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TABLE OF CONTENTS
Item 15. Exhibits and Financial Statement Schedules

Table of Contents

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, 2012

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
5.50% Non-Cumulative Perpetual Preferred Stock, Series C   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. ý

         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 29, 2012, the aggregate market value of the registrant's common stock ("Common Stock") held by non-affiliates of the registrant was approximately $2,231,286,687 based on the June 29, 2012 closing sale price of Common Stock of $48.58 per share as reported on the New York Stock Exchange.

         As of January 31, 2013, there were 53,865,942 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 2013 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.

   


Table of Contents


TABLE OF CONTENTS

PART I

       

Item 1.

 

Business

  2

Item 1A.

 

Risk Factors

  15

Item 1B.

 

Unresolved Staff Comments

  23

Item 2.

 

Properties

  23

Item 3.

 

Legal Proceedings

  23

Item 4.

 

Mine Safety Disclosures

  23

PART II

       

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  24

Item 6.

 

Selected Financial Data

  25

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  25

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  25

Item 8.

 

Financial Statements and Supplementary Data

  25

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  25

Item 9A.

 

Controls and Procedures

  25

Item 9B.

 

Other Information

  25

PART III

       

Item 10.

 

Directors and Officers of the Registrant

  26

Item 11.

 

Executive Compensation

  26

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  26

Item 13.

 

Certain Relationships and Related Transactions

  26

Item 14.

 

Principal Accountant Fees and Services

  26

PART IV

       

Item 15.

 

Exhibits and Financial Statement Schedules

  27

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PART I

Item 1.    Business

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, investing and trust services to its clients through its wholly-owned banking subsidiary, City National Bank (the "Bank" and together with the Corporation, its subsidiaries and its asset management affiliates the "Company"). The Bank, which has conducted business since 1954, is a national banking association headquartered in Los Angeles, California and operates through 78 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, 2012, 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 year-end 2012, the Company had consolidated total assets of $28.62 billion, total loan balances of $15.85 billion, total deposits of $23.50 billion, and assets under management or administration of $56.68 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, 2012, the Company had 3,472 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 ("MD&A") and Note 3, Business Combinations, of the Notes to Consolidated Financial Statements, 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 22 of the Notes to Consolidated Financial Statements as well as in the MD&A section of this report.

        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.

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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:

    investment management and advisory services and brokerage services, including portfolio management, securities trading and asset management;

    personal and business trust and investment services, including employee benefit trust services, 401(k) and defined benefit plans; and

    estate and financial planning and custodial services.

        The Company also advises and makes available mutual funds under the name of CNI Charter Funds and Rochdale Investment Trust. 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.

Economic Conditions, Government Policies, Legislation and Regulation

        The Company's earnings and profitability, like most financial institutions, are highly sensitive to general business and economic conditions. These conditions include the yield curve, inflation, available

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money supply, the value of the U.S. dollar as compared to foreign currencies, fluctuations in both debt and equity markets, and the strength of the U.S. economy and the local economies in which we conduct business. Energy and commodity prices are additional primary sources of risk and volatility. The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the States of California, Nevada, New York, Tennessee and Georgia, and in the United States as a whole. While the United States is showing signs of recovery from the recent economic crisis, it is not certain that conditions will continue to improve and could worsen. Unemployment levels are improving but remain high. Uncertainty regarding continued economic improvement could lead to decreased consumer confidence and spending which could have a negative impact on our clients' businesses and in turn on our business. The Company can be negatively affected by changes in the financial performance of our clients and 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 shown signs of improvement, declines in commercial real estate and housing values could have a negative impact on the value of collateral securing loans. In addition, unresolved federal budget negotiations and the level of United States debt may have a destabilizing effect on financial markets. Europe and other global economies face continued economic stresses including increasing debt levels, that could impact the capital markets generally, including the Company's ability to access capital and the trading price of the Company's securities.

        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. See Item 1A—Risk Factors.

        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 U.S. Government securities, including adjusting the required level of reserves for depository institutions subject to its reserve requirements, and varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. Changes in the policies of the Federal Reserve may have an effect on the Company's business, results of operations and financial condition.

        Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently introduced in the U.S. Congress, in the state legislatures, and before various regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they may have on the Company cannot be determined at this time.

Supervision and Regulation

General

        The Corporation, the Bank and the Corporation's non-banking subsidiaries are subject to extensive regulation under both federal and state law. These regulations are intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the

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protection of shareholders of the Corporation. Set forth below is a summary description of the significant laws and regulations applicable to the Corporation and the Bank. The description is qualified in its entirety by reference to the applicable laws and regulations.

Regulatory Agencies

        The Corporation is a legal entity separate and distinct from the Bank and its other subsidiaries. As a financial holding company and a bank holding company, the Corporation is regulated under the Bank Holding Company Act of 1956 (the "BHC Act"), and is subject to supervision, regulation and inspection by the Federal Reserve. The Corporation is also under the jurisdiction of the 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 primary regulator, and also by the Federal Reserve, the Consumer Financial Protection Bureau ("CFPB") 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 and 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 management rating of 1 or 2 (on a scale of 5, with 1 being the highest rating) in its most recent examination. In addition, the subsidiary depository institution must have received a rating of at least "satisfactory" in its most recent examination under the CRA. (See the section captioned "Community Reinvestment Act" included elsewhere in this item.) Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), bank holding companies, as well as their depository institution subsidiaries, are also required to be "well capitalized" and "well managed" in

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order to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies.

        Financial holding companies that do not continue to meet all of the requirements for such status, depending on which requirement they fail to meet, may not be able to undertake new activities or acquisitions that are financial in nature, or may lose the ability to continue those activities that are not generally permissible for bank holding companies. In addition, failure to satisfy conditions prescribed by the Federal Reserve to comply with any such requirements could result in orders to divest banking subsidiaries or to cease engaging in activities other than those closely related to banking under the BHC Act.

        The BHC Act, the Federal Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition of control of a commercial bank or its parent holding company, whether by (i) the acquisition of 25 percent or more of any class of voting securities; (ii) controlling the election of a majority of the directors; or (iii) the exercise of a controlling influence over the management or policies of the banking organization, which can include the acquisition of as little as 5 percent of any class of voting securities together with other factors. Under the Federal Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant's performance record under the CRA (see the section captioned "Community Reinvestment Act" included elsewhere in this item), fair housing laws and the effectiveness of the subject organizations in combating money laundering activities. Under the Dodd-Frank Act, bank regulatory authorities also review the potential risks of the transaction to the stability of the U.S. banking system or financial system.

Source of Strength Doctrine

        Federal Reserve policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and does not permit a bank holding company to conduct its operations in an unsafe or unsound manner. Under this "source of strength doctrine," a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment of deposits and to certain other indebtedness of such subsidiary banks. The BHC Act provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. In addition, under the National Bank Act, if the capital stock of the Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the Corporation. If the assessment is not paid within three months, the OCC could order a sale of the Bank stock held by the Corporation to 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 codifies the "source of strength doctrine."

The Bank

        The OCC has extensive examination, supervision and enforcement authority over all national banks, including the Bank. If, as a result of an examination of a bank, the OCC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other

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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 various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and, as a result, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

        The Dodd-Frank Act 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 Financial Stability Oversight Council 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.

        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. For example, the Dodd-Frank Act requires that all insured depository institutions and their holding companies be subject to the same generally applicable risk-based capital and leverage rules, which led to the removal of trust preferred securities as a permitted component of a holding company's Tier 1 capital and other comprehensive revisions to regulatory capital rules, including the Basel III capital standards discussed further below. Provisions in the legislation that require revisions to the capital

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requirements of the Corporation and the Bank could require the Corporation and the Bank to seek other sources of capital in the future.

        The Dodd-Frank Act also expands the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009 and increases the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35%. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. The Dodd-Frank Act also provides for amendments to the Electronic Fund Transfer Act ("EFTA") which have resulted in rules limiting debit-card interchange fees and stringent requirements regarding remittance transfers to locations outside the United States. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. 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.

        Other significant provisions of the Dodd-Frank Act include:

    Comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives activities in the institution itself;

    Establishment of fiduciary duties for broker-dealers when providing investment advice to retail customers, which standard would be no less stringent than the standard currently applied to investment advisors;

    Prohibitions on banking entities from engaging in most proprietary trading or from acquiring or retaining any equity, partnership or other ownership interest in, or sponsorship of, a private equity or hedge fund, subject to certain limited exceptions;

    Mortgage reform provisions regarding a customer's ability to repay, restricting variable-rate lending by requiring that the ability to repay be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and

    Corporate governance requirements regarding executive compensation and related disclosure that apply to all public companies, not just financial institutions.

        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 now be foreseen. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial 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

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requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 ("Patriot Act") significantly expanded the anti-money laundering ("AML") and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including "Know Your Customer" and "Enhanced Due Diligence" practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing. The Patriot Act also applies BSA procedures to broker-dealers. An institution subject to the Patriot Act must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The OCC continues to issue regulations and new guidance with respect to the application and requirements of BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by Treasury's Office of Foreign Assets Control ("OFAC"), these are typically known as the "OFAC" rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.

        Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

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. 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.

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Dividends and Other Transfers of Funds

        The Corporation is a legal entity separate and distinct from the Bank. Dividends from the Bank constitute the principal source of cash revenues to the Corporation. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan and lease losses. In addition, federal bank regulatory authorities can prohibit the Bank from paying dividends, depending upon the Bank's financial condition and compliance with capital and non-capital safety and soundness standards established under the Federal Deposit Insurance Act, as described below. Federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. See Note 13 of Notes to Consolidated Financial Statements for additional information.

        Federal law limits the ability of the Bank to extend credit to the Corporation or its other affiliates, to invest in stock or other securities thereof, to take such securities as collateral for loans, and to purchase assets from the Corporation or other affiliates. These restrictions prevent the Corporation and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Corporation or to or in any other affiliate are limited individually to 10 percent of the Bank's capital stock and surplus and in the aggregate to 20 percent of the Bank's capital stock and surplus. See Note 13 of Notes to Consolidated Financial Statements for additional information.

        Federal law also provides that extensions of credit and other transactions between the Bank and the Corporation or one of its non-bank subsidiaries must be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions involving other non-affiliated companies, or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.

Capital Adequacy and Prompt Corrective Action

        Each federal banking regulatory agency has adopted risk-based capital regulations under which a banking organization's capital is compared to the risk associated with its operations for both transactions reported on the balance sheet as assets as well as transactions that are off-balance sheet items, such as letters of credit and recourse arrangements. Under the capital regulations, the nominal dollar amounts of assets and the balance sheet equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from zero percent for asset categories with low credit risk, such as cash and certain Treasury securities, to 100 percent for asset categories with relatively high credit risk, such as commercial loans. In total, these balances comprise the company's risk-weighted assets ("RWA") which are the basis for important regulatory capital ratios. Bank holding companies and national banks such as the Corporation and the Bank are currently required to maintain Tier 1 and Total capital equal to at least 4 percent and 8 percent, respectively, of their total RWA before they may be classified as "adequately capitalized." Banking organizations with Tier 1 and Total capital ratios above 6 percent and 10 percent, respectively, are eligible to be classified as "well capitalized" by the regulatory agencies. 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.

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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.

        In addition to the risk-based capital guidelines, federal banking regulatory agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For banks with low risk balance sheets, strong liquidity, earnings and capital, and the lowest level of supervisory concern, the minimum leverage ratio is 3 percent. For all other banks, the minimum leverage ratio is 4 percent. These minimum standards are necessary for a bank to be classified as "adequately capitalized." Banks with leverage capital ratios of 5 percent or more may be classified as "well capitalized." As with the risk-based capital requirements, banks with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios above the minimum levels. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

        At December 31, 2012, the Corporation and the Bank each exceeded the required risk-based capital ratios for classification as "well capitalized" as well as the required minimum leverage ratios for the Bank. See "Management's Discussion and Analysis—Balance Sheet Analysis—Capital" of this report.

        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. A depository institution's treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank's assets at the time it 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 current U.S. federal bank regulatory agencies' risk-based capital guidelines are based upon the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision ("BCBS"). The BCBS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply.

        For several years, the U.S. bank regulators have been preparing to implement a new framework for risk-based capital adequacy developed by BCBS, sometimes referred to as "Basel II." In July 2007, the U.S. bank regulators announced an agreement reflecting their then-current plan for implementing the most advanced approach under Basel II for the largest, most internationally active financial institutions. The agreement also provides that the regulators will propose rules permitting other

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financial institutions, such as the Corporation, to choose between the current method of calculating risked-based capital ("Basel I") and the "standardized" approach under Basel II. The standardized approach under Basel II would lower risk weightings for certain categories of assets (including mortgages) from the weightings reflected in Basel I, but would also require an explicit capital charge for operational risk, which is not required by Basel I. In July 2008, the U.S. bank regulators proposed a new rule, which includes the previously mentioned methods to calculate risked-based capital, but for institutions using the "standardized" framework, modifies the method for determining the leverage ratio requirement. At this time, Basel II does not apply to either the Corporation or the Bank.

        In December 2010, the BCBS published the final version of the Capital Accord commonly referred to as Basel III. A key goal of the Basel III agreement is to strengthen the capital resources of banking organizations during normal and challenging business environments. The standards established in the Capital Accord will be implemented by the governing regulatory agencies of the participating nations. These standards must also be integrated with the safety and soundness standards required under the Dodd-Frank Act. In June 2012, United States banking regulators issued proposed standards combining Basel III and Dodd-Frank Act requirements. The proposed requirements will be phased in over several years, and will replace the previous regulatory model established under the Basel I Accord. Important elements of the Basel III standards include the following:

    Increase minimum capital requirements;

    Raise the quality of capital so banks are better able to absorb losses;

    Implement a leverage ratio concept for international banks and U.S. bank holding companies;

    Establish a specific capital conservation buffer; and

    Provide a more uniform supervisory standard for U.S financial institution regulatory agencies.

        Basel III represents both an addition to, and a revision of, the approach of Basel II. As Basel III has not yet been finalized and implemented by the federal banking agencies, the Corporation cannot be certain as to how Basel III will impact the Corporation or the Bank, or how the requirements of the Dodd-Frank Act will be reconciled with those of Basel III.

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. The Emergency Economic Stabilization Act of 2008 temporarily raised the maximum standard deposit insurance amount to $250,000. In October 2008, the FDIC established a Temporary Liquidity Guarantee Program under which the FDIC fully insured all funds in non-interest-bearing transaction accounts until December 31, 2009, which was later extended to 2010 (the "Transaction Account Guarantee Program") and guaranteed certain senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009 with the FDIC guarantee expiring December 31, 2012 (the "Debt Guarantee Program"). The Bank did not participate in the Debt Guarantee Program. The Bank did participate in the Transaction Account Guarantee Program until July 1, 2010. Thereafter, 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. The expiration of the Program did not have a significant impact to the Company's deposit levels and the Company maintains significant readily available liquidity resources to fund any further outflows. While the Company has experienced deposit outflows since December 31, 2012, this is primarily attributed to seasonal cash flow variability of the Bank's clients.

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        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. Any funds remaining after June 30, 2013 would be returned to the institution. If the prepayment would impair an institution's liquidity or otherwise create significant hardship, it could apply for an exemption.

        The Dodd-Frank Act 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 0.0066% for calendar year 2012 and have been set at 0.0064% for the first quarter of 2013. 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.

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

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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.

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.

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Executive Officers of the Registrant

        Shown below are the names and ages of all executive officers of the Corporation and officers of the Bank who are deemed to be executive officers of the Corporation as of February 1, 2013, 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)

    62   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

   
89
 

Chairman of the Board, City National Corporation

Christopher J. Carey

   
58
 

Executive Vice President and Chief Financial Officer, City National Corporation and City National Bank since July 2004.

Christopher J. Warmuth

   
58
 

Executive Vice President, City National Corporation and President, City National Bank since May 2005

Michael B. Cahill

   
59
 

Executive Vice President, Corporate Secretary and General Counsel, City National Bank and City National Corporation since June 2001; Manager, Legal and Compliance Division since 2005.

Brian Fitzmaurice

   
52
 

Executive Vice President and Chief Credit Officer, City National Bank since February 2006

Olga Tsokova

   
39
 

Senior Vice President and Chief Accounting Officer, City National Corporation and City National Bank since July 2008 and SOX 404 Manager since March 2005; Controller, City National Bank, July 2008 to September 2008.


(1)
Russell Goldsmith is the son of Bram Goldsmith.

Item 1A—Risk Factors

Forward-Looking Statements

        This report and other reports and statements issued by the Company and its officers from time to time contain forward-looking statements that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of our management, and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, and statements preceded by, followed by, or that include the words "will," "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions.

        Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on the forward-looking statements, since they are based on current expectations. Actual results may differ materially from those currently expected or anticipated. Forward-looking statements are not guarantees of performance. By their nature, forward-looking statements are subject to risks, uncertainties, and assumptions. These statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made or to update earnings guidance including the factors that influence earnings. A number of factors, many of which are beyond the Company's ability to control or predict, could cause future results to differ

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materially from those contemplated by such forward-looking statements. These factors include, without limitation, the significant factors set forth below.

Factors That May Affect Future Results

        General business and economic conditions may significantly affect our earnings.    Our business and earnings are sensitive to general economic, political and industry conditions. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; rising inflation or interest rates; political unrest, acts of war, terrorism, natural disasters; or a combination of these or other factors. A political, economic or financial disruption in the United States or other countries or regions could adversely impact our business by increasing volatility in financial markets generally.

        The United States in recent years has faced a severe economic crisis including a major recession from which it is slowly recovering. Business activity across a wide range of industries and regions remains reduced and local governments and many businesses continue to experience financial difficulty. While reflecting some improvement, 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, unresolved federal budget negotiations and the level of United States debt may have a destabilizing effect on financial markets. Europe and other global economies face continued economic stresses, including increasing 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.

        Our financial performance is impacted by the business conditions in the markets where we operate and in the United States generally. 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 is driven by economic conditions in the markets where our customers operate. 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. Declines in real estate values in the markets in which we operate, including California, Nevada and New York, have impacted our results of operations. While there have been some signs of improvement, further declines in real estate values in the markets where we operate 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, 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 various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and, as a result, many of

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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, including, but not limited to, the following:

    Establishment of the Financial Stability Oversight Council ("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. The FSOC may recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;

    Provisions requiring that all insured depository institutions and their holding companies be subject to the same generally applicable risk-based capital and leverage rules which led to the removal of trust preferred securities as a permitted component of a holding company's Tier 1 capital and other comprehensive revisions to regulatory capital rules, including the Basel III capital standards discussed further below;

    Changes to the FDIC assessment for depository institutions with assets of $10 billion or more, such as the Bank, and increases to the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35%;

    Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

    Establishment of the CFPB with broad authority to implement new consumer protection regulations and, for banking organizations with $10 billion or more in assets, to examine and enforce compliance with federal consumer laws;

    Amendments to the EFTA which have resulted in rules limiting debit-card interchange fees and stringent requirements regarding remittance transfers to locations outside the United States; and

    Establishment of mortgage reform provisions regarding a customer's ability to repay, restricting variable-rate lending by requiring that the ability to repay be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.

        Most provisions in the Dodd-Frank Act remain subject to regulatory rule-making and implementation, the effects of which are not yet known, including mandates requiring the Federal Reserve to establish compensation guidelines covering regulated financial institutions. The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional legislative or regulatory changes may impact the profitability of our business activities, may require that we change certain of our business practices, may materially affect our business model or affect retention of key personnel, may require us to raise additional regulatory capital and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.

        Further significant changes in banking laws or regulations, 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

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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 "Supervision and Regulation" and the discussion under Item 1, Business, "Economic Conditions, Government Policies, Legislation and Regulation." We cannot predict the substance or impact of any change in regulation, whether by regulators or as a result of legislation, or in the way such statutory or regulatory requirements are interpreted or enforced. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business practices, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

        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 U.S. 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 may be subject to more stringent capital requirements.    As discussed above, the Dodd-Frank Act creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital requirements as companies grow in size and complexity, requires that the OCC seek to make countercyclical its capital requirements for national banks and applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. 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.

        We are also subject to risk-based capital guidelines implemented by the U.S. federal bank regulatory agencies based on the 1988 capital accord of the BCBS, referred to as Basel I. For several years, the U.S. bank regulators have been preparing to implement a new framework for risk-based capital adequacy developed by BCBS, referred to as Basel II. In December 2010, the BCBS published the final version of the Capital Accord commonly referred to as Basel III. A key goal of the Basel III agreement is to strengthen the capital resources of banking organizations during normal and challenging business environments. The standards established in the Capital Accord will be implemented by the governing regulatory agencies of the participating nations. These standards must also be integrated with the safety and soundness standards required under the Dodd-Frank Act. In June 2012, United States banking regulators issued proposed standards combining Basel III and Dodd-Frank Act requirements. The proposed requirements will be phased in over several years, and will replace the previous regulatory model established under the Basel I Accord. Important elements of the Basel III standards include the following:

    Increase minimum capital requirements;

    Raise the quality of capital so banks are better able to absorb losses;

    Implement a leverage ratio concept for international banks and U.S. bank holding companies;

    Establish a specific capital conservation buffer; and

    Provide a more uniform supervisory standard for U.S financial institution regulatory agencies.

        Basel III represents both an addition to, and a revision of, the approach of Basel II. As Basel III has not yet been finalized and implemented by the federal banking agencies, the Corporation cannot be certain as to how Basel III will impact the Corporation or the Bank, or how the requirements of the Dodd-Frank Act will be reconciled with those of Basel III. Stricter capital requirements and capital

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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 the section captioned "Capital Adequacy and Prompt Corrective Action" in Item 1. Business located 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. The Company continually monitors changes in the economy, particularly housing prices and unemployment rates. There are inherent risks in our lending activities, including flat or volatile interest rates and changes in the economic conditions in the markets in which we operate. Continuing weak economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of collateral securing those loans. If the value of real estate in the Company's market declines materially, a significant portion of the loan portfolio could become under-collateralized which could have a 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 allowance for loan and lease losses. See the section captioned "Loan and Lease Portfolio" and "Asset Quality" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to our loan portfolio and our process for determining the appropriate level of the allowance for possible loan 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

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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 to disrupt business operations and other compromises to data and systems for political or criminal purposes. We employ an in-depth defense approach that leverages people, processes and technology to manage and maintain cyber security controls. We have an experienced team of Information Security professionals, the latest automated tools, and Board-approved policies, to secure our digital environment. We employ a variety of preventative and detective tools to monitor, block, and alert on any suspicious activity, as well as to report on any suspected advanced persistent threats. We have not experienced any significant compromises due to cyber security attacks. To date there have been no security breaches of our systems, no virus outbreaks, no compromise of data, and no material financial losses related to cyber attacks. Although rogue viruses on occasion do 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 has been very low, with no incidents experienced in recent years that pose any significant risks to the integrity of confidential company or client information. Although to date we have not experienced material financial losses related to these risks, there can be no assurance that we will not suffer such losses in the future. Any such losses can adversely affect our financial condition or results of operations, and could expose us to reputation risk, the loss of client business, as well as additional regulatory scrutiny, possible litigation, and related financial liability. These risks also include possible business interruption. Cyber security risks may also occur with our third party technology 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. 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.

        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 have made 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.

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        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.    Increased competition in our markets may result in 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. 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 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

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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 amortizable intangible assets associated with acquisitions would result in a charge to earnings.    Goodwill is evaluated for impairment at least annually, and amortizable intangible assets are evaluated for impairment annually or when events or circumstances indicate that the carrying value of those assets may not be recoverable. We may be required to record a charge to earnings during the period in which any impairment of goodwill or intangibles is determined.

        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 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

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issues; and our protection of confidential client information. Negative public opinion can adversely affect our ability to keep and attract clients and can expose us to litigation and regulatory action. We take steps to minimize reputation risk in the way we conduct our business activities and deal with our clients, communities and vendors.

        The soundness of other financial institutions could adversely affect us.    Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.

Item 1B—Unresolved Staff Comments

        The Company has no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2012 fiscal year and that remain unresolved.

Item 2.    Properties

        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, 2012, the Bank owned five banking office properties in Beverly Hills, Riverside and Sun Valley, California and in North Las Vegas and Minden, Nevada. In addition to the properties owned, the Company maintained operations in 108 other locations, comprised of 73 banking offices and 35 other offices as of December 31, 2012. 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 $39 million, with lease expiration dates for office facilities ranging from 2013 to 2039, exclusive of renewal options.

Item 3.    Legal Proceedings

        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, 2012, 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.

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PART II

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.

        On November 15, 2012, the Corporation's Board of Directors declared an accelerated quarterly cash dividend of $0.25 per common share and a special cash dividend of $0.25 per common share. The accelerated and special dividends were payable on December 18, 2012, in addition to the regular $0.25 per common share dividend declared on October 18, 2012 and paid on November 21, 2012. The accelerated quarterly cash dividend represents the dividend that the Corporation would have otherwise declared during the first quarter of 2013.

Quarter Ended
  High   Low   Dividends
Declared
 

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)

2011

                   

March 31

  $ 62.90   $ 55.65   $ 0.20  

June 30

    58.75     52.02     0.20  

September 30

    55.54     37.76     0.20  

December 31

    45.10     36.01     0.20  

(1)
On November 15, 2012, the Corporation's Board of Directors declared an accelerated quarterly cash dividend of $0.25 per common share and a special cash dividend of $0.25 per common share. The accelerated and special dividends were payable on December 18, 2012, in addition to the regular $0.25 per common share dividend declared on October 18, 2012 and paid on November 21, 2012. The accelerated quarterly cash dividend represents the dividend that the Corporation would have otherwise declared during the first quarter of 2013.

        As of January 31, 2013, the closing price of the Corporation's stock was $52.96 per share. As of that date, there were 1,607 holders of record of the Corporation's common stock.

        For a discussion of dividend restrictions on the Corporation's common stock, see the Dividends and Other Transfers of Funds section of Part I and Note 13 of the Notes to Consolidated Financial Statements.

        On January 24, 2008, the Company's Board of Directors authorized the Corporation to repurchase 1 million additional shares of the Corporation's stock following the completion of its previously approved initiative. Unless terminated earlier by resolution of the Board of Directors, the program will expire when the Corporation has repurchased all shares authorized for repurchase thereunder. There were no issuer repurchases of the Corporation's common stock as part of its repurchase plan in the fourth quarter of the year ended December 31, 2012. As of December 31, 2012, 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, 2012 of equity securities that are registered by the Company pursuant to

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Section 12 of the Exchange Act appears under Note 12 of the Notes to Consolidated Financial Statements and is incorporated herein by reference.

Item 6.    Selected Financial Data

        The information required by this item appears on page 40 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 41 through 105, 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 69 through 74, 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 105 under the captions "2012 Quarterly Operating Results" and "2011 Quarterly Operating Results," and on page A-4 through A-90 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 (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.

Item 9B.    Other Information.

        None.

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PART III

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 2013 Annual Meeting of Stockholders (the "2013 Proxy Statement"), and such information either shall be (i) deemed to be incorporated herein by reference from that portion of the 2013 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 2013 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2013 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 information required by this item will appear in the 2013 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2013 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 13.    Certain Relationships and Related Transactions and Director Independence.

        The information required by this item will appear in the 2013 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2013 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 2013 Proxy Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the 2013 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.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

    (a)
    The following documents are filed as part of this report:

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, 2012 and 2011

    A-4  

 

Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2012

    A-5  

 

Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2012

    A-6  

 

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2012

    A-7  

 

Consolidated Statements of Changes in Equity for each of the years in the three-year period ended December 31, 2012

    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.

 

Filed herewith.

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).

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).

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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).

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).

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).

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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).

10.10*

 

Ninth Amendment to Employment Agreement dated as of January 28, 2013 by and between Bram Goldsmith, Registrant and City National Bank.

 

Filed herewith.

10.11*

 

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).

10.12*

 

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).

10.13*

 

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).

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10.14*   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).

10.15*

 

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).

10.16*

 

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).

10.17*

 

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).

10.18*

 

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).

10.19*

 

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).

10.20*

 

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).

10.21*

 

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).

10.22*

 

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).

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10.23*   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).

10.24*

 

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).

10.25*

 

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).

10.26*

 

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).

10.27*

 

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).

10.28*

 

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).

10.29*

 

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).

10.30*

 

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).

10.31*

 

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).

31


Table of Contents

10.32*   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).

10.33*

 

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).

10.34*

 

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).

10.35*

 

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).

10.36*

 

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).

10.37*

 

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).

10.38*

 

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).

10.39*

 

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).

10.40*

 

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).

32


Table of Contents

10.41*   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).

10.42*

 

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).

10.43*

 

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).

10.44*

 

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).

10.45*

 

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).

10.46*

 

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).

10.47*

 

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).

10.48*

 

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).

10.49*

 

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).

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Table of Contents

10.50*   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).

10.51*

 

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).

10.52*

 

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).

10.53*

 

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).

10.54*

 

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).

10.55*

 

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).

10.56*

 

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).

10.57*

 

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).

10.58

 

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).

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Table of Contents

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.

*
Management contract or compensatory plan or arrangement

35


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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    CITY NATIONAL CORPORATION
(Registrant)

February 28, 2013

 

By

 

/s/ RUSSELL GOLDSMITH

Russell Goldsmith,
President and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 
/s/ RUSSELL GOLDSMITH

Russell Goldsmith
(Principal Executive Officer)
  President/Chief Executive Officer/Director   February 28, 2013

/s/ CHRISTOPHER J. CAREY

Christopher J. Carey
(Principal Financial Officer)

 

Executive Vice President and Chief Financial Officer

 

February 28, 2013

/s/ OLGA TSOKOVA

Olga Tsokova
(Principal Accounting Officer)

 

Senior Vice President and Chief Accounting Officer

 

February 28, 2013

/s/ BRAM GOLDSMITH

Bram Goldsmith

 

Chairman of the Board/Director

 

February 28, 2013

/s/ CHRISTOPHER J. WARMUTH

Christopher J. Warmuth

 

Executive Vice President/Director

 

February 28, 2013

/s/ RICHARD L. BLOCH

Richard L. Bloch

 

Director

 

February 28, 2013

36


Table of Contents

Signature
 
Title
 
Date

 

 

 

 

 
/s/ KENNETH L. COLEMAN

Kenneth L. Coleman
  Director   February 28, 2013

/s/ ASHOK ISRANI

Ashok Israni

 

Director

 

February 28, 2013

/s/ RONALD L. OLSON

Ronald L. Olson

 

Director

 

February 28, 2013

/s/ BRUCE ROSENBLUM

Bruce Rosenblum

 

Director

 

February 28, 2013

/s/ PETER M. THOMAS

Peter M. Thomas

 

Director

 

February 28, 2013

/s/ ROBERT H. TUTTLE

Robert H. Tuttle

 

Director

 

February 28, 2013

/s/ KENNETH ZIFFREN

Kenneth Ziffren

 

Director

 

February 28, 2013

37


Table of Contents


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 is 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) volatility in the municipal bond market; (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 borrowers, including adverse impact on loan utilization rates, delinquencies, defaults and customers' ability to meet certain credit obligations, changes in customers' suppliers, and other counterparties' performance and creditworthiness; (15) a substantial and permanent loss of either client accounts and/or assets under management at the Company's investment advisory affiliates or its wealth management division; (16) 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; (21) 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; and (22) 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."

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CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

(in thousands, except per share amounts)
  2012   2011   Percent
change
 

FOR THE YEAR

                   

Net income available to common shareholders

  $ 208,049   $ 172,421     21 %

Net income per common share, basic

    3.85     3.24     19  

Net income per common share, diluted

    3.83     3.21     19  

Dividends per common share

    1.50     0.80     88  

AT YEAR END

                   

Assets

  $ 28,618,492   $ 23,666,291     21  

Securities

    10,719,451     8,101,556     32  

Loans and leases, excluding covered loans

    14,818,295     12,309,385     20  

Covered loans (1)

    1,031,004     1,481,854     (30 )

Deposits

    23,502,355     20,387,582     15  

Common shareholders' equity

    2,335,398     2,144,849     9  

Total equity

    2,505,318     2,144,849     17  

Book value per common share

    43.89     40.86     7  

AVERAGE BALANCES

                   

Assets

  $ 25,236,172   $ 22,527,750     12  

Securities

    8,495,746     6,634,547     28  

Loans and leases, excluding covered loans

    13,285,220     11,698,388     14  

Covered loans (1)

    1,268,513     1,699,182     (25 )

Deposits

    21,628,868     19,305,703     12  

Common shareholders' equity

    2,260,740     2,058,269     10  

Total equity

    2,283,489     2,076,721     10  

SELECTED RATIOS

                   

Return on average assets

    0.82 %   0.77 %   6  

Return on average common shareholders' equity

    9.20     8.38     10  

Corporation's tier 1 leverage

    6.60     6.77     (3 )

Corporation's tier 1 risk-based capital

    9.41     10.26     (8 )

Corporation's total risk-based capital

    12.52     12.83     (2 )

Period-end common shareholders' equity to period-end assets

    8.16     9.06     (10 )

Period-end equity to period-end assets

    8.75     9.06     (3 )

Dividend payout ratio, per common share

    38.96     24.64     58  

Net interest margin

    3.61     3.79     (5 )

Expense to revenue ratio (2)

    65.29     65.53     (0 )

ASSET QUALITY RATIOS (3)

                   

Nonaccrual loans to total loans and leases

    0.67 %   0.91 %   (26 )

Nonaccrual loans and OREO to total loans and leases and OREO

    0.81     1.16     (30 )

Allowance for loan and lease losses to total loans and leases

    1.88     2.13     (12 )

Allowance for loan and lease losses to nonaccrual loans

    278.48     234.37     19  

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

    0.05     (0.05 )   NM  

AT YEAR END

                   

Assets under management (4)

  $ 38,239,781   $ 31,326,318     22  

Assets under management or administration (4)(5)

    56,680,318     46,490,341     22  


NM—Not
meaningful

(1)
Covered loans represent acquired loans that are covered under loss-sharing agreements with the FDIC.

(2)
The expense to revenue ratio is defined as noninterest expense excluding other real estate owned ("OREO") expense divided by total revenue (net interest income on a fully taxable-equivalent basis and noninterest income).

(3)
Excludes covered assets, which consist of acquired loans and OREO that are covered under loss-sharing agreements with the FDIC.

(4)
Excludes $21.69 billion and $15.95 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of December 31, 2012 and December 31, 2011, respectively.

(5)
Assets under administration have been revised to exclude the Company's investments that were held in custody and serviced by the Company's wealth management business. Prior period balances have been reclassified to conform to current period presentation.

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SELECTED FINANCIAL INFORMATION

 
  As of or for the year ended December 31,  
(in thousands, except per share amounts) (1)
  2012   2011   2010   2009   2008  

Statement of Income Data:

                               

Interest income

  $ 886,551   $ 843,090   $ 830,196   $ 709,077   $ 784,688  

Interest expense

    55,715     70,100     99,871     85,024     184,792  
                       

Net interest income

    830,836     772,990     730,325     624,053     599,896  

Provision for credit losses on loans and leases, excluding covered loans

    10,000     12,500     103,000     285,000     127,000  

Provision for losses on covered loans

    45,346     43,646     76,218          

Noninterest income

    357,603     341,867     361,375     292,197     266,984  

Noninterest expense

    825,138     805,095     751,330     581,087     587,763  
                       

Income before taxes

    307,955     253,616     161,152     50,163     152,117  

Income taxes

    98,822     77,561     26,055     (1,886 )   41,783  
                       

Net income

  $ 209,133   $ 176,055   $ 135,097   $ 52,049   $ 110,334  

Less: Net income attributable to noncontrolling interest

    1,084     3,634     3,920     710     5,378  
                       

Net income attributable to City National Corporation

  $ 208,049   $ 172,421   $ 131,177   $ 51,339   $ 104,956  

Less: Dividends and accretion on preferred stock

            5,702     25,903     2,445  
                       

Net income available to common shareholders

  $ 208,049   $ 172,421   $ 125,475   $ 25,436   $ 102,511  
                       

Per Common Share Data:

                               

Net income per common share, basic

    3.85     3.24     2.38     0.50     2.12  

Net income per common share, diluted

    3.83     3.21     2.36     0.50     2.11  

Dividends per common share

    1.50     0.80     0.40     0.55     1.92  

Book value per common share

    43.89     40.86     37.51     34.74     33.52  

Weighted average common shares outstanding, basic

    53,211     52,439     51,992     50,272     47,930  

Weighted average common shares outstanding, diluted

    53,475     52,849     52,455     50,421     48,196  

Balance Sheet Data—At Period End:

                               

Assets

  $ 28,618,492   $ 23,666,291   $ 21,353,118   $ 21,078,757   $ 16,455,515  

Securities

    10,719,451     8,101,556     5,976,072     4,461,060     2,440,468  

Loans and leases, excluding covered loans

    14,818,295     12,309,385     11,386,628     12,146,908     12,444,259  

Covered loans (2)

    1,031,004     1,481,854     1,857,522     1,851,821      

Interest-earning assets

    26,937,396     22,090,781     19,667,137     19,055,189     15,104,199  

Core deposits

    22,937,859     19,727,968     17,294,342     15,728,847     11,210,091  

Deposits

    23,502,355     20,387,582     18,176,862     17,379,448     12,652,124  

Common shareholders' equity

    2,335,398     2,144,849     1,959,579     1,790,275     1,614,904  

Total equity

    2,505,318     2,144,849     1,984,718     2,012,764     2,030,434  

Balance Sheet Data—Average Balances:

                               

Assets

  $ 25,236,172   $ 22,527,750   $ 21,156,661   $ 17,711,495   $ 16,028,821  

Securities

    8,495,746     6,634,547     4,677,306     3,327,235     2,398,285  

Loans and leases, excluding covered loans

    13,285,220     11,698,388     11,576,380     12,296,619     12,088,715  

Covered loans (2)

    1,268,513     1,699,182     1,940,316     66,470      

Interest-earning assets

    23,564,106     20,842,016     19,269,707     16,315,487     14,670,167  

Core deposits

    20,937,260     18,512,261     16,757,396     13,048,724     10,600,180  

Deposits

    21,628,868     19,305,703     17,868,392     14,351,898     11,899,642  

Common shareholders' equity

    2,260,740     2,058,269     1,902,846     1,745,101     1,636,597  

Total equity

    2,283,489     2,076,721     1,961,109     2,160,922     1,706,092  

Asset Quality:

                               

Nonaccrual loans, excluding covered nonaccrual loans

  $ 99,787   $ 112,026   $ 190,923   $ 388,707   $ 211,142  

Covered nonaccrual loans

        422     2,557          

OREO, excluding covered OREO

    21,027     30,790     57,317     53,308     11,388  

Covered OREO

    58,276     98,550     120,866     60,558      
                       

Total nonaccrual loans and OREO

  $ 179,090   $ 241,788   $ 371,663   $ 502,573   $ 222,530  
                       

Performance Ratios:

                               

Return on average assets

    0.82 %   0.77 %   0.62 %   0.29 %   0.65 %

Return on average common shareholders' equity

    9.20     8.38     6.59     1.46     6.26  

Net interest spread

    3.30     3.47     3.45     3.41     3.27  

Net interest margin

    3.61     3.79     3.86     3.91     4.20  

Period-end common shareholders' equity to period-end assets

    8.16     9.06     9.18     8.49     9.81  

Period-end equity to period-end assets

    8.75     9.06     9.29     9.55     12.34  

Dividend payout ratio, per common share

    38.96     24.64     16.75     107.80     90.61  

Expense to revenue ratio

    65.29     65.53     62.45     61.70     66.80  

Asset Quality Ratios (3):

                               

Nonaccrual loans to total loans and leases

    0.67 %   0.91 %   1.68 %   3.20 %   1.70 %

Nonaccrual loans and OREO to total loans and leases and OREO

    0.81     1.16     2.17     3.62     1.79  

Allowance for loan and lease losses to total loans and leases

    1.88     2.13     2.26     2.38     1.80  

Allowance for loan and lease losses to nonaccrual loans

    278.48     234.37     134.61     74.22     106.11  

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

    0.05     (0.05 )   (1.13 )   (1.84 )   (0.57 )

(1)
Certain prior period balances have been reclassified to conform to current period presentation.

(2)
Covered loans represent acquired loans that are covered under loss-sharing agreements with the FDIC.

(3)
Excludes covered assets.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

        City National Corporation (the "Corporation"), through its primary subsidiary, City National Bank (the "Bank"), provides private and business banking services, including investment and trust services to mid-size businesses, entrepreneurs, professionals and affluent individuals. The Bank is the largest independent commercial bank headquartered in Los Angeles. For 59 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 CNI Charter Funds and Rochdale Investment Trust.

        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 38 in connection with "forward-looking" statements included in this report.

        Over the last three years, the Company's total assets have grown by 36 percent and total loans, excluding loans covered by loss-sharing agreements with the FDIC, were up 22 percent. Deposit balances grew 35 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 at the date of acquisition. Rochdale manages assets for

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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.

Business Combinations

        The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.

Fair Value Measurements

        Accounting guidance defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.

        For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated for purposes of applying fair value measurement. The valuation premise is a concept that determines whether an asset is measured on a standalone basis or in combination with other assets. The Company measures its assets and liabilities on a standalone basis then aggregates assets and liabilities with similar characteristics for disclosure purposes.

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        Management employs market standard valuation techniques in determining the fair value of assets and liabilities. Inputs used in valuation techniques are based on assumptions that market participants would use in pricing an asset or liability. The inputs used in valuation techniques are prioritized as follows:

 

Level 1—Quoted market prices in an active market for identical assets and liabilities.

   
 

Level 2—Observable inputs including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates, and inputs that are derived principally from or corroborated by observable market data.

   
 

Level 3—Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available.

   

        If the determination of fair value measurement for a particular asset or liability is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Management's assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability measured.

        The Company records securities available-for-sale, trading securities, derivative contracts, certain contingent liabilities and redeemable noncontrolling interest at fair value on a recurring basis. Certain assets such as 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 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 values for U.S. Treasury securities, marketable equity securities and trading securities, with the exception of agency and municipal securities held in the trading account, are based on quoted market prices. Securities with fair values based on quoted market prices are classified in Level 1 of the fair value hierarchy. Level 2 securities include the Company's portfolio of federal agency, mortgage-backed, state and municipal securities for which fair values are calculated with models using quoted prices and other inputs directly or indirectly observable for the asset or liability. Prices for the significant majority of these securities are obtained through a third-party valuation source. Management reviewed the valuation techniques and assumptions used by the provider and determined that the provider utilizes widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Prices for the remaining securities are obtained from dealer quotes. Securities classified in Level 3 include municipal auction rate securities and certain collateralized debt obligation instruments for which the market has become inactive. Fair values for these securities were determined using internal models based on assumptions that are not observable in the market. Securities held-to-maturity are not measured at fair value on a recurring basis.

        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

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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. These loans are classified in Level 2 of the fair value hierarchy. In certain circumstances, appraised values or broker quotes are adjusted based on management's assumptions regarding current market conditions to determine fair value. These loans are classified in Level 3 of the fair value hierarchy.

        Derivatives—The fair value of non-exchange traded (over-the-counter) derivatives 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. The fair values of interest rate contracts include interest receivable and cash collateral, if any. Although the Company has determined that the majority of the inputs used to value derivative contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified the derivative contract valuations in their entirety in Level 2 of the fair value hierarchy.

        The fair value of foreign exchange options and transactions is derived from market spot and/or forward foreign exchange rates and is classified in Level 1 of the fair value hierarchy.

        Other Real Estate Owned—The fair value of OREO is generally based on third-party appraisals performed in accordance with professional appraisal standards and Bank regulatory requirements under the Financial Institutions Reform Recovery and Enforcement Act of 1989. Appraisals are reviewed and approved by the Company's appraisal department. OREO measured at fair value based on third party appraisals or observable market data is classified in Level 2 of the fair value hierarchy. In certain circumstances, fair value may be determined using a combination of inputs including appraised values, broker price opinions and recent market activity. The weighting of each input in the calculation of fair value is based on management's assumptions regarding market conditions. These assumptions cannot be observed in the market. OREO measured at fair value using non-observable inputs is classified in Level 3 of the fair value hierarchy.

        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. Contingent consideration represents additional purchase price consideration to be transferred to the former shareholders of an acquired entity if certain future events or conditions are met. These contingencies are generally based on earnings or revenue growth targets contained in the acquisition agreement. FDIC clawback liabilities represent estimated payments by the Company to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. Contingent consideration and FDIC clawback 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. Contingent liabilities are classified in Level 3 of the fair value hierarchy.

        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,

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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. Redeemable noncontrolling interest is classified in Level 3 of the fair value hierarchy.

Securities

        Securities are classified based on management's intention on the date of purchase. Securities classified as available-for-sale or trading are presented at fair value and securities classified as held-to-maturity are presented at amortized cost. Unrealized gains or losses on securities available-for-sale are excluded from net income but are included as a separate component of other comprehensive income, net of taxes. Premiums or discounts on securities are amortized or accreted into income using the interest method over the expected lives of the individual securities. The Company performs a quarterly assessment of available-for-sale and held-to-maturity debt securities to determine whether a decline in fair value below amortized cost is other than temporary. Amortized cost includes adjustments made to the cost of an investment for accretion, amortization, collection of cash and previous other-than temporary impairment recognized in earnings. Other-than-temporary impairment exists when it is probable that the Company will be unable to recover the entire amortized cost basis of the security. If the decline in fair value is judged to be other than temporary, the security is written down to fair value which becomes the new cost basis and an impairment loss is recognized.

        For debt securities, the classification of other-than-temporary impairment depends on whether the Company intends to sell the security or it more likely than not will be required to sell the security before recovery of its cost basis, and on the nature of the impairment. If the Company intends to sell a security or it is more likely than not it will be required to sell a security prior to recovery of its cost basis, the entire amount of impairment is recognized in earnings. If the Company does not intend to sell the security or it is not more likely than not it will be required to sell the security prior to recovery of its cost basis, the credit loss component of impairment is recognized in earnings and impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security's effective interest rate at the date of acquisition. The cost basis of an other-than-temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value.

        Realized gains or losses on sales of securities are recorded using the specific identification method. Trading securities are valued at fair value with any unrealized gains or losses included in net income.

Acquired Impaired Loans

        Loans acquired for which it is probable that all contractual payments will not be received are accounted for under 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 of acquired impaired loans is determined using discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates. As estimated credit and market risks are included in the determination of fair value, no allowance for loan losses is established on the acquisition date. The excess of expected cash flows at acquisition over the initial investment in acquired loans ("accretable yield") is recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. In accordance with ASC 310-30, the Company assembles loans into pools based on common risk characteristics. The Company believes that the primary drivers of risk in its acquired loan portfolio are loan program and

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purpose, and has assembled its loan pools based on these risk characteristics. The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis. Increases in estimated cash flows over those expected at the acquisition date and subsequent measurement periods are recognized as interest income, prospectively. Decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording a provision for loan losses. Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated.

Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments

        The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses, reserve for off-balance sheet credit commitments and provision for credit losses. The provision is the expense recognized in the consolidated statements of income to adjust the allowance and reserve to the levels deemed appropriate by management, as determined through application of the Company's allowance methodology procedures. The provision for credit losses reflects management's judgment of the adequacy of the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments. It is determined through quarterly analytical reviews of the loan and commitment portfolios and consideration of such other factors as the Company's loan and lease loss experience, trends in problem loans, concentrations of credit risk, underlying collateral values, and current economic conditions, as well as the results of the Company's ongoing credit review process. As conditions change, 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 considers all available evidence, including as appropriate, the probability that a specific loan will default, the expected exposure of a loan at default,

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an estimate of loss given default, the present value of expected future cash flows discounted using the loan's contractual effective rate, the secondary market value of the loan and the fair value of collateral.

        The allowance for loan and lease losses is decreased by the amount of charge-offs and increased by the amount of recoveries. Generally, commercial, commercial real estate and real estate construction loans are charged off immediately when it is determined that advances to the borrower are in excess of the calculated current fair value of the collateral or if a borrower is deemed incapable of repayment of unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance pending. Consumer loans are charged-off based on delinquency, ranging from 60 days for overdrafts to 180 days for secured consumer loans, or earlier when it is determined that the loan is uncollectible due to a triggering event, such as bankruptcy, fraud or death.

        Reserve for Off-Balance Sheet Credit Commitments —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. Increases and decreases in the reserve for off-balance sheet credit commitments are reflected as an allocation of provision expense from or to the allowance for loan and lease losses.

        Allowance for Losses on Covered Loans—The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis. Decreases in expected cash flows after the acquisition date and subsequent measurement periods are recognized by recording a provision for loan losses. See Acquired Impaired Loans for further discussion.

Other Real Estate Owned

        OREO includes real estate acquired in full or partial satisfaction of a loan and is recorded at fair value less estimated costs to sell at the acquisition date. The excess of the carrying amount of a loan over the fair value of real estate acquired (less costs to sell) is charged to the allowance for loan and lease losses. If the fair value of OREO at initial acquisition exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the allowance for loan and lease losses if a charge-off had previously been recorded, or as a gain on initial transfer in noninterest income. The fair value of OREO is generally based on a third party appraisal or, in certain circumstances, may be based on a combination of an appraised value, broker price opinions and recent sales activity. Declines in the fair value of OREO that occur subsequent to acquisition are charged to OREO expense in the period in which they are identified. Expenses for holding costs are charged to OREO expense as incurred.

        Covered OREO consists of acquired OREO that is covered under loss-sharing agreements with the FDIC. These assets were recorded at their fair value on acquisition date. Covered OREO is reported in Other real estate owned in the consolidated balance sheets.

Goodwill and Other Intangible Assets

        Under the acquisition method of accounting, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed, including contingent consideration, at their acquisition date fair values. Management utilizes valuation techniques based on discounted cash flow analysis to determine these fair values. Any excess of the purchase price over amounts allocated to acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed are greater than the purchase price, a bargain purchase gain is recognized. Intangible assets include core deposit intangibles and client advisory contract intangibles (combined, customer-relationship intangibles) originating from acquisitions of financial services firms. Core deposit intangibles are amortized over a

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range of four to eight years and client advisory contract intangibles are amortized over various periods ranging from four to 20 years.

        Goodwill and customer-relationship intangibles are evaluated for impairment at least annually or more frequently if events or circumstances, such as changes in economic or market conditions, indicate that potential impairment exists. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment for which discrete financial information is available and regularly reviewed by management. Fair values of reporting units are determined using methods consistent with current market practices for valuing similar types of businesses. Valuations are generally based on market multiples of net income or gross revenues combined with an analysis of expected near and long-term financial performance. Management utilizes market information including market comparables and recent merger and acquisition transactions to validate the reasonableness of its valuations. 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. If so, a further test is required to measure the amount of impairment. If an impairment loss exists, the carrying amount of the goodwill is adjusted to a new cost basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

        Impairment testing of customer-relationship intangibles is performed at the individual asset level. Impairment exists when the carrying amount of an intangible asset is not recoverable and exceeds its fair value. The carrying amount of an intangible asset is not recoverable when the carrying amount of the asset exceeds the sum of undiscounted cash flows (cash inflows less cash outflows) associated with the use and/or disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The fair value of core deposit intangibles is 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. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is amortized over the remaining useful life of the asset.

Noncontrolling Interest

        Noncontrolling interest is the portion of equity in a subsidiary not attributable to a parent, and is reported as a separate component of equity in the consolidated balance sheets, with the exception of noncontrolling ownership interests that are redeemable at the option of the holder or outside the control of the issuer. These redeemable noncontrolling interests are not considered to be permanent equity and are reported in the mezzanine section of the consolidated balance sheets at fair value. Consolidated net income is attributed to controlling and noncontrolling interest in the consolidated statements of income.

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Share-based Compensation Plans

        The Company measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. This cost is recognized in the consolidated statements of income over the vesting period of the award. The fair value of a stock option award is estimated using a Black-Scholes option valuation model. Restricted stock and restricted stock unit awards are valued at the closing price of the Company's stock on the date of the grant. Cash-settled restricted stock units are initially valued at the closing price of the Company's stock on the date of the grant and subsequently remeasured to the closing price of the Company's stock at each reporting date until settlement.

Income Taxes

        The calculation of the Company's income tax provision and related tax accruals requires the use of estimates and judgments. The provision for income taxes includes current and deferred income tax expense on net income adjusted for permanent and temporary differences in the tax and financial accounting for certain assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities 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.

        Accrued income taxes represent the estimated amounts due to or received from the various taxing jurisdictions where the Company has established a business presence. The balance also includes a contingent reserve for potential taxes, interest and penalties related to uncertain tax positions. On a quarterly basis, management evaluates the contingent tax accruals to determine if they are sufficiently reserved based on a probability assessment of potential outcomes. The determination is based on facts and circumstances, including the interpretation of existing law, new judicial or regulatory guidance and the status of tax audits. From time to time, there may be differences in opinion with respect to the tax treatment accorded transactions. If a tax position which was previously recognized on the financial statements is no longer more likely than not to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. The Company recognizes accrued interest and penalties relating to uncertain tax positions as an income tax provision expense.

Derivatives and Hedging

        As part of its asset and liability management strategies, the Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to (1) the fair value of certain fixed-rate deposits and borrowings (fair value hedges) and (2) certain cash flows related to future interest payments on variable rate loans (cash flow hedges). Interest-rate swap agreements involve the exchange of fixed and variable rate interest payments between counterparties based upon a notional principal amount and maturity date. The Company recognizes derivatives as assets or liabilities on the consolidated balance sheets at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction. The Company's interest-rate risk management contracts qualify for hedge accounting treatment under ASC Topic 815, Derivatives and Hedging.

        On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge or cash flow hedge. For a fair value hedge, the change in the fair value of the derivative instrument is recognized in current earnings, on the same line in the consolidated statements of income as the changes in fair value of the related hedged item. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in Accumulated other comprehensive income

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(loss) ("AOCI"). Any ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in Other noninterest income in the consolidated statements of income. Amounts within AOCI are reclassified into earnings on the same line in the consolidated statements of income as the hedged item, i.e., included in interest income on loans and leases. For both fair value and cash flow hedges, the periodic accrual of interest receivable or payable on interest rate swaps is recorded as an adjustment to net interest income for the hedged items.

        The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively.

        The Company discontinues hedge accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value on the consolidated balance sheets, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings. When it is determined that a cash flow hedge no longer qualifies as an effective hedge, future changes

        The Company also offers various derivative products to clients and enters into derivative transactions in due course. These transactions are not linked to specific Company assets or liabilities in the consolidated balance sheets or to forecasted transactions in a hedge relationship and, therefore, do not qualify for hedge accounting. The contracts are marked-to-market each reporting period with changes in fair value recorded as part of Other noninterest income in the consolidated statements of income. Fair values are determined from verifiable third-party sources that have considerable experience with the derivative markets. The Company provides client data to the third party source for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts.

        The Company enters into foreign currency option contracts with clients to assist them in hedging their economic exposures arising out of foreign-currency denominated commercial transactions. Foreign currency options allow the counterparty to purchase or sell a foreign currency at a specified date and price. These option contracts are offset by paired trades with third-party banks. The Company also takes proprietary currency positions within risk limits established by the Company's Asset/Liability Management Committee. Both the realized and unrealized gains and losses on foreign exchange contracts are recorded in Other noninterest income in the consolidated statements of income.

RECENT DEVELOPMENTS

        On November 13, 2012, the Company issued 7,000,000 depositary shares, each representing a 1/40th interest in a share of 5.50% Series C non-cumulative perpetual preferred stock with a liquidation preference of $1,000 per share (equivalent to $25.00 per depositary share). Net proceeds, after issuance cost, were approximately $169.9 million.

2012 HIGHLIGHTS

    Consolidated net income attributable to City National Corporation ("CNC") was $208.0 million, or $3.83 per diluted common share in 2012, up 21 percent from $172.4 million, or $3.21 per diluted common share, in 2011. The growth in net income was attributable to higher interest income from loans and securities, lower interest expense on deposits and the acquisitions of Rochdale and FAEF.

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    Revenue, which consists of net interest income and noninterest income, was $1.19 billion, an increase of 7 percent from $1.11 billion in 2011.

    Fully taxable-equivalent net interest income, including dividend income, amounted to $850.7 million in 2012, up 8 percent from $790.3 million in 2011.

    Net interest margin was 3.61 percent in 2012, compared with 3.79 percent in 2011.

    Noninterest income was $357.6 million for 2012, up 5 percent from $341.9 million for 2011, due primarily to the acquisition of Rochdale and FAEF and net gains from private equity and other alternative investments.

    Noninterest expense for 2012 was $825.1 million, up 2 percent from $805.1 million in 2011, largely due to the acquisitions of Rochdale and FAEF. The results for 2012 also included $4.7 million in legal expenses related to the resolution of a legal claim.

    The effective tax rate for 2012 was 32.1 percent compared to 30.6 percent in the prior year.

    Total assets were $28.62 billion at December 31, 2012, up 21 percent from $23.67 billion at the end of 2011. Total average assets increased 12 percent to $25.24 billion for 2012 from $22.53 billion for 2011.

    Loans and leases, excluding covered loans, grew 20 percent from $12.31 billion as of 2011 to $14.82 billion as of 2012. Average loans for 2012, on the same basis, were $13.29 billion, up 14 percent from $11.70 billion in 2011. These results reflect strong loan growth across all business segments, with over two-thirds coming from commercial lending.

    Excluding covered loans, results for 2012 included a $10.0 million provision for loan and lease losses, down from $12.5 million in 2011. The allowance for losses on non-covered loans and leases was $277.9 million at December 31, 2012 compared with $262.6 million at December 31, 2011. The Company remains adequately reserved at 1.88 percent of total loans and leases, excluding covered loans, at December 31, 2012, compared with 2.13 percent at December 31, 2011.

    In 2012, net loan recoveries totaled $7.1 million, or 0.05 percent of average total loans and leases, excluding covered loans, on an annualized basis, compared with net charge-offs of $5.4 million, or 0.05 percent in 2011. Nonaccrual loans, excluding covered loans, totaled $99.8 million at December 31, 2012, down from $112.0 million at December 31, 2011. At December 31, 2012, nonperforming assets, excluding covered assets, were $120.8 million, down from $142.8 million at December 31, 2011.

    Average securities for 2012 totaled $8.50 billion, up 28 percent from 2011 due to strong deposit growth.

    Period-end deposits at December 31, 2012 were $23.50 billion, up 15 percent from $20.39 billion for 2011. Average deposits grew to $21.63 billion for 2012, a 12 percent increase from $19.31 billion in 2011. Average core deposits, which equal 97 percent of total deposit balances in 2012, were up 13 percent from 2011.

    The ratio of Tier 1 common shareholders' equity to risk-based assets was 8.5 percent at December 31, 2012 compared to 10.2 percent as of December 31, 2011. The change from the year-earlier period is a reflection of asset growth and acquisitions. Refer to the "Capital" section of Management's Discussion and Analysis for further discussion of this non-GAAP measure.

    The Company announced on November 15, 2012, that its Board of Directors had declared an accelerated quarterly common stock cash dividend of $0.25 per share and a special common

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      stock cash dividend of $0.25 per share. The quarterly and special dividends were payable on December 18, 2012 to shareholders of record on December 3, 2012.

OUTLOOK

        Given particularly strong growth in net income in 2012, the Company's management expects net income to grow very modestly in 2013. Nonetheless, loan and deposit balances are expected to increase, and credit quality should remain strong, though rising loan balances may require a somewhat higher loan-loss provision. Low interest rates and a very flat yield curve will continue to put pressure on the Company's net interest margin. This outlook reflects management's expectations for the continuation of moderate economic growth throughout 2013.

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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
2012
  Year
Ended
2011
 
(in thousands, except per share amounts) (1)
  Amount   %   Amount   %   2010   2009   2008  

Interest income (2)

  $ 903,278   $ 45,678     5   $ 857,600   $ 17,027     2   $ 840,573   $ 720,195   $ 796,879  

Interest expense

    55,715     (14,385 )   (21 )   70,100     (29,771 )   (30 )   99,871     85,024     184,792  
                                       

Net interest income

    847,563     60,063     8     787,500     46,798     6     740,702     635,171     612,087  

Provision for credit losses on loans and leases, excluding covered loans

    10,000     (2,500 )   (20 )   12,500     (90,500 )   (88 )   103,000     285,000     127,000  

Provision for losses on covered loans

    45,346     1,700     4     43,646     (32,572 )   (43 )   76,218          

Noninterest income

    357,603     15,736     5     341,867     (19,508 )   (5 )   361,375     292,197     266,984  

Noninterest expense:

                                                       

Staff expense

    479,302     30,600     7     448,702     38,879     9     409,823     320,276     354,513  

Other expense

    345,836     (10,557 )   (3 )   356,393     14,886     4     341,507     260,811     233,250  
                                       

Total

    825,138     20,043     2     805,095     53,765     7     751,330     581,087     587,763  

Income before income taxes

    324,682     56,556     21     268,126     96,597     56     171,529     61,281     164,308  

Income taxes

    98,822     21,261     27     77,561     51,506     198     26,055     (1,886 )   41,783  

Less: Adjustments (2)

    16,727     2,217     15     14,510     4,133     40     10,377     11,118     12,191  
                                       

Net income

  $ 209,133   $ 33,078     19   $ 176,055   $ 40,958     30   $ 135,097   $ 52,049   $ 110,334  
                                       

Less: Net income attributable to noncontrolling interest

    1,084     (2,550 )   (70 )   3,634     (286 )   (7 )   3,920     710     5,378  
                                       

Net income attributable to City National Corporation

  $ 208,049   $ 35,628     21   $ 172,421   $ 41,244     31   $ 131,177   $ 51,339   $ 104,956  
                                       

Less: Dividends and accretion on preferred stock

            NM         (5,702 )   (100 )   5,702     25,903     2,445  
                                       

Net income available to common shareholders

  $ 208,049   $ 35,628     21   $ 172,421   $ 46,946     37   $ 125,475   $ 25,436   $ 102,511  
                                       

Net income per common share, diluted

  $ 3.83   $ 0.62     19   $ 3.21   $ 0.85     36   $ 2.36   $ 0.50   $ 2.11  
                                       

(1)
Certain prior period balances have been reclassified to conform to the current period presentation.

(2)
Includes amounts to convert nontaxable income to a fully taxable-equivalent yield. To compare tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the applicable statutory tax rate.

Net Interest Income

        Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets.

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        The following tables present the components of net interest income on a fully taxable-equivalent basis for the last five years:

Net Interest Income Summary

 
  2012   2011  
(in thousands) (1)
  Average
balance
  Interest
income/
expense (2)(4)
  Average
interest
rate
  Average
balance
  Interest
income/
expense (2)(4)
  Average
interest
rate
 

Assets

                                     

Interest-earning assets

                                     

Loans and leases

                                     

Commercial

  $ 5,923,271   $ 236,346     3.99 % $ 4,818,081   $ 198,225     4.11 %

Commercial real estate mortgages

    2,375,389     108,618     4.57     1,962,740     106,076     5.40  

Residential mortgages

    3,846,823     160,422     4.17     3,670,996     172,714     4.70  

Real estate construction

    281,309     14,435     5.13     379,136     18,335     4.84  

Equity lines of credit

    725,077     25,632     3.54     731,425     26,142     3.57  

Installment

    133,351     6,086     4.56     136,010     6,631     4.88  
                               

Total loans and leases, excluding covered loans (3)

    13,285,220     551,539     4.15     11,698,388     528,123     4.51  

Covered loans

    1,268,513     164,537     12.97     1,699,182     161,064     9.48  
                               

Total loans and leases

    14,553,733     716,076     4.92     13,397,570     689,187     5.14  

Due from banks—interest-bearing

    287,476     721     0.25     523,429     1,504     0.29  

Federal funds sold and securities purchased under resale agreements

    112,158     318     0.28     154,395     422     0.27  

Securities

    8,495,746     186,163     2.19     6,634,547     166,487     2.51  

Other interest-earning assets

    114,993     3,096     2.69     132,075     2,757     2.09  
                               

Total interest-earning assets

    23,564,106     906,374     3.85     20,842,016     860,357     4.13  
                                   

Allowance for loan and lease losses

    (325,605 )               (333,312 )            

Cash and due from banks

    176,443                 196,864              

Other non-earning assets

    1,821,228                 1,822,182              
                                   

Total assets

  $ 25,236,172               $ 22,527,750              
                                   

Liabilities and Equity

                                     

Interest-bearing deposits

                                     

Interest checking accounts

  $ 1,980,590   $ 1,883     0.10   $ 1,767,775   $ 2,755     0.16  

Money market accounts

    5,904,484     7,432     0.13     6,626,365     23,278     0.35  

Savings deposits

    368,319     503     0.14     325,882     911     0.28  

Time deposits—under $100,000

    225,081     1,082     0.48     293,545     1,513     0.52  

Time deposits—$100,000 and over

    691,608     3,142     0.45     793,442     5,228     0.66  
                               

Total interest-bearing deposits

    9,170,082     14,042     0.15     9,807,009     33,685     0.34  

Federal funds purchased and securities sold under repurchase agreements

   
52,051
   
46
   
0.09
   
3,145
   
2
   
0.07
 

Other borrowings

    833,757     41,627     4.99     803,948     36,413     4.53  
                               

Total interest-bearing liabilities

    10,055,890     55,715     0.55     10,614,102     70,100     0.66  
                                   

Noninterest-bearing deposits

    12,458,786                 9,498,694              

Other liabilities

    438,007                 338,233              

Total equity

    2,283,489                 2,076,721              
                                   

Total liabilities and equity

  $ 25,236,172               $ 22,527,750              
                                   

Net interest spread

                3.30 %               3.47 %

Fully taxable-equivalent net interest and dividend income

        $ 850,659               $ 790,257        
                                   

Net interest margin

                3.61 %               3.79 %
                                   

Less: Dividend income included in other income

          3,096                 2,757        
                                   

Fully taxable-equivalent net interest income

        $ 847,563               $ 787,500        
                                   

(1)
Certain prior period balances have been reclassified to conform to the current period presentation.

(2)
Net interest income is presented on a fully taxable-equivalent basis.

(3)
Includes average nonaccrual loans of $107,363, $145,825, $278,705, $351,215 and $128,296 for 2012, 2011, 2010, 2009 and 2008, respectively.

(4)
Loan income includes loan fees of $25,907, $18,740, $20,555, $18,381 and $17,008 for 2012, 2011, 2010, 2009 and 2008, respectively.

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Net Interest Income Summary

 
  2010   2009   2008  
 
  Average
balance
  Interest
income/
expense (2)(4)
  Average
interest
rate
  Average
balance
  Interest
income/
expense (2)(4)
  Average
interest
rate
  Average
balance
  Interest
income/
expense (2)(4)
  Average
interest
rate
 

                                                       
                                                         
                                                         

  $ 4,390,834   $ 194,568     4.43 % $ 4,701,386   $ 199,647     4.25 % $ 4,662,641   $ 252,911     5.42 %

    2,059,680     114,542     5.56     2,171,353     121,515     5.60     2,057,459     134,511     6.54  

    3,553,347     186,526     5.25     3,481,227     192,774     5.54     3,293,166     184,818     5.61  

    660,603     26,132     3.96     1,094,332     37,154     3.40     1,406,181     76,039     5.41  

    742,862     26,567     3.58     674,459     23,417     3.47     503,428     22,340     4.44  

    169,054     8,775     5.19     173,862     8,842     5.09     165,840     9,841     5.93  
                                             

    11,576,380     557,110     4.81     12,296,619     583,349     4.74     12,088,715     680,460     5.63  

    1,940,316     138,451     7.14     66,470     4,052     6.10             0.00  
                                             

    13,516,696     695,561     5.15     12,363,089     587,401     4.75     12,088,715     680,460     5.63  

    678,929     1,890     0.28     361,571     1,486     0.41     96,872     1,896     1.96  

   
249,381
   
634
   
0.25
   
186,123
   
264
   
0.14
   
10,037
   
161
   
1.61
 

    4,677,306     142,488     3.05     3,327,235     131,044     3.94     2,398,285     114,362     4.77  

    147,395     2,787     1.89     77,469     2,743     3.54     76,258     4,297     5.63  
                                             

    19,269,707     843,360     4.38     16,315,487     722,938     4.43     14,670,167     801,176     5.46  
                                                   

    (315,228 )               (254,610 )               (178,587 )            

    237,853                 320,010                 370,468              

    1,964,329                 1,330,608                 1,166,773              
                                                   

  $ 21,156,661               $ 17,711,495               $ 16,028,821              
                                                   

 
$

1,998,990
 
$

4,308
   
0.22
 
$

1,540,496
 
$

3,980
   
0.26
 
$

851,029
 
$

5,688
   
0.67
 

    5,911,058     31,591     0.53     4,084,090     32,068     0.79     3,760,516     72,212     1.92  

    317,263     1,508     0.48     239,441     1,590     0.66     137,779     556     0.40  

    430,557     2,448     0.57     239,680     3,222     1.34     220,259     6,695     3.04  

    1,110,996     9,175     0.83     1,303,174     19,569     1.50     1,299,462     37,840     2.91  
                                             

    9,768,864     49,030     0.50     7,406,881     60,429     0.82     6,269,045     122,991     1.96  

                                                          

    163,309     5,292     3.24     414,672     8,292     2.00     1,098,731     27,591     2.51  

    846,513     45,549     5.38     542,521     16,303     3.01     1,068,491     34,210     3.20  
                                             

    10,778,686     99,871     0.93     8,364,074     85,024     1.02     8,436,267     184,792     2.19  
                                                   

    8,099,528                 6,945,017                 5,630,597              

    317,338                 241,482                 255,865              

    1,961,109                 2,160,922                 1,706,092              
                                                   

  $ 21,156,661               $ 17,711,495               $ 16,028,821              
                                                   

                3.45 %               3.41 %               3.27 %

        $ 743,489               $ 637,914               $ 616,384        
                                                   

                3.86 %               3.91 %               4.20 %
                                                   

                                                          

          2,787                 2,743                 4,297        
                                                   

        $ 740,702               $ 635,171               $ 612,087        
                                                   

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        Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. The following table provides a breakdown of the changes in net interest income on a fully taxable-equivalent basis and dividend income due to volume and rate between 2012 and 2011, as well as between 2011 and 2010. 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

 
  2012 vs 2011   2011 vs 2010  
 
  Increase (decrease)
due to
   
  Increase (decrease)
due to
   
 
 
  Net
increase
(decrease)
  Net
increase
(decrease)
 
(in thousands) (1)
  Volume   Rate   Volume   Rate  

Interest earned on:

                                     

Total loans and leases (2)

  $ 57,754   $ (30,865 ) $ 26,889   $ (6,129 ) $ (245 ) $ (6,374 )

Securities

    42,627     (22,951 )   19,676     52,230     (28,231 )   23,999  

Due from banks—interest-bearing

    (610 )   (173 )   (783 )   (445 )   59     (386 )

Federal funds sold and securities purchased under resale agreements

    (120 )   16     (104 )   (256 )   44     (212 )

Other interest-earning assets

    (389 )   728     339     (305 )   275     (30 )
                           

Total interest-earning assets

    99,262     (53,245 )   46,017     45,095     (28,098 )   16,997  
                           

Interest paid on:

                                     

Interest checking deposits

    301     (1,173 )   (872 )   (457 )   (1,096 )   (1,553 )

Money market deposits

    (2,299 )   (13,547 )   (15,846 )   3,481     (11,794 )   (8,313 )

Savings deposits

    106     (514 )   (408 )   40     (637 )   (597 )

Time deposits

    (954 )   (1,563 )   (2,517 )   (3,048 )   (1,834 )   (4,882 )

Total borrowings

    3,657     1,601     5,258     (9,508 )   (4,918 )   (14,426 )
                           

Total interest-bearing liabilities

    811     (15,196 )   (14,385 )   (9,492 )   (20,279 )   (29,771 )
                           

  $ 98,451   $ (38,049 ) $ 60,402   $ 54,587   $ (7,819 ) $ 46,768  
                           

(1)
Certain prior period balances have been reclassified to conform to the current period presentation.

(2)
Includes covered loans.

Comparison of 2012 with 2011

        Net interest income was $830.8 million for 2012, an increase of 7 percent from $773.0 million for 2011. The increase from the prior year was largely due to higher interest income on loans and securities. Interest income on total loans was $708.9 million in 2012, up 4 percent from 2011. The increase reflects the growth in the Company's loan and lease portfolio and higher income from the net accelerated accretable yield recognition on covered loans that were paid off or fully charged off during 2012, partially offset by lower yields on loans. Income from accelerated accretable yield recognition was $82.8 million for 2012, up from $55.7 million for 2011. Interest income on securities was $176.7 million in 2012, an 11 percent increase from 2011. The impact of lower yields was offset by significant growth in the securities portfolio over the prior year. Average securities were $8.50 billion in 2012, up 28 percent from 2011 as the Company continued to invest a large share of its growing deposits in securities.

        Total interest expense was $55.7 million in 2012, down from $70.1 million in 2011. Interest expense on deposits was $14.0 million in 2012, down 58 percent from $33.7 million in 2011 as a result of lower interest rates and a 6 percent decrease in average interest-bearing deposits. Interest expense on borrowings increased 14 percent to $41.7 million in 2012, compared to $36.4 million in 2011. The

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growth in interest expense on borrowings was primarily attributable to debt assumed in the acquisition of FAEF and the issuance of $150.0 million in subordinated notes during the second quarter of 2012.

        The net settlement of interest-rate swaps increased net interest income by $8.4 million for 2012 and $15.1 million for 2011.

        The fully taxable net interest margin declined to 3.61 percent for 2012, from 3.79 percent for 2011. The average yield on earning assets for 2012 was 3.85 percent, down 28 basis points from 4.13 percent in 2011. The average cost of interest-bearing liabilities decreased to 0.55 percent, or by 11 basis points, from 0.66 percent for 2011. Fully taxable-equivalent net interest income, which includes amounts to convert nontaxable income to fully taxable-equivalent amounts, was $847.6 million for 2012 compared with $787.5 million for 2011. Fully taxable-equivalent net interest and dividend income was $850.7 million and $790.3 million in 2012 and 2011, respectively. The $60.4 million increase in fully taxable-equivalent net interest and dividend income from the prior year was primarily generated through loans and securities growth (volume variance) and lower rates on interest-bearing deposits, partially offset by lower yields on loans and securities (rate variance).

        Average loans and leases, excluding covered loans, were $13.29 billion, a 14 percent increase from $11.70 billion for 2011. The increase was primarily driven by a growth in commercial loans, which grew 23 percent from 2011, and commercial real estate mortgage loans, which grew 21 percent. The growth in commercial loans from the prior year was due to both organic loan growth and lease financing loans that were acquired with FAEF. Average covered loans were $1.27 billion in 2012, a decrease of 25 percent from $1.70 billion in 2011.

        Average deposits were $21.63 billion for 2012, a 12 percent increase from $19.31 billion in 2011. Average core deposits, which do not include certificates of deposits of $100,000 or more, were $20.94 billion and represented 97 percent of the total average deposit balance, compared to $18.51 billion and 96 percent in 2011. Average interest-bearing deposits were $9.17 billion in 2012, down 6 percent from $9.81 billion for 2011. Average noninterest-bearing deposits increased 31 percent to $12.46 billion from $9.50 billion in 2011.

Comparison of 2011 with 2010

        Net interest income was $773.0 million for 2011, an increase of 6 percent from $730.3 million for 2010. Interest income on securities was $159.3 million in 2011, a 16 percent increase from 2010 due primarily to a 42 percent increase in average securities over the year-earlier period. Interest income on total loans was $681.9 million in 2011, down 1 percent from 2010, reflecting lower yields on non-covered loans in 2011, partially offset by an increase in interest income on covered loans. Interest income from covered loans included $55.7 million of income from the accelerated accretable yield recognition on covered loans that were paid off or fully charged off during the current year, compared to $20.6 million in 2010.

        Total interest expense was $70.1 million in 2011, down from $99.9 million in 2010. Interest expense on deposits was $33.7 million in 2011, down 31 percent from $49.0 million in 2010 as a result of lower interest rates. Interest expense on borrowings decreased 28 percent to $36.4 million in 2011, compared to $50.8 million in 2010. The lower interest expense reflected a decrease in average borrowings due to the extinguishment of structured repurchase agreements and the redemption of trust preferred securities in 2010.

        The net settlement of interest-rate swaps increased net interest income by $15.1 million for 2011 and $25.8 million for 2010.

        The fully taxable net interest margin declined to 3.79 percent for 2011, from 3.86 percent for 2010. The average yield on earning assets for 2011 was 4.13 percent, down 25 basis points from 4.38 percent in 2010. The average cost of interest-bearing liabilities decreased to 0.66 percent, or by 27 basis points,

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from 0.93 percent for 2010. Fully taxable-equivalent net interest income was $787.5 million for 2011 compared with $740.7 million for 2010. Fully taxable-equivalent net interest and dividend income was $790.3 million and $743.5 million in 2011 and 2010, respectively. The $46.8 million increase in fully taxable-equivalent net interest and dividend income from 2010 was primarily generated through securities growth and lower interest-bearing liabilities (volume variance) and was partially offset by a decrease in net interest income largely due to lower yields on securities (rate variance).

        Average loans and leases, excluding covered loans, were $11.70 billion, a 1 percent increase from $11.58 billion for 2010. The increase was primarily driven by a growth in commercial loans, which grew 10 percent from 2010, partially offset by lower commercial real estate mortgage and real estate construction loans. Average covered loans were $1.70 billion in 2011, a decrease of 12 percent from $1.94 billion in 2010.

        Average total securities were $6.63 billion in 2011, a 42 percent increase from 2010. The increase reflected the Company's strong deposit growth which outpaced loan growth.

        Average deposits were $19.31 billion for 2011, an 8 percent increase from $17.87 billion in 2010. Average core deposits were $18.51 billion and represented 96 percent of the total average deposit balance, compared to $16.76 billion and 94 percent in 2010. Average interest-bearing deposits were $9.81 billion in 2011, up slightly from $9.77 billion for 2010, and average noninterest-bearing deposits increased 17 percent to $9.50 billion from $8.10 billion in 2010.

Provision for Credit Losses

        The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses, reserve for off-balance sheet credit commitments and provision for credit losses. The provision for credit losses on loans and leases, excluding covered loans, is the expense recognized in the consolidated statements of income to adjust the allowance and the reserve for off-balance sheet credit commitments to the levels deemed appropriate by management, as determined through application of the Company's allowance methodology procedures. See "Critical Accounting Policies—Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments."

        The Company recorded expense of $10.0 million, $12.5 million and $103.0 million through the provision for credit losses on loans and leases, excluding covered loans, in 2012, 2011 and 2010, respectively. The provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by a broad range of economic factors. Additional factors affecting the provision include net loan charge-offs, nonaccrual loans, specific reserves, risk rating migration and changes in the portfolio size and composition. See "Balance Sheet Analysis—Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.

        Covered loans represent loans acquired from the FDIC that are subject to loss-sharing agreements, and are primarily accounted for as acquired impaired loans under ASC 310-30. The provision for losses on covered loans is the expense recognized in the consolidated statements of income related to impairment losses resulting from the Company's quarterly review and update of cash flow projections on its covered loan portfolio. The Company recorded provision for losses on covered loans of $45.3 million, $43.6 million and $76.2 million in 2012, 2011 and 2010, respectively. Approximately $0.3 million and $0.4 million of the provision in 2011 and 2010, respectively, related to a small population of acquired loans that are outside the scope of ASC 310-30. The provision for losses on covered loans is the result of changes in expected cash flows, both amount and timing, due to loan payments and the Company's revised loss and prepayment forecasts. The revisions of the loss and prepayment forecasts were based on the results of management's review of the credit quality of the

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outstanding covered loans and the analysis of the loan performance data since the acquisition of covered loans. The Company will continue updating cash flow projections on covered loans on a quarterly basis. Due to the uncertainty in the future performance of the covered loans, additional impairments may be recognized in the future.

        Credit quality will be influenced by underlying trends in the economic cycle, particularly in California, New York and Nevada, and other factors which are beyond management's control. Consequently, no assurances can be given that the Company will not sustain loan or lease losses, in any particular period, that are sizable in relation to the allowance for loan and lease losses.

        Refer to "Loans and Leases—Asset Quality" on page 88 for further discussion of credit quality.

Noninterest Income

        Noninterest income for the year totaled $357.6 million, an increase of 5 percent from $341.9 million in 2011. Noninterest income decreased 5 percent between 2011 and 2010. Noninterest income represented 30 percent of total revenues in 2012, a decrease from 31 percent and 33 percent in 2011 and 2010, respectively.

        A breakdown of noninterest income by category is provided in the table below:

Analysis of Changes in Noninterest Income

 
   
  Increase
(Decrease)
   
  Increase
(Decrease)
   
 
(in thousands) (1)
  2012   Amount   %   2011   Amount   %   2010  

Trust and investment fees

  $ 155,224   $ 14,492     10.3   $ 140,732   $ 6,005     4.5   $ 134,727  

Brokerage and mutual fund fees

    27,804     7,364     36.0     20,440     (3,302 )   (13.9 )   23,742  
                                   

Total wealth management fees

    183,028     21,856     13.6     161,172     2,703     1.7     158,469  

Cash management and deposit transaction fees

    45,649     1,344     3.0     44,305     (3,288 )   (6.9 )   47,593  

International services fees

    39,963     3,497     9.6     36,466     5,169     16.5     31,297  

FDIC loss sharing (expense) income, net

    (6,017 )   2,620     30.3     (8,637 )   (71,972 )   (113.6 )   63,335  

Other noninterest income

    82,865     7,183     9.5     75,682     43,539     135.5     32,143  
                                   

Total noninterest income before gain (loss)

    345,488     36,500     11.8     308,988     (23,849 )   (7.2 )   332,837  

Gain on disposal of assets

    11,293     (9,007 )   (44.4 )   20,300     17,463     615.5     2,837  

Gain on acquisition

        (8,164 )   (100.0 )   8,164     (19,175 )   (70.1 )   27,339  

Gain on sale of securities

    1,113     (3,953 )   (78.0 )   5,066     4,673     1,189.1     393  

Impairment loss on securities

    (291 )   360     55.3     (651 )   1,380     67.9     (2,031 )
                                   

Total noninterest income

  $ 357,603   $ 15,736     4.6   $ 341,867   $ (19,508 )   (5.4 ) $ 361,375  
                                   

(1)
Certain prior period balances have been reclassified to conform to the current period presentation.

Wealth Management

        The Company provides various trust, investment and wealth advisory services to its individual and business clients. The Company delivers these services through the Bank's wealth management division as well as through its wealth management affiliates. Trust services are provided only by the Bank. Trust and investment fee revenue includes fees from trust, investment and asset management, and other wealth advisory services. The majority of these fees are based on the market value of client assets managed, advised, administered or held in custody. The remaining portion of these fees is based on the specific service provided, such as estate and financial planning services, or may be fixed fees. For those fees based on market valuations, the mix of assets held in client accounts, as well as the type of managed account, impacts how closely changes in trust and investment fee income correlate with changes in the financial markets. Changes in market valuations are reflected in fee income primarily on a trailing-quarter basis. Also included in total trust and investment fees is the Company's portion of

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income from certain investments accounted for under the equity method. Trust and investment fees were $155.2 million, an increase of 10 percent from $140.7 million for 2011. Money market mutual fund and brokerage fees were $27.8 million, an increase of 36 percent from $20.4 million for 2011. The increase was largely due to the acquisition of Rochdale, as well as slightly higher short-term interest rates.

        Assets under management include assets for which the Company makes investment decisions on behalf of its clients and assets under advisement for which the Company receives advisory fees from its clients. Assets under administration are assets the Company holds in a fiduciary capacity or for which it provides non-advisory services. During the third quarter of 2012, assets under administration were revised to exclude the Company's investments that were held in custody and serviced by the Company's wealth management business. Prior period balances were reclassified to conform to current period presentation. The table below provides a summary of assets under management and assets under administration for the dates indicated:

 
  December 31,    
 
 
  %
Change
 
(in millions)
  2012   2011  

Assets Under Management

  $ 38,240   $ 31,326     22  

Assets Under Administration

                   

Brokerage

    5,218     5,320     (2 )

Custody and other fiduciary

    13,222     9,844     34  
                 

Subtotal

    18,440     15,164     22  
                 

Total assets under management or administration (1)

  $ 56,680   $ 46,490     22  
                 

(1)
Excludes $21.69 billion and $15.95 billion of assets under management for asset managers in which the Company held a noncontrolling ownership interest as of December 31, 2012 and December 31, 2011, respectively.

        Assets under management increased 22 percent from December 31, 2011 due primarily to the acquisition of Rochdale and market appreciation. A distribution of assets under management by type of investment is provided in the following table:

 
  % of Assets Under Management  
Investment
  December 31,
2012
  December 31,
2011
 

Equities

    43 %   38 %

U.S. fixed income

    27     28  

Cash and cash equivalents

    18     21  

Other (1)

    12     13  
           

    100 %   100 %
           

(1)
Includes private equity and other alternative investments.

Other Noninterest Income

        Cash management and deposit transaction fees for 2012 were $45.6 million, up 3 percent from 2011, compared with a 7 percent decrease in 2011 from 2010. The increase from the prior year was due to new product sales and growth in transaction volumes.

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        International services income for 2012 was $40.0 million compared to $36.5 million in 2011 and $31.3 million in 2010. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection fees and gains and losses associated with fluctuations in foreign currency exchange rates. The 10 percent increase from 2011 largely reflected increased client activity and the addition of new clients.

        Net FDIC loss sharing expense was $6.0 million in 2012 and $8.6 million in 2011, compared to net FDIC loss sharing income of $63.3 million in 2010. See "Noninterest Income and Expense Related to Covered Assets" for further discussion of FDIC loss sharing income and expense.

        The Company recognized $1.1 million of net gains on the sale of securities in 2012, compared with net gains of $5.1 million for 2011 and $0.4 million for 2010.

        Impairment losses on securities available-for-sale recognized in earnings were $0.3 million in 2012, down from $0.7 million in 2011 and $2.0 million in 2010. See "Balance Sheet Analysis—Securities" for further discussion of impairment loss on securities available-for-sale.

        Net gain on disposal of assets was $11.3 million in 2012, compared to $20.3 million in 2011 and $2.8 million in 2010. The net gain was primarily due to gains recognized on the sale of covered and non-covered OREO.

        The Company recognized an $8.2 million and $27.3 million pretax gain on FDIC-assisted acquisitions in 2011 and 2010, respectively.

        Other income was $82.9 million in 2012 compared to $75.7 million in 2011 and $32.1 million in 2010. The increase in other income in 2012 from the year earlier was primarily attributable to the FAEF acquisition, higher income from client swap transactions and higher distribution income from private equity investments. These increases were partially offset by lower gains on transfers of covered loans to OREO. The increase in other income in 2011 compared with 2010 was largely due to higher net gains on transfers of covered loans to OREO. In addition, other income for 2010 included total charges of $19.1 million on the early extinguishment of debt and a $5.9 million loss related to one of the Company's affiliated investment advisors.

Noninterest Expense

        Noninterest expense was $825.1 million in 2012, an increase of 2 percent from $805.1 million in 2011. Noninterest expense increased 7 percent in 2011 compared to 2010. The increase in noninterest expense for 2012 compared with the year earlier was primarily attributable to the Rochdale and FAEF acquisitions, higher occupancy expense and higher legal expenses related to the resolution of a legal claim. The increase from 2010 to 2011 was due largely to higher compensation costs, as well as increased expenses for OREO, marketing and advertising, and legal and professional services.

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        The following table provides a summary of noninterest expense by category:

Analysis of Changes in Noninterest Expense

 
   
  Increase
(Decrease)
   
  Increase
(Decrease)
   
 
(in thousands)
  2012   Amount   %   2011   Amount   %   2010  

Salaries and employee benefits

  $ 479,302   $ 30,600     6.8   $ 448,702   $ 38,879     9.5   $ 409,823  

All other:

                                           

Net occupancy of premises

    61,534     7,194     13.2     54,340     (1,227 )   (2.2 )   55,567  

Legal and professional fees

    52,840     2,885     5.8     49,955     2,314     4.9     47,641  

Information services

    34,244     2,147     6.7     32,097     1,273     4.1     30,824  

Depreciation and amortization

    32,485     4,889     17.7     27,596     1,751     6.8     25,845  

Amortization of intangibles

    7,268     (459 )   (5.9 )   7,727     (1,309 )   (14.5 )   9,036  

Marketing and advertising

    30,665     1,745     6.0     28,920     5,808     25.1     23,112  

Office services and equipment

    17,848     (120 )   (0.7 )   17,968     1,587     9.7     16,381  

Other real estate owned

    38,253     (26,791 )   (41.2 )   65,044     1,933     3.1     63,111  

FDIC assessments

    18,117     (11,363 )   (38.5 )   29,480     425     1.5     29,055  

Other operating

    52,582     9,316     21.5     43,266     2,331     5.7     40,935  
                                   

Total all other

    345,836     (10,557 )   (3.0 )   356,393     14,886     4.4     341,507  
                                   

Total noninterest expense

  $ 825,138   $ 20,043     2.5   $ 805,095   $ 53,765     7.2   $ 751,330  
                                   

        Salaries and employee benefits expense for 2012 was $479.3 million, up 7 percent from $448.7 million in 2011. Salaries and employee benefits expense increased 9 percent in 2011 from $409.8 million in 2010. Full-time equivalent staff grew to 3,472 at December 31, 2012 from 3,256 at December 31, 2011 and 3,178 at December 31, 2010. The increase in salaries and employee benefits expense and headcount in 2012 was primarily attributable to business acquisitions. The expense growth in 2011 compared to 2010 was due to an increase in employee headcount and higher bonus and incentive compensation expense.

        Salaries and employee benefits expense for 2012 included $18.6 million related to share-based compensation plans, compared with $19.5 million for 2011 and $16.7 million for 2010. At December 31, 2012, there was $12.9 million of unrecognized compensation cost related to unvested stock options granted under the Company's plans. That cost is expected to be recognized over a weighted average period of 2.4 years. At December 31, 2012, there was $20.6 million of unrecognized compensation cost related to restricted stock granted under the Company's plans. That cost is expected to be recognized over a weighted average period of 3.0 years. In 2012, the Company granted cash-settled restricted stock units to employees. These units are initially valued at the closing price of the Company's stock on the date of award and subsequently remeasured at each reporting date until settlement. See Note 15, Share-Based Compensation, of the Notes to the Unaudited Consolidated Financial Statements for further discussion.

        The remaining noninterest expense categories totaled $345.8 million in 2012, down 3 percent from $356.4 million in 2011. Increases in operating expenses associated with the Company's acquisitions and the addition of new office space were offset by lower FDIC assessments and decreases in covered OREO expense. The remaining noninterest expense categories were up 4 percent in 2011 from 2010 due to higher expenses for OREO, marketing and advertising, and legal and professional services.

        The following table provides a summary of OREO expense for non-covered OREO and covered OREO. Under the loss-sharing agreements, 80 percent of qualifying covered OREO expense is

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reimbursable by the FDIC and reflected in FDIC loss sharing income (expense), net in the noninterest income section of the consolidated statements of income.

 
  For the year ended December 31,  
(in thousands)
  2012   2011   2010  

Non-covered OREO expense

                   

Valuation write-downs

  $ 3,543   $ 4,008   $ 18,857  

Holding costs and foreclosure expense

    867     2,197     2,441  
               

Total non-covered OREO expense

  $ 4,410   $ 6,205   $ 21,298  
               

Covered OREO expense

                   

Valuation write-downs

  $ 20,440   $ 41,443   $ 24,809  

Holding costs and foreclosure expense

    13,403     17,396     17,004  
               

Total covered OREO expense

  $ 33,843   $ 58,839   $ 41,813  
               

Total OREO expense

  $ 38,253   $ 65,044   $ 63,111  
               

        Legal and professional fees were $52.8 million for 2012, compared to $50.0 million in 2011 and $47.6 million in 2010. The increase in legal and professional fees in 2012 is primarily due to acquisition-related transaction costs and legal expenses associated with the resolution of a legal claim. Legal and professional fees associated with covered loans and OREO were approximately $10.0 million, $10.2 million and $6.7 million for 2012, 2011 and 2010, respectively. Qualifying legal and professional fees for covered assets are also reimbursable by the FDIC at 80 percent.

        Net income attributable to noncontrolling interest, representing noncontrolling ownership interests in the net income of affiliates, was $1.1 million in 2012, down from $3.6 million in 2011 and $3.9 million in 2010.

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Noninterest Income and Expense Related to Covered Assets

        The following table summarizes the components of noninterest income and noninterest expense related to covered assets for the years ended December 31, 2012, 2011 and 2010:

 
  For the year ended December 31,  
(in thousands)
  2012   2011   2010  

Noninterest income related to covered assets

                   

FDIC loss sharing (expense) income, net

                   

Gain on indemnification asset

  $ 60,057   $ 34,026   $ 52,061  

Indemnification asset accretion

    (17,234 )   (15,568 )   9,185  

Net FDIC reimbursement for OREO and loan expenses

    32,797     53,324     41,210  

Removal of indemnification asset for loans paid-off or fully charged-off

    (32,797 )   (26,002 )   (14,228 )

Removal of indemnification asset for unfunded loan commitments and loans transferred to OREO

    (11,220 )   (24,945 )   (15,315 )

Removal of indemnification asset for OREO and net reimbursement to FDIC for OREO sales

    (7,106 )   (12,867 )   (3,549 )

Loan recoveries shared with FDIC

    (28,647 )   (16,174 )   (2,765 )

Increase in FDIC clawback liability

    (1,867 )   (1,192 )   (3,264 )

Other

        761      
               

Total FDIC loss sharing (expense) income, net

    (6,017 )   (8,637 )   63,335  
               

Gain on disposal of assets

                   

Net gain on sale of OREO

    7,740     16,272     3,895  

Gain on acquisition

   
   
8,164
   
27,339
 

Other income

                   

Net gain on transfers of covered loans to OREO

    16,180     33,858     21,218  

Amortization of fair value on acquired unfunded loan commitments

    1,572     3,104     3,432  

OREO income

    2,925     2,083     1,512  

Other

    (3,150 )   (1,909 )   (3,810 )
               

Total other income

    17,527     37,136     22,352  
               

Total noninterest income related to covered assets

 
$

19,250
 
$

52,935
 
$

116,921
 
               

Noninterest expense related to covered assets (1)

                   

Other real estate owned

                   

Valuation write-downs

  $ 20,440   $ 41,443   $ 24,809  

Holding costs and foreclosure expense

    13,403     17,396     17,004  
               

Total other real estate owned

    33,843     58,839     41,813  
               

Legal and professional fees

   
9,996
   
10,221
   
6,668
 

Other operating expense

                   

Other covered asset expenses

    84     53     14  
               

Total noninterest expense related to covered assets (2)

 
$

43,923
 
$

69,113
 
$

48,495
 
               

(1)
OREO, legal and professional fees and other expenses related to covered assets must meet certain FDIC criteria in order for the expense amounts to be reimbursed. Certain amounts reflected in these categories may not be reimbursed by the FDIC.

(2)
Excludes personnel and other corporate overhead expenses that the Company incurs to service covered assets and costs associated with the branches acquired in FDIC-assisted acquisitions.

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Noninterest income

        Income and expense from FDIC loss-sharing agreements are reflected in FDIC loss sharing income (expense), net. This balance includes FDIC indemnification asset accretion or amortization, gain or loss on the FDIC indemnification asset, and expense from the reduction of the FDIC indemnification asset upon the removal of loans, OREO and unfunded loan commitments. Loans are removed when they have been fully paid off, fully charged off, sold or transferred to OREO. Net FDIC loss sharing income (expense) also includes income recognized on the portion of expenses related to covered assets that are reimbursable by the FDIC, net of income due to the FDIC, as well as the income statement effects of other loss-share transactions.

        Net FDIC loss sharing expense was $6.0 million for 2012, compared to net FDIC loss sharing expense of $8.6 million in 2011 and net FDIC loss sharing income of $63.3 million in 2010. The lower expense in 2012 compared to 2011 was primarily attributable to higher gains on the indemnification asset from a revision of the Company's projected cash flows forecast on its covered loans, partially offset by lower FDIC reimbursement for covered OREO and loan expenses resulting from an overall decline in OREO and loan costs. The decrease from income to expense in 2011 compared to 2010 was attributable to expense from the amortization of the FDIC indemnification asset compared to accretion income recognized in 2010, as well as higher expenses from the reduction of the FDIC indemnification asset due to loan removals. It also reflects lower gains on the indemnification asset and an increase in loan recoveries that are shared with the FDIC.

        The Company recognized a net gain on sales of covered OREO of $7.7 million in 2012 compared to $16.3 million in 2011 and $3.9 million in 2010. Other income related to covered assets was $17.5 million, $37.1 million and $22.4 million in 2012, 2011 and 2010, respectively, and consists primarily of net gain on transfers of covered loans to OREO, the amortization of fair value on acquired unfunded loan commitments and OREO income. Total other income decreased from prior periods due to lower net gains recognized on the transfers of covered loans to OREO, which were $16.2 million, $33.9 million and $21.2 million in 2012, 2011 and 2010, respectively. The gain or loss recognized on the transfer of covered loans to OREO is calculated as the difference between the carrying value of the covered loan and the fair value of the underlying foreclosed collateral. Refer to the above table for additional information on the components of other income related to covered assets for the years ended December 31, 2012, 2011 and 2010.

Noninterest expense

        Noninterest expense related to covered assets includes OREO expense, legal and professional expense, and other covered asset-related expenses, and may be subject to FDIC reimbursement. Expenses must meet certain FDIC criteria in order for the expense amounts to be reimbursed. Certain amounts reflected in these balances may not be reimbursed by the FDIC if they do not meet the criteria. Total OREO expense, which includes valuation write-downs, holding costs and foreclosure expenses was $33.8 million for 2012, down from $58.8 million for 2011 and $41.8 million for 2010.

Segment Operations

        The Company's reportable segments are Commercial and Private Banking, Wealth Management and Other. For a more complete description of the segments, including summary financial information, see Note 22 of the Notes to Consolidated Financial Statements.

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Commercial and Private Banking

Comparison of 2012 to 2011

        Net income for the Commercial and Private Banking segment decreased to $106.8 million for 2012 from $120.7 million for 2011. The decrease in net income from the prior year was primarily attributable to lower net interest income and lower noninterest income. Net interest income decreased to $724.6 million for 2012 from $740.4 million for 2011. The decline in net interest income for the current year was primarily a result of lower funds transfer pricing income on deposits. In 2012, the funds transfer pricing rate paid on core non-maturing deposits was lowered by 50 percent from 2011. The funds transfer pricing system intends to protect the business line from interest rate volatility, but during extended periods of extremely low or high interest rates, it is not possible to fully mitigate the impact of rate changes. As such, despite record deposit and loan generation in 2012, net interest income declined from 2011. The funds transfer pricing rate on core non-maturity deposits is not expected to decline any further. This decrease in net interest income was partially offset by interest income from leases acquired in the FAEF acquisition and higher interest income from covered loans due to an increase in income from the accelerated yield recognition on covered loans that were paid off or charged off during the year.

        Average loans, excluding covered loans, were $13.22 billion in 2012, up 14 percent from $11.64 billion in 2011, due to organic loan growth, an increase in purchased participations in Shared National Credits, and the leases acquired in the FAEF acquisition. For more discussion on Share National Credits, see "Balance Sheet Analysis—Loan and Lease Portfolio—Commercial and Lease Financing." Average covered loans decreased to $1.27 billion for 2012 from $1.70 billion for the prior year. Average deposits increased by 12 percent to $21.06 billion for 2012 from $18.86 billion for 2011. The growth in average deposits compared with the year earlier was driven by new client relationships and growth in deposits of existing clients.

        Provision for credit losses on loans and leases, excluding covered loans, decreased to $10.0 million for 2012 from $12.5 million for 2011. Provision for losses on covered loans increased to $45.3 million for 2012 from $43.6 million for 2011. Refer to "Results of Operations—Provision for Credit Losses" for further discussion of the provision.

        Noninterest income decreased by 3 percent to $215.4 million for 2012 from $222.3 million for 2011. The decrease is primarily due to lower gains on transfers of covered loans to OREO in 2012. Additionally, noninterest income for the prior year included an $8.2 million acquisition gain. Refer to "Results of Operations—Noninterest Income and Expense Related to Covered Assets" for further discussion. These declines in noninterest income were partially offset by increases in lease income from FAEF and higher income from client swap transactions. Noninterest expense, including depreciation and amortization, increased to $700.5 million for 2012 from $698.5 million for the year earlier. Increases in operating expenses associated with acquisitions were largely offset by decreases in covered OREO expense and lower FDIC assessments.

Comparison of 2011 to 2010

        Net income for the Commercial and Private Banking segment increased to $120.7 million for 2011 from $91.6 million for 2010. The increase in net income from the prior year was primarily attributable to growth in net interest income and a significantly lower provision for losses on total loans, partially offset by a decrease in noninterest income and an increase in noninterest expense. Net interest income increased to $740.4 million for 2011 from $702.8 million for 2010. The increase in net interest income for 2011 was primarily due to an increase in interest income from the accelerated yield recognition on covered loans that were paid off or charged off during the year. Average loans, excluding covered loans, increased to $11.64 billion for 2011 from $11.53 billion for 2010. Average covered loans decreased to $1.70 billion for 2011 from $1.94 billion for the prior year. Average deposits increased by

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9 percent to $18.86 billion for 2011 from $17.29 billion for 2010. The growth in average deposits compared with the year earlier reflected the addition of new clients and higher levels of liquidity maintained by existing clients.

        Provision for credit losses on loans and leases, excluding covered loans, decreased to $12.5 million for 2011 from $103.0 million for 2010. Provision for losses on covered loans decreased to $43.6 million for 2011 from $76.2 million for 2010. Refer to "Results of Operations—Provision for Credit Losses" for further discussion of the provision.

        Noninterest income decreased by 20 percent to $222.3 million for 2011 from $277.9 million for 2010. The decrease is primarily due to higher FDIC loss sharing expense and lower acquisition gains compared with the year earlier. Refer to "Results of Operations—Noninterest Income and Expense Related to Covered Assets" for further discussion of FDIC loss sharing expense. Noninterest expense, including depreciation and amortization, increased to $698.5 million, or by 9 percent, for 2011 from $643.5 million for the year earlier. The increase in noninterest expense from 2010 was largely driven by higher compensation costs, as well as increased expenses for legal and professional services, marketing and advertising, and OREO. Noninterest expense for 2011 reflected the full-year impact of two FDIC-assisted acquisitions completed during the second quarter of 2010, a bank acquisition completed in the second quarter of 2011 and the addition of new branch offices in 2011.

Wealth Management

Comparison of 2012 to 2011

        The Wealth Management segment had net income attributable to CNC of $8.8 million for 2012, an increase of 54 percent from $5.7 million for 2011. Noninterest income increased by 16 percent to $187.8 million for 2012 from $162.2 million for 2011, mostly as a result of the Rochdale acquisition. Refer to "Results of Operations—Noninterest Income—Wealth Management" for further discussion of the factors impacting fee income for the Wealth Management segment. Noninterest expense, including depreciation and amortization, was $175.2 million for 2012 compared with $152.5 million for the year earlier. The increase in noninterest expense in 2012 compared with the year earlier was primarily due to the acquisition of Rochdale.

Comparison of 2011 to 2010

        The Wealth Management segment had net income attributable to CNC of $5.7 million for 2011, an increase of 150 percent from $2.3 million for 2010. Noninterest income increased by 4 percent to $162.2 million for 2011 from $155.7 million for 2010. Refer to "Results of Operations—Noninterest Income—Wealth Management" for a discussion of the factors impacting fee income for the Wealth Management segment. Noninterest expense, including depreciation and amortization, was $152.5 million for 2011 compared with $151.7 million for the year earlier. The increase in noninterest expense in 2011 compared with the year earlier was primarily attributable to higher incentive compensation and expense related to the resolution of two legal claims.

Other

Comparison of 2012 to 2011

        Net income attributable to CNC for the Other segment increased to $92.4 million for 2012, from $46.0 million for 2011. The Asset Liability Funding Center ("Funding Center"), which is included in the Other segment, is used for funds transfer pricing. The Funding Center charges the business line units for loans and pays them for generating deposits. In general, net interest income decreases in the Funding Center when loans and securities balances decrease or when deposit balances increase. However, in periods of extremely low interest rates, the funding credit given on deposits to the

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Commercial and Private Banking segment declines considerably which may cause net interest income in the Funding Center to increase. Net interest income increased to $102.6 million for 2012 from $30.4 million for 2011. The increase in net interest income was due to higher funds transfer income due to loan and securities growth, and to a reduction in the funds transfer rate paid to business line units on deposit balances. Although deposits have increased from the prior year, the transfer pricing paid on deposits declined as a result of the continuing low interest rate environment.

        Noninterest income (loss) was ($45.6) million for 2012 compared with ($42.7) million for the year earlier. The change in noninterest income (loss) reflects an increase in the elimination of inter-segment revenues (recorded in Other segment) due to higher wealth management fee income compared to the year-earlier period, as well as lower net gains on the sale of securities.

Comparison of 2011 to 2010

        Net income attributable to CNC for the Other segment increased to $46.0 million for 2011, from $37.2 million for 2010. Net interest income increased to $30.4 million for 2011 from $25.8 million for 2010. The increase in net interest income was due to higher funds transfer income due to securities growth, partially offset by an increase in deposit balances in the Commercial and Private Banking and Wealth Management segments. Noninterest income (loss) was ($42.7) million for 2011 compared with ($72.2) million for the year earlier. Gains on sales of securities increased to $5.1 million for 2011 from $0.4 million in 2010. Additionally, noninterest income (loss) for 2010 included a $12.3 million charge for the early retirement of debt, a $6.8 million charge for the redemption of trust preferred securities and a $5.0 million charge for the write-off of a CRA-related receivable.

Income Taxes

        The Company recognized income tax expense of $98.8 million in 2012, compared to tax expense of $77.6 million in 2011 and $26.1 million in 2010. The effective tax rate for 2012 was equal to 32.1 percent of pretax income, compared to 30.6 percent for 2011 and 16.2 percent for 2010. The increase in the effective tax rate in 2012, as compared to 2011, was attributable in part to higher pretax income. The effective tax rate for 2010 reflects a favorable tax litigation settlement. The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including tax benefits from investments in affordable housing partnerships, tax-exempt income on municipal bonds and bank-owned life insurance and other adjustments.

        The Company had net deferred tax assets of $124.5 million and $155.5 million as of December 31, 2012 and 2011, respectively.

        The Company and its subsidiaries file a consolidated federal income tax return and also file income tax returns in various state jurisdictions. The Company is currently being audited by the Internal Revenue Service for the tax year 2012. The Company is also currently under audit with the California Franchise Tax Board for the tax years 2005 to 2007. The potential financial statement impact, if any, resulting from the completion of these audits is expected to be minimal.

        From time to time, there may be differences in opinions with respect to the tax treatment of certain transactions. If a tax position which was previously recognized on the consolidated financial statements is no longer more likely than not to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. The Company did not have any tax positions for which previously recognized benefits were derecognized during the year ended December 31, 2012.

        See Note 17 of the Notes to Consolidated Financial Statements for further discussion of income taxes.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk results from the variability of future cash flows and earnings due to changes in the financial markets. These changes may also impact the fair values of loans, securities and borrowings. The values of financial instruments may fluctuate because of interest rate changes, foreign currency exchange rate changes or other market changes. The Company's asset/liability management process entails the evaluation, measurement and management of market risk and liquidity risk. The principal objective of asset/liability management is to optimize net interest income subject to margin volatility and liquidity constraints over the long term. Margin volatility results when the rate reset (or repricing) characteristics of assets are materially different from those of the Company's liabilities. The Board of Directors approves asset/liability policies and annually reviews and approves the limits within which the risks must be managed. The Asset/Liability Management Committee ("ALCO"), which is comprised of senior management and key risk management individuals, sets risk management guidelines within the broader limits approved by the Board, monitors the risks and periodically reports results to the Board.

Risk Management Framework

        Risk management oversight and governance is provided through the Board of Directors' Audit & Risk Committee and facilitated through multiple management committees. Consisting of three outside directors, the Audit & Risk Committee monitors the Company's overall aggregate risk profile as established by the Board of Directors including all credit, market, liquidity, operational and regulatory risk management activities. The Committee reviews and approves the activities of key management governance committees that regularly evaluate risks and internal controls for the Company. These management committees include ALCO, the Credit Policy Committee, the Senior Operations Risk Committee and the Risk Council, among others. The Risk Council reviews the development, implementation and maintenance of risk management processes from a Company-wide perspective, and assesses the adequacy and effectiveness of the Company's risk management policies and the Enterprise Risk Management program. Other management committees, with representatives from the Company's various lines of business and affiliates, address and monitor specific risk types. These committees include the Compliance Committee, the Wire Risk Committee, Product Review Committee and the Information Technology Steering Committee, among others, and report periodically to the key management committees. The Senior Risk Management Officer and the Internal Audit and Credit Risk Review units provide the Audit & Risk Committee with independent assessments of the Company's internal control and related systems and processes.

Liquidity Risk

        Liquidity risk results from the mismatching of asset and liability cash flows. Funds for this purpose can be obtained in cash markets, by borrowing, or by selling certain assets. The objective of liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Company's operations and meet obligations and other commitments on a timely basis and at a reasonable cost. The Company achieves this objective through the selection of asset and liability maturity mixes that it believes best meet its needs. The Company's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets. Liquidity risk management is an important element in the Company's ALCO process, and is managed within limits approved by the Board of Directors and guidelines set by management. Attention is also paid to potential outflows resulting from disruptions in the financial markets or to unexpected credit events. These factors are incorporated into the Company's contingency funding analysis, and provide the basis for the identification of primary and secondary liquidity reserves.

        In recent years, the Company's core deposit base has provided the majority of the Company's funding requirements. This relatively stable and low-cost source of funds, along with shareholders' equity, provided 92 percent and 91 percent of funding for average total assets in 2012 and 2011,

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respectively. Strong core deposits are indicative of the strength of the Company's franchise in its chosen markets and reflect the confidence that clients have in the Company. The Company places a very high priority in maintaining this confidence through conservative credit and capital management practices and by maintaining significant on-balance sheet liquidity reserves.

        The Bank opted out of the Transaction Account Guarantee Program as of July 1, 2010, with notice to depositors. Effective December 31, 2010, the Dodd-Frank Act required unlimited FDIC deposit insurance on all non-interest bearing transaction accounts and mandated participation by all member banks such as the Bank. This requirement and mandate expired on December 31, 2012, at which time unlimited FDIC insurance on non-interest bearing transaction accounts came to an end. Upon expiration, the standard maximum FDIC insurance coverage returned to $250,000 for non-interest bearing transaction accounts. The expiration of the Program did not have a significant impact to the Company's deposit levels and the Company maintains significant readily available liquidity resources to fund any further outflows. While the Company has experienced deposit outflows since December 31, 2012, this is primarily attributed to seasonal cash flow variability of the Bank's clients.

        Funding obtained through short-term wholesale or market sources averaged $52.1 million and $3.8 million for 2012 and 2011, respectively, and ended the year at $1.21 billion. The Company's liquidity position was also supported through longer-term borrowings (including the current portion of long-term debt) which averaged $833.8 million in 2012 compared with $803.3 million for 2011. Market sources of funds comprise a modest portion of total Bank funding and are managed within concentration and maturity guidelines reviewed by management and implemented by the Company's treasury department.

        Liquidity is further provided by assets such as federal funds sold, balances held at the Federal Reserve Bank, and trading securities, which may be immediately converted to cash at minimal cost. The aggregate of these assets averaged $382.0 million during 2012 compared with $652.6 million in 2011. In addition, the Company has committed and unutilized secured borrowing capacity of $4.52 billion as of December 31, 2012 from the Federal Home Loan Bank of San Francisco, of which the Bank is a member. The Company's investment portfolio also provides a substantial secondary liquidity reserve. The portfolio of securities available-for-sale averaged $7.40 billion and $6.53 billion in 2012 and 2011, respectively. The unpledged portion of debt securities available-for-sale and held-to-maturity at fair value totaled $9.59 billion at December 31, 2012. These securities could be used as collateral for borrowing or a portion of available-for-sale securities could be sold.

Interest Rate Risk

        Interest rate risk is inherent in financial services businesses. Interest rate risk results from assets and liabilities maturing or repricing at different times; assets and liabilities repricing at the same time but in different amounts or from short-term and long-term interest rates changing by different amounts (changes in the yield curve).

        The Company has established two primary measurement processes to quantify and manage exposure to interest rate risk: net interest income simulation modeling and economic value of equity analysis. Net interest income simulations are used to identify the direction and severity of interest rate risk exposure across a 12 and 24 month forecast horizon. Economic value of equity calculations are used to estimate the price sensitivity of shareholders' equity to changes in interest rates. The Company also uses gap analysis to provide insight into structural mismatches of asset and liability cash flows.

        Net Interest Income Simulation:    As part of its overall interest rate risk management process, the Company performs stress tests on net interest income projections based on a variety of factors, including interest rate levels, changes in the relationship between the prime rate and short-term interest rates, and the shape of the yield curve. The Company uses a simulation model to estimate the severity of this risk and to develop mitigation strategies, including interest-rate hedges. The magnitude of the

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change is determined from historical volatility analysis. The assumptions used in the model are updated periodically and reviewed and approved by ALCO. In addition, the Board of Directors has adopted limits within which interest rate exposure must be contained. Within these broader limits, ALCO sets management guidelines to further contain interest rate risk exposure.

        The Company is naturally asset-sensitive due to its large portfolio of rate-sensitive commercial loans that are funded in part by noninterest bearing and rate-stable core deposits. As a result, if there are no significant changes in the mix of assets and liabilities, the net interest margin increases when interest rates increase and decreases when interest rates decrease. The Company uses on and off-balance sheet hedging vehicles to manage risk. The Company uses a simulation model to estimate the impact of changes in interest rates on net interest income. Interest rate scenarios include stable rates and a 400 basis point parallel shift in the yield curve occurring gradually over a two-year period. The model is used to project net interest income assuming no changes in loans or deposit mix as it stood at December 31, 2012, as well as a dynamic simulation that includes changes to balance sheet mix in response to changes in interest rates. In the dynamic simulation, loans and deposit balances are modeled based on experience in previous vigorous economic recovery cycles. Loans, excluding covered loans, increase 10 percent per year compared to the base case. Similarly, deposits decline 5 percent per year. Loan yields and deposit rates change over the simulation horizon based on current spreads and adjustment factors that are statistically derived using historical rate and balance sheet data.

        As of December 31, 2012, the Federal funds target rate was at a range of zero percent to 0.25 percent. At December 31, 2012, a gradual 400 basis point parallel increase in the yield curve over the next 24 months assuming a static balance sheet would result in an increase in projected net interest income of approximately 8.2 percent in year one and a 29.2 percent increase in year two. This compares to an increase in projected net interest income of approximately 6.1 percent in year one and a 22.7 percent increase in year two at December 31, 2011. Interest rate sensitivity has increased due to changes in the mix of the balance sheet, primarily significant growth in floating rate loans and non-rate sensitive deposits. The dynamic simulation incorporates balance sheet changes resulting from a gradual 400 basis point increase in rates. In combination, these rate and balance sheet effects result in an increase in projected net interest income of approximately 9.4 percent in year one and 33.5 percent increase in year two. Measurement of a gradual 400 basis point parallel decrease in rates is not meaningful due to the current low rate environment. However, low short-term interest rates have contributed to compression of the net interest margin. Net interest margin could decrease further should the current rate environment be sustained. The Company's interest rate risk exposure remains within Board limits and ALCO guidelines.

        The Company's loan portfolio includes floating rate loans which are tied to short-term market index rates, adjustable rate loans for which the initial rate is fixed for a period from one year to as much as ten years, and fixed-rate loans whose interest rate does not change through the life of the transaction. The following table shows the composition of the Company's loan portfolio by major loan category as of December 31, 2012. Each loan category is further divided into Floating, Adjustable and

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Fixed rate components. Floating rate loans are generally tied to either the Prime rate or to a LIBOR based index.

 
  Floating Rate    
   
   
 
 
   
   
  Total
Loans
 
(in millions)
  Prime   LIBOR   Total   Adjustable   Fixed  

Commercial

  $ 2,222   $ 3,280   $ 5,502   $ 74   $ 1,373   $ 6,949  

Commercial real estate mortgages

    358     1,286     1,644     78     1,107     2,829  

Residential mortgages

                2,496     1,466     3,962  

Real estate construction

    140     56     196         27     223  

Equity lines of credit

    712         712             712  

Installment

    81         81         62     143  

Covered loans

    63     126     189     642     200     1,031  
                           

Total loans and leases

  $ 3,576   $ 4,748   $ 8,324   $ 3,290   $ 4,235   $ 15,849  
                           

Percentage of portfolio

    22 %   30 %   52 %   21 %   27