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.6* |
Fifth Amendment to Employment Agreement dated as of April 3, 2009, by and between Bram Goldsmith, Registrant and City National Bank. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009. |
||
10.7* |
Sixth Amendment to Employment Agreement dated as of February 9, 2010, by and between Bram Goldsmith, Registrant and City National Bank. |
Filed herewith. |
||
10.8* |
Seventh Amendment to Employment Agreement dated as of February 17, 2011 by and between Bram Goldsmith, Registrant and City National Bank. |
Filed herewith. |
||
10.9* |
Amended and Restated Employment Agreement between the Company and Russell Goldsmith dated June 24, 2010. |
Filed herewith. |
||
10.10* |
1995 Omnibus Plan. |
Filed herewith. |
||
10.11* |
Amendment to 1995 Omnibus Plan regarding Section 7.6(a). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.12* |
Amended and Restated Section 2.8 of 1995 Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
10.13* |
Amendment to City National Corporation 1995 Omnibus Plan dated December 31, 2008. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.14* |
1999 Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
30
| 10.15* | Amended and Restated 2002 Omnibus Plan. | Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. | ||
10.16* |
First Amendment to the City National Corporation Amended and Restated 2002 Omnibus Plan. |
Filed herewith. |
||
10.17* |
Amendment to City National Corporation Amended and Restated 2002 Omnibus Plan dated December 31, 2008. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.18* |
Amended and Restated 2010 Variable Bonus Plan. |
Incorporated by reference from Appendix B to the Registrant's Proxy Statement filed with the SEC for the Annual Meeting of Stockholders held on April 21, 2010. |
||
10.19* |
City National Corporation 2008 Omnibus Plan, As Amended. |
Incorporated by reference from Appendix A to the Registrant's Proxy Statement filed with the SEC for the Annual Meeting of Stockholders held on April 21, 2010. |
||
10.20* |
2000 City National Bank Executive Deferred Compensation Plan. |
Filed herewith. |
||
10.21* |
Amendment Number 3 to 2000 City National Bank Executive Deferred Compensation Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
10.22* |
Amendment Number 4 to 2000 City National Bank Executive Deferred Compensation Plan (As in Effect Immediately Prior to January 1, 2009). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.23* |
2000 City National Bank Executive Deferred Compensation Plan (Amended and Restated for Plan Years 2004/05 and Later Effective on January 1, 2009). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.24* |
City National Corporation Strategy and Planning Committee Change in Control Severance Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.25* |
City National Corporation Executive Committee Change in Control Severance Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008 |
31
| 10.26* | 2000 City National Bank Director Deferred Compensation Plan. | Filed herewith. | ||
10.27* |
Amendment Number 2 to 2000 City National Bank Director Deferred Compensation Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007. |
||
10.28* |
Amendment Number 3 to 2000 City National Bank Director Deferred Compensation Plan (As In Effect Immediately Prior to January 1, 2009). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.29* |
2000 City National Bank Director Deferred Compensation Plan (Amended and Restated for Plan Years 2005 and Later Effective on January 1, 2009). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
10.30* |
Executive Management Incentive Compensation Plan. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
||
10.31* |
Key Officer Incentive Compensation Plan. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
||
10.32* |
City National Corporation 2001 Stock Option Plan. |
Filed herewith. |
||
10.33* |
Form of Restricted Stock Unit Award Agreement Under the City National Corporation 2002 Amended and Restated Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
||
10.34* |
Form of Stock Option Award Agreement Under the City National Corporation 2002 Amended and Restated Omnibus Plan (Compensation Committee and Board Approval). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
||
10.35* |
Form of Stock Option Award Agreement Under the City National Corporation 2002 Amended and Restated Omnibus Plan (Compensation Committee Approval). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
||
10.36* |
Form of Restricted Stock Award Agreement Under the City National Corporation 2002 Amended and Restated Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
||
10.37* |
Form of Director Stock Option Agreement Under the City National Corporation Amended and Restated 2002 Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
32
| 10.38* | Form of Stock Option Award Agreement Under the City National Corporation Amended and Restated 2002 Omnibus Plan (2006 and later grants). | Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. | ||
10.39* |
Form of Restricted Stock Award Agreement Under the City National Corporation Amended and Restated 2002 Omnibus Plan and Restricted Stock Unit Award Agreement Addendum (2006 and later grants). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. |
||
10.40* |
Form of Restricted Stock Unit Award Agreement Under the City National Corporation Amended and Restated 2002 Omnibus Plan and Restricted Stock Unit Award Agreement Addendum (2006 and later grants). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. |
||
10.41* |
Form of Restricted Stock Unit Award Agreement (Cash Only Award) Under the City National Corporation Amended and Restated 2002 Omnibus Plan and Restricted Stock Unit Award Agreement (Cash Only Award) Addendum. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006. |
||
10.42* |
Form of Restricted Stock Award Agreement Under the City National Corporation 2008 Omnibus Plan. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
||
10.43* |
Form of Restricted Stock Unit Award Agreement and Restricted Stock Unit Award Agreement Addendum under the City National Corporation 2008 Omnibus Plan. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
||
10.44* |
Form of Stock Option Award Agreement Under the City National Corporation 2008 Omnibus Plan. |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
||
10.45* |
Summary—Brian Fitzmaurice. |
Filed herewith. |
||
10.46* |
Letter Agreement dated January 12, 2009 between City National Bank and Richard Gershen. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009. |
||
10.47 |
Lease dated November 19, 2003 between TPG Plaza Investments and City National Bank (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008. |
||
12 |
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements. |
Filed herewith. |
33
| 21 | Subsidiaries of the Registrant. | Filed herewith. | ||
23 |
Consent of KPMG LLP. |
Filed herewith. |
||
31.1 |
Certification of the Chief Executive Officer pursuant to Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Filed herewith. |
||
31.2 |
Certification of the Chief Financial Officer pursuant to Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Filed herewith. |
||
32.0 |
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Filed herewith. |
||
99.1 |
Certification of the Principal Executive Officer Pursuant to 31 CFR Section 30.15 to Comply with Certification Requirements of Section 111(b)(4) of EESA. |
Filed herewith. |
||
99.2 |
Certification of the Principal Financial Officer Pursuant to 31 CFR Section 30.15 to Comply with Certification Requirements of Section 111(b)(4) of EESA. |
Filed herewith. |
||
101.INS |
XBRL Instance Document. |
Filed herewith. |
||
101.SCH |
XBRL Taxonomy Extension Schema Document. |
Filed herewith. |
||
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document. |
Filed herewith. |
||
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document. |
Filed herewith. |
||
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document. |
Filed herewith. |
||
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document. |
Filed herewith. |
34
Pursuant to the requirements of Section 13 or 15(d) 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) |
||||
February 28, 2011 |
By |
/s/ RUSSELL GOLDSMITH Russell Goldsmith, President and Chief Executive Officer |
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
| /s/ RUSSELL GOLDSMITH Russell Goldsmith (Principal Executive Officer) |
President/Chief Executive Officer/Director |
February 28, 2011 | ||
/s/ CHRISTOPHER J. CAREY Christopher J. Carey (Principal Financial Officer) |
Executive Vice President and Chief Financial Officer |
February 28, 2011 |
||
/s/ OLGA TSOKOVA Olga Tsokova (Principal Accounting Officer) |
Senior Vice President and Chief Accounting Officer |
February 28, 2011 |
||
/s/ BRAM GOLDSMITH Bram Goldsmith |
Chairman of the Board/Director |
February 28, 2011 |
||
/s/ CHRISTOPHER J. WARMUTH Christopher J. Warmuth |
Executive Vice President/Director |
February 28, 2011 |
||
/s/ RICHARD L. BLOCH Richard L. Bloch |
Director |
February 28, 2011 |
35
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
| /s/ KENNETH L. COLEMAN Kenneth L. Coleman |
Director | February 28, 2011 | ||
/s/ ALISON DAVIS Alison Davis |
Director |
February 28, 2011 |
||
/s/ ASHOK ISRANI Ashok Israni |
Director |
February 28, 2011 |
||
/s/ RONALD L. OLSON Ronald L. Olson |
Director |
February 28, 2011 |
||
/s/ BRUCE ROSENBLUM Bruce Rosenblum |
Director |
February 28, 2011 |
||
/s/ PETER M. THOMAS Peter M. Thomas |
Director |
February 28, 2011 |
||
/s/ ROBERT H. TUTTLE Robert H. Tuttle |
Director |
February 28, 2011 |
||
/s/ KENNETH ZIFFREN Kenneth Ziffren |
Director |
February 28, 2011 |
36
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 about the company, for which the company claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on management's knowledge and belief as of today and include information concerning the company's possible or assumed future financial condition, and its results of operations, business and earnings outlook. These forward-looking statements are subject to risks and uncertainties. A number of factors, many 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 general economic, political or industry conditions and the related credit and market conditions, including political, economic or financial disruption in the Mid-East, (2) changes in the pace of economic recovery and related changes in employment levels, (3) the effect of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the new rules and regulations to be promulgated by supervisory and oversight agencies implementing the new legislation, taking into account that the precise timing, extent and nature of such rules and regulations and the impact on the Company is uncertain, (4) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities, (5) changes in the level of nonperforming assets, charge-offs, other real estate owned and provision expense, (6) incorrect assumptions in the value of the loans acquired in FDIC-assisted acquisitions resulting in greater than anticipated losses in the acquired loan portfolios exceeding the losses covered by the loss-sharing agreements with the FDIC, (7) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board, (8) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources, (9) volatility in the municipal bond market, (10) adequacy of the Company's enterprise risk management framework, (11) the Company's ability to increase market share and control expenses, (12) the Company's ability to attract new employees and retain and motivate existing employees, (13) increased competition in the Company's markets, (14) changes in the financial performance and/or condition of the Company's borrowers, including adverse impact on loan utilization rates, delinquencies, defaults and customers' ability to meet certain credit obligations, changes in customers' suppliers, and other counterparties' performance and creditworthiness, (15) a substantial and permanent loss of either client accounts and/or assets under management at the Company's investment advisory affiliates or its wealth management division, (16) changes in consumer spending, borrowing and savings habits, (17) soundness of other financial institutions which could adversely affect the Company, (18) protracted labor disputes in the Company's markets, (19) earthquake, fire or other natural disasters affecting the condition of real estate collateral, (20) the effect of acquisitions and integration of acquired businesses and de novo branching efforts, (21) the impact of changes in regulatory, judicial or legislative tax treatment of business transactions, (22) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies, and (23) the success of the Company at managing the risks involved in the foregoing.
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 after the date the statements are made, or to update earnings guidance, including the factors that influence earnings.
For a more complete discussion of these risks and uncertainties, see Part I, Item 1A, titled "Risk Factors."
37
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts) (1)
|
2010 | 2009 | Percent change |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
FOR THE YEAR |
|||||||||||
Net income attributable to City National Corporation |
$ | 131,177 | $ | 51,339 | 156 | % | |||||
Net income available to common shareholders |
125,475 | 25,436 | 393 | ||||||||
Net income per common share, basic |
2.38 | 0.50 | 376 | ||||||||
Net income per common share, diluted |
2.36 | 0.50 | 372 | ||||||||
Dividends per common share |
0.40 | 0.55 | (27 | ) | |||||||
AT YEAR END |
|||||||||||
Assets |
$ | 21,353,118 | $ | 21,078,757 | 1 | ||||||
Securities |
5,976,072 | 4,461,060 | 34 | ||||||||
Loans and leases, excluding covered loans |
11,386,628 | 12,146,908 | (6 | ) | |||||||
Covered loans (2) |
1,857,522 | 1,851,821 | 0 | ||||||||
Deposits |
18,176,862 | 17,379,448 | 5 | ||||||||
Common shareholders' equity |
1,959,579 | 1,790,275 | 9 | ||||||||
Total equity |
1,984,718 | 2,012,764 | (1 | ) | |||||||
Book value per common share |
37.51 | 34.74 | 8 | ||||||||
AVERAGE BALANCES |
|||||||||||
Assets |
$ | 21,156,661 | $ | 17,711,495 | 19 | ||||||
Securities |
4,677,306 | 3,327,235 | 41 | ||||||||
Loans and leases, excluding covered loans |
11,576,380 | 12,296,619 | (6 | ) | |||||||
Covered loans (2) |
1,940,316 | 66,470 | 2,819 | ||||||||
Deposits |
17,868,392 | 14,351,897 | 25 | ||||||||
Common shareholders' equity |
1,902,846 | 1,745,101 | 9 | ||||||||
Total equity |
1,961,109 | 2,160,922 | (9 | ) | |||||||
SELECTED RATIOS |
|||||||||||
Return on average assets |
0.62 | % | 0.29 | % | 114 | ||||||
Return on average common shareholders' equity |
6.59 | 1.46 | 351 | ||||||||
Corporation's tier 1 leverage |
6.74 | 9.48 | (29 | ) | |||||||
Corporation's tier 1 risk-based capital |
10.52 | 12.20 | (14 | ) | |||||||
Corporation's total risk-based capital |
13.28 | 15.15 | (12 | ) | |||||||
Period-end common shareholders' equity to period-end assets |
9.18 | 8.49 | 8 | ||||||||
Period-end equity to period-end assets |
9.29 | 9.55 | (3 | ) | |||||||
Dividend payout ratio, per common share |
16.75 | 107.80 | (84 | ) | |||||||
Net interest margin |
3.86 | 3.91 | (1 | ) | |||||||
Expense to revenue ratio (3) |
62.45 | 61.70 | 1 | ||||||||
ASSET QUALITY RATIOS (4) |
|||||||||||
Nonaccrual loans to total loans and leases |
1.68 | % | 3.20 | % | (48 | ) | |||||
Nonaccrual loans and OREO to total loans and leases and OREO |
2.17 | 3.62 | (40 | ) | |||||||
Allowance for loan and lease losses to total loans and leases |
2.26 | 2.38 | (5 | ) | |||||||
Allowance for loan and lease losses to nonaccrual loans |
134.61 | 74.22 | 81 | ||||||||
Net charge-offs to average total loans and leases |
(1.13 | ) | (1.84 | ) | (39 | ) | |||||
AT YEAR END |
|||||||||||
Assets under management (5) |
$ | 36,753,673 | $ | 35,238,753 | 4 | ||||||
Assets under management or administration (5) |
58,470,832 | 55,119,366 | 6 | ||||||||
38
SELECTED FINANCIAL INFORMATION
| |
As of or for the year ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share amounts) (1)
|
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||
Statement of Income Data: |
|||||||||||||||||||
Interest income |
$ | 830,196 | $ | 709,077 | $ | 784,688 | $ | 894,101 | $ | 826,315 | |||||||||
Interest expense |
99,871 | 85,024 | 184,792 | 285,829 | 220,405 | ||||||||||||||
Net interest income |
730,325 | 624,053 | 599,896 | 608,272 | 605,910 | ||||||||||||||
Provision for credit losses on loans and leases,excluding covered loans |
103,000 | 285,000 | 127,000 | 20,000 | (610 | ) | |||||||||||||
Provision for losses on covered loans |
76,218 | — | — | — | — | ||||||||||||||
Noninterest income |
361,375 | 292,197 | 266,984 | 303,202 | 242,370 | ||||||||||||||
Noninterest expense |
751,330 | 581,087 | 587,763 | 534,931 | 476,046 | ||||||||||||||
Income before taxes |
161,152 | 50,163 | 152,117 | 356,543 | 372,844 | ||||||||||||||
Income taxes |
26,055 | (1,886 | ) | 41,783 | 124,974 | 133,363 | |||||||||||||
Net income |
$ | 135,097 | $ | 52,049 | $ | 110,334 | $ | 231,569 | $ | 239,481 | |||||||||
Less: Net income attributable to noncontrolling interest |
3,920 | 710 | 5,378 | 8,856 | 5,958 | ||||||||||||||
Net income attributable to City National Corporation |
$ | 131,177 | $ | 51,339 | $ | 104,956 | $ | 222,713 | $ | 233,523 | |||||||||
Less: Dividends and accretion on preferred stock |
5,702 | 25,903 | 2,445 | — | — | ||||||||||||||
Net income available to common shareholders |
$ | 125,475 | $ | 25,436 | $ | 102,511 | $ | 222,713 | $ | 233,523 | |||||||||
Per Common Share Data: |
|||||||||||||||||||
Net income per common share, basic |
2.38 | 0.50 | 2.12 | 4.58 | 4.78 | ||||||||||||||
Net income per common share, diluted |
2.36 | 0.50 | 2.11 | 4.50 | 4.65 | ||||||||||||||
Dividends per common share |
0.40 | 0.55 | 1.92 | 1.84 | 1.64 | ||||||||||||||
Book value per common share |
37.51 | 34.74 | 33.52 | 33.66 | 30.86 | ||||||||||||||
Shares used to compute net income per common share, basic |
51,992 | 50,272 | 47,930 | 48,234 | 48,477 | ||||||||||||||
Shares used to compute net income per common share, diluted |
52,455 | 50,421 | 48,196 | 49,069 | 49,893 | ||||||||||||||
Balance Sheet Data—At Period End: |
|||||||||||||||||||
Assets |
$ | 21,353,118 | $ | 21,078,757 | $ | 16,455,515 | $ | 15,889,290 | $ | 14,884,309 | |||||||||
Securities |
5,976,072 | 4,461,060 | 2,440,468 | 2,756,010 | 3,101,154 | ||||||||||||||
Loans and leases, excluding covered loans |
11,386,628 | 12,146,908 | 12,444,259 | 11,630,638 | 10,386,005 | ||||||||||||||
Covered loans (2) |
1,857,522 | 1,851,821 | — | — | — | ||||||||||||||
Interest-earning assets |
19,667,137 | 19,055,189 | 15,104,199 | 14,544,176 | 13,722,062 | ||||||||||||||
Deposits |
18,176,862 | 17,379,448 | 12,652,124 | 11,822,505 | 12,172,816 | ||||||||||||||
Common shareholders' equity |
1,959,579 | 1,790,275 | 1,614,904 | 1,610,139 | 1,465,495 | ||||||||||||||
Total equity |
1,984,718 | 2,012,764 | 2,030,434 | 1,635,722 | 1,491,175 | ||||||||||||||
Balance Sheet Data—Average Balances: |
|||||||||||||||||||
Assets |
$ | 21,156,661 | $ | 17,711,495 | $ | 16,028,821 | $ | 15,370,764 | $ | 14,715,512 | |||||||||
Securities |
4,677,306 | 3,327,235 | 2,398,285 | 2,833,489 | 3,488,005 | ||||||||||||||
Loans and leases, excluding covered loans |
11,576,380 | 12,296,619 | 12,088,715 | 11,057,411 | 9,948,363 | ||||||||||||||
Covered loans (2) |
1,940,316 | 66,470 | — | — | — | ||||||||||||||
Interest-earning assets |
19,269,707 | 16,315,487 | 14,670,167 | 14,054,123 | 13,568,255 | ||||||||||||||
Deposits |
17,868,392 | 14,351,897 | 11,899,642 | 12,236,383 | 11,869,927 | ||||||||||||||
Common shareholders' equity |
1,902,846 | 1,745,101 | 1,636,597 | 1,564,080 | 1,440,509 | ||||||||||||||
Total equity |
1,961,109 | 2,160,922 | 1,706,092 | 1,588,480 | 1,465,726 | ||||||||||||||
Asset Quality: |
|||||||||||||||||||
Nonaccrual loans, excluding covered nonaccrual loans |
$ | 190,923 | $ | 388,707 | $ | 211,142 | $ | 75,561 | $ | 20,883 | |||||||||
Covered nonaccrual loans |
2,557 | — | — | — | — | ||||||||||||||
OREO, excluding covered OREO |
57,317 | 53,308 | 11,388 | — | — | ||||||||||||||
Covered OREO |
120,866 | 60,558 | — | — | — | ||||||||||||||
Total nonaccrual loans and OREO |
$ | 371,663 | $ | 502,573 | $ | 222,530 | $ | 75,561 | $ | 20,883 | |||||||||
Performance Ratios: |
|||||||||||||||||||
Return on average assets |
0.62 | % | 0.29 | % | 0.65 | % | 1.45 | % | 1.59 | % | |||||||||
Return on average common shareholders' equity |
6.59 | 1.46 | 6.26 | 14.24 | 16.21 | ||||||||||||||
Net interest spread |
3.45 | 3.41 | 3.27 | 2.91 | 3.18 | ||||||||||||||
Net interest margin |
3.86 | 3.91 | 4.20 | 4.45 | 4.58 | ||||||||||||||
Period-end common shareholders' equity to period-end assets |
9.18 | 8.49 | 9.81 | 10.13 | 9.85 | ||||||||||||||
Period-end equity to period-end assets |
9.29 | 9.55 | 12.34 | 10.29 | 10.02 | ||||||||||||||
Dividend payout ratio, per common share |
16.75 | 107.80 | 90.61 | 40.13 | 34.31 | ||||||||||||||
Expense to revenue ratio |
62.45 | 61.70 | 66.80 | 57.87 | 55.28 | ||||||||||||||
Asset Quality Ratios (3): |
|||||||||||||||||||
Nonaccrual loans to total loans and leases |
1.68 | % | 3.20 | % | 1.70 | % | 0.65 | % | 0.20 | % | |||||||||
Nonaccrual loans and OREO to total loans and leases and OREO |
2.17 | 3.62 | 1.79 | 0.65 | 0.20 | ||||||||||||||
Allowance for loan and lease losses to total loans and leases |
2.26 | 2.38 | 1.80 | 1.45 | 1.50 | ||||||||||||||
Allowance for loan and lease losses to nonaccrual loans |
134.61 | 74.22 | 106.11 | 223.03 | 743.88 | ||||||||||||||
Net (charge-offs)/recoveries to average total loans and leases |
(1.13 | ) | (1.84 | ) | (0.57 | ) | (0.08 | ) | 0.03 | ||||||||||
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
City National Corporation (the "Corporation"), through its primary subsidiary, City National Bank (the "Bank"), provides private and business banking services, including investment and trust services to mid-size businesses, entrepreneurs, professionals and affluent individuals. The Bank is the largest independent commercial bank headquartered in Los Angeles. For over 50 years, the Bank has served clients through relationship banking. The Bank seeks to build client relationships with a high level of personal service and tailored products through private and commercial banking teams, product specialists and investment advisors to facilitate clients' use, where appropriate, of multiple services and products offered by the Company. The Company offers a broad range of lending, deposit, cash management, international banking and other products and services. The Company also lends, invests and provides services in accordance with its Community Reinvestment Act commitment. Through the Company's asset management firms, subsidiaries of the Corporation, and Wealth Management Services, a division of the Bank, the Company offers 1) investment management and advisory services and brokerage services, including portfolio management, securities trading and asset management; 2) personal and business trust and investment services, including employee benefit trust services; 401(k) and defined benefit plan administration, and; 3) estate and financial planning and custodial services. The Bank also advises and markets mutual funds under the name of CNI Charter Funds.
The Corporation is the holding company for the Bank. References to the "Company" mean the Corporation and its subsidiaries including the Bank. The financial information presented herein includes the accounts of the Corporation, its non-bank subsidiaries, the Bank, and the Bank's wholly owned subsidiaries. All material transactions between these entities are eliminated.
See "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995," on page 37 in connection with "forward-looking" statements included in this report.
Over the last three years, the Company's total assets have grown by 34 percent. Total loans, excluding loans covered by a loss sharing agreement with the Federal Deposit Insurance Corporation ("FDIC"), were down 2 percent. The decline in loans reflect relatively weak loan demand due to challenging business and economic conditions in past and current years, along with the Company's continued progress in reducing the number of problem loans. Deposit balances grew 54 percent for the same period.
On July 21, 2009, the Company acquired a majority interest in Lee Munder Capital Group, LLC ("LMCG"), a Boston-based investment firm that manages assets for corporations, pensions, endowments and affluent households. LMCG had approximately $3.36 billion of assets under management at the date of acquisition and manages or advises on client assets totaling $4.93 billion as of December 31, 2010. LMCG was merged with Independence Investments, a Boston-based institutional asset management firm in which the Company held a majority interest. The combined entity is the Company's primary institutional asset management affiliate, with more than $4 billion of assets under management at acquisition date. It is operated under the Lee Munder Capital Group name and is an affiliate of Convergent Capital Management LLC.
On December 18, 2009, the Bank acquired the banking operations of Imperial Capital Bank ("ICB") in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $3.26 billion in assets, $2.38 billion in loans and $2.08 billion in deposits. In connection with the acquisition, the Company entered into a loss sharing agreement with the FDIC with respect to acquired loans ("covered loans") and other real estate owned ("covered other real estate owned" or "covered OREO") (collectively, "covered assets").
40
On May 7, 2010, the Bank acquired the banking operations of 1st Pacific Bank of California ("FPB") in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $318.6 million in assets and assumed $264.2 million in liabilities. The Bank acquired most of FPB's assets, including loans with a fair value of $202.8 million, and assumed deposits with a fair value of $237.2 million. The acquired loans and OREO are subject to a loss sharing agreement with the FDIC.
On May 28, 2010, the Bank acquired the banking operations of Sun West Bank ("SWB") in Nevada in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $340.0 million in assets and assumed $310.1 million in liabilities. The Bank acquired most of SWB's assets, including loans with a fair value of $127.6 million, and assumed deposits of with a fair value of $304.3 million. The acquired loans and OREO are subject to a loss-sharing agreement with the FDIC.
On November 15, 2010, the Company completed a relatively small, but strategically important acquisition of a Los Angeles, California-based accounting software firm, Datafaction, which will complement the Bank's proprietary cash management solutions available to its business clients.
CAPITAL ACTIVITY
On January 24, 2008, the Board of Directors authorized the repurchase of 1 million shares of City National Corporation stock, following the completion of its previously approved stock buyback initiative. The Corporation repurchased an aggregate of 421,500 shares of common stock in 2008 at an average price of $48.41. The shares purchased under the buyback programs may be reissued for acquisitions, upon the exercise of stock options, and for other general corporate purposes. The Corporation did not repurchase any shares in 2009 and 2010. At January 31, 2011, additional shares of 1,140,400 could be repurchased under the existing authority.
The Corporation paid dividends of $0.40 per share of common stock in 2010 and $0.55 per share of common stock in 2009. On January 20, 2011, the Board of Directors authorized a quarterly cash dividend on common stock at a rate of $0.20 per share to shareholders of record on February 2, 2011, payable on February 16, 2011.
On November 21, 2008, City National Corporation received aggregate proceeds of $400 million from the United States Department of the Treasury ("Treasury") under the Troubled Asset Relief Program ("TARP") Capital Purchase Program in exchange for 400,000 shares of cumulative perpetual preferred stock and a 10-year warrant to purchase up to 1,128,668 shares of the Company's common stock at an exercise price of $53.16 per share. The preferred stock and warrant were recorded in equity on a relative fair value basis at the time of issuance. The preferred stock was valued by calculating the present value of expected cash flows and the warrant was valued using an option valuation model. The allocated values of the preferred stock and warrant were approximately $389.9 million and $10.1 million, respectively. Cumulative dividends on the preferred stock were payable quarterly at the rate of 5 percent for the first five years and increasing to 9 percent thereafter. The warrant had a 10-year term and was immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $53.16 per share of the common stock.
On December 30, 2009, the Corporation repurchased $200 million, or 200,000 shares, of preferred shares from the Treasury. The repurchase represented 50 percent of the preferred stock issued to the Treasury and required an accelerated accretion charge of $4.0 million in 2009. On March 3, 2010, the Corporation repurchased the remaining $200 million, or 200,000 shares, of preferred shares, which resulted in an accelerated accretion charge of $3.8 million in 2010. On April 8, 2010, the Corporation repurchased its outstanding common stock warrant issued to the Treasury. The repurchase price of $18.5 million was recorded as a charge to additional paid-in capital.
41
Dividends on preferred stock were paid on a quarterly basis. The Corporation paid dividends of $1.7 million and accreted $4.0 million of discount on preferred stock in 2010. The Corporation paid or accrued dividends of $19.9 million and accreted $6.0 million of discount on preferred stock in 2009. The discount accretion includes the accelerated accretion due to the repurchase of preferred stock in 2010 and 2009.
On December 8, 2009, City National Capital Trust I, a statutory trust formed by the Corporation, issued $250.0 million of cumulative trust preferred securities. The notes paid a fixed rate of 9.625 percent and mature on February 1, 2040. The trust preferred securities qualified as Tier 1 capital. On October 16, 2010, the Company used net proceeds from a September 2010 issue of senior notes to redeem the $250.0 million of trust preferred securities. The Company recognized a $6.8 million charge on the early redemption of the trust preferred securities in noninterest income in 2010.
On July 15, 2009, the Bank issued a $50.0 million unsecured subordinated note to a third party investor that matures on July 15, 2019. On August 12, 2009, the Bank issued $130.0 million in subordinated notes of which $55.0 million were floating rate subordinated notes and $75.0 million were fixed rate subordinated notes. These subordinated notes mature on August 12, 2019. The subordinated notes qualify as Tier 2 capital for regulatory purposes.
On May 8, 2009, the Corporation completed an offering of 2.8 million common shares at $39.00 per share. The net proceeds from the offering were $104.3 million. On May 15, 2009, the underwriters exercised their over-allotment option to purchase an additional 420,000 shares of the Corporation's common stock at $39.00 per share. The net proceeds from the exercise of the over-allotment option were $15.6 million. Common stock qualifies as Tier 1 capital.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles. 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 eleven policies as being critical because they require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, contingent assets and liabilities, and revenues and expenses included in the consolidated financial statements. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Circumstances and events that differ significantly from those underlying the Company's estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.
The Company's critical accounting policies include those that address accounting for business combinations, financial assets and liabilities reported at fair value, securities, acquired impaired loans, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, other real estate owned, goodwill and other intangible assets, noncontrolling interest, share-based compensation plans, income taxes and derivatives and hedging activities. The Company, with the concurrence of the Audit and Risk Committee, has reviewed and approved these critical accounting policies, which are further described in Management's Discussion and Analysis and Note 1 of the Notes to Consolidated Financial Statements included in this Form 10-K. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.
Business Combinations
The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any
42
excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.
Fair Value Measurements
Under Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures, fair value for financial reporting purposes is the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.
For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated for purposes of applying fair value measurement. The valuation premise is a concept that determines whether an asset is measured on a standalone basis or in combination with other assets. The Company measures its assets and liabilities on a standalone basis then aggregates assets and liabilities with similar characteristics for disclosure purposes.
Fair Value Hierarchy
Management employs market standard valuation techniques in determining the fair value of assets and liabilities. Inputs used in valuation techniques are based on assumptions that market participants would use in pricing an asset or liability. Inputs used in valuation techniques are prioritized in the fair value hierarchy as follows:
| |
|
||
|---|---|---|---|
| Level 1— | Quoted market prices in an active market for identical assets and liabilities. | ||
Level 2— |
Observable inputs including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates, and inputs that are derived principally from or corroborated by observable market data. |
||
Level 3— |
Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available. |
If the determination of fair value measurement for a particular asset or liability is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Management's assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability measured.
The Company records securities available-for-sale, trading securities and derivative contracts at fair value on a recurring basis. Certain other assets such as impaired loans, OREO, goodwill, customer-relationship intangibles and investments carried at cost are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.
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A description of the valuation techniques applied to the Company's major categories of assets and liabilities measured at fair value follows.
Securities—Fair values for U.S. Treasury securities, marketable equity securities and trading securities, with the exception of agency securities held in the trading account, are based on quoted market prices. Securities with fair values based on quoted market prices are classified in Level 1 of the fair value hierarchy. Level 2 securities include the Company's portfolio of federal agency, mortgage-backed, state and municipal securities for which fair values are calculated with models using quoted prices and other inputs directly or indirectly observable for the asset or liability. Prices for the significant majority of these securities are obtained through a third-party valuation source. Management reviewed the valuation techniques and assumptions used by the provider and determined that the provider utilizes widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Prices for the remaining securities are obtained from dealer quotes. Securities classified in Level 3 include certain collateralized debt obligation instruments for which the market has become inactive. Fair values for these securities were determined using internal models based on assumptions that are not observable in the market.
Loans—The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans. Loans measured for impairment based on the fair value of collateral or observable market prices are reported at fair value for disclosure purposes. The majority of loans reported at fair value are measured for impairment by valuing the underlying collateral based on third-party appraisals or broker quotes. These loans are classified in Level 2 of the fair value hierarchy. In certain circumstances, appraised values or broker quotes are adjusted based on management's assumptions regarding current market conditions to determine fair value. These loans are classified in Level 3 of the fair value hierarchy.
Derivatives—The fair value of non-exchange traded (over-the-counter) derivatives are obtained from third party market sources that use conventional valuation algorithms. The Company provides client data to the third party sources for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts. The fair values of interest rate contracts include interest receivable and cash collateral, if any. Although the Company has determined that the majority of the inputs used to value derivative contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified the derivative contract valuations in their entirety in Level 2 of the fair value hierarchy.
The fair value of foreign exchange options and transactions are derived from market spot and/or forward foreign exchange rates and are classified in Level 1 of the fair value hierarchy.
Other Real Estate Owned—The fair value of OREO is generally based on third-party appraisals performed in accordance with professional appraisal standards and Bank regulatory requirements under the Financial Institutions Reform Recovery and Enforcement Act of 1989. Appraisals are reviewed and approved by the Company's appraisal department. OREO measured at fair value based on third party appraisals or observable market data is classified in Level 2 of the fair value hierarchy. In certain circumstances, fair value may be determined using a combination of inputs including appraised values, broker price opinions and recent market activity. The weighting of each input in the calculation of fair value is based on management's assumptions regarding market conditions. These assumptions cannot be observed in the market. OREO measured at fair value using non-observable inputs is classified in Level 3 of the fair value hierarchy.
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Securities
Securities are classified based on management's intention on the date of purchase. All securities are classified as available-for-sale or trading and are presented 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. The Company performs a quarterly assessment to determine whether a decline in fair value below amortized cost is other than temporary. Amortized cost includes adjustments made to the cost of an investment for accretion, amortization, collection of cash and previous other-than temporary impairment recognized in earnings. Other-than-temporary impairment exists when it is probable that the Company will be unable to recover the entire amortized cost basis of the security. If the decline in fair value is judged to be other than temporary, the security is written down to fair value which becomes the new cost basis and an impairment loss is recognized.
For debt securities, the classification of other-than-temporary impairment depends on whether the Company intends to sell the security or it more likely than not will be required to sell the security before recovery of its cost basis, and on the nature of the impairment. If the Company intends to sell a security or it is more likely than not it will be required to sell a security prior to recovery of its cost basis, the entire amount of impairment is recognized in earnings. If the Company does not intend to sell the security or it is not more likely than not it will be required to sell the security prior to recovery of its cost basis, the credit loss component of impairment is recognized in earnings and impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security's effective interest rate at the date of acquisition. The cost basis of an other-than-temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value.
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.
Acquired Impaired Loans
Loans acquired for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). These loans are recorded at fair value at the time of acquisition. Fair value of acquired impaired loans is determined using discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates. As estimated credit and market risks are included in the determination of fair value, no allowance for loan losses is established on the acquisition date. The excess of expected cash flows at acquisition over the initial investment in acquired loans ("accretable yield") is recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. Subsequent to acquisition, the Company aggregates loans into pools of loans with common risk characteristics. The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis. Increases in estimated cash flows over those expected at the acquisition date and subsequent measurement periods are recognized as interest income, prospectively. Decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording a provision for loan losses. Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and
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performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated.
Covered Loans—The term covered loans refers to acquired loans that are covered under a loss sharing agreement with the FDIC. Covered loans are reported in the loan section of the consolidated balance sheets.
Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments
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 consolidated statements of income to adjust the allowance and reserve to the levels deemed appropriate by management, as determined through application of the Company's allowance methodology procedures. The provision for credit losses reflects management's judgment of the adequacy of the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments. It is determined through quarterly analytical reviews of the loan and commitment portfolios and consideration of such other factors as the Company's loan and lease loss experience, trends in problem loans, concentrations of credit risk, underlying collateral values, and current economic conditions, as well as the results of the Company's ongoing credit review process. As conditions change, our level of provisioning and the allowance for loan and lease losses and reserve for off-balance sheet credit commitments may change.
For commercial, non-homogenous loans that are not impaired, the Bank derives loss factors via a process that begins with estimates of probable losses inherent in the portfolio based upon various statistical analyses. The factors included in the analysis include loan type, migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, as well as analyses that reflect current trends and conditions. Each portfolio of smaller balance homogeneous loans including residential first mortgages, installment, revolving credit and most other consumer loans is collectively evaluated for loss potential. Management also establishes a qualitative reserve that considers overall portfolio indicators, including current and historical credit losses; delinquent, nonperforming and criticized loans; trends in volumes and terms of loans; and, an evaluation of overall credit quality and the credit process, including lending policies and procedures, economic, geographical, product, and other environmental factors. Management also considers trends in internally risk-rated exposures, criticized exposures, cash-basis loans, and historical and forecasted write-offs; and, a review of industry, geographic, and portfolio concentrations, including current developments within those segments. In addition, management considers the current business strategy and credit process, including credit-limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.
The allowance for loan and lease losses attributed to impaired loans considers all available evidence, including as appropriate, the probability that a specific loan will default, the expected exposure of a loan at default, an estimate of loss given default, the present value of the expected future cash flows discounted using the loan's contractual effective rate, the secondary market value of the loan and the fair value of collateral.
The quantitative portion of the allowance for loan and lease losses is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the allowance. The qualitative portion of the allowance attempts to incorporate the risks inherent in the portfolio, economic uncertainties, competition, regulatory requirements and other subjective factors including industry trends, changes in underwriting standards, decline in the value of collateral for collateral dependent loans and existence of concentrations.
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The allowance for loan and lease losses is increased by the provision for credit losses charged to operating expense and is decreased by the amount of charge-offs, net of recoveries.
Reserve for Off-Balance Sheet Credit Commitments —Off-balance sheet credit commitments include commitments to extend credit, letters of credit and financial guarantees. The reserve for off-balance sheet credit commitments is established by converting the off-balance sheet exposures to a loan equivalent amount and then applying the methodology used for loans described above. The reserve for off-balance sheet credit commitments is recorded as a liability in the Company's consolidated balance sheets. Increases and decreases in the reserve for off-balance sheet credit commitments are reflected as an allocation of provision expense from the allowance for loan and lease losses.
Allowance for Loan Losses on Covered Loans—The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis. Decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording a provision for loan losses. See Acquired Impaired Loans for further discussion.
Other Real Estate Owned
OREO includes real estate acquired in full or partial satisfaction of a loan and is recorded at fair value less estimated costs to sell at the acquisition date. The excess of the carrying amount of a loan over the fair value of real estate acquired (less costs to sell) is charged to the allowance for loan and lease losses. If the fair value of OREO at initial acquisition exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the allowance for loan and lease losses if a charge-off had previously been recorded, or as a gain on initial transfer in noninterest income. The fair value of OREO is generally based on a third party appraisal or, in certain circumstances, may be based on a combination of an appraised value, broker price opinions and recent sales activity. Declines in the fair value of OREO that occur subsequent to acquisition are charged to OREO expense in the period in which they are identified. Expenses for holding costs are charged to OREO expense as incurred.
Covered OREO includes acquired OREO that is covered under a loss sharing agreement with the FDIC. These assets were recorded at their fair value on acquisition date. Covered OREO is reported in Other real estate owned in the consolidated balance sheets.
Goodwill and Intangibles
The Company applies the acquisition method of accounting effective January 1, 2009. Previously, acquisitions were accounted for using the purchase method. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed, including contingent consideration, in the transaction at their acquisition date fair values. Management utilizes valuation techniques based on discounted cash flow analysis to determine these fair values. Any excess of the purchase price over amounts allocated to acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Intangible assets include core deposit intangibles and client advisory contract intangibles (combined, customer-relationship intangibles) originating from acquisitions of financial services firms. Core deposit intangibles are amortized over a range of four to eight years and client advisory contract intangibles are amortized over various periods ranging from four to 20 years. At December 31, 2010, the weighted-average amortization period for the contract intangibles is 17.3 years.
Goodwill and customer-relationship intangibles are evaluated for impairment at least annually or more frequently if events or circumstances, such as changes in economic or market conditions, indicate that potential impairment exists. Given the volatility in the current economic environment, goodwill and customer-relationship intangibles are evaluated for impairment on a quarterly basis. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below
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an operating segment for which discrete financial information is available and regularly reviewed by management. Fair values of reporting units are determined using methods consistent with current market practices for valuing similar types of businesses. Valuations are generally based on market multiples of net income or gross revenues combined with an analysis of expected near and long-term financial performance. Management utilizes market information including market comparables and recent merger and acquisition transactions to validate the reasonableness of its valuations. If the fair value of the reporting unit, including goodwill, is determined to be less than the carrying amount of the reporting units, a further test is required to measure the amount of impairment. If an impairment loss exists, the carrying amount of the goodwill is adjusted to a new cost basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.
Impairment testing of customer-relationship intangibles is performed at the individual asset level. Impairment exists when the carrying amount of an intangible asset is not recoverable and exceeds its fair value. The carrying amount of an intangible asset is not recoverable when the carrying amount of the asset exceeds the sum of undiscounted cash flows (cash inflows less cash outflows) associated with the use and/or disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The fair value of core deposit intangibles is determined using market-based core deposit premiums from recent deposit sale transactions. The fair value of client advisory contracts is based on discounted expected future cash flows. Management makes certain estimates and assumptions in determining the expected future cash flows from customer-relationship intangibles including account attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these estimates and assumptions could adversely impact the valuation of these intangible assets. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is amortized over the remaining useful life of the asset.
Noncontrolling Interest
The Company has both redeemable and non-redeemable noncontrolling interest. Non-redeemable noncontrolling interest in majority-owned affiliates is reported as a separate component of equity in Noncontrolling interest in the consolidated balance sheets. Redeemable noncontrolling interest includes noncontrolling ownership interests that are redeemable at the option of the holder or outside the control of the issuer. These interests are not considered to be permanent equity and are reported in the mezzanine section of the consolidated balance sheets at fair value. Consolidated net income is attributed to controlling and noncontrolling interest in the consolidated statements of income.
Share-based Compensation Plans
The Company measures the cost of employee services received in exchange for an award of equity instruments, such as stock options or restricted stock, based on the fair value of the award on the grant date. This cost is recognized in the consolidated statements of income over the vesting period of the award.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model into which the Company inputs its assumptions. The Company evaluates exercise behavior and values options separately for executive and non-executive employees. The Company uses historical data to predict option exercise and employee termination behavior. Expected volatilities are based on the historical volatility of the Company's stock. The expected term of options granted is derived from actual historical exercise activity 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. As a practice, the exercise price of the Company's stock option grants equals the closing market price of the Company's common stock on the date of the grant.
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The Company issues restricted stock awards which vest over a five-year period during which time the holder receives dividends and has full voting rights. Twenty-five percent of the restricted stock awards vest two years from the date of grant, then twenty-five percent vests on each of the next three consecutive grant anniversary dates. Restricted stock is valued at the closing price of the Company's stock on the date of award.
Income Taxes
The calculation of the Company's income tax provision and related tax accruals requires the use of estimates and judgments. The provision for income taxes includes current and deferred income tax expense on net income adjusted for permanent and temporary differences in the tax and financial accounting for certain assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities, as well as for operating losses and tax credit carry forwards, using enacted tax laws and rates. On a quarterly basis, management evaluates its deferred tax assets to determine if these tax benefits are expected to be realized in future periods. This determination is based on facts and circumstances, including the Company's current and future tax outlook. To the extent a deferred tax asset is no longer considered "more likely than not" to be realized, a valuation allowance is established.
Accrued income taxes represent the estimated amounts due to or received from the various taxing jurisdictions where the Company has established a business presence. The balance also includes a contingent reserve for potential taxes, interest and penalties related to uncertain tax positions. On a quarterly basis, management evaluates the contingent tax accruals to determine if they are sufficiently reserved based on a probability assessment of potential outcomes. The determination is based on facts and circumstances, including the interpretation of existing law, new judicial or regulatory guidance and the status of tax audits. From time to time, there may be differences in opinion with respect to the tax treatment accorded transactions. If a tax position which was previously recognized on the financial statements is no longer "more likely than not" to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. The Company recognizes accrued interest and penalties relating to uncertain tax positions as an income tax provision expense.
Derivatives and Hedging
As part of its asset and liability management strategies, the Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to (1) the fair value of certain fixed-rate deposits and borrowings (fair value hedges) and (2) certain cash flows related to future interest payments on variable rate loans (cash flow hedges). Interest-rate swap agreements involve the exchange of fixed and variable rate interest payments between counterparties based upon a notional principal amount and maturity date. The Company evaluates the creditworthiness of counterparties prior to entering into derivative contracts, and has established counterparty risk limits and monitoring procedures to reduce the risk of loss due to nonperformance. The Company recognizes derivatives as assets or liabilities on the consolidated balance sheets at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction. The Company's interest-rate risk management contracts qualify for hedge accounting treatment under ASC Topic 815, Derivatives and Hedging.
The Company documents its hedge relationships, including identification of the hedging instruments and 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 or (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. 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.
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Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the continued 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, "Measuring the Ineffectiveness of a Cash Flow Hedge of Interest Rate Risk under Paragraph 30(b) When the Shortcut Method is not Applied." 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 Accumulated other comprehensive income (loss) ("AOCI"). When the cash flows associated with the hedged item are realized, the gain or loss included in AOCI is recognized on the same line in the consolidated statements of income as the hedged item, i.e., included in Interest income on loans and leases. Any ineffective portion of the changes of fair value of cash flow hedges is recognized immediately in Other noninterest income in the consolidated statements of income.
For fair value hedges, the Company uses interest-rate swaps to hedge the fair value of certain certificates of deposit, subordinated debt and other long-term debt. The certificates of deposit are single maturity, fixed-rate, non-callable, negotiable certificates of deposit. 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. 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 the accounting guidance 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 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 statements of income as the related hedged item. 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 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.
The Company also offers various derivative products to clients and enters into derivative transactions in due course. These transactions are not linked to specific Company assets or liabilities in the consolidated balance sheets or to forecasted transactions in a hedge relationship and, therefore, do not qualify for hedge accounting. The contracts are marked-to-market each reporting period with
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changes in fair value recorded as part of Other noninterest income in the consolidated statements of income. Fair values are determined from verifiable third-party sources that have considerable experience with the derivative markets. The Company provides client data to the third party source for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts.
The Company enters into foreign currency option contracts with clients to assist them in hedging their economic exposures arising out of foreign-currency denominated commercial transactions. Foreign currency options allow the counterparty to purchase or sell a foreign currency at a specified date and price. These option contracts are offset by paired trades with third-party banks. The Company also takes proprietary currency positions within risk limits established by the Company's Asset/Liability Management Committee. Both the realized and unrealized gains and losses on foreign exchange contracts are recorded in Other noninterest income in the consolidated statements of income.
2010 HIGHLIGHTS
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RECENT DEVELOPMENTS
On February 11, 2011, the Company acquired a branch in San Jose, California. The Company assumed $8.4 million of deposits. The acquisition did not include the branch's loan portfolio. The new San Jose branch is the Company's 11th bank branch in Northern California.
OUTLOOK
The Company's management anticipates increased profitability in 2011, as asset quality continues to improve and annual credit costs move lower than the $103 million recorded in 2010 (excluding provisions related to FDIC-covered loans). However, it is likely that slow economic growth, limited loan demand, conditions in the commercial real estate market, and the continuing decline of covered assets will moderate overall average loan growth. Low interest rates will continue to place pressure on the
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Company's net interest margin and revenue growth. Management expects to increase the Company's already-strong capital ratios in 2011.
RESULTS OF OPERATIONS
Summary
A summary of the Company's results of operations on a fully taxable-equivalent basis for each of the last five years ended December 31 follows:
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Increase (Decrease) |
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Year Ended 2010 |
Year Ended 2009 |
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(in thousands, except per share amounts) (1) |
Amount | % | Amount | % | 2008 | 2007 | 2006 | |||||||||||||||||||||||
Interest income (2) |
$ | 840,573 | $ | 120,378 | 17 | $ | 720,195 | $ | (76,684 | ) | (10 | ) | $ | 796,879 | $ | 907,083 | $ | 839,223 | ||||||||||||
Interest expense |
99,871 | 14,847 | 17 | 85,024 | (99,768 | ) | (54 | ) | 184,792 | 285,829 | 220,405 | |||||||||||||||||||
Net interest income |
740,702 | 105,531 | 17 | 635,171 | 23,084 | 4 | 612,087 | 621,254 | 618,818 | |||||||||||||||||||||
Provision for credit losses on loans and leases, excluding covered loans |
103,000 | (182,000 | ) | (64 | ) | 285,000 | 158,000 | 124 | 127,000 | 20,000 | (610 | ) | ||||||||||||||||||
Provision for losses on covered loans |
76,218 | 76,218 | NM | — | — | — | — | — | — | |||||||||||||||||||||
Noninterest income |
361,375 | 69,178 | 24 | 292,197 | 25,213 | 9 | 266,984 | 303,202 | 242,370 | |||||||||||||||||||||
Noninterest expense: |
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Staff expense |
409,823 | 89,547 | 28 | 320,276 | (34,237 | ) | (10 | ) | 354,513 | 328,672 | 293,066 | |||||||||||||||||||
Other expense |
341,507 | 80,696 | 31 | 260,811 | 27,561 | 12 | 233,250 | 206,259 | 182,980 | |||||||||||||||||||||
Total |
751,330 | 170,243 | 29 | 581,087 | (6,676 | ) | (1 | ) | 587,763 | 534,931 | 476,046 | |||||||||||||||||||
Income before income taxes |
171,529 | 110,248 | 180 | 61,281 | (103,027 | ) | (63 | ) | 164,308 | 369,525 | 385,752 | |||||||||||||||||||
Income taxes |
26,055 | 27,941 | (1,481 | ) | (1,886 | ) | (43,669 | ) | (105 | ) | 41,783 | 124,974 | 133,363 | |||||||||||||||||
Less: Adjustments (2) |
10,377 | (741 | ) | (7 | ) | 11,118 | (1,073 | ) | (9 | ) | 12,191 | 12,982 | 12,908 | |||||||||||||||||
Net income |
$ | 135,097 | $ | 83,048 | 160 | $ | 52,049 | (58,285 | ) | (53 | ) | $ | 110,334 | $ | 231,569 | $ | 239,481 | |||||||||||||
Less: Net income attributable to noncontrolling interest |
3,920 | 3,210 | 452 | 710 | (4,668 | ) | (87 | ) | 5,378 | 8,856 | 5,958 | |||||||||||||||||||
Net income attributable to City National Corporation |
$ | 131,177 | $ | 79,838 | 156 | $ | 51,339 | (53,617 | ) | (51 | ) | $ | 104,956 | $ | 222,713 | $ | 233,523 | |||||||||||||
Less: Dividends and accretion on preferred stock |
5,702 | (20,201 | ) | (78 | ) | 25,903 | 23,458 | 959 | 2,445 | — | — | |||||||||||||||||||
Net income available to common shareholders |
$ | 125,475 | $ | 100,039 | 393 | $ | 25,436 | $ | (77,075 | ) | (75 | ) | $ | 102,511 | $ | 222,713 | $ | 233,523 | ||||||||||||
Net income per common share, diluted |
$ | 2.36 | $ | 1.86 | 372 | $ | 0.50 | $ | (1.61 | ) | (76 | ) | $ | 2.11 | $ | 4.50 | $ | 4.65 | ||||||||||||
Net Interest Income
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.
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The following table presents the components of net interest income on a fully taxable-equivalent basis for the last five years:
Net Interest Income Summary
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(in thousands)
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Average Balance |
Interest income/ expense (1)(4) |
Average interest rate |
Average Balance |
Interest income/ expense (1)(4) |
Average interest rate |
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Assets (2) |
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Interest-earning assets |
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Loans and leases |
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Commercial |
$ | 4,390,834 | $ | 194,568 | 4.43 | % | $ | 4,701,386 | $ | 199,647 | 4.25 | % | |||||||||||
Commercial real estate mortgages |
2,059,680 | 114,542 | 5.56 | 2,171,353 | 121,515 | 5.60 | |||||||||||||||||
Residential mortgages |
3,553,347 | 186,526 | 5.25 | 3,481,227 | 192,774 | 5.54 | |||||||||||||||||
Real estate construction |
660,603 | 26,132 | 3.96 | 1,094,332 | 37,154 | 3.40 | |||||||||||||||||
Equity lines of credit |
742,862 | 26,567 | 3.58 | 674,459 | 23,417 | 3.47 | |||||||||||||||||
Installment |
169,054 | 8,775 | 5.19 | 173,862 | 8,842 | 5.09 | |||||||||||||||||
Total loans and leases, excluding covered loans (3) |
11,576,380 | 557,110 | 4.81 | 12,296,619 | 583,349 | 4.74 | |||||||||||||||||
Covered loans |
1,940,316 | 138,451 | 7.14 | 66,470 | 4,052 | 6.10 | |||||||||||||||||
Total loans and leases |
13,516,696 | 695,561 | 5.15 | 12,363,089 | 587,401 | 4.75 | |||||||||||||||||
Due from banks—interest-bearing |
678,929 | 1,890 | 0.28 | 361,571 | 1,486 | 0.41 | |||||||||||||||||
Federal funds sold and securities purchased under resale agreements |
249,381 | 634 | 0.25 | 186,123 | 264 | 0.14 | |||||||||||||||||
Securities available-for-sale |
4,618,896 | 142,419 | 3.08 | 3,234,303 | 130,213 | 4.03 | |||||||||||||||||
Trading securities |
58,410 | 69 | 0.12 | 92,932 | 831 | 0.89 | |||||||||||||||||
Other interest-earning assets |
147,395 | 2,787 | 1.89 | 77,469 | 2,743 | 3.54 | |||||||||||||||||
Total interest-earning assets |
19,269,707 | 843,360 | 4.38 | 16,315,487 | 722,938 | 4.43 | |||||||||||||||||
Allowance for loan and lease losses |
(315,228 | ) | (254,610 | ) | |||||||||||||||||||
Cash and due from banks |
237,853 | 320,010 | |||||||||||||||||||||
Other non-earning assets |
1,964,329 | 1,330,608 | |||||||||||||||||||||
Total assets |
$ | 21,156,661 | $ | 17,711,495 | |||||||||||||||||||
Liabilities and Equity (2) |
|||||||||||||||||||||||
Interest-bearing deposits |
|||||||||||||||||||||||
Interest checking accounts |
$ | 1,998,990 | $ | 4,308 | 0.22 | $ | 1,540,496 | $ | 3,980 | 0.26 | |||||||||||||
Money market accounts |
5,911,058 | 31,591 | 0.53 | 4,084,090 | 32,068 | 0.79 | |||||||||||||||||
Savings deposits |
317,263 | 1,508 | 0.48 | 239,441 | 1,590 | 0.66 | |||||||||||||||||
Time deposits—under $100,000 |
430,557 | 2,448 | 0.57 | 239,680 | 3,222 | 1.34 | |||||||||||||||||
Time deposits—$100,000 and over |
1,110,996 | 9,175 | 0.83 | 1,303,174 | 19,569 | 1.50 | |||||||||||||||||
Total interest-bearing deposits |
9,768,864 | 49,030 | 0.50 | 7,406,881 | 60,429 | 0.82 | |||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
163,309 | 5,292 | 3.24 | 414,672 | 8,292 | 2.00 | |||||||||||||||||
Other borrowings |
846,513 | 45,549 | 5.38 | 542,521 | 16,303 | 3.01 | |||||||||||||||||
Total interest-bearing liabilities |
10,778,686 | 99,871 | 0.93 | 8,364,074 | 85,024 | 1.02 | |||||||||||||||||
Noninterest-bearing deposits |
8,099,528 | 6,945,017 | |||||||||||||||||||||
Other liabilities |
317,338 | 241,482 | |||||||||||||||||||||
Total equity |
1,961,109 | 2,160,922 | |||||||||||||||||||||
Total liabilities and equity |
$ | 21,156,661 | $ | 17,711,495 | |||||||||||||||||||
Net interest spread |
3.45 | % | 3.41 | % | |||||||||||||||||||
Fully taxable-equivalent net interest and dividend income |
$ | 743,489 | $ | 637,914 | |||||||||||||||||||
Net interest margin |
3.86 | % | 3.91 | % | |||||||||||||||||||
Less: Dividend income included in other income |
2,787 | 2,743 | |||||||||||||||||||||
Fully taxable-equivalent net interest income |
$ | 740,702 | $ | 635,171 | |||||||||||||||||||
54
Net Interest Income Summary
| |
2008 | 2007 | 2006 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Average Balance |
Interest income/ expense (1)(4) |
Average interest rate |
Average Balance |
Interest income/ expense (1)(4) |
Average interest rate |
Average Balance |
Interest income/ expense (1)(4) |
Average interest rate |
|||||||||||||||||||||
|
||||||||||||||||||||||||||||||
|
$ | 4,662,641 | $ | 252,911 | 5.42 | % | $ | 4,279,523 | $ | 310,869 | 7.26 | % | $ | 3,882,466 | $ | 268,364 | 6.91 | % | ||||||||||||
|
2,057,459 | 134,511 | 6.54 | 1,878,671 | 136,446 | 7.26 | 1,786,024 | 133,429 | 7.47 | |||||||||||||||||||||
|
3,293,166 | 184,818 | 5.61 | 3,020,316 | 166,823 | 5.52 | 2,764,599 | 147,573 | 5.34 | |||||||||||||||||||||
|
1,406,181 | 76,039 | 5.41 | 1,291,708 | 110,483 | 8.55 | 955,456 | 84,462 | 8.84 | |||||||||||||||||||||
|
503,428 | 22,340 | 4.44 | 404,493 | 30,456 | 7.53 | 364,744 | 27,938 | 7.66 | |||||||||||||||||||||
|
165,840 | 9,841 | 5.93 | 182,700 | 13,539 | 7.41 | 195,074 | 14,760 | 7.57 | |||||||||||||||||||||
|
12,088,715 | 680,460 | 5.63 | 11,057,411 | 768,616 | 6.95 | 9,948,363 | 676,526 | 6.80 | |||||||||||||||||||||
|
— | — | 0.00 | — | — | 0.00 | — | — | 0.00 | |||||||||||||||||||||
|
12,088,715 | 680,460 | 5.63 | 11,057,411 | 768,616 | 6.95 | 9,948,363 | 676,526 | 6.80 | |||||||||||||||||||||
|
96,872 | 1,896 | 1.96 | 88,787 | 2,604 | 2.93 | 54,843 | 1,161 | 2.12 | |||||||||||||||||||||
|
10,037 | 161 | 1.61 | 13,066 | 686 | 5.25 | 30,417 | 1,525 | 5.01 | |||||||||||||||||||||
|
2,292,932 | 112,437 | 4.90 | 2,757,304 | 131,218 | 4.76 | 3,438,002 | 157,208 | 4.57 | |||||||||||||||||||||
|
105,353 | 1,925 | 1.83 | 76,185 | 3,959 | 5.20 | 50,003 | 2,803 | 5.61 | |||||||||||||||||||||
|
76,258 | 4,297 | 5.63 | 61,370 | 3,771 | 6.14 | 46,627 | 2,532 | 5.43 | |||||||||||||||||||||
|
14,670,167 | 801,176 | 5.46 | 14,054,123 | 910,854 | 6.48 | 13,568,255 | 841,755 | 6.20 | |||||||||||||||||||||
|
(178,587 | ) | (157,012 | ) | (157,433 | ) | ||||||||||||||||||||||||
|
370,468 | 423,526 | 428,742 | |||||||||||||||||||||||||||
|
1,166,773 | 1,050,127 | 875,948 | |||||||||||||||||||||||||||
|
$ | 16,028,821 | $ | 15,370,764 | $ | 14,715,512 | ||||||||||||||||||||||||
|
$ | 851,029 | $ | 5,688 | 0.67 | $ | 784,293 | $ | 4,739 | 0.60 | $ | 758,164 | $ | 2,427 | 0.32 | |||||||||||||||
|
3,760,516 | 72,212 | 1.92 | 3,654,508 | 111,827 | 3.06 | 3,303,373 | 76,293 | 2.31 | |||||||||||||||||||||
|
137,779 | 556 | 0.40 | 147,764 | 715 | 0.48 | 168,853 | 685 | 0.41 | |||||||||||||||||||||
|
220,259 | 6,695 | 3.04 | 240,388 | 9,518 | 3.96 | 183,972 | 6,355 | 3.45 | |||||||||||||||||||||
|
1,299,462 | 37,840 | 2.91 | 1,876,184 | 87,881 | 4.68 | 1,721,292 | 73,264 | 4.26 | |||||||||||||||||||||
|
6,269,045 | 122,991 | 1.96 | 6,703,137 | 214,680 | 3.20 | 6,135,654 | 159,024 | 2.59 | |||||||||||||||||||||
|
1,098,731 | 27,591 | 2.51 | 662,928 | 32,491 | 4.90 | 541,671 | 26,463 | 4.89 | |||||||||||||||||||||
|
1,068,491 | 34,210 | 3.20 | 644,633 | 38,658 | 6.00 | 627,409 | 34,918 | 5.57 | |||||||||||||||||||||
|
8,436,267 | 184,792 | 2.19 | 8,010,698 | 285,829 | 3.57 | 7,304,734 | 220,405 | 3.02 | |||||||||||||||||||||
|
5,630,597 | 5,533,246 | 5,734,273 | |||||||||||||||||||||||||||
|
255,865 | 238,340 | 210,779 | |||||||||||||||||||||||||||
|
1,706,092 | 1,588,480 | 1,465,726 | |||||||||||||||||||||||||||
|
$ | 16,028,821 | $ | 15,370,764 | $ | 14,715,512 | ||||||||||||||||||||||||
|
3.27 | % | 2.91 | % | 3.18 | % | ||||||||||||||||||||||||
|
$ | 616,384 | $ | 625,025 | $ | 621,350 | ||||||||||||||||||||||||
|
4.20 | % | 4.45 | % | 4.58 | % | ||||||||||||||||||||||||
|
4,297 | 3,771 | 2,532 | |||||||||||||||||||||||||||
|
$ | 612,087 | $ | 621,254 | $ | 618,818 | ||||||||||||||||||||||||
55
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 provides a breakdown of the changes in net interest income on a fully taxable-equivalent basis and dividend income due to volume and rate between 2010 and 2009, as well as between 2009 and 2008. The impact of interest rate swaps, which affect interest income on loans and leases and interest expense on deposits and borrowings, is included in rate changes.
Changes In Net Interest Income
| |
2010 vs 2009 | 2009 vs 2008 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Increase (decrease) due to |
|
Increase (decrease) due to |
|
|||||||||||||||||
| |
Net increase (decrease) |
Net increase (decrease) |
|||||||||||||||||||
(in thousands)
|
Volume | Rate | Volume | Rate | |||||||||||||||||
Interest earned on: |
|||||||||||||||||||||
Total loans and leases (1) |
$ | 56,852 | $ | 51,308 | $ | 108,160 | $ | 15,178 | $ | (108,237 | ) | $ | (93,059 | ) | |||||||
Securities available-for-sale |
47,501 | (35,295 | ) | 12,206 | 40,262 | (22,486 | ) | 17,776 | |||||||||||||
Due from banks—interest-bearing |
987 | (583 | ) | 404 | 2,012 | (2,422 | ) | (410 | ) | ||||||||||||
Trading securities |
(229 | ) | (533 | ) | (762 | ) | (204 | ) | (890 | ) | (1,094 | ) | |||||||||
Federal funds sold and securities purchased under resale agreements |
112 | 258 | 370 | 379 | (276 | ) | 103 | ||||||||||||||
Other interest-earning assets |
1,715 | (1,671 | ) | 44 | 67 | (1,621 | ) | (1,554 | ) | ||||||||||||
Total interest-earning assets |
106,938 | 13,484 | 120,422 | 57,694 | (135,932 | ) | (78,238 | ) | |||||||||||||
Interest paid on: |
|||||||||||||||||||||
Interest checking deposits |
1,028 | (700 | ) | 328 | 3,002 | (4,710 | ) | (1,708 | ) | ||||||||||||
Money market deposits |
11,961 | (12,438 | ) | (477 | ) | 5,720 | (45,864 | ) | (40,144 | ) | |||||||||||
Savings deposits |
424 | (506 | ) | (82 | ) | 550 | 484 | 1,034 | |||||||||||||
Time deposits |
(19 | ) | (11,149 | ) | (11,168 | ) | 666 | (22,410 | ) | (21,744 | ) | ||||||||||
Total borrowings |
1,426 | 24,820 | 26,246 | (31,639 | ) | (5,567 | ) | (37,206 | ) | ||||||||||||
Total interest-bearing liabilities |
14,820 | 27 | 14,847 | (21,701 | ) | (78,067 | ) | (99,768 | ) | ||||||||||||
|
$ | 92,118 | $ | 13,457 | $ | 105,575 | $ | 79,395 | $ | (57,865 | ) | $ | 21,530 | ||||||||
Comparison of 2010 with 2009
Net interest income was $730.3 million for 2010, an increase of 17 percent from $624.1 million for 2009. The increase is attributed to interest income on the Company's covered loan portfolio from its acquisition of ICB in December 2009 and FPB and SWB in May 2010. Interest income on covered loans also included $20.6 million of interest income from the accelerated accretable yield recognition on FDIC-covered loans that were paid off or fully charged off during the year. The increase was partially offset by lower interest income on the Company's non-covered loan portfolio, which decreased from an average loan balance of $12.30 billion in 2009 to $11.58 billion in 2010. The low levels of non-covered loan growth reflect relatively weak loan demand due to challenging business and economic conditions, along with the Company's continued progress in reducing the number of problem loans. The Company's prime lending rate for 2010 was 3.25 percent, unchanged from the prior year. The increase in net interest income was also due to strong growth in deposits, which were invested in securities available-for-sale and other liquid assets. Interest income on securities available-for-sale increased 10 percent to $136.7 million in 2010 from 2009. The increase was a result of a 43 percent increase in average securities available-for-sale in 2010, offset by lower yields.
Total interest expense was $99.9 million in 2010 and $85.0 million in 2009. Interest expense on deposits was $49.0 million in 2010 compared to $60.4 million in 2009, a 19 percent decrease, and was a
56
result of lower interest rates, partially offset by a 32 percent increase in average interest-bearing deposit balances from 2009 to 2010. Interest expense on borrowings increased to $50.8 million in 2010 compared to $24.6 million in 2009 and was primarily due to an increase in higher-cost borrowings resulting from the issuance of $180 million of subordinated debt in the third quarter of 2009 and $250 million of trust preferred securities in December 2009, which was redeemed in October 2010. The Company also issued $300 million of senior notes in September 2010.
The net settlement of interest-rate swaps increased interest income by $25.8 million for 2010 and $27.5 million for 2009.
Fully taxable-equivalent net interest income, which includes amounts to convert nontaxable income to fully taxable-equivalent amounts, increased to $740.7 million for 2010 compared with $635.2 million for 2009. Fully taxable-equivalent net interest and dividend income was $743.5 million and $637.9 million in 2010 and 2009, respectively. The average yield on earning assets for 2010 decreased to 4.38 percent, or by 5 basis points, compared with 4.43 percent for 2009. The average cost of interest-bearing liabilities decreased to 0.93 percent, or by 9 basis points, from 1.02 percent for 2009. The fully taxable net interest margin declined to 3.86 percent for 2010 from 3.91 percent for 2009. Of the total $105.6 million increase in fully taxable-equivalent net interest and dividend income, approximately $92.1 million was generated through covered loans and securities growth, offset by an increase in deposits (volume variance). The remaining $13.5 million increase was primarily attributable to higher yields from the covered loan portfolio and lower rates earned on remaining interest-earning assets and paid on interest-bearing deposits (rate variance). The higher yields on the covered loan portfolio were largely due to the acceleration of accretable yield on acquired loans as discussed above.
Average loans and leases, excluding covered loans, were $11.58 billion, a 6 percent decrease from average loans and leases of $12.30 billion for 2009. Average commercial loans and commercial real estate mortgage loans were 7 percent and 5 percent lower from 2009, respectively. Average residential mortgage loans, nearly all of which are made to the Company's private banking clients, increased 2 percent from 2009. Average construction loans decreased 40 percent from prior year. Average covered loans increased to $1.94 billion in 2010 from $66.5 million in 2009.
Average total securities, which include trading securities, were $4.68 billion in 2010, a 41 percent increase from 2009. The increase in average securities from prior year reflects the Company's strong deposit growth and relatively weak loan demand.
Average deposits increased 25 percent to $17.87 billion in 2010 from $14.35 billion for 2009. Average core deposits, which continued to provide substantial benefits to the Bank's cost of funds, increased 28 percent to $16.76 billion from $13.05 billion for 2009. Average core deposits, which do not include certificates of deposits of $100,000 or more, represented 94 percent of the total average deposit balance for the year, compared to 91 percent for the prior year. Average interest-bearing deposits increased 32 percent to $9.77 billion from $7.41 billion for 2009, and average noninterest-bearing deposits increased 17 percent to $8.10 billion from $6.95 billion in 2009.
Comparison of 2009 with 2008
Net interest income increased to $624.1 million for 2009 from $599.9 million for 2008. The increase in net interest income was primarily a result of lower funding costs in 2009. Interest expense on deposits was $60.4 million in 2009 compared to $123.0 million in 2008, a 51 percent decrease, and was a result of declining interest rates, partially offset by an 18 percent increase in average interest-bearing deposit balances from 2008 to 2009. Interest expense on borrowings decreased to $24.6 million in 2009 compared to $61.8 million in 2008 and was due to lower average balances on federal funds purchased and other short-term borrowings in 2009. In addition to lower funding costs, interest income on loans declined from $676.4 million in 2008 to $582.8 million in 2009 as a result of declining interest rates and low levels of loan growth, not including loans assumed from the acquisition of ICB on
57
December 18, 2009. The Company's average prime rate for 2009 decreased by 184 basis points to 3.25 percent compared with 2008. The net settlement of interest-rate swaps increased interest income by $27.5 million for 2009 and increased interest income by $12.8 million for 2008. The favorable impact of interest-rate swaps on net interest income compared with 2008 only partially offset the impact of lower rates on loan yields.
Fully taxable-equivalent net interest income, which includes amounts to convert nontaxable income to fully taxable-equivalent amounts, increased to $635.2 million for 2009 compared with $612.1 million for 2008. Fully taxable-equivalent net interest and dividend income was $637.9 million and $616.4 million in 2009 and 2008, respectively. The average yield on earning assets decreased to 4.43 percent, or by 103 basis points, for 2009 compared with 5.46 percent for 2008. The average cost of interest-bearing liabilities decreased to 1.02 percent, or by 117 basis points, from 2.19 percent for 2008. The fully taxable net interest margin declined to 3.91 percent for 2009 from 4.20 percent for 2008. Lower funding costs and growth in noninterest-bearing deposits reduced the impact of the 103 basis point decrease in the yield on earning assets compared with 2008. Of the total $21.5 million increase in fully taxable-equivalent net interest and dividend income, approximately $79.4 million of the increase was generated through loan and securities growth as well as a decline in borrowings (volume variance) and was partially offset by a $57.8 million decrease in net interest income due to declining rates earned on interest-earning assets and paid on interest-bearing liabilities (rate variance).
Average loans and leases, excluding covered loans, grew to $12.30 billion, a 2 percent increase from average loans and leases of $12.09 billion for 2008. Average commercial loans were virtually unchanged from 2008. Average commercial real estate mortgages grew 6 percent from prior year. Average residential mortgage loans, nearly all of which are made to the Company's private banking clients, increased 6 percent from 2008. Average construction loans, which decreased 22 percent from prior year, are a portfolio that is diverse in terms of geography and product type. It consists primarily of recourse loans to well-established real estate developers and is generally located in established urban markets. Most of these developers are clients with whom the Company has significant long-term relationships.
Average total securities, which include trading securities, were $3.33 billion in 2009, an increase of $0.93 billion, or 39 percent, from 2008.
Average deposits increased 21 percent to $14.35 billion in 2009 from $11.90 billion for 2008. Average core deposits increased 23 percent to $13.05 billion from $10.60 billion for 2008, and represented 91 percent of the total average deposit balance for the year, compared to 89 percent for the prior year. Average interest-bearing deposits increased 18 percent to $7.41 billion in 2009 from $6.27 billion for 2008, and average noninterest-bearing deposits increased 23 percent to $6.95 billion in 2009 from $5.63 billion in 2008.
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 for credit losses on loans and leases, excluding covered loans, is the expense recognized in the consolidated statements of income to adjust the allowance and the reserve for off-balance sheet commitments to the levels deemed appropriate by management, as determined through its application of the Company's allowance methodology procedures. See "Critical Accounting Policies—Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments."
The Company recorded expense of $103.0 million, $285.0 million and $127.0 million through the provision for credit losses on loans and leases, excluding covered loans, in 2010, 2009 and 2008, respectively. The provision reflects management's continuing assessment of the credit quality of the
58
Company's loan portfolio, which is affected by a broad range of economic factors. Additional factors affecting the provision include net loan charge-offs, nonaccrual loans, specific reserves, risk rating migration and changes in the portfolio size and composition. See "Balance Sheet Analysis—Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.
Nonaccrual loans, excluding covered loans, decreased to $190.9 million at December 31, 2010, from $388.7 million at December 31, 2009. The decrease in nonaccrual loans relates primarily to the real estate construction, commercial and commercial real estate mortgage loan portfolios. Total nonperforming assets, excluding covered assets, were $248.2 million, or 2.17 percent of total loans and leases and OREO, excluding covered assets, at December 31, 2010. This compares with $442.0 million, or 3.62 percent, at the end of 2009.
Net loan charge-offs were $130.3 million, or 1.13 percent of total loans and leases, excluding covered loans, for the year ended December 31, 2010, compared with net loan charge-offs of $225.9 million and $68.5 million for the years ended December 31, 2009 and 2008, respectively. The decrease in net charge-offs in 2010 compared to 2009 occurred primarily in the Company's commercial and real estate construction loan portfolios.
Covered loans represent loans acquired from the FDIC that are subject to a loss sharing agreement, and are primarily accounted for as acquired impaired loans under ASC 310-30. The provision for losses on covered loans is the expense recognized in the consolidated statements of income related primarily to impairment losses resulting from the Company's quarterly review and update of cash flow projections on its covered loan portfolio. In 2010, the Company recorded provision for losses on covered loans of $76.2 million. Approximately $0.4 million of the provision on covered loans related to a small population of acquired loans that are outside the scope of ASC 310-30. The loss on covered loans is mainly the result of lower projected interest cash flows due to the Company's revised default forecasts, though credit losses remain in line with previous expectations. Revisions to the default forecasts in 2010 are based on the results of management's review of the credit quality of the covered loans and the analysis of the loan performance data since the acquisition of the covered loans. The Company will continue updating cash flow projections on the covered loans on a quarterly basis. Due to the uncertainty in the future performance of the covered loans, additional impairments may be recognized in the future.
As of December 31, 2010, the allowance for loan losses for covered loans was $67.4 million. There was no allowance for loan losses for covered loans as of December 31, 2009. The allowance is included in Covered loans on the consolidated balance sheets.
Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. At December 31, 2010, there were no acquired impaired covered loans accounted for under ASC 310-30 that were on nonaccrual status. Of the population of covered loans that are accounted for outside the scope of ASC 310-30, the Company had $2.6 million of acquired covered loans that were on nonaccrual status and were considered to be impaired.
Credit quality will be influenced by underlying trends in the economic cycle, particularly in California and Nevada, and other factors which are beyond management's control. Consequently, no assurances can be given that the Company will not sustain loan or lease losses, in any particular period, that are sizable in relation to the allowance for loan and lease losses.
59
Noninterest Income
Noninterest income for the year totaled $361.4 million, an increase of 24 percent, from $292.2 million in 2009. Noninterest income increased 9 percent, between 2009 and 2008. Noninterest income represented 33 percent of total revenues in 2010, compared with 32 percent and 31 percent in 2009 and 2008, respectively.
A breakdown of noninterest income by category is provided in the table below:
Analysis of Changes in Noninterest Income
| |
|
Increase (Decrease) |
|
Increase (Decrease) |
|
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) (1)
|
2010 | Amount | % | 2009 | Amount | % | 2008 | ||||||||||||||||
Trust and investment fees |
$ | 134,727 | $ | 17,665 | 15.1 | $ | 117,062 | $ | (15,152 | ) | (11.5 | ) | $ | 132,214 | |||||||||
Brokerage and mutual fund fees |
23,742 | (4,190 | ) | (15.0 | ) | 27,932 | (45,514 | ) | (62.0 | ) | 73,446 | ||||||||||||
Total wealth management fees |
158,469 | 13,475 | 9.3 | 144,994 | (60,666 | ) | (29.5 | ) | 205,660 | ||||||||||||||
Cash management and deposit transaction fees |
47,593 | (4,076 | ) | (7.9 | ) | 51,669 | 3,362 | 7.0 | 48,307 | ||||||||||||||
International services fees |
31,297 | 290 | 0.9 | 31,007 | (1,442 | ) | (4.4 | ) | 32,449 | ||||||||||||||
Bank-owned life insurance |
2,736 | (317 | ) | (10.4 | ) | 3,053 | 301 | 10.9 | 2,752 | ||||||||||||||
FDIC loss sharing income, net |
63,335 | 62,612 | 8,660.0 | 723 | 723 | NM | — | ||||||||||||||||
Other noninterest income |
29,407 | 5,979 | 25.5 | 23,428 | (5,532 | ) | (19.1 | ) | 28,960 | ||||||||||||||
Total noninterest income before gain (loss) |
332,837 | 77,963 | 30.6 | 254,874 | (63,254 | ) | (19.9 | ) | 318,128 | ||||||||||||||
Gain (loss) on disposal of assets |
2,837 | 1,561 | 122.3 | 1,276 | 1,629 | 461.5 | (353 | ) | |||||||||||||||
Gain on acquisition |
27,339 | (10,867 | ) | (28.4 | ) | 38,206 | 38,206 | NM | — | ||||||||||||||
Gain (loss) on sale of securities |
393 | (13,893 | ) | (97.2 | ) | 14,286 | 15,797 | 1,045.5 | (1,511 | ) | |||||||||||||
Impairment loss on securities |
(2,031 | ) | 14,414 | 87.6 | (16,445 | ) | 32,835 | 66.6 | (49,280 | ) | |||||||||||||
Total noninterest income |
$ | 361,375 | $ | 69,178 | 23.7 | $ | 292,197 | $ | 25,213 | 9.4 | $ | 266,984 | |||||||||||
Wealth Management
The Company provides various trust, investment, brokerage and wealth advisory services to its individual and business clients. The Company delivers these services through the Bank's wealth management division as well as through its wealth management affiliates. Trust services are provided only by the Bank. Trust and investment fee revenue includes fees from trust, investment and asset management, and other wealth advisory services. A portion of these fees is based on the market value of client assets managed, advised, administered or held in custody. The remaining portion of these fees is based on the specific service provided, such as estate and financial planning services, or may be fixed fees. For those fees based on market valuations, the mix of assets held in client accounts, as well as the type of managed account, impacts how closely changes in trust and investment fee income correlate with changes in the financial markets. Changes in market valuations are reflected in fee income primarily on a trailing-quarter basis. Trust and investment fees were $134.7 million, an increase of 15 percent from $117.1 million for 2009. Money market mutual fund and brokerage fees were $23.7 million, down 15 percent from $27.9 million for 2009, due to lower balances, historically low short-term interest rates and reduced spreads on brokerage transactions.
Assets under management ("AUM") include assets for which the Company makes investment decisions on behalf of its clients and assets under advisement for which the Company receives advisory fees from its clients. Assets under administration ("AUA") are assets the Company holds in a fiduciary
60
capacity or for which it provides non-advisory services. The table below provides a summary of AUM and AUA:
| |
December 31, | |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
% Change |
|||||||||||
(in millions)
|
2010 | 2009 | ||||||||||
Assets Under Management |
$ | 36,754 | $ | 35,239 | 4 | |||||||
Assets Under Administration |
||||||||||||
Brokerage |
5,929 | 4,733 | 25 | |||||||||
Custody and other fiduciary |
15,788 | 15,147 | 4 | |||||||||
Subtotal |
21,717 | 19,880 | 9 | |||||||||
Total assets under management or administration (1) |
$ | 58,471 | $ | 55,119 | 6 | |||||||
AUM increased 4 percent and assets under management or administration increased 6 percent from December 31, 2009. The increase in AUM was due to higher equity market values as well as new custodial business.
A distribution of AUM by type of investment is provided in the following table:
| |
% of AUM | ||||||
|---|---|---|---|---|---|---|---|
Investment (1)
|
December 31, 2010 |
December 31, 2009 |
|||||
Equities |
40 | % | 36 | % | |||
U.S. fixed income |
25 | 27 | |||||
Cash and cash equivalents |
19 | 21 | |||||
Other (2) |
16 | 16 | |||||
|
100 | % | 100 | % | |||
Other Noninterest Income
Cash management and deposit transaction fees for 2010 were $47.6 million, down 8 percent from 2009, compared with a 7 percent increase in 2009 from 2008. The decreases were due to higher deposit balances, the low interest rate environment, and lower gross charges.
International services income for 2010 was $31.3 million compared to $31.0 million in 2009 and $32.4 million in 2008. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection fees and gains and losses associated with fluctuations in foreign currency exchange rates. There was a slight improvement in income from 2009 to 2010 compared to the decrease in 2009 from 2008, which reflected the impact of the slowdown in the global economy on the demand for services during that period of time.
Income and expense from FDIC loss-sharing agreements is reflected in FDIC loss sharing income, net. This balance includes discount accretion and gain on the FDIC indemnification asset and expense from the reduction of the FDIC indemnification asset upon the removal of loans, OREO and unfunded
61
loan commitments. Loans are removed when they have been fully paid off, fully charged off, or transferred to OREO. Net FDIC loss sharing income also includes income recognized on the portion of expenses related to covered assets that are reimbursable by the FDIC, net of income due to the FDIC, as well as the income statement effects of other loss-share transactions. The following table provides the components of FDIC loss sharing income, net for the years ended December 31, 2010 and 2009:
| |
For the year ended December 31, |
|||||||
|---|---|---|---|---|---|---|---|---|
(in thousands)
|
2010 | 2009 | ||||||
Indemnification asset accretion |
$ | 9,185 | $ | 723 | ||||
Gain on indemnification asset |
52,061 | — | ||||||
Removal of indemnification asset |
(29,543 | ) | — | |||||
Net FDIC reimbursement for OREO and loan expenses |
41,210 | — | ||||||
Net reimbursement to FDIC for gains and losses on OREO sales |
(3,549 | ) | — | |||||
Increase in FDIC clawback liability |
(3,264 | ) | — | |||||
Other |
(2,765 | ) | — | |||||
Total FDIC loss sharing income, net |
$ | 63,335 | $ | 723 | ||||
Net FDIC loss sharing income was $63.3 million for 2010, compared with $0.7 million for 2009. The increase in FDIC loss sharing income from 2009 to 2010 was a result of a partial year of activity relating to the ICB acquisition in December 2009 and the FDIC-assisted acquisitions of FPB and SWB in May 2010. In 2010, the Company recognized $52.1 million of income on the FDIC indemnification asset as a result of revisions of the Company's projected cash flows forecast on its covered loans.
Net gain on disposal of assets was $2.8 million in 2010, compared to $1.3 million in 2009. Net loss on sale of other assets was $0.4 million in 2008. The net gain in 2010 is primarily attributable to gains recognized on the sale of OREO, partially offset by a $5.0 million charge for the write-off of a Community Reinvestment Act-related receivable.
Other income was $29.4 million in 2010 compared to $23.4 million in 2009 and $29.0 million in 2008. Other income for 2010 includes $21.2 million of net gains recorded on the transfer of covered loans to OREO, as well as additional income from the amortization of the fair value on unfunded loan commitments acquired in the FDIC-assisted acquisitions. The increase in other income from 2009 was also the result of improved market valuations on trading securities and lower impairment losses on private equity investments. The increases in other income was partially offset by total charges of $19.1 million recognized on the early extinguishment of debt and a $5.9 million loss related to one of the Company's affiliated investment advisors.
The Company recognized $27.3 million of gain on the acquisitions of FPB and SWB in 2010, compared to a $38.2 million gain on the acquisition of ICB in 2009.
The Company recognized $0.4 million of net gains on the sale of securities available-for-sale in 2010, compared to $14.3 million of net gains and $1.5 million of net losses on the sale of securities available-for-sale in 2009 and 2008, respectively.
Impairment losses on securities available-for-sale recognized in earnings were $2.0 million in 2010, a decrease from $16.4 million in 2009 and $49.3 million in 2008. See "Balance Sheet Analysis—Securities" for further discussion of impairment loss on securities available-for-sale.
Noninterest Expense
Noninterest expense was $751.3 million in 2010, an increase of 29 percent, from $581.1 million in 2009. Noninterest expense decreased 1 percent, in 2009 over 2008. The increase from 2009 to 2010 was
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due largely to the acquisitions of ICB in December 2009 and FPB and SWB in May 2010. It also reflected higher compensation costs, legal and professional fees, and OREO expenses. The decrease from 2008 to 2009 was due primarily to lower personnel costs, reduced incentive compensation and a salary freeze, offset by higher FDIC costs, legal fees and OREO expense.
The following table provides a summary of noninterest expense by category:
Analysis of Changes in Noninterest Expense
| |
|
Increase (Decrease) |
|
Increase (Decrease) |
|
|||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) (1)
|
2010 | Amount | % | 2009 | Amount | % | 2008 | |||||||||||||||||
Salaries and employee benefits |
$ | 409,823 | $ | 89,547 | 28.0 | $ | 320,276 | $ | (34,237 | ) | (9.7 | ) | $ | 354,513 | ||||||||||
All Other: |
||||||||||||||||||||||||
Net occupancy of premises |
55,567 | 5,144 | 10.2 | 50,423 | 909 | 1.8 | 49,514 | |||||||||||||||||
Legal and professional fees |
47,641 | 10,631 | 28.7 | 37,010 | 1,666 | 4.7 | 35,344 | |||||||||||||||||
Information services |
30,824 | 2,989 | 10.7 | 27,835 | 866 | 3.2 | 26,969 | |||||||||||||||||
Depreciation and amortization |
25,845 | (374 | ) | (1.4 | ) | 26,219 | 4,018 | 18.1 | 22,201 | |||||||||||||||
Marketing and advertising |
23,112 | 2,986 | 14.8 | 20,126 | (2,771 | ) | (12.1 | ) | 22,897 | |||||||||||||||
Office services and equipment |
16,381 | 1,386 | 9.2 | 14,995 | (553 | ) | (3.6 | ) | 15,548 | |||||||||||||||
Amortization of intangibles |
9,036 | 1,679 | 22.8 | 7,357 | (10,381 | ) | (58.5 | ) | 17,738 | |||||||||||||||
Other real estate owned |
63,111 | 54,186 | 607.1 | 8,925 | 8,356 | 1,468.5 | 569 | |||||||||||||||||
FDIC assessments |
29,055 | 1,002 | 3.6 | 28,053 | 21,811 | 349.4 | 6,242 | |||||||||||||||||
Other operating |
40,935 | 1,067 | 2.7 | 39,868 | 3,640 | 10.0 | 36,228 | |||||||||||||||||
Total all other |
341,507 | 80,696 | 30.9 | 260,811 | 27,561 | 11.8 | 233,250 | |||||||||||||||||
Total noninterest expense |
$ | 751,330 | $ | 170,243 | 29.3 | $ | 581,087 | $ | (6,676 | ) | (1.1 | ) | $ | 587,763 | ||||||||||
Salaries and employee benefits expense for 2010 increased to $409.8 million, or 28 percent, from $320.3 million in 2009, primarily due to increased personnel costs from the three FDIC-assisted acquisitions as well as increases in bonuses and incentive compensation. Salaries and employee benefits expense decreased 10 percent in 2009 from 2008 largely due to a reduction in incentive compensation and personnel costs, along with a salary freeze. Full-time equivalent staff increased to 3,178 at December 31, 2010 from 3,017 at December 31, 2009 and 2,989 at December 31, 2008, due primarily to acquisitions.
Salaries and employee benefits expense for 2010 includes $16.7 million related to share-based compensation plans compared with $14.4 million for 2009 and $14.7 million for 2008. At December 31, 2010, there was $13.0 million of unrecognized compensation cost related to unvested stock options granted under the Company's plans. That cost is expected to be recognized over a weighted average period of 2.3 years. At December 31, 2010, there was $19.0 million of unrecognized compensation cost related to restricted shares granted under the Company's plans. That cost is expected to be recognized over a weighted average period of 3.3 years.
The remaining noninterest expense categories increased $80.7 million or 31 percent, between 2009 and 2010. The increase is primarily attributable to increased expenses from the Company's three FDIC-assisted acquisitions. The Company recognized a $10.6 million, or 28 percent, increase in legal and professional fees, and a $54.2 million or 607 percent, increase in OREO expense. The majority of the increase in OREO expense was attributable to FDIC-covered OREO. Of the qualified covered asset-related expenses, 80 percent is reimbursed by the FDIC and reflected in FDIC loss sharing income, net in the noninterest income section of the consolidated statements of income.
63
The following table provides OREO expense for non-covered OREO and covered OREO:
| |
For the year ended December 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
2010 | 2009 | 2008 | |||||||||
Non-covered OREO expense |
||||||||||||
Valuation write-downs |
$ | 18,857 | $ | 4,385 | $ | — | ||||||
Holding costs and foreclosure expense |
$ | 2,441 | 4,428 | 569 | ||||||||
Total non-covered OREO expense |
$ | 21,298 | $ | 8,813 | $ | 569 | ||||||
Covered OREO expense |
||||||||||||
Valuation write-downs |
$ | 24,809 | $ | — | $ | — | ||||||
Holding costs and foreclosure expense |
$ | 17,004 | 112 | — | ||||||||
Total covered OREO expense |
$ | 41,813 | $ | 112 | $ | — | ||||||
Total OREO expense |
$ | 63,111 | $ | 8,925 | $ | 569 | ||||||
The remaining noninterest expense categories for 2009 increased $27.6 million or 12 percent, from 2008. The increase was primarily attributable to higher FDIC costs, which grew $21.8 million from 2008, due to higher assessment rates and higher deposit levels. Total FDIC costs for 2009 also included the Company's $8.0 million share of a special assessment levied against all FDIC-insured deposits. Other real estate owned expenses were $8.9 million in 2009 compared to $0.6 million in prior year due to increased OREO activity. Other operating expenses grew 10 percent from prior year.
Net income attributable to noncontrolling interest (formerly minority interest expense), representing noncontrolling ownership interests in the net income of affiliates, increased to $3.9 million in 2010, from $0.7 million in 2009 and $5.4 million in 2008. The increase in 2010 compared to 2009 was primarily due to a general return to profitability for the Company's majority-owned wealth management affiliates. The decrease in 2009 compared to 2008 was primarily due to declining income of the wealth-management affiliates.
Segment Operations
The Company's reportable segments are Commercial and Private Banking, Wealth Management and Other. For a more complete description of the segments, including summary financial information, see Note 22 of the Notes to Consolidated Financial Statements.
Commercial and Private Banking
Comparison of 2010 to 2009
Net income for the Commercial and Private Banking segment increased to $92.0 million for 2010 from $38.1 million for 2009. The increase in net income compared with the prior year was due to growth in net interest income, a lower provision for credit losses and higher noninterest income. Increases in revenue were offset in part by increased expenses associated with the FDIC-assisted acquisitions and increased OREO expense. Net interest income for 2010 was $700.6 million, an increase of 12 percent from $623.0 million for 2009. The increase in net interest income was primarily due to covered loans acquired in the three FDIC-assisted acquisitions that occurred in December 2009 and May 2010. In addition, net interest income for the current year includes $20.6 million of interest income from the accelerated accretable yield recognition on FDIC-covered loans that were paid off or fully charged off during the year. Average loans, excluding covered loans, decreased to $11.53 billion, or by 6 percent, for 2010 compared with the year earlier. The decrease in average loans for the year reflects lower loan demand due to challenging business and economic conditions, along with a
64
reduction in the amount of problem loans. Average covered loans were $1.94 billion for 2010 and $66.5 million for 2009. Average deposits increased by 31 percent to $17.29 billion for 2010 from $13.22 billion for 2009. The growth in average deposits compared with the prior year was driven by the FDIC-assisted acquisitions, new clients and growth in liquidity of existing clients.
Provision for credit losses on loans and leases, excluding covered loans, decreased to $103.0 million for 2010 from $285.0 million for 2009. Provision for losses on covered loans was $76.2 million for 2010. There was no provision recorded on covered loans in 2009. Refer to page 58 for further discussion of the provision.
Noninterest income increased to $277.2 million for 2010 from $203.9 million for 2009, a 36 percent increase. The increase is primarily due to higher FDIC loss sharing income related to the acquired banks which increased to $63.3 million in 2010 from $0.7 million in 2009. Noninterest expense, including depreciation and amortization, increased to $640.0 million, or by 34 percent, for 2010 from $476.2 million for the year earlier. Noninterest expense for the current year increased as a result of the three bank acquisitions and higher OREO expense, a large portion of which is reimbursable by the FDIC. FDIC reimbursement for OREO expense is recognized in noninterest income.
Comparison of 2009 to 2008
Net income for the Commercial and Private Banking segment decreased by $87.6 million, or 70 percent, to $38.1 million for 2009 from $125.8 million for 2008. The decrease in net income for 2009 compared with the prior year was the result of a higher provision for credit losses and lower noninterest income. Net interest income decreased to $623.0 million for 2009 from $628.5 million for 2008. The favorable impact of loan growth on net interest income in 2009 was offset by a lower net interest margin which was impacted by historically low interest rates. Average loan balances, excluding covered loans, increased to $12.26 billion for 2009 from $12.01 billion for 2008. Average deposits grew by 22 percent to $13.22 billion for 2009 from $10.87 billion for the previous year. Noninterest income increased 9 percent to $203.9 million for 2009 from $187.6 million for 2008. Decreases in trust and investment fees and brokerage and mutual fund fees from the prior year were offset by a $38.2 million gain on a bank acquisition. Noninterest expense, including depreciation and amortization, was $476.2 million for 2009 and $472.3 million for 2008. Reductions in personnel costs were offset by increases in FDIC insurance premiums and OREO expense in 2009.
Wealth Management
Comparison of 2010 to 2009
The Wealth Management segment had net income attributable to City National Corporation ("CNC") of $0.9 million for 2010, a decrease from $2.8 million for 2009. Increases in fee income for the current year resulting from improving conditions in the financial markets were partially offset by increases in noninterest expense. Refer to Noninterest Income—Wealth Management for a discussion of the factors impacting fee income for the Wealth Management segment. Noninterest expense, including depreciation and amortization, increased by 7 percent to $154.1 million for 2010 from $144.5 million for the year earlier. Noninterest expense for 2010 includes a $5.9 million impairment charge related to an affiliated investment advisor.
Comparison of 2009 to 2008
The Wealth Management segment had net income attributable to CNC of $2.8 million for 2009, a decrease of $26.5 million, or 90 percent, from $29.4 million for 2008. The decrease in net income compared with the previous year is a result of fee waivers on the money market funds due to the low interest rate environment, low equity market valuations, lower trading activity and narrower spreads at the broker dealer. Additionally, noninterest income for 2009 includes a $2.1 million one-time charge
65
related to the deconsolidation of an asset management affiliate. Noninterest expense, including depreciation and amortization, declined by 10 percent to $144.5 million for 2009 from $161.3 million for 2008. The decrease in noninterest expense compared with the year earlier is due to lower compensation costs that reflect lower incentive levels and staff count reductions, and noninterest expense for 2008 includes a $9.4 million impairment write down of a contract intangible. Decreases in noninterest expense for 2009 were partially offset by expenses related to Lee Munder Capital Group, an institutional asset management firm that was acquired in July 2009.
Other
Comparison of 2010 to 2009
Net income attributable to CNC for the Other segment increased to $38.3 million for 2010, from $10.3 million for 2009. Net interest income increased to $28.0 million for 2010 from $1.3 million of net interest expense for 2009. Net interest income for the current year was favorably impacted by the change in the earning-asset mix which is largely due to the acquired loan portfolio. Loans receive a higher funding charge from the Asset Liability Funding Center ("Funding Center") than other types of earning assets which results in higher revenue in the Funding Center. The Funding Center has also experienced a decrease in net funding costs due to the low interest rate environment. Noninterest income for the current year included a $12.3 million charge for the early retirement of debt and a $6.8 million charge for the redemption of trust preferred securities. Noninterest income for 2010 also reflects an increase in the elimination of intersegment revenues (recorded in Other segment) compared with 2009 due to higher trust and investment fee income. Impairment losses on securities available-for-sale decreased to $2.0 million in 2010 from $16.4 million a year earlier.
Comparison of 2009 to 2008
Net income attributable to CNC for the Other segment was $10.4 million for 2009 compared with a net loss of $50.2 million for 2008. Net interest expense was $1.3 million for 2009 compared with $31.9 million for the prior year. Net interest expense was favorably impacted by lower net funding costs in the Asset Liability Funding Center due to the decline in interest rates in 2009 and growth in core deposits. Noninterest income for 2009 reflects a significant reduction in the elimination of intersegment revenues compared with 2008 resulting from declines in trust, investment and brokerage fees. .Additionally, net securities losses, which include securities sales net of impairment charges, decreased to $2.2 million for 2009 from $50.8 million for 2008.
Income Taxes
The Company recognized income tax expense of $26.1 million in 2010, compared to a tax benefit of $1.9 million in 2009 and tax expense of $41.8 million in 2008. The effective tax rate for 2010 was equal to 16.2 percent of pretax income, compared to a tax benefit of 3.8 percent of pretax income for 2009 and effective tax rate of 27.5 percent of pretax income for 2008. The tax benefit in 2009 was attributable to lower income for the year and permanent tax differences that do not vary directly with the level of income and therefore have a larger relative impact on the effective tax rate when earnings are lower. The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including tax benefits from investments in affordable housing partnerships, tax-exempt income on municipal bonds and bank-owned life insurance and other adjustments.
The Company had net deferred tax assets of $105.4 million and $164.0 million as of December 31, 2010 and 2009, respectively.
In May 2010, the California Franchise Tax Board closed its audits for the years 1998 through 2004 and settled litigation related to various refund claims and other pending matters under review. Under the terms of the settlement, the Company received $29 million in tax credits, which added
66
approximately $19 million to the Company's net income in 2010. During the year, the Company also recorded an adjustment to correct certain deferred tax accounts related to revisions of book and tax basis differences established in previous years related to its wealth management affiliates, low income housing investments and fixed assets. The net effect of the adjustment was a reduction of the deferred tax asset and a corresponding tax expense of $4.3 million.
Excluding the $19 million tax credit and $4.3 million expense relating to revisions to correct certain deferred tax accounts, the effective tax rate was 25.3 percent for 2010. Management believes that this non-GAAP financial measure enhances the comparability of the financial results with prior periods as well as to highlight the effects of the above items in 2010. The Company believes that investors may find it useful to see these non-GAAP financial measures to analyze the Company's effective tax rate without the impact of these items.
The Company and its subsidiaries file a consolidated federal income tax return and also file income tax returns in various state jurisdictions. The Internal Revenue Service ("IRS") completed its audits of the Company for the tax year 2009 resulting in no material financial statement impact. The Company is currently being audited by the IRS for 2010. The Company is also currently under audit with the California Franchise Tax Board for the tax years 2005 to 2007. The potential financial statement impact, if any, resulting from the completion of these audits is expected to be minimal.
From time to time, there may be differences in opinions with respect to the tax treatment of certain transactions. If a tax position which was previously recognized on the consolidated financial statements is no longer "more likely than not" to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. The Company did not have any tax positions for which previously recognized benefits were derecognized during the year ended December 31, 2010.
See Note 17 of the Notes to Consolidated Financial Statements for further discussion of income taxes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 fluctuate 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 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 annually reviews and approves the limits within which the risks must be managed. The Asset/Liability Management Committee ("ALCO"), which is comprised of senior management and key risk management individuals, sets risk management guidelines within the broader limits approved by the Board, monitors the risks and periodically reports results to the Board.
Risk Management Framework
Risk management oversight and governance is provided through the Board of Directors' Audit and Risk Committee and facilitated through multiple management committees. Consisting of four outside directors, the Audit and Risk Committee monitors the Company's overall aggregate risk profile as established by the Board of Directors including all credit, market, liquidity, operational and regulatory risk management activities. The Committee reviews and approves the activities of key management governance committees that regularly evaluate risks and internal controls for the Company. These management committees include the Asset/Liability Management Committee, the Credit Policy
67
Committee, the Senior Operations Risk Committee and the Risk Council, among others. The Risk Council reviews the development, implementation and maintenance of risk management processes from a Company-wide perspective, and assesses the adequacy and effectiveness of the Company's risk management policies and the Enterprise Risk Management program. Other management committees, with representatives from the Company's various lines of business and affiliates, address and monitor specific risk types, including the Compliance Committee, the Wire Risk Committee, and the Information Technology Steering Committee, and report periodically to the key management committees. The Senior Risk Management Officer and the Internal Audit and Credit Risk Review units provide the Audit and Risk Committee with independent assessments of the Company's internal control and related systems and processes.
Liquidity Risk
Liquidity risk results from the mismatching of asset and liability cash flows. Funds for this purpose can be obtained in cash markets, by borrowing, or by selling certain assets. The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets. Liquidity risk management is an important element in the Company's ALCO process, and is managed within limits approved by the Board of Directors and guidelines set by management. Attention is also paid to potential outflows resulting from disruptions in the financial markets or to unexpected credit events. These factors are incorporated into the Company's contingency funding analysis, and provide the basis for the identification of primary and secondary liquidity reserves.
In recent years, the Company's core deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 88 percent and 86 percent of funding for average total assets in 2010 and 2009, respectively. Strong core deposits are indicative of the strength of the Company's franchise in its chosen markets and reflect the confidence that clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining significant on-balance sheet liquidity reserves.
The following table provides information on other short-term funding sources:
| |
2010 | 2009 | 2008 | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
Balances at Year-end |
Average Balance |
Average Rate |
Balances at Year-end |
Average Balance |
Average Rate |
Balances at Year-end |
Average Balance |
Average Rate |
||||||||||||||||||||
Federal funds purchased |
$ | — | $ | 29,131 | 0.10 | % | $ | 426,779 | $ | 214,672 | 0.16 | % | $ | 708,157 | $ | 896,676 | 2.18 | % | |||||||||||
Securities sold under repurchase agreements |
— | 134,178 | 3.92 | 200,000 | 200,000 | 3.98 | 200,000 | 202,055 | 3.97 | ||||||||||||||||||||
Other short-term borrowings |
620 | 711 | 0.08 | 690 | 52,298 | 0.63 | 124,500 | 667,457 | 2.69 | ||||||||||||||||||||
Total |
$ | 620 | $ | 164,020 | 3.23 | % | $ | 627,469 | $ | 466,970 | 1.85 | % | $ | 1,032,657 | $ | 1,766,188 | 2.58 | % | |||||||||||
Maximum month-end balance |
|||||||||||||||||||||||||||||
Federal funds purchased |
$ | 99,394 | $ | 689,202 | $ | 1,361,678 | |||||||||||||||||||||||
Securities sold under repurchase agreements |
200,000 | ||||||||||||||||||||||||||||