Share-Based Compensation

3 Months Ended

Mar. 31, 2012

Share-Based Compensation

Share-Based Compensation

Note 11. Share-Based Compensation

On March 31, 2012, the Company had one share-based compensation plan, the Amended and Restated City National Corporation 2008 Omnibus Plan (the “Plan”), which was approved by the Company’s shareholders on April 23, 2008. No new awards will be granted under predecessor plans. A description of the Plan is provided below. The compensation cost that has been recognized for all share-based awards was $4.7 million for the three months ended March 31, 2012 and 2011. The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements was $2.0 million for the three months ended March 31, 2012 and 2011. The Company received $2.0 million and $4.0 million in cash for the exercise of stock options during the three months ended March 31, 2012 and 2011, respectively. The actual tax benefit realized for the tax deductions from stock option exercises was $0.4 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.

Plan Description

The Plan permits the grant of stock options, restricted stock, restricted stock units, performance shares, performance share units, performance units and stock appreciation rights, or any combination thereof, to the Company’s eligible employees and non-employee directors. No grants of performance shares, performance share units or stock appreciation rights had been made as of March 31, 2012. The purpose of the Plan is to promote the success of the Company by providing additional means to attract, motivate, retain and reward key employees of the Company with awards and incentives for high levels of individual performance and improved financial performance of the Company, and to link non-employee director compensation to shareholder interests through equity grants. Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. These awards vest in four years and have 10-year contractual terms. Restricted stock awards granted under the Plan vest over a period of at least three years, as determined by the Compensation, Nominating and Governance Committee. The participant is entitled to dividends and voting rights for all shares issued even though they are not vested. Restricted stock awards issued under predecessor plans vest over five years. The Plan provides for acceleration of vesting if there is a change in control (as defined in the Plan) or a termination of service, which may include disability or death. Unvested options are forfeited upon termination of employment, except for those instances noted above, and the case of the retirement of a retirement-age employee for options granted prior to January 31, 2006. The Company generally issues treasury shares upon share option exercises. All unexercised options expire 10 years from the grant date. At March 31, 2012, there were approximately 1.1 million shares available for future grants.

Fair Value

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation methodology that uses the assumptions noted in the following table. The Company evaluates exercise behavior and values options separately for executive and non-executive employees. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses a 20-year look back period to calculate the volatility factor. The length of the look back period reduces the impact of the recent disruptions in the capital markets, and provides values that management believes are more representative of expected future volatility. The Company uses historical data to predict option exercise and employee termination behavior. The expected term of options granted is derived from historical exercise activity and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is equal to the dividend yield of the Company’s stock at the time of the grant.

To estimate the fair value of stock option awards, the Company uses the Black-Scholes methodology, which incorporates the assumptions summarized in the table below:

	For the three months ended March 31,
	2012		2011
Weighted-average volatility	30.58	%	30.91	%
Dividend yield	2.14	%	1.46	%
Expected term (in years)	6.11		6.04
Risk-free interest rate	1.44	%	2.98	%

Using the Black-Scholes methodology, the weighted-average grant-date fair values of options granted during the three months ended March 31, 2012 and 2011 were $11.64 and $18.43, respectively. The total intrinsic values of options exercised during the three months ended March 31, 2012 and 2011 were $0.9 million and $2.3 million, respectively.

A summary of option activity and related information for the three months ended March 31, 2012 is presented below:

			Weighted				Weighted
			Average		Aggregate		Average
	Number of		Exercise		Intrinsic		Remaining
	Shares		Price		Value		Contractual
Options	(in thousands)		(per share)		(in thousands) (1)		Term
Outstanding at January 1, 2012	4,990		$	52.61
Granted	603		46.66
Exercised	(59	)	34.24
Forfeited or expired	(460	)	50.83
Outstanding at March 31, 2012	5,074		$	52.28	$	265,246	5.96
Exercisable at March 31, 2012	3,443		$	54.54	$	187,779	4.62

(1) Includes in-the-money options only.

A summary of changes in unvested options and related information for the three months ended March 31, 2012 is presented below:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Unvested Options	(in thousands)		(per share)
Unvested at January 1, 2012	1,641		$	13.57
Granted	603		11.64
Vested	(599	)	12.22
Forfeited	(14	)	13.43
Unvested at March 31, 2012	1,631		$	13.35

The number of options vested during the three months ended March 31, 2012 and 2011 was 599,119 and 580,636, respectively. The total fair value of options vested during the three months ended March 31, 2012 and 2011 was $7.3 million and $6.8 million, respectively. As of March 31, 2012, there was $17.8 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 2.9 years.

The Plan provides for granting of restricted shares of Company stock to employees. In general, twenty-five percent of the restricted stock vests two years from the date of grant, then twenty-five percent vests on each of the next three consecutive grant anniversary dates. The restricted stock is subject to forfeiture until the restrictions lapse or terminate. A summary of changes in restricted stock and related information for the three months ended March 31, 2012 is presented below:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Restricted Stock (1)	(in thousands)		(per share)
Unvested at January 1, 2012	875		$	50.12
Granted	76		46.66
Vested	(170	)	45.75
Forfeited	(5	)	48.24
Unvested at March 31, 2012	776		$	50.75

(1) Includes restricted stock units.

Restricted stock is valued at the closing price of the Company’s stock on the date of award. The weighted-average grant-date fair values of restricted stock granted during the three months ended March 31, 2012 and 2011 were $46.66 and $60.86, respectively. The number of restricted shares vested during the three months ended March 31, 2012 and 2011 was 169,568 and 134,636, respectively. The total fair value of restricted stock vested during the three months ended March 31, 2012 and 2011 was $7.8 million and $6.2 million, respectively. The compensation expense related to restricted stock for the three months ended March 31, 2012 and 2011 was $2.5 million and $2.3 million, respectively. As of March 31, 2012, the unrecognized compensation cost related to restricted stock granted under the Company’s plans was $26.3 million. That cost is expected to be recognized over a weighted-average period of 3.5 years.

In February 2012, the Company amended the Plan to permit the grant of cash-settled restricted stock units. In general, twenty-five percent of the cash-settled restricted stock units vests two years from the date of grant, then twenty-five percent vests on each of the next three consecutive grant anniversary dates. The units are subject to forfeiture until the restrictions lapse or terminate. Upon vesting, the units are converted to cash based on the closing stock price at vesting date and distributed to plan participants. Plan participants are entitled to dividends, which vest and are paid at the same time as the underlying cash-settled restricted stock units. Dividends are subject to forfeiture in the same manner as the underlying cash-settled restricted stock units. A summary of changes in cash-settled restricted stock units for the three months ended March 31, 2012 is presented below:

	Number of
	Shares
Cash-Settled Restricted Stock Units	(in thousands)
Unvested at January 1, 2012	—
Granted	99
Forfeited	(1	)
Unvested at March 31, 2012	98

Cash-settled restricted stock 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. The compensation expense related to cash-settled restricted stock units for the three months ended March 31, 2012 was $0.1 million.