Use these links to rapidly review the document
TABLE OF CONTENTS
PART IV
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||
ý |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 2013 |
||
OR |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
||
Commission file number 1-10521
CITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State of incorporation) |
95-2568550 (I.R.S. Employer Identification No.) |
|
City National Plaza 555 South Flower Street, Los Angeles, California, 90071 (Address of principal executive offices) (Zip Code) |
||
Registrant's telephone number, including area code (213) 673-7700 |
||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which registered |
|
|---|---|---|
| Common Stock, $1.00 par value | New York Stock Exchange | |
Depositary Shares, each representing a 1/40th interest in a share of 5.50% Non-Cumulative Perpetual Preferred Stock, Series C |
New York Stock Exchange |
|
Depositary Shares, each representing a 1/40th interest in a share of 6.750% Fixed Rate/Floating Rate Non-Cumulative Preferred Stock Series D |
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 28, 2013, the aggregate market value of the registrant's common stock ("Common Stock") held by non-affiliates of the registrant was approximately $2,924,914,275 based on the June 28, 2013 closing sale price of Common Stock of $63.37 per share as reported on the New York Stock Exchange.
As of January 31, 2014, there were 54,681,723 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 2014 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.
1
Overview
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, investment 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 operates through 77 offices, including 16 full-service regional centers, in Southern California, the San Francisco Bay area, Nevada, New York City, Nashville, Tennessee and Atlanta, Georgia. As of December 31, 2013, the Company had five consolidated asset management affiliates in which it held a majority ownership interest. The Company also had one unconsolidated subsidiary, Business Bancorp Capital Trust I. At December 31, 2013, the Company had consolidated total assets of $29.72 billion, total loan balances of $17.89 billion, total deposits of $25.68 billion, and assets under management or administration of $64.69 billion. The Company provides comprehensive financial solutions to affluent individuals, entrepreneurs, professionals, their businesses and their families. The Company provides a premier banking and financial experience through an uncommon dedication to extraordinary service, proactive advice and complete financial solutions. At December 31, 2013, the Company had 3,566 full-time equivalent employees.
Additional information regarding our business and our subsidiaries, as well as regarding our acquisitions, is included in the information set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3, Business Combinations, of the Notes to Consolidated Financial Statements, elsewhere in this report, and is incorporated herein by reference.
Our website is www.cnb.com and the investor relations section of our website may be reached through https://www.cnb.com/investor-relations/investor-kit.asp. We make available free of charge, on or through the investor relations links on our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as any amendment to those reports, and proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Information about our Board of Directors (the "Board") and its committees and our corporate governance policies and practices is available on the Corporate Governance section of the Investor Relations page of our web site. Our SEC filings are also available through the SEC's website at www.sec.gov.
Business Segments
The Company has three reportable segments, Commercial and Private Banking, Wealth Management and Other. The Commercial and Private Banking segment provides banking products and services, including commercial and mortgage lending, lines of credit, equipment lease financing, deposits, cash management services, international trade finance and letters of credit. 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 23 of the Notes to Consolidated Financial Statements as well as in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this report.
2
The Company's principal client base consists of small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. The Company serves its clients through relationship banking. The Company'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 Company 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:
The Company also advises and makes available mutual funds under the name of City National Rochdale Funds. The Bank's wealth management division and the Corporation's asset management subsidiaries 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.
Competition
There is significant competition among commercial banks and other financial institutions in the Company's market areas. California, New York, Nevada, Tennessee and Georgia are highly competitive environments for banks and other financial organizations that provide private and business banking and wealth management services. The Company 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 specialized 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.
3
Economic Conditions and Government Policies
The Company's business, earnings and profitability are highly sensitive to general economic, political and industry conditions. These conditions include the yield curve, inflation, available money supply, the value of the United States dollar as compared to foreign currencies, fluctuations in both debt and equity markets, energy and commodity prices and the strength of the United States economy and the local economies in which we conduct business. While the United States is showing signs of recovery from the recent economic crisis, the pace of recovery is slow and national unemployment levels remain elevated. The resulting economic pressure on consumers and uncertainty regarding continuing economic improvement may result in further changes in consumer spending, borrowing and savings habits which could adversely affect our business, financial condition and results of operations. In addition, the level of United States debt may have a destabilizing effect on financial markets. Despite improved financial market conditions, Europe, Asia and other global economies continue to face economic stresses, including significant debt levels, that could impact the capital markets generally, including the trading price of securities, such as our common stock, that do not have substantial direct exposure to foreign economies. A political, economic or financial disruption in the United States or other countries or regions could adversely impact our business by increasing volatility in financial markets generally.
Our financial performance is highly dependent on the business environment in the States of California and New York, as well as on the economic conditions in the United States generally. The economic conditions in these markets can impact the demand for credit and other banking products and the ability of borrowers to pay interest on and repay principal on outstanding loans and the value of collateral securing those loans. Our business can be negatively affected by changes in the financial performance and/or condition of our borrowers, including through decreased loan utilization rates, increased delinquencies and defaults and changes to our customers' ability to meet certain credit obligations. While real estate values have improved, declines in real estate and housing values could have a negative impact on the value of collateral securing loans and could lead to delinquencies and credit quality issues in our residential mortgage and home-equity loan portfolios which could have a negative effect on our results of operations. In addition, negative economic conditions coupled with elevated unemployment and reduced consumer spending could result in higher credit losses in our commercial loan, commercial real estate loan and commercial real estate construction loan portfolios.
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. The Company's business and earnings are further 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 United States 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. For a further discussion of risks related to the Company's business, see Item 1A, Risk Factors, included elsewhere in this report.
4
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. These regulations are intended primarily for the protection of depositors, borrowers, consumers, the deposit insurance fund, and the banking system as a whole. 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 SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, 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 of its operations by the Office of the Comptroller of the Currency ("OCC"), its prudential regulator, the Consumer Financial Protection Bureau ("CFPB"), its primary regulator for consumer compliance regulations, and the Federal Depository Insurance Corporation ("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, by the SEC under the Investment Advisors Act of 1940. The Company's registered broker-dealers are regulated by the SEC, the Financial Industry Regulatory Authority ("FINRA"), the Commodities Futures Trading Commission ("CFTC") and various state securities regulators.
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
5
management rating of 1 or 2 (on a scale of 5, with 1 being the highest rating) in its most recent regulatory examination. In addition, the subsidiary depository institution must have received a rating of at least "satisfactory" in its most recent examination under the CRA. See "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"), bank holding companies, as well as their depository institution subsidiaries, are also 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 or any depository institution controlled by a financial holding company that do not continue to meet the applicable capital or management standards, may be subject to corrective capital or managerial standards, may be prohibited from undertaking new activities or acquisitions that are financial in nature, or may lose the ability to continue those activities that are permissible for financial 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 CRA, fair housing laws and the effectiveness of the subject organizations in combating money laundering activities. Under the Dodd-Frank Act, bank regulatory authorities also review the potential risks of the transaction to the stability of the United States 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 satisfy 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 further codifies the "source of strength doctrine."
6
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.
The Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, has had, and will continue to have, a broad impact on the financial services industry, imposing significant regulatory and compliance changes, increased capital, leverage and liquidity requirements and numerous other provisions designed to improve supervision and oversight of the financial services sector. The Dodd-Frank Act requires the U.S. Department of the Treasury, the Financial Stability Oversight Council ("FSOC"), the SEC, the CFTC, the Federal Reserve, the OCC, the CFPB and the FDIC to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. These federal agencies have engaged in significant rulemaking but a substantial amount of rulemaking remains to be completed. 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 significantly restructures the financial services regulatory scheme, including through the expansion of the scope of oversight responsibility of certain federal agencies and through the creation of new oversight bodies. For example, the Dodd-Frank Act established the 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 and non-bank financial institutions, including the authority to prohibit "unfair, deceptive or abusive acts and practices." The CFPB has examination and enforcement authority over all banking and non-banking financial organizations with more than $10 billion in assets. The Dodd-Frank Act also created the FSOC which is charged with identifying risks to financial stability that could arise from the material financial distress or failure, or ongoing activities, of nonbank financial companies and which could recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity. 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 state and federal consumer protection laws.
7
Other changes resulting from the Dodd-Frank Act include:
8
those deposits may generate. Changes regarding remittance transfers to locations outside the United States may increase the costs associated with these services and discourage the provision of these services.
The Dodd-Frank Act impacts, among other things, the way financial services companies do business, the cost of doing business and capital standards applicable to financial services companies. The increased regulatory burden on the financial services industry, 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 yet 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 services industry more generally.
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, performing comprehensive risk assessments, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive independent 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 additional 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 "United States persons" engaging in financial transactions relating to making
9
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 country have an interest, by prohibiting transfers of property subject to United States jurisdiction (including property in the possession or control of United States 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 and result in material fines and sanctions.
Fair Lending Laws
The enforcement of Fair Lending laws has been an increasing area of focus for regulators, including the OCC and CFPB. Fair Lending laws related to extensions of credit are included in The Equal Credit Opportunity Act of 1974 and the Fair Housing Act of 1968 which prohibit discrimination in residential real estate and credit transactions based on race, color, national origin, sex, marital status, familial status, religion, age, physical ability, the fact that all or part of the applicant's income derives from a public assistance program or the fact that the applicant has exercised any right under the Consumer Credit Protection Act. The Servicemembers Civil Relief Act is also now considered a Fair lending law. Under the Fair Lending laws, lenders can also be liable for policies which have a disparate impact on, or result in disparate treatment of, a protected class of applicants or borrowers. Lenders are required to have a Fair Lending program that is of sufficient scope to monitor the inherent Fair Lending risk of the institution and that appropriately remediates any issues which are identified. Generally, regulatory agencies are required to refer fair lending violations to the Department of Justice for investigation. In December 2012, The Department of Justice and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations and have generally committed to strengthen their coordination efforts. Failure of a financial institution to maintain and implement an adequate Fair Lending program, 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
10
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 no more 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
In December 2010, the Basel Committee on Banking Supervision ("BCBS") published the final version of the Capital Accord commonly referred to as Basel III. In 2013, the United States banking regulators approved final rules implementing the regulatory capital and other related requirements under Basel III and the Dodd-Frank Act. The United States implementation of the Basel III final rule represents the most comprehensive overhaul of United States bank capital standards since the United States adoption of Basel I in 1989. The key goal of the final rule is to strengthen the capital resources of banking organizations during both normal and challenging business environments. The rule will replace the previous regulatory model established under Basel I and will be phased-in over several years with the final increased capital components required to be fully implemented by January 1, 2019. Important elements of the final rules include the following:
Under the final rules the key measures of capital adequacy were modified and now include requirements relating to Common Equity Tier 1 ("CET1"), Tier 1 Risk-Based Capital, Total Risk-Based Capital, and Tier 1 Leverage. The new Risk-Based Capital ("RBC") rules revised the "well capitalized" and "adequately capitalized" thresholds under the regulatory Prompt Corrective Action ("PCA") capital ratio requirements. The new rule also introduced CET1 as a PCA category. 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 zero percent for asset categories with low credit risk, such as cash and certain Treasury securities, to 1,250 percent for asset categories with relatively high credit risk, such as certain unsettled securitization transactions. In total, these balances comprise the company's risk-weighted assets ("RWA") which are the basis for computing regulatory capital ratios. Accordingly, required capital is commensurate with each individual company's risk profile and complexity and risk weighting will vary given the specific company's operations. Bank holding
11
companies and national banks such as the Corporation and the Bank are required to maintain the following minimum risk-based capital ratios to be considered "adequately capitalized":
Capital Measure
|
Current Requirement | 1/1/2015 | |||||
|---|---|---|---|---|---|---|---|
CET 1 |
None | 4.5 | % | ||||
Tier 1 RBC |
4.0 | % | 6.0 | % | |||
Total RBC |
8.0 | % | 8.0 | % | |||
Beginning January 1, 2016, additional capital conservation buffers are required as well as additional increases to the buffer each year until fully phased in by January 1, 2019. The buffer percentages as well as the regulatory requirement for CET1 and Total RBC incorporating the buffer are as follows:
Capital Measure
|
1/1/2016 | 1/1/2017 | 1/1/2018 | 1/1/2019 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Buffer |
0.625 | % | 1.25 | % | 1.875 | % | 2.5 | % | |||||
Buffer + CET1 |
5.125 | % | 5.75 | % | 6.375 | % | 7.0 | % | |||||
Buffer + Total RBC |
8.625 | % | 9.25 | % | 9.875 | % | 10.5 | % | |||||
The Federal Deposit Insurance Corporation Improvement 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. The United States Basel III final rule revised the capital thresholds for the different PCA categories for all insured depository institutions. A depository institution's treatment for purposes of the PCA provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. FDICIA as modified by Basel III 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 became "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 following revised PCA thresholds will become effective on January 1, 2015:
PCA Threshold
|
Total Capital | Tier 1 | CET1 | Leverage Ratio | ||||
|---|---|---|---|---|---|---|---|---|
Well Capitalized |
10% or greater | 8% or greater | 6.5% or greater | 5% or greater | ||||
Adequately Capitalized |
8% or greater | 6% or greater | 4.5% or greater | 4% or greater | ||||
Undercapitalized |
less than 8% | less than 6% | less than 4.5% | less than 4% | ||||
Significantly Undercapitalized |
less than 6% | less than 4% | less than 3% | less than 3% | ||||
Critically Undercapitalized |
Tangible Equity less than 2% of Total Assets | |||||||
The risk-based capital rules reflect the credit-risk of the company's activities, not other risks such as interest rate, liquidity, business or operational risks. During volatile or turbulent market conditions, bank regulators may set higher capital requirements for individual banks or for categories of banks. In order to maintain a capital reserve sufficient to support normal banking operations during such turbulent episodes, the Company uses internal capital adequacy assessment and stress testing procedures to establish Board approved guidelines for capital management.
12
At December 31, 2013, the Corporation and the Bank each exceeded the new risk-based capital ratio requirements, as well as the January 1, 2019 fully phased-in capital ratio requirements, and both are classified as "well capitalized" under the PCA guidelines. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations "Balance Sheet Analysis—Capital" included elsewhere in this report.
Premiums for Deposit Insurance
The Bank's deposits are insured to applicable limits by the FDIC, which insurance is funded through assessments on member banks such as the Bank. In 2010, the Dodd-Frank Act Deposit Insurance Provision permanently increased the maximum deposit insurance amount from $100,000 to $250,000 effective December 31, 2010 and provided unlimited FDIC deposit insurance on non-interest bearing transactions accounts for all FDIC-insured banks effective from December 31, 2010, through December 31, 2012. The provision authorizing unlimited deposit insurance terminated on December 31, 2012, and was not extended.
In June 2009, 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 assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009. The prepaid assessment would be applied against the actual assessment until exhausted and any funds remaining after June 30, 2013 would be returned to the institution. In June 2013, the Bank received a return of excess funds from this program.
The Dodd-Frank Act expanded 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. In 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 base 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, was 0.0064% for calendar year 2013 and have been set at 0.0062% for the first quarter of 2014. These assessments will continue until the FICO bonds mature in 2017.
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.
13
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, Nevada, Tennessee and Georgia.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977, 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 laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Cyber Security
In the ordinary course of business, we rely on electronic communications and information systems to conduct our businesses and to store sensitive data, including financial information regarding our customers. The integrity of information systems are under significant threat from cyber attacks by third parties, including through coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes. Regulators have tasked financial institutions with preventing cyber attacks on their systems
14
and with recognizing potential cyber fraud from the systems of their clients and third-party service providers. We employ an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cyber security controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Although malicious software on occasion does penetrate the external automated tools, they have been caught timely by internal filters. The historical impact of such attacks on our operations, expenses and risks profile has been low, with no incidents experienced in recent years that pose a significant risk to the integrity of confidential company or client information. While to date, we have not experienced a significant compromise, significant data loss or material financial losses related to cyber security attacks, our systems and those of our clients and third-party service providers are under constant threat and we may experience a significant event in the future. Risks and exposures related to cyber security attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our clients. See Item 1A, Risk Factors, for a further discussion of risks related to cyber attacks.
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. The Dodd-Frank Act has added additional corporate governance, executive compensation and disclosure requirements, including mandatory advisory votes on executive compensation, expanded disclosures for public companies soliciting proxies and additional 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 NYSE 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.
15
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 3, 2014, 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) |
63 | Chairman of the Board of City National Corporation since October 2013; 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 |
90 |
Chairman Emeritus of the Board of City National Corporation since October 2013; Chairman of the Board, City National Corporation through October 2013 and prior to that, for more than the past five years. |
|||
Christopher J. Carey |
59 |
Executive Vice President and Chief Financial Officer, City National Corporation and City National Bank since July 2004. |
|||
Christopher J. Warmuth |
59 |
Executive Vice President, City National Corporation and President, City National Bank since May 2005. |
|||
Michael B. Cahill |
60 |
Executive Vice President, Corporate Secretary and General Counsel, City National Bank and City National Corporation since June 2001; Manager, Corporate Administrative and Risk Group since 2011. |
|||
Brian Fitzmaurice |
53 |
Executive Vice President and Chief Credit Officer, City National Bank since February 2006. |
|||
Olga Tsokova |
40 |
Senior Vice President and Chief Accounting Officer, City National Corporation and City National Bank since July 2008. |
|||
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
16
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, earnings and profitability are highly sensitive to general economic, political and industry conditions. These conditions include the yield curve, inflation, available money supply, the value of the United States dollar as compared to foreign currencies, fluctuations in both debt and equity markets, energy and commodity prices and the strength of the United States economy and the local economies in which we conduct business. While the United States is showing signs of recovery from the recent economic crisis, the pace of recovery is slow and national unemployment levels remain elevated. There can be no assurance that these conditions will continue to improve and these conditions could worsen. The resulting economic pressure on consumers and uncertainty regarding continuing economic improvement may result in further changes in consumer spending, borrowing and savings habits which could adversely affect our business, financial condition and results of operations. In addition, the level of United States debt may have a destabilizing effect on financial markets. Despite improved financial market conditions, Europe, Asia and other global economies continue to face economic stresses, including significant debt levels, that could impact the capital markets generally, including the trading price of securities, such as our common stock, that do not have substantial direct exposure to foreign economies. A political, economic or financial disruption in the United States or other countries or regions could adversely impact our business by increasing volatility in financial markets generally.
Our financial performance is highly dependent on the business environment in the States of California and New York, as well as on the economic conditions in the United States generally. The economic conditions in these markets can impact the demand for credit and other banking products and the ability of borrowers to pay interest on and repay principal on outstanding loans and the value of collateral securing those loans. Our business can be negatively affected by changes in the financial performance and/or condition of our borrowers, including through decreased loan utilization rates, increased delinquencies and defaults and changes to our customers' ability to meet certain credit obligations. While real estate values have improved, declines in real estate and housing values could have a negative impact on the value of collateral securing loans and could lead to delinquencies and credit quality issues in our residential mortgage and home-equity loan portfolios which could have a negative effect on our results of operations. In addition, negative economic conditions coupled with elevated unemployment and reduced consumer spending could result in higher credit losses in our commercial loan, commercial real estate loan and commercial real estate construction loan portfolios.
The Dodd-Frank Act and related legislation regarding the financial services industry may have a significant adverse effect on our operations. The Dodd-Frank Act has had and will continue to have, a broad impact on the financial services industry, imposing significant regulatory and compliance changes, increased capital, leverage and liquidity requirements and numerous other requirements designed to improve supervision and oversight of the financial services sector. The federal agencies tasked with implementing the Dodd-Frank Act have engaged in significant rulemaking but a substantial amount of rulemaking remains to be completed. 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.
Many of the provisions of the Dodd-Frank Act, and related legislation and rulemaking, directly affect our business. For example, the implementation of the final Basel III standards significantly modifies the way we measure and manage capital. See Item 1, Business, "Capital Adequacy and Prompt Corrective Action", above and this Item 1A, Risk Factors, for further discussion. In addition,
17
the implementation of the Qualified Mortgage and Ability-To-Repay rules could have an impact on our standard underwriting and processing practices and our product offerings going forward, which could result in increased compliance costs. To the extent we fail to comply with applicable rules and regulations or fail to identify practices later deemed to be problematic, we could be subject to litigation, regulatory enforcement, fines and penalties. For example, UDAAP is a wide-ranging regulatory net intended to protect consumers and many areas are subject to intense regulatory scrutiny, from advertising and marketing materials to the order of processing and paying items in a checking account and includes activities by third-party vendors. These and other 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). We may also be required to invest significant management attention and resources to make any necessary changes and our ability to conduct our business as previously conducted or our results of operations or financial condition may be adversely affected. See Item 1, Business, "Supervision and Regulation" and "The Dodd-Frank Act" above for a further discussion of these and other regulatory changes.
Further significant changes in banking laws or regulations, the interpretation of those rules and regulations, and changes in federal monetary policy could materially affect our business. In addition to the Dodd-Frank Act discussed above, the banking industry is subject to extensive federal and state regulation. The implementation of new laws or changes in existing laws, including changes in the interpretations of such laws and related rules and regulations by regulators, courts or others, could have a negative impact on our business. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Parts of our business are also subject to federal and state securities laws and regulations. Significant changes in these laws and regulations could also affect our business. For further discussion of the regulation of financial services, see Item 1, Business, "Supervision 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.
Our business is also impacted by federal monetary policy, particularly as implemented through the Federal Reserve System. Federal monetary policy significantly affects our credit conditions, primarily through open market operations in United States government securities, the discount rate for member bank borrowing, and bank reserve requirements. Changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System could have a negative impact on our business and results of operations.
We are subject to stringent capital requirements which could adversely affect our results of operations or financial condition. The Dodd-Frank Act created the FSOC 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. 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.
18
We are also subject to risk-based capital guidelines implemented by the United States federal bank regulatory agencies based on the 1988 capital accord of the BCBS, referred to as Basel I. In December 2010, the BCBS published the final version of the Capital Accord commonly referred to as Basel III. In 2013, the United States banking regulators approved final rules implementing the regulatory capital and other related requirements under Basel III and the Dodd-Frank Act. The rule replaces the previous regulatory model established under Basel I and will be phased-in over several years with the final increased capital components required to be fully implemented by January 1, 2019.
Basel III represents both an addition to, and a revision of, the approach of Basel II. Depository institutions subject to the Basel III capital requirements and that do not meet minimum capital requirements, will be subject to prompt corrective action by federal bank regulatory agencies. Prompt corrective action can include progressively more restrictive constraints on operations, management and capital distributions depending on how the institutions' capital levels compare to PCA standards. Stricter capital requirements and capital ratios 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. See Item 1, Business, "Capital Adequacy and Prompt Corrective Action," included elsewhere in this report for further discussion.
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. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession, and unemployment. In general, the greater 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. Changes in inflation, interest rates and market liquidity may also impact our margins and funding sources.
Our results of operations could be adversely affected if we were 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 not prevent unexpected losses that could adversely affect our results. We continually monitor 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, including California, New York, Nevada, Tennessee and Georgia. 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 our markets declines materially, a significant portion of the loan portfolio could become under-collateralized which could have a negative effect on results of operations. We monitor the value of collateral, such as real estate, for loans made by us. 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
19
allowance for loan and lease losses. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Loan and Lease Portfolio" and "Asset Quality" 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 and lease losses.
We may experience further impairments of loans covered under loss-sharing agreements with the FDIC that could negatively impact our earnings. Covered loans consist of acquired loans that are covered under loss-sharing agreements with the FDIC. 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. To the extent that incorrect assumptions in the value of the covered loans result in greater than anticipated losses in the covered loan portfolio exceeding the losses covered by the loss-sharing agreements with the FDIC, it could have a negative effect on our results of operations.
Disruptions to our information systems and security breaches could adversely affect our business and reputation. In the ordinary course of business, we rely on electronic communications and information systems to conduct our businesses and to store sensitive data, including financial information regarding our customers. The integrity of information systems are under significant threat from cyber attacks by third parties, including through coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes. We employ an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cyber security controls.
Notwithstanding the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and attackers respond rapidly to changes in defensive measures. Cyber security risks may also occur with our third-party service providers, and may interfere with their ability to fulfill their contractual obligations to us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of operations. We offer our clients the ability to bank remotely and provide other technology based products and services, which services include the secure transmission of confidential information over the Internet and other remote channels. To the extent that our client's systems are not secure or are otherwise compromised, our network could be vulnerable to unauthorized access, malicious software, phishing schemes and other security breaches. To the extent that our activities or the activities of our clients or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. While to date we have not experienced a significant compromise, significant data loss or material financial losses related to cyber security attacks, our systems and those of our clients and third-party service providers are under constant threat and we may experience a significant event in the future. We may suffer material financial losses related to these risks in the future or we may be subject to liability for compromises to our client or third-party service provider systems. Any such losses or liabilities could adversely affect our financial condition or results of operations, and could expose us to reputation risk, the loss of client business, increased operational costs, as well as additional regulatory scrutiny, possible litigation, and related financial liability. These risks also include possible business interruption, including the inability to access critical information and systems
We may enter into new lines of business or offer new products and services which expose us to additional risk or which are not successful. We may enter into new lines of business or offer new products or services as new opportunities arise or as our business strategy changes. New lines of business or new products or services may involve significant business, reputational or regulatory risk, including increased regulatory scrutiny. The success of these efforts depends on many factors, including the competitive landscape, market adoption and successful implementation. We may experience
20
significant losses to the extent that we invest significant time and resources to a new line of business, product or service and it is not successful. There can be no assurance that we can successfully manage these risks and failure to do so could have a material adverse effect on our financial condition or results of operations.
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 on our earnings.
We may experience 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 could make it 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 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 services companies and other companies that offer banking and wealth management services could negatively impact our business. We operate in a highly competitive environment and increased competition in our markets may result in downward pressure on pricing, lower loan levels, a reduction in deposits and/or assets under management, increased costs and may limit our ability to increase market share. 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. A substantial and permanent loss of either client accounts or assets under management at our wealth management affiliates or our wealth management division could have a negative impact on our results of operations. 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, retain and motivate talented people, our business could suffer.
21
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 could have a negative impact on our business. 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 and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements or elected representatives approve changes to tax laws that could affect our corporate taxes. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
Businesses we acquire may not perform as expected which could have a negative impact on our business and results of operations. 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 the businesses we acquire do not perform as expected or we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected. We also expand our operations through de novo branching efforts. If our de novo branching efforts are not successful in driving new business, it could increase our operation costs and have a negative impact on our business.
Impairment of goodwill or intangible assets associated with acquisitions would result in a charge to earnings. Goodwill and 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.
Our business and financial results could be impacted materially by adverse results in legal proceedings and governmental investigations and inquiries. Aspects of our business involve risk of legal liability. We have been named or threatened to be named as defendants in various legal proceedings arising from our business activities. In addition, we may be the subject of governmental investigations and other forms of regulatory inquiry from time to time. The results of these legal proceedings and governmental investigations and inquiries could lead to significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from the legal
22
proceedings in question. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or by international hostilities. Neither the occurrence nor the potential impact of disasters, terrorist activities and international hostilities can be predicted. However, these occurrences could impact us directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact on our borrowers, the value of collateral, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. For example, a significant earthquake could impact us directly by disrupting our business operations or could lead to an increase in delinquencies, bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.
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. Our brand and reputation may also be harmed by actions taken by third parties that we contract with to provide services to the extent such parties fail to meet their contractual, legal and regulatory obligations or act in a manner that is harmful to our clients. If we fail to supervise these relationships effectively, we could also be subject to regulatory enforcement, including fines and penalties. 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 but our efforts may not be sufficient.
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 2013 fiscal year and that remain unresolved.
23
The Bank leases approximately 410,000 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, 2013, the Bank owned five banking office properties in Beverly Hills, Riverside and Sun Valley, California and in North Las Vegas and Minden, Nevada, and a data center located in Los Angeles. In addition to the properties owned, the Company maintained operations in 107 other locations, comprised of 72 banking offices and 35 other offices as of December 31, 2013. Other offices include locations that provide wealth management, leasing and general operations support.
The non-owned banking offices and other properties are leased by the Company. Total annual net rental payments (exclusive of operating charges and real property taxes) are approximately $43 million, with lease expiration dates for office facilities ranging from 2014 to 2039, exclusive of renewal options.
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, 2013, 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.
Item 4. Mine Safety Disclosures
Not applicable.
24
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 NYSE 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 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
2013 |
||||||||||
March 31 |
$ | 59.61 | $ | 51.13 | $ | — | ||||
June 30 |
63.66 | 54.36 | 0.25 | |||||||
September 30 |
71.15 | 64.11 | 0.25 | |||||||
December 31 |
79.33 | 65.39 | 0.25 | |||||||
2012 |
||||||||||
March 31 |
$ | 54.44 | $ | 45.39 | $ | 0.25 | ||||
June 30 |
54.63 | 46.39 | 0.25 | |||||||
September 30 |
54.48 | 48.20 | 0.25 | |||||||
December 31 |
52.60 | 47.27 | 0.75 | (1) | ||||||
As of January 31, 2014, the closing price of the Corporation's stock was $72.35 per share. As of that date, there were 1,533 holders of record of the Corporation's common stock.
For a discussion of dividend restrictions on the Corporation's common stock, see Part I, Business, "Dividends and Other Transfers of Funds" and Note 13 of the Notes to Consolidated Financial Statements included elsewhere in this report.
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, 2013. As of December 31, 2013, there were 1,140,400 shares remaining to be purchased.
The information required by this item regarding purchases by the Company during the quarter ended December 31, 2013 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act appears under Note 12 of the Notes to Consolidated Financial Statements and is incorporated herein by reference.
25
Item 6. Selected Financial Data
The information required by this item appears on page 43 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 44 through 101, under the caption "Management's Discussion and Analysis," and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item appears on pages 68 through 72, 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 100 under the captions "2013 Quarterly Operating Results" and "2012 Quarterly Operating Results," and on page A-4 through A-88 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 its "disclosure controls and procedures" (as defined in Rules 13a-15(e) under the Securities and Exchange Act of 1934, as amended (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 last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
26
Item 10. Directors, Executive Officers and Corporate Governance
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 2014 Annual Meeting of Stockholders (the "2014 Proxy Statement"), and such information either shall be (i) deemed to be incorporated herein by reference from that portion of the 2014 Proxy Statement, if filed with the SEC 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 SEC 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 2014 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2014 Proxy Statement, if filed with the SEC 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 SEC 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, 2013, 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 |
4,842,815 | (1)(2) | $ | 55.50 | (2) | 3,311,164 | (3) | |||
Equity compensation plans not approved by security holders (4) |
— | — | — | |||||||
| | | | | | | | | | | |
Total |
4,842,815 | (2) | $ | 55.50 | (2) | 3,311,164 | (3) | |||
27
Other information required by this item will appear in the 2014 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2014 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 and Director Independence.
The information required by this item will appear in the 2014 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2014 Proxy Statement, if filed with the SEC 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 SEC 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 2014 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2014 Proxy Statement, if filed with the SEC 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 SEC on Form 10-K/A not later than the end of such 120 day period.
28
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, 2013 and 2012 |
A-4 | ||||
|
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2013 |
A-5 | ||||
|
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2013 |
A-6 | ||||
|
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2013 |
A-7 | ||||
|
Consolidated Statements of Changes in Equity for each of the years in the three-year period ended December 31, 2013 |
A-8 | ||||
|
Notes to Consolidated Financial Statements |
A-9 | ||||
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 (File No. 001-10521). | ||
3.1 |
Restated Certificate of Incorporation. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-10521). |
||
3.2 |
Certificate of Amendment of Restated Certificate of Incorporation. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 001-10521). |
||
3.3 |
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 for the year ended December 31, 2009 (File No. 001-10521). |
29
| 3.4 | 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 (File No. 001-10521). | ||
3.5 |
Certificate of Designations for 5.50% Non-Cumulative Perpetual Preferred Stock, Series C. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 13, 2012 (File No. 001-10521). |
||
3.6 |
Bylaws, as amended to date. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed May 18, 2012 (File No. 001-10521). |
||
3.7 |
Certificate of Designations for 6.750% Fixed Rate/Floating Rate Non-Cumulative Preferred Stock, Series D |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 7, 2013 (File No. 001-10521). |
||
4.1 |
Specimen Common Stock Certificate for Registrant. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-10521). |
||
4.2 |
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 (File No. 001-10521). |
||
4.3 |
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 (File No. 001-10521). |
||
4.4 |
Form of Certificate Representing the 6.750% Fixed Rate/Floating Rate Non-Cumulative Preferred Stock, Series D. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 7, 2013 (File No. 001-10521). |
||
4.5 |
Deposit Agreement, dated November 7, 2013, between the Corporation, Computershare Trust Company, N.A., Computershare Inc. and the holders from time to time of the Depositary Receipts described therein. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 7, 2013 (File No. 001-10521). |
||
4.6 |
Form of Depositary Receipt (included as part of Exhibit 3.9). |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed November 7, 2013 (File No. 001-10521). |
30
| 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 (File No. 001-10521). | ||
10.2* |
Amendment to Employment Agreement dated as of May 15, 2005 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, 2010 (File No. 001-10521). |
||
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 (File No. 001-10521). |
||
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 (File No. 001-10521). |
||
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 (File No. 001-10521). |
||
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 (File No. 001-10521). |
||
10.7* |
Sixth Amendment to Employment Agreement dated as of February 9, 2010, 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, 2010 (File No. 001-10521). |
||
10.8* |
Seventh Amendment to Employment Agreement dated as of February 17, 2011 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, 2010 (File No. 001-10521). |
||
10.9* |
Eighth Amendment to Employment Agreement dated as of February 13, 2012 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, 2011 (File No. 001-10521). |
31
| 10.10* | Ninth Amendment to Employment Agreement dated as of January 28, 2013 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, 2012 (File No. 001-10521) | ||
10.11* |
Tenth Amendment to Employment Agreement dated as of January 31, 2014 by and between Bram Goldsmith, Registrant and City National Bank |
Filed herewith. |
||
10.12* |
Amended and Restated Employment Agreement between the Company and Russell Goldsmith dated June 24, 2010. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-10521). |
||
10.13* |
Amendment to Amended and Restated Employment Agreement between the Company and Russell Goldsmith dated March 14, 2012. |
Incorporated by reference from the Registrant's Current Report on Form 8-K filed March 16, 2012 (File No. 001-10521). |
||
10.14* |
1995 Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-10521). |
||
10.15* |
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 (File No. 001-10521). |
||
10.16* |
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 (File No. 001-10521). |
||
10.17* |
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 (File No. 001-10521). |
||
10.18* |
1999 Omnibus Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-10521). |
32
| 10.19* | 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 (File No. 001-10521). | ||
10.20* |
First Amendment to 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, 2010 (File No. 001-10521). |
||
10.21* |
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 (File No. 001-10521). |
||
10.22* |
City National Corporation 2011 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 20, 2011 (File No. 001-10521). |
||
10.23* |
Amended and Restated City National Corporation 2008 Omnibus Plan. |
Incorporated by reference from Appendix A to the Registrant's Proxy Statement filed with the SEC for the Annual Meeting of Stockholders held on May 9, 2012 (File No. 001-10521). |
||
10.24* |
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, 2010 (File No. 001-10521). |
||
10.25* |
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 (File No. 001-10521). |
||
10.26* |
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 (File No. 001-10521). |
||
10.27* |
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 (File No. 001-10521). |
33
| 10.28* | Amendment Number 1 to 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, 2011 (File No. 001-10521). | ||
10.29* |
Amendment Number 2 to 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, 2011 (File No. 001-10521). |
||
10.30* |
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 (File No. 001-10521). |
||
10.31* |
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 (File No. 001-10521). |
||
10.32* |
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, 2010 (File No. 001-10521). |
||
10.33* |
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 (File No. 001-10521). |
||
10.34* |
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 (File No. 001-10521). |
||
10.35* |
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 (File No. 001-10521). |
||
10.36* |
Amendment No. 1 to 2000 City National Bank Director Deferred Compensation Plan (Amended and Restated for Plan Years 2004/5 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, 2011 (File No. 001-10521). |
34
| 10.37* | Amendment No. 2 to 2000 City National Bank Director Deferred Compensation Plan (Amended and Restated for Plan Years 2004/5 and Later Effective January 1, 2009). | Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-10521). | ||
10.38* |
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 (File No. 001-10521). |
||
10.39* |
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 (File No. 001-10521). |
||
10.40* |
City National Corporation 2001 Stock Option Plan. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-10521). |
||
10.41* |
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 (File No. 001-10521). |
||
10.42* |
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 (File No. 001-10521). |
||
10.43* |
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 (File No. 001-10521). |
||
10.44* |
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 (File No. 001-10521). |
||
10.45* |
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 (File No. 001-10521). |
35
| 10.46* | 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 Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-10521). | ||
10.47* |
Form of Restricted Stock Award Agreement Under the City National Corporation Amended and Restated 2002 Omnibus Plan (2006 and later grants). |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-10521). |
||
10.48* |
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 Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-10521). |
||
10.49* |
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, 2011 (File No. 001-10521). |
||
10.50* |
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 March 31, 2011 (File No. 001-10521). |
||
10.51* |
Form of Restricted Stock Unit 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 March 31, 2011 (File No. 001-10521). |
||
10.52* |
Form of 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 (File No. 001-10521). |
||
10.53* |
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 (File No. 001-10521). |
||
10.54* |
Form of Restricted Stock Unit Award Agreement (Cash Only) 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 March 31, 2012 (File No. 001-10521). |
36
| 10.55* | Form of Restricted Stock Unit Award Agreement (Cash Only) 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 March 31, 2012 (File No. 001-10521). | ||
10.56* |
Form of Performance Unit Award Agreement Under the City National Corporation 2008 Omnibus Plan (EPS). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 001-10521). |
||
10.57* |
Form of Performance Unit Award Agreement Addendum Under the City National Corporation 2008 Omnibus Plan (EPS). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 001-10521). |
||
10.58* |
Summary—Brian Fitzmaurice. |
Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-10521). |
||
10.59 |
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 (File No. 001-10521). |
||
10.60* |
Amended and restated City National Corporation 2008 Omnibus Plan. |
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 17, 2013 (File No. 001-10521). |
||
10.61* |
Form of Performance Unit Award Agreement Under the City National Corporation 2008 Omnibus Plan (TSR). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q For the quarter ended June 30, 2013 (File No. 001-10521). |
||
10.62* |
Form of Performance Unit Award Agreement Addendum (TSR). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q For the quarter ended June 30, 2013 (File No. 001-10521). |
||
10.63* |
Form of Performance Unit Award Agreement Under the City National Corporation 2008 Omnibus Plan (TSR). |
Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q For the quarter ended September 30, 2013 (File No. 001-10521). |
37
| 10.64* | Form of Performance Unit Award Agreement Addendum (TSR). | Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q For the quarter ended September 30, 2013 (File No. 001-10521). | ||
12 |
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements. |
Filed herewith. |
||
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. |
||
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. |
38
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) |
||||
March 3, 2014 |
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) |
Chairman of the Board, President/Chief Executive Officer/Director | March 3, 2014 | ||
/s/ CHRISTOPHER J. CAREY Christopher J. Carey (Principal Financial Officer) |
Executive Vice President and Chief Financial Officer |
March 3, 2014 |
||
/s/ OLGA TSOKOVA Olga Tsokova (Principal Accounting Officer) |
Senior Vice President and Chief Accounting Officer |
March 3, 2014 |
||
/s/ BRAM GOLDSMITH Bram Goldsmith |
Chairman Emeritus of the Board/Director |
March 3, 2014 |
||
/s/ CHRISTOPHER J. WARMUTH Christopher J. Warmuth |
Executive Vice President/Director |
March 3, 2014 |
||
/s/ MOHAMAD ALI Mohamad Ali |
Director |
March 3, 2014 |
39
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
| /s/ RICHARD L. BLOCH Richard L. Bloch |
Director | March 3, 2014 | ||
/s/ KENNETH L. COLEMAN Kenneth L. Coleman |
Director |
March 3, 2014 |
||
/s/ ASHOK ISRANI Ashok Israni |
Director |
March 3, 2014 |
||
/s/ RONALD L. OLSON Ronald L. Olson |
Director |
March 3, 2014 |
||
/s/ BRUCE ROSENBLUM Bruce Rosenblum |
Director |
March 3, 2014 |
||
/s/ PETER M. THOMAS Peter M. Thomas |
Director |
March 3, 2014 |
||
/s/ ROBERT H. TUTTLE Robert H. Tuttle |
Director |
March 3, 2014 |
||
/s/ KENNETH ZIFFREN Kenneth Ziffren |
Director |
March 3, 2014 |
40
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 and the impact they have on the Company and its customers, including changes in consumer spending, borrowing and savings habits; (2) the impact on financial markets and the economy of the level of U.S. and European debt; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; (4) continued delay in the pace of economic recovery and continued stagnant or decreasing employment levels; (5) the effect of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the 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 are uncertain; (6) the impact of revised capital requirements under Basel III; (7) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (8) the impact of cyber security attacks or other disruptions to the Company's information systems and any resulting compromise of data or disruptions in service; (9) changes in the level of nonperforming assets, charge-offs, other real estate owned and provision expense; (10) 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; (11) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (12) the Company's ability to attract new employees and retain and motivate existing employees; (13) increased competition in the Company's markets and our ability to increase market share and control expenses; (14) changes in the financial performance and/or condition of the Company's customers, or changes in the performance or creditworthiness of our customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit obligations; (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) soundness of other financial institutions which could adversely affect the Company; (17) protracted labor disputes in the Company's markets; (18) the impact of natural disasters, terrorist activities or international hostilities on the operations of our business or the value of collateral; (19) the effect of acquisitions and integration of acquired businesses and de novo branching efforts; (20) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; and (21) 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."
41
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts) (1)
|
2013 | 2012 | Percent change |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
FOR THE YEAR |
||||||||||
Total revenue |
$ | 1,178,884 | $ | 1,188,439 | (1 | )% | ||||
Net income attributable to City National Corporation |
230,009 | 208,049 | 11 | |||||||
Net income available to common shareholders |
220,384 | 208,049 | 6 | |||||||
Net income per common share, basic |
4.02 | 3.85 | 4 | |||||||
Net income per common share, diluted |
3.99 | 3.83 | 4 | |||||||
Dividends per common share |
0.75 | 1.50 | (50 | ) | ||||||
AT YEAR END |
||||||||||
Assets |
$ | 29,717,951 | $ | 28,618,492 | 4 | |||||
Securities |
9,281,317 | 10,719,451 | (13 | ) | ||||||
Loans and leases, excluding covered loans |
17,170,438 | 14,818,295 | 16 | |||||||
Covered loans (2) |
716,911 | 1,031,004 | (30 | ) | ||||||
Deposits |
25,679,437 | 23,502,355 | 9 | |||||||
Common shareholders' equity |
2,473,370 | 2,335,398 | 6 | |||||||
Total shareholders' equity |
2,740,986 | 2,505,318 | 9 | |||||||
Book value per common share |
45.65 | 43.89 | 4 | |||||||
AVERAGE BALANCES |
||||||||||
Assets |
$ | 28,290,973 | $ | 25,236,172 | 12 | |||||
Securities |
9,133,591 | 8,495,746 | 8 | |||||||
Loans and leases, excluding covered loans |
15,775,880 | 13,285,220 | 19 | |||||||
Covered loans (2) |
865,640 | 1,268,513 | (32 | ) | ||||||
Deposits |
23,954,163 | 21,628,868 | 11 | |||||||
Common shareholders' equity |
2,410,585 | 2,260,740 | 7 | |||||||
Total shareholders' equity |
2,595,227 | 2,283,489 | 14 | |||||||
SELECTED RATIOS |
||||||||||
Return on average assets |
0.81 | % | 0.82 | % | (1 | ) | ||||
Return on average common equity |
9.14 | 9.20 | (1 | ) | ||||||
Corporation's tier 1 leverage |
7.17 | 6.60 | 9 | |||||||
Corporation's tier 1 risk-based capital |
10.09 | 9.41 | 7 | |||||||
Corporation's total risk-based capital |
13.00 | 12.52 | 4 | |||||||
Period-end common equity to period-end assets |
8.32 | 8.16 | 2 | |||||||
Period-end equity to period-end assets |
9.22 | 8.75 | 5 | |||||||
Dividend payout ratio, per common share |
18.69 | 38.96 | (52 | ) | ||||||
Net interest margin |
3.18 | 3.61 | (12 | ) | ||||||
Expense to revenue ratio (3) |
69.61 | 65.29 | 7 | |||||||
ASSET QUALITY RATIOS (4) |
||||||||||
Nonaccrual loans to total loans and leases |
0.40 | % | 0.67 | % | (40 | ) | ||||
Nonaccrual loans and OREO to total loans and leases and OREO |
0.47 | 0.81 | (42 | ) | ||||||
Allowance for loan and lease losses to total loans and leases |
1.76 | 1.88 | (6 | ) | ||||||
Allowance for loan and lease losses to nonaccrual loans |
440.76 | 278.48 | 58 | |||||||
Net recoveries to average total loans and leases |
0.21 | 0.05 | 320 | |||||||
AT YEAR END |
||||||||||
Assets under management (5) |
$ | 45,001,125 | $ | 38,808,171 | 16 | |||||
Assets under management or administration (5) |
64,691,185 | 57,248,709 | 13 | |||||||
42
SELECTED FINANCIAL INFORMATION
| |
As of or for the year ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share amounts) (1)
|
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
Statement of Income Data: |
||||||||||||||||
Interest income |
$ | 879,661 | $ | 886,551 | $ | 843,090 | $ | 830,196 | $ | 709,077 | ||||||
Interest expense |
55,946 | 55,715 | 70,100 | 99,871 | 85,024 | |||||||||||
| | | | | | | | | | | | | | | | | |
Net interest income |
823,715 | 830,836 | 772,990 | 730,325 | 624,053 | |||||||||||
Provision for credit losses on loans and leases, excluding covered loans |
— | 10,000 | 12,500 | 103,000 | 285,000 | |||||||||||
Provision for losses on covered loans |
635 | 45,346 | 43,646 | 76,218 | — | |||||||||||
Noninterest income |
355,169 | 357,603 | 341,867 | 361,375 | 292,197 | |||||||||||
Noninterest expense |
851,114 | 825,138 | 805,095 | 751,330 | 581,087 | |||||||||||
| | | | | | | | | | | | | | | | | |
Income before taxes |
327,135 | 307,955 | 253,616 | 161,152 | 50,163 | |||||||||||
Income taxes |
94,619 | 98,822 | 77,561 | 26,055 | (1,886 | ) | ||||||||||
| | | | | | | | | | | | | | | | | |
Net income |
$ | 232,516 | $ | 209,133 | $ | 176,055 | $ | 135,097 | $ | 52,049 | ||||||
Less: Net income attributable to noncontrolling interest |
2,507 | 1,084 | 3,634 | 3,920 | 710 | |||||||||||
| | | | | | | | | | | | | | | | | |
Net income attributable to City National Corporation |
$ | 230,009 | $ | 208,049 | $ | 172,421 | $ | 131,177 | $ | 51,339 | ||||||
Less: Dividends and accretion on preferred stock |
9,625 | — | — | 5,702 | 25,903 | |||||||||||
| | | | | | | | | | | | | | | | | |
Net income available to common shareholders |
$ | 220,384 | $ | 208,049 | $ | 172,421 | $ | 125,475 | $ | 25,436 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Per Common Share Data: |
||||||||||||||||
Net income per common share, basic |
4.02 | 3.85 | 3.24 | 2.38 | 0.50 | |||||||||||
Net income per common share, diluted |
3.99 | 3.83 | 3.21 | 2.36 | 0.50 | |||||||||||
Dividends per common share |
0.75 | 1.50 | 0.80 | 0.40 | 0.55 | |||||||||||
Book value per common share |
45.65 | 43.89 | 40.86 | 37.51 | 34.74 | |||||||||||
Weighted average common shares outstanding, basic |
54,139 | 53,211 | 52,439 | 51,992 | 50,272 | |||||||||||
Weighted average common shares outstanding, diluted |
54,640 | 53,475 | 52,849 | 52,455 | 50,421 | |||||||||||
Balance Sheet Data—At Period End: |
||||||||||||||||
Assets |
$ | 29,717,951 | $ | 28,618,492 | $ | 23,666,291 | $ | 21,353,118 | $ | 21,078,757 | ||||||
Securities |
9,281,317 | 10,719,451 | 8,101,556 | 5,976,072 | 4,461,060 | |||||||||||
Loans and leases, excluding covered loans |
17,170,438 | 14,818,295 | 12,309,385 | 11,386,628 | 12,146,908 | |||||||||||
Covered loans (2) |
716,911 | 1,031,004 | 1,481,854 | 1,857,522 | 1,851,821 | |||||||||||
Interest-earning assets |
27,999,100 | 26,937,396 | 22,090,781 | 19,667,137 | 19,055,189 | |||||||||||
Core deposits |
25,167,324 | 22,937,859 | 19,727,968 | 17,294,342 | 15,728,847 | |||||||||||
Deposits |
25,679,437 | 23,502,355 | 20,387,582 | 18,176,862 | 17,379,448 | |||||||||||
Common shareholders' equity |
2,473,370 | 2,335,398 | 2,144,849 | 1,959,579 | 1,790,275 | |||||||||||
Total equity |
2,740,986 | 2,505,318 | 2,144,849 | 1,984,718 | 2,012,764 | |||||||||||
Balance Sheet Data—Average Balances: |
||||||||||||||||
Assets |
$ | 28,290,973 | $ | 25,236,172 | $ | 22,527,750 | $ | 21,156,661 | $ | 17,711,495 | ||||||
Securities |
9,133,591 | 8,495,746 | 6,634,547 | 4,677,306 | 3,327,235 | |||||||||||
Loans and leases, excluding covered loans |
15,775,880 | 13,285,220 | 11,698,388 | 11,576,380 | 12,296,619 | |||||||||||
Covered loans (2) |
865,640 | 1,268,513 | 1,699,182 | 1,940,316 | 66,470 | |||||||||||
Interest-earning assets |
26,631,072 | 23,564,106 | 20,842,016 | 19,269,707 | 16,315,487 | |||||||||||
Core deposits |
23,350,079 | 20,937,260 | 18,512,261 | 16,757,396 | 13,048,724 | |||||||||||
Deposits |
23,954,163 | 21,628,868 | 19,305,703 | 17,868,392 | 14,351,898 | |||||||||||
Common shareholders' equity |
2,410,585 | 2,260,740 | 2,058,269 | 1,902,846 | 1,745,101 | |||||||||||
Total equity |
2,595,227 | 2,283,489 | 2,076,721 | 1,961,109 | 2,160,922 | |||||||||||
Asset Quality: |
||||||||||||||||
Nonaccrual loans, excluding covered nonaccrual loans |
$ | 68,651 | $ | 99,787 | $ | 112,026 | $ | 190,923 | $ | 388,707 | ||||||
Covered nonaccrual loans |
— | — | 422 | 2,557 | — | |||||||||||
OREO, excluding covered OREO |
12,611 | 21,027 | 30,790 | 57,317 | 53,308 | |||||||||||
Covered OREO |
25,481 | 58,276 | 98,550 | 120,866 | 60,558 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total nonaccrual loans and OREO |
$ | 106,743 | $ | 179,090 | $ | 241,788 | $ | 371,663 | $ | 502,573 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Performance Ratios: |
||||||||||||||||
Return on average assets |
0.81 | % | 0.82 | % | 0.77 | % | 0.62 | % | 0.29 | % | ||||||
Return on average common equity |
9.14 | 9.20 | 8.38 | 6.59 | 1.46 | |||||||||||
Net interest spread |
2.87 | 3.30 | 3.47 | 3.45 | 3.41 | |||||||||||
Net interest margin |
3.18 | 3.61 | 3.79 | 3.86 | 3.91 | |||||||||||
Period-end common equity to period-end assets |
8.32 | 8.16 | 9.06 | 9.18 | 8.49 | |||||||||||
Period-end equity to period-end assets |
9.22 | 8.75 | 9.06 | 9.29 | 9.55 | |||||||||||
Dividend payout ratio, per common share |
18.69 | 38.96 | 24.64 | 16.75 | 107.80 | |||||||||||
Expense to revenue ratio |
69.61 | 65.29 | 65.53 | 62.45 | 61.70 | |||||||||||
Asset Quality Ratios (3): |
||||||||||||||||
Nonaccrual loans to total loans and leases |
0.40 | % | 0.67 | % | 0.91 | % | 1.68 | % | 3.20 | % | ||||||
Nonaccrual loans and OREO to total loans and leases and OREO |
0.47 | 0.81 | 1.16 | 2.17 | 3.62 | |||||||||||
Allowance for loan and lease losses to total loans and leases |
1.76 | 1.88 | 2.13 | 2.26 | 2.38 | |||||||||||
Allowance for loan and lease losses to nonaccrual loans |
440.76 | 278.48 | 234.37 | 134.61 | 74.22 | |||||||||||
Net recoveries (charge-offs) to average total loans and leases |
0.21 | 0.05 | (0.05 | ) | (1.13 | ) | (1.84 | ) | ||||||||
43
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 commercial bank headquartered in Los Angeles. For 60 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 CRA commitment. Through the Company's asset management subsidiaries 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 Company also advises and markets mutual funds under the name of City National Rochdale 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 41 in connection with "forward-looking" statements included in this report.
Over the last three years, the Company's total assets have grown by 39 percent and total loans, excluding loans covered by loss-sharing agreements with the FDIC, were up 51 percent. Deposit balances grew 41 percent for the same period.
On April 8, 2011, the Bank acquired the banking operations of Nevada Commerce Bank ("NCB"), based in Las Vegas, Nevada, in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $138.9 million in assets and assumed $121.9 million in liabilities. The Bank acquired most of NCB's assets, including loans with a fair value of $56.4 million, and assumed deposits with a fair value of $118.4 million. In connection with the acquisition, the Company entered into a loss-sharing agreement with the FDIC with respect to acquired loans and OREO.
On April 30, 2012, the Company acquired First American Equipment Finance ("FAEF"), a privately owned equipment leasing company, in an all-cash transaction. Headquartered in Rochester, New York, FAEF leases technology and office equipment nationwide. Its clients include educational institutions, hospitals and health systems, large law firms, insurance underwriters, enterprise businesses, professional service businesses and nonprofit organizations. FAEF operates as a wholly owned subsidiary of the Bank. Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $343.0 million in assets and assumed $325.0 million in liabilities. The Company acquired lease receivables with a fair value of $318.3 million and assumed borrowings and nonrecourse debt with a fair value of $320.9 million.
On July 2, 2012, the Company acquired Rochdale Investment Management, LLC and associated entities (collectively, "Rochdale"), a New York City-based investment firm with approximately $4.89 billion of assets under management ("AUM") at the date of acquisition. Rochdale manages assets
44
for affluent and high-net-worth clients and their financial advisors across the nation, and operates as a wholly owned subsidiary of the Bank.
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 11 policies as 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 ("OREO"), 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 & 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.
Fair Value Measurements
Fair value 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. Management employs market standard valuation techniques in determining the fair value of assets and liabilities. The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three categories:
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. |
The Company records securities available-for-sale, trading securities, derivative contracts, certain contingent liabilities and redeemable noncontrolling interest at fair value on a recurring basis. Impaired loans, OREO, securities held-to-maturity, 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 periodically evaluated for impairment and for which any
45
impairment is recorded in the period in which the remeasurement is performed. A description of the valuation techniques applied to the Company's major categories of assets and liabilities measured at fair value follows.
Securities Available-for-Sale and Trading Securities—Fair value for Level 1 securities is based on quoted market prices. Level 2 securities are valued based on dealer quotes or with models using quoted prices and other inputs directly or indirectly observable for the asset. 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. Securities for which the market is inactive are determined using internal models based on assumptions that are not observable in the market, such as risk-adjusted discount rates consistent with similarly-rated securities, prepayment rates and default rates. These securities are classified as Level 3.
The Company performs a quarterly assessment of debt and equity securities held in its investment portfolio to determine whether a decline in fair value below amortized cost is other-than-temporary. The assessment considers all available information related to the individual security being analyzed. For debt securities, impairment is considered other-than-temporary if the holder has the intent to sell a security, it is more likely than not the holder will be required to sell the security before recovery, or the holder does not expect to recover the amortized cost of the security. Impairment of equity securities is considered other-than-temporary when uncertainty exists as to whether and when an investor will be able to recover the cost of an investment, and whether the investor has the intent and ability to hold the security until its value recovers. Other-than-temporary impairment losses on equity securities are recognized in earnings. 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 amortized cost, and on the nature of the impairment. If the Company intends to sell an impaired debt security or it is more likely than not it will be required to sell a security prior to recovery of its amortized cost, an impairment loss is recognized in earnings for the entire difference between the amortized cost and fair value of the security on the measurement date. If the Company does not intend to sell the security and it is not more likely than not it would be required to sell the security prior to recovery of its amortized cost, the credit loss component of impairment is recognized in earnings. Impairment associated with factors other than credit, such as market liquidity, is recognized in other comprehensive income, net of tax.
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. In certain circumstances, appraised values or broker quotes are adjusted based on management's assumptions regarding current market conditions to determine fair value.
Derivatives—The fair value of non-exchange traded (over-the-counter) derivatives is 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. Credit valuation adjustments utilize non-observable inputs, such as estimates of credit spreads. The fair values of interest rate contracts include interest receivable and cash collateral, if any. The fair value of foreign exchange options and transactions is derived from market spot and/or forward foreign exchange rates.
Other Real Estate Owned—The fair value of OREO is generally based on third-party appraisals, which are reviewed and approved by the Company's appraisal department. Fair value may also be
46
determined by 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. In certain circumstances, OREO may be measured at fair value based upon a sales price contained in an executed sales contract for which escrow had not closed as of the measurement date.
Contingent Liabilities—Contingent liabilities include contingent consideration obligations from business combinations that are settled in cash and FDIC clawback liabilities associated with FDIC-assisted acquisitions. These contingent liabilities are recorded at fair value based on the circumstances that exist as of the acquisition date and are remeasured to fair value at each reporting date until the contingency is resolved. The Company's contingent liabilities are valued using the discounted cash flow method based on the terms specified in the acquisition or loss-sharing agreements and the following unobservable inputs, as applicable: (1) risk-adjusted discount rate reflecting the Bank's credit risk, plus a liquidity premium, (2) management's forecast of a range of possible performance outcomes, including revenue growth and margin, (3) management's estimate of the probability of each possible outcome, and (4) prepayment assumptions.
Redeemable Noncontrolling Interest—Redeemable noncontrolling interest is comprised of noncontrolling ownership interests in the Corporation's investment management and wealth advisory affiliates. Redeemable noncontrolling interest is valued based on a combination of factors, including, but not limited to, observable valuation of firms similar to the affiliates, multiples of revenue or profit, unique investment track products or performance, strength in the marketplace, projected discounted cash flow scenarios, strategic value of affiliates to other entities, as well as unique sources of value specific to an individual firm. The methodology used to fair value these interests is consistent with the industry practice of valuing similar types of instruments.
At December 31, 2013, $6.36 billion, or approximately 21 percent, of the Company's total assets were recorded at fair value on a recurring basis. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than one percent of total assets was measured using Level 3 inputs. At December 31, 2013, $95.9 million of the Company's total liabilities were recorded at fair value on a recurring basis using mostly Level 2 or Level 3 inputs. Redeemable noncontrolling interest of $39.8 million as reported in the mezzanine section of the consolidated balance sheet was recorded at fair value on a recurring basis using Level 3 inputs.
At December 31, 2013, $21.7 million, or less than one percent of the Company's total assets, were recorded at fair value on a nonrecurring basis. These assets were measured using Level 3 inputs. No liabilities were measured at fair value on a nonrecurring basis at December 31, 2013.
Acquired Impaired Loans
Loans acquired for which it is probable that all contractual payments will not be received are accounted for under Accounting Standards Codification ("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 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. The Company updates its cash flow projections 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.
47
Decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording a provision for loan losses.
Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments
It is the Company's policy to maintain an allowance for loan and lease losses and reserve for off-balance sheet credit commitments that represent management's best estimate of probable credit losses inherent in the loan portfolio and probable estimated losses on unused commitments to provide financing. The methodology for determining allowances and reserves is well documented and consistently applied. The Company performs ongoing quarterly analytical reviews of the loan and commitment portfolios to assess trends and other factors that may impact the overall collectability of the loan portfolio. This review takes into consideration historical 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, the level of provisioning and the allowance for loan and lease losses and reserve for off-balance sheet credit commitments may change.
The relative significance of risk considerations used in measuring the allowance for loan and lease losses will vary by portfolio segment. For commercial loans, the primary risk consideration is a borrower's ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for commercial real estate and real estate construction loans. The primary risk considerations for consumer loans are a borrower's personal cash flow and liquidity, as well as collateral value.
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 considered 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. 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, and regulatory requirements and other subjective factors such as changes in underwriting standards. It also considers overall portfolio indicators, including current and historical credit losses; delinquent, nonperforming and criticized loans; portfolio concentrations; trends in volumes and terms of loans; and economic trends in the broad market and in specific industries.
A portion of the allowance for loan and lease losses is attributed to impaired loans that are individually measured for impairment. This measurement is based on the present value of expected future cash flows discounted using the loan's contractual effective rate, the fair value of collateral or the secondary market value of the loan.
Off-balance sheet credit commitments include commitments to extend credit and letters of credit. 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.
48
Management uses the best information available in determining the appropriate balance for the allowance for loan and lease losses and reserve for off-balance sheet credit commitments. These estimates may change if economic conditions or other factors differ significantly from the assumptions used in making these estimates. See "Management's Discussion and Analysis—Balance Sheet Analysis—Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" included elsewhere in this report for additional discussion of our allowance and reserve methodology.
Goodwill and Other Intangible Assets
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. Goodwill is tested for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. The first step of the impairment evaluation process involves an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors considered include, but are not limited to, industry and market conditions and trends, the Company's financial performance and any Company-specific events relevant to the assessment. If the assessment of qualitative factors indicates that it is not more likely than not that impairment exists, no further testing is performed. If there is an indication that impairment exists, a quantitative test is performed to determine whether the fair value of each reporting unit, including goodwill, is less than the carrying amount of the reporting unit. 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.
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. The fair value of core deposit intangibles is based either on deposit premiums paid in recent deposit sale transactions, if relevant market data is available, or is based on discounted estimated future cash flows associated with the acquired deposits. The fair value of client advisory and other client service 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 anticipated cash flows for these intangible assets.
Income Taxes
The calculation of the Company's income tax provision and related tax accruals requires the use of estimates and judgments. 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 using enacted tax laws and rates and tax carryforwards. 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.
49
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.
Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements for further discussion of all of the Company's critical accounting policies.
RECENT DEVELOPMENTS
On November 7, 2013, the Corporation issued 4 million depositary shares at a price of $25 per depositary share, each representing a 1/40th interest in a share of 6.75 percent Series D fixed-to-floating rate non-cumulative perpetual preferred stock. Net proceeds after issuance costs were $97.7 million.
2013 HIGHLIGHTS
50
OUTLOOK
The Company's management expects modest net income growth in 2014, even as low short-term interest rates continue to put pressure on the Company's net interest margin. The Company anticipates continued solid growth in loans, deposits, and wealth management assets. Rising loan balances are expected to require some loan-loss provisions, but credit quality should remain stable. This outlook reflects management's expectations for continued moderate U.S. economic growth in 2014.
51
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:
| |
|
Increase (Decrease) |
|
Increase (Decrease) |
|
|
|
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
|
Year Ended December 31, | |||||||||||||||||||||||||
| |
Year Ended 2013 |
Year Ended 2012 |
||||||||||||||||||||||||||
(in thousands, except per share amounts) (1)
|
Amount | % | Amount | % | 2011 | 2010 | 2009 | |||||||||||||||||||||
Interest income (2) |
$ | 897,355 | $ | (5,923 | ) | (1 | ) | $ | 903,278 | $ | 45,678 | 5 | $ | 857,600 | $ | 840,573 | $ | 720,195 | ||||||||||
Interest expense |
55,946 | 231 | 0 | 55,715 | (14,385 | ) | (21 | ) | 70,100 | 99,871 | 85,024 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income |
841,409 | (6,154 | ) | (1 | ) | 847,563 | 60,063 | 8 | 787,500 | 740,702 | 635,171 | |||||||||||||||||
Provision for credit losses on loans and leases,excluding covered loans |
— | (10,000 | ) | (100 | ) | 10,000 | (2,500 | ) | (20 | ) | 12,500 | 103,000 | 285,000 | |||||||||||||||
Provision for losses on covered loans |
635 | (44,711 | ) | (99 | ) | 45,346 | 1,700 | 4 | 43,646 | 76,218 | — | |||||||||||||||||
Noninterest income |
355,169 | (2,434 | ) | (1 | ) | 357,603 | 15,736 | 5 | 341,867 | 361,375 | 292,197 | |||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Staff expense |
517,743 | 38,441 | 8 | 479,302 | 30,600 | 7 | 448,702 | 409,823 | 320,276 | |||||||||||||||||||
Other expense |
333,371 | (12,465 | ) | (4 | ) | 345,836 | (10,557 | ) | (3 | ) | 356,393 | 341,507 | 260,811 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
851,114 | 25,976 | 3 | 825,138 | 20,043 | 2 | 805,095 | 751,330 | 581,087 | |||||||||||||||||||
Income before income taxes |
344,829 | 20,147 | 6 | 324,682 | 56,556 | 21 | 268,126 | 171,529 | 61,281 | |||||||||||||||||||
Income taxes |
94,619 | (4,203 | ) | (4 | ) | 98,822 | 21,261 | 27 | 77,561 | 26,055 | (1,886 | ) | ||||||||||||||||
Less: Adjustments (2) |
17,694 | 967 | 6 | 16,727 | 2,217 | 15 | 14,510 | 10,377 | 11,118 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income |
$ | 232,516 | $ | 23,383 | 11 | $ | 209,133 | $ | 33,078 | 19 | $ | 176,055 | $ | 135,097 | $ | 52,049 | ||||||||||||
Less: Net income attributable to noncontrolling interest |
2,507 | 1,423 | 131 | 1,084 | (2,550 | ) | (70 | ) | 3,634 | 3,920 | 710 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to City National Corporation |
$ | 230,009 | $ | 21,960 | 11 | $ | 208,049 | $ | 35,628 | 21 | $ | 172,421 | $ | 131,177 | $ | 51,339 | ||||||||||||
Less: Dividends and accretion on preferred stock |
9,625 | 9,625 | NM | — | — | — | — | 5,702 | 25,903 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income available to common shareholders |
$ | 220,384 | $ | 12,335 | 6 | $ | 208,049 | $ | 35,628 | 21 | $ | 172,421 | $ | 125,475 | $ | 25,436 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per common share, diluted |
$ | 3.99 | $ | 0.16 | 4 | $ | 3.83 | $ | 0.62 | 19 | $ | 3.21 | $ | 2.36 | $ | 0.50 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM—Not meaningful
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.
52
The following tables present the components of net interest income on a fully taxable-equivalent basis for the last five years:
| |
2013 | 2012 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) (1)
|
Average balance |
Interest income/ expense (2)(3) |
Average interest rate |
Average balance |
Interest income/ expense (2)(3) |
Average interest rate |
|||||||||||||
Assets |
|||||||||||||||||||
Interest-earning assets |
|||||||||||||||||||
Loans and leases |
|||||||||||||||||||
Commercial |
$ | 7,408,542 | $ | 262,974 | 3.55 | % | $ | 5,923,271 | $ | 236,346 | 3.99 | % | |||||||
Commercial real estate mortgages |
2,963,331 | 112,695 | 3.80 | 2,362,711 | 108,035 | 4.57 | |||||||||||||
Residential mortgages |
4,201,368 | 154,493 | 3.68 | 3,846,823 | 160,422 | 4.17 | |||||||||||||
Real estate construction |
358,005 | 16,134 | 4.51 | 293,987 | 15,018 | 5.11 | |||||||||||||
Home equity loans and lines of credit |
697,041 | 25,202 | 3.62 | 725,077 | 25,632 | 3.54 | |||||||||||||
Installment |
147,593 | 6,514 | 4.41 | 133,351 | 6,086 | 4.56 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total loans and leases, excluding covered loans (4) |
15,775,880 | 578,012 | 3.66 | 13,285,220 | 551,539 | 4.15 | |||||||||||||
Covered loans |
865,640 | 133,855 | 15.46 | 1,268,513 | 164,537 | 12.97 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total loans and leases |
16,641,520 | 711,867 | 4.28 | 14,553,733 | 716,076 | 4.92 | |||||||||||||
Due from banks—interest-bearing |
504,809 | 1,285 | 0.25 | 287,476 | 721 | 0.25 | |||||||||||||
Federal funds sold and securities purchased under resale agreements |
258,226 | 5,844 | 2.26 | 112,158 | 318 | 0.28 | |||||||||||||
Securities |
9,133,591 | 178,359 | 1.95 | 8,495,746 | 186,163 | 2.19 | |||||||||||||
Other interest-earning assets |
92,926 | 4,488 | 4.83 | 114,993 | 3,096 | 2.69 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets |
26,631,072 | 901,843 | 3.39 | 23,564,106 | 906,374 | 3.85 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Allowance for loan and lease losses |
(324,826 | ) | (325,605 | ) | |||||||||||||||
Cash and due from banks |
148,001 | 176,443 | |||||||||||||||||
Other non-earning assets |
1,836,726 | 1,821,228 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total assets |
$ | 28,290,973 | $ | 25,236,172 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity |
|||||||||||||||||||
Interest-bearing deposits |
|||||||||||||||||||
Interest checking accounts |
$ | 2,260,118 | $ | 1,577 | 0.07 | $ | 1,980,590 | $ | 1,883 | 0.10 | |||||||||
Money market accounts |
6,051,654 | 6,150 | 0.10 | 5,904,484 | 7,432 | 0.13 | |||||||||||||
Savings deposits |
422,553 | 378 | 0.09 | 368,319 | 503 | 0.14 | |||||||||||||
Time deposits—under $100,000 |
189,160 | 597 | 0.32 | 225,081 | 1,082 | 0.48 | |||||||||||||
Time deposits—$100,000 and over |
604,084 | 2,412 | 0.40 | 691,608 | 3,142 | 0.45 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits |
9,527,569 | 11,114 | 0.12 | 9,170,082 | 14,042 | 0.15 | |||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
301,086 |
401 |
0.13 |
52,051 |
46 |
0.09 |
|||||||||||||
Other borrowings |
952,521 | 44,431 | 4.66 | 833,757 | 41,627 | 4.99 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities |
10,781,176 | 55,946 | 0.52 | 10,055,890 | 55,715 | 0.55 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits |
14,426,594 | 12,458,786 | |||||||||||||||||
Other liabilities |
487,976 | 438,007 | |||||||||||||||||
Total equity |
2,595,227 | 2,283,489 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity |
$ | 28,290,973 | $ | 25,236,172 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net interest spread |
2.87 | % | 3.30 | % | |||||||||||||||
Fully taxable-equivalent net interest and dividend income |
$ | 845,897 | $ | 850,659 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net interest margin |
3.18 | % | 3.61 | % | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Less: Dividend income included in other income |
4,488 | 3,096 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Fully taxable-equivalent net interest income |
$ | 841,409 | $ | 847,563 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
53
| |
2011 | 2010 | 2009 | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Average balance |
Interest income/ expense (2)(3) |
Average interest rate |
Average balance |
Interest income/ expense (2)(3) |
Average interest rate |
Average balance |
Interest income/ expense (2)(3) |
Average interest rate |
|||||||||||||||||||
|
$ | 4,818,081 | $ | 198,225 | 4.11 | % | $ | 4,390,834 | $ | 194,568 | 4.43 | % | $ | 4,701,386 | $ | 199,647 | 4.25 | % | ||||||||||
|
1,962,740 | 106,076 | 5.40 | 2,059,680 | 114,542 | 5.56 | 2,171,353 | 121,515 | 5.60 | |||||||||||||||||||
|
3,670,996 | 172,714 | 4.70 | 3,553,347 | 186,526 | 5.25 | 3,481,227 | 192,774 | 5.54 | |||||||||||||||||||
|
379,136 | 18,335 | 4.84 | 660,603 | 26,132 | 3.96 | 1,094,332 | 37,154 | 3.40 | |||||||||||||||||||
|
731,425 | 26,142 | 3.57 | 742,862 | 26,567 | 3.58 | 674,459 | 23,417 | 3.47 | |||||||||||||||||||
|
136,010 | 6,631 | 4.88 | 169,054 | 8,775 | 5.19 | 173,862 | 8,842 | 5.09 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
11,698,388 | 528,123 | 4.51 | 11,576,380 | 557,110 | 4.81 | 12,296,619 | 583,349 | 4.74 | |||||||||||||||||||
|
1,699,182 | 161,064 | 9.48 | 1,940,316 | 138,451 | 7.14 | 66,470 | 4,052 | 6.10 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
13,397,570 | 689,187 | 5.14 | 13,516,696 | 695,561 | 5.15 | 12,363,089 | 587,401 | 4.75 | |||||||||||||||||||
|
523,429 | 1,504 | 0.29 | 678,929 | 1,890 | 0.28 | 361,571 | 1,486 | 0.41 | |||||||||||||||||||
|
154,395 |
422 |
0.27 |
249,381 |
634 |
0.25 |
186,123 |
264 |
0.14 |
|||||||||||||||||||
|
6,634,547 | 166,487 | 2.51 | 4,677,306 | 142,488 | 3.05 | 3,327,235 | 131,044 | 3.94 | |||||||||||||||||||
|
132,075 | 2,757 | 2.09 | 147,395 | 2,787 | 1.89 | 77,469 | 2,743 | 3.54 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
20,842,016 | 860,357 | 4.13 | 19,269,707 | 843,360 | 4.38 | 16,315,487 | 722,938 | 4.43 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
(333,312 | ) | (315,228 | ) | (254,610 | ) | ||||||||||||||||||||||
|
196,864 | 237,853 | 320,010 | |||||||||||||||||||||||||
|
1,822,182 | 1,964,329 | 1,330,608 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
$ | 22,527,750 | $ | 21,156,661 | $ | 17,711,495 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
$ |
1,767,775 |
$ |
2,755 |
0.16 |
$ |
1,998,990 |
$ |
4,308 |
0.22 |
$ |
1,540,496 |
$ |
3,980 |
0.26 |
|||||||||||||
|
6,626,365 | 23,278 | 0.35 | 5,911,058 | 31,591 | 0.53 | 4,084,090 | 32,068 | 0.79 | |||||||||||||||||||
|
325,882 | 911 | 0.28 | 317,263 | 1,508 | 0.48 | 239,441 | 1,590 | 0.66 | |||||||||||||||||||
|
293,545 | 1,513 | 0.52 | 430,557 | 2,448 | 0.57 | 239,680 | 3,222 | 1.34 | |||||||||||||||||||
|
793,442 | 5,228 | 0.66 | 1,110,996 | 9,175 | 0.83 | 1,303,174 | 19,569 | 1.50 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
9,807,009 | 33,685 | 0.34 | 9,768,864 | 49,030 | 0.50 | 7,406,881 | 60,429 | 0.82 | |||||||||||||||||||
|
||||||||||||||||||||||||||||
|
3,145 | 2 | 0.07 | 163,309 | 5,292 | 3.24 | 414,672 | 8,292 | 2.00 | |||||||||||||||||||
|
803,948 | 36,413 | 4.53 | 846,513 | 45,549 | 5.38 | 542,521 | 16,303 | 3.01 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
10,614,102 | 70,100 | 0.66 | 10,778,686 | 99,871 | 0.93 | 8,364,074 | 85,024 | 1.02 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
9,498,694 | 8,099,528 | 6,945,017 | |||||||||||||||||||||||||
|
338,233 | 317,338 | 241,482 | |||||||||||||||||||||||||
|
2,076,721 | 1,961,109 | 2,160,922 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
$ | 22,527,750 | $ | 21,156,661 | $ | 17,711,495 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
3.47 | % | 3.45 | % | 3.41 | % | ||||||||||||||||||||||
|
$ | 790,257 | $ | 743,489 | $ | 637,914 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
3.79 | % | 3.86 | % | 3.91 | % | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
||||||||||||||||||||||||||||
|
2,757 | 2,787 | 2,743 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
$ | 787,500 | $ | 740,702 | $ | 635,171 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
54
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 and dividend income on a fully taxable-equivalent basis due to volume and rate between 2013 and 2012, as well as between 2012 and 2011. 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
| |
2013 vs 2012 | 2012 vs 2011 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
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) |
$ | 95,704 | $ | (99,913 | ) | $ | (4,209 | ) | $ | 57,754 | $ | (30,865 | ) | $ | 26,889 | ||||
Securities |
13,357 | (21,161 | ) | (7,804 | ) | 42,627 | (22,951 | ) | 19,676 | ||||||||||
Due from banks—interest-bearing |
553 | 11 | 564 | (610 | ) | (173 | ) | (783 | ) | ||||||||||
Federal funds sold and securities purchased under resale agreements |
870 | 4,656 | 5,526 | (120 | ) | 16 | (104 | ) | |||||||||||
Other interest-earning assets |
(686 | ) | 2,078 | 1,392 | (389 | ) | 728 | 339 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets |
109,798 | (114,329 | ) | (4,531 | ) | 99,262 | (53,245 | ) | 46,017 | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Interest paid on: |
|||||||||||||||||||
Interest checking deposits |
241 | (547 | ) | (306 | ) | 301 | (1,173 | ) | (872 | ) | |||||||||
Money market deposits |
181 | (1,463 | ) | (1,282 | ) | (2,299 | ) | (13,547 | ) | (15,846 | ) | ||||||||
Savings deposits |
66 | (191 | ) | (125 | ) | 106 | (514 | ) | (408 | ) | |||||||||
Time deposits |
(525 | ) | (690 | ) | (1,215 | ) | (954 | ) | (1,563 | ) | (2,517 | ) | |||||||
Total borrowings |
14,673 | (11,514 | ) | 3,159 | 3,657 | 1,601 | 5,258 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities |
14,636 | (14,405 | ) | 231 | 811 | (15,196 | ) | (14,385 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
|
$ | 95,162 | $ | (99,924 | ) | $ | (4,762 | ) | $ | 98,451 | $ | (38,049 | ) | $ | 60,402 | ||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Comparison of 2013 with 2012
Net interest income was $823.7 million for 2013, a 1 percent decrease from $830.8 million for 2012. The decrease in net interest income from the prior year was largely due to lower yields on earning assets. Interest income on total loans was $704.7 million in 2013, down from $708.9 million in 2012. Increases in interest income driven by loan growth were more than offset by low yields on non-covered loans and lower income from covered loans. The decrease in interest income on covered loans was a result of portfolio run-off and a decline in the net accelerated accretable yield recognition on covered loans that were paid off or fully charged off during 2013. Income from accelerated accretable yield recognition decreased to $71.0 million for 2013 from $82.8 million for 2012.
Average loans and leases, excluding covered loans, totaled $15.78 billion in 2013, an increase of 19 percent from $13.29 billion for 2012. The commercial and commercial real estate mortgage loan portfolios grew 25 percent from 2012. Residential mortgage loans were up 9 percent from prior year and real estate construction loans increased by 22 percent compared to 2012. Average covered loans were $865.6 million in 2013, down 32 percent from $1.27 billion in 2012.
Interest income on securities was $167.8 million in 2013, a 5 percent decrease from $176.7 million in 2012 due to lower yields. Average total securities were $9.13 billion in 2013, up 8 percent from 2012 as the Company continued to invest its growing deposits in securities. The growth in securities was
55
partially offset by the Company selling some longer-duration securities from its available-for-sale portfolio to shorten the duration of the investment portfolio in anticipation of higher interest rates.
The decrease in net interest income was partially offset by a $5.5 million increase in income from federal funds sold and securities purchased under resale agreements. The increase was mostly due to the addition of securities purchased under resale agreements.
Total interest expense was $55.9 million in 2013, up slightly from $55.7 million in 2012. Interest expense on borrowings increased 8 percent to $44.8 million in 2013 from $41.7 million in 2012. The growth in interest expense on borrowings was primarily attributable to the issuance of subordinated debt in June 2012 and increased overnight and FHLB borrowings in the first half of 2013.
Interest expense on deposits was $11.1 million in 2013, down 21 percent from $14.0 million in 2012. Despite the increase in average interest-bearing deposits from the prior year, interest expense on deposits decreased due to lower deposit rates. Average deposits were $23.95 billion for 2013, an 11 percent increase from $21.63 billion in 2012. Average core deposits, which do not include certificates of deposits of $100,000 or more, were $23.35 billion and $20.94 billion for 2013 and 2012, respectively. Average core deposits represented 97 percent of the total average deposit balance in 2013 and 2012. Average interest-bearing deposits were $9.53 billion in 2013, up 4 percent from the prior year. Average noninterest-bearing deposits increased 16 percent to $14.43 billion from $12.46 billion in 2012.
The net settlement of interest-rate swaps increased net interest income by $1.1 million for 2013 and $8.4 million for 2012. The decrease from prior year was due to the maturity of outstanding interest rate swaps in 2013.
Fully taxable-equivalent net interest income, which includes amounts to convert nontaxable income to fully taxable-equivalent amounts, was $841.4 million for 2013 compared with $847.6 million for 2012. Fully taxable-equivalent net interest and dividend income was $845.9 million and $850.7 million in 2013 and 2012, respectively. The fully taxable net interest margin declined to 3.18 percent for 2013 from 3.61 percent for 2012. The average yield on earning assets for 2013 was 3.39 percent, down 46 basis points from 3.85 percent in 2012. The average cost of interest-bearing liabilities decreased to 0.52 percent, or by 3 basis points, from 0.55 percent for 2012. The decrease in the net interest margin from 2012 was primarily the result of lower yields on loans and securities (rate variance). The impact of lower yields was substantially offset by growth in loans and securities (volume variance).
Comparison of 2012 with 2011
Net interest income was $830.8 million for 2012, an increase of 7 percent from $773.0 millio