Note 19. Segment Results

The Company has three reportable segments: Commercial and Private Banking, Wealth Management and Other. The factors considered in determining whether individual operating segments could be aggregated include that the operating segments: (i) offer the same products and services, (ii) offer services to the same types of clients, (iii) provide services in the same manner and (iv) operate in the same regulatory environment. The management accounting process measures the performance of the operating segments based on the Company’s management structure and is not necessarily comparable with similar information for other financial services companies. If the management structures and/or the allocation process changes, allocations, transfers and assignments may change.

The Commercial and Private Banking reportable segment is the aggregation of the Commercial and Private Banking, Real Estate, Entertainment, Corporate Banking, Core Branch Banking and FAEF operating segments. 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 to small and medium-sized businesses, entrepreneurs and affluent individuals. This segment primarily serves clients in California, New York, Nevada, Tennessee and Georgia. FAEF serves clients nationwide.

The Wealth Management segment includes the Corporation’s investment advisory affiliates and the Bank’s Wealth Management Services. The asset management affiliates and the Wealth Management division of the Bank make the following investment advisory and wealth management resources and expertise available to individual and institutional clients: investment management, wealth advisory services, brokerage, estate and financial planning and personal, business, custodial and employee trust services. The Wealth Management segment also advises and makes available mutual funds under the name of CNI Charter Funds. Both the asset management affiliates and the Bank’s Wealth Management division provide proprietary and nonproprietary products to offer a full spectrum of investment solutions in all asset classes and investment styles, including fixed-income instruments, mutual funds, domestic and international equities and alternative investments such as hedge funds. This segment serves clients nationwide.

The Other segment includes all other subsidiaries of the Company, the corporate departments, including the Treasury Department and the Asset Liability Funding Center, that have not been allocated to the other segments, and inter-segment eliminations for revenue recognized in multiple segments for management reporting purposes. The Company uses traditional matched-maturity funds transfer pricing methodology. However, both positive and negative variances occur over time when transfer pricing non-maturing balance sheet items such as demand deposits. These variances, offset in the Funding Center, are evaluated at least annually by management and allocated back to the business segments as deemed necessary.

Business segment earnings are the primary measure of the segment’s performance as evaluated by management. Business segment earnings include direct revenue and expenses of the segment as well as corporate and inter-company cost allocations. Allocations of corporate expenses, such as data processing and human resources, are calculated based on estimated activity levels for the fiscal year. Costs associated with intercompany support and services groups, such as Operational Services, are allocated to each business segment based on actual services used. Capital is allocated based on the estimated risk within each business segment. The methodology of allocating capital is based on each business segment’s credit, market, and operational risk profile. If applicable, any provision for credit losses is allocated based on various credit factors, including but not limited to, credit risk ratings, credit rating fluctuation, charge-offs and recoveries and loan growth.

Effective with second quarter 2013 reporting, the methodology for allocating the provision for income taxes to the segments was revised to base the allocation on the Company’s effective tax rate. The allocation was previously based on the statutory tax rate. Prior period segment results have been revised to reflect this change in methodology.

Exposure to market risk is managed in the Company’s Treasury department. Interest rate risk is mostly removed from the Commercial and Private Banking segment and transferred to the Funding Center through a fund transfer pricing (“FTP”) methodology and allocation model. The FTP model records a cost of funds or credit for funds using a combination of matched maturity funding for fixed term assets and liabilities and a blended rate for the remaining assets and liabilities with varying maturities.

The Bank’s investment portfolio and unallocated equity are included in the Other segment. Amortization expense associated with customer-relationship intangibles is charged to the affected operating segments.

Selected financial information for each segment is presented in the following tables. Commercial and Private Banking includes all revenue and costs from products and services utilized by clients of Commercial and Private Banking, including both revenue and costs for Wealth Management products and services. The revenues and costs associated with Wealth Management products and services that are allocated to Commercial and Private Banking for management reporting purposes are eliminated in the Other segment. The current period reflects any changes made in the process or methodology for allocations to the reportable segments. Prior period segment results have been revised to conform to current period presentation.

	For the three months ended June 30, 2013
	Commercial and			Wealth					Consolidated
(in thousands)	Private Banking			Management		Other			Company

Earnings Summary:
Net interest income	$	185,024		$	247	$	17,648		$	202,919
Provision for losses on covered loans	(11,927		)	—		—			(11,927		)
Noninterest income	30,555			58,472		(6,818		)	82,209
Depreciation and amortization	3,624			1,876		4,680			10,180
Noninterest expense	171,289			48,684		(18,724		)	201,249
Income before income taxes	52,593			8,159		24,874			85,626
Provision for income taxes	15,699			2,298		7,425			25,422
Net income	36,894			5,861		17,449			60,204
Less: Net income attributable to noncontrolling interest	—			463		—			463
Net income attributable to City National Corporation	$	36,894		$	5,398	$	17,449		$	59,741

Selected Average Balances:
Loans and leases, excluding covered loans	$	15,379,372		$	—	$	54,730		$	15,434,102
Covered loans	909,728			—		—			909,728
Total assets	16,505,989			652,737		10,310,855			27,469,581
Deposits	22,409,159			120,702		588,957			23,118,818
Goodwill	393,177			249,445		—			642,622
Customer-relationship intangibles, net	5,176			40,199		—			45,375

	For the three months ended June 30, 2012
	Commercial and		Wealth					Consolidated
(in thousands)	Private Banking		Management		Other			Company

Earnings Summary:
Net interest income	$	184,758	$	648	$	31,073		$	216,479
Provision for credit losses on loans and leases, excluding covered loans	1,000		—		—			1,000
Provision for losses on covered loans	13,293		—		—			13,293
Noninterest income	50,089		39,966		(15,287		)	74,768
Depreciation and amortization	3,414		1,538		4,579			9,531
Noninterest expense	165,635		36,123		(16,773		)	184,985
Income before income taxes	51,505		2,953		27,980			82,438
Provision for income taxes	17,123		846		9,302			27,271
Net income	34,382		2,107		18,678			55,167
Less: Net income attributable to noncontrolling interest	—		409		—			409
Net income attributable to City National Corporation	$	34,382	$	1,698	$	18,678		$	54,758

Selected Average Balances:
Loans and leases, excluding covered loans	$	13,073,029	$	—	$	52,838		$	13,125,867
Covered loans	1,341,041		—		—			1,341,041
Total assets	14,728,913		530,179		9,103,454			24,362,546
Deposits	20,379,604		96,839		471,803			20,948,246
Goodwill	370,333		162,813		—			533,146
Customer-relationship intangibles, net	8,129		25,714		—			33,843

	For the six months ended June 30, 2013
	Commercial and			Wealth					Consolidated
(in thousands)	Private Banking			Management		Other			Company

Earnings Summary:
Net interest income	$	368,980		$	565	$	34,447		$	403,992
Provision for losses on covered loans	(2,035		)	—		—			(2,035		)
Noninterest income	80,818			113,925		(19,006		)	175,737
Depreciation and amortization	7,243			3,776		9,265			20,284
Noninterest expense	342,286			95,664		(35,465		)	402,485
Income before income taxes	102,304			15,050		41,641			158,995
Provision for income taxes	30,237			4,138		12,308			46,683
Net income	72,067			10,912		29,333			112,312
Less: Net income attributable to noncontrolling interest	—			1,048		—			1,048
Net income attributable to City National Corporation	$	72,067		$	9,864	$	29,333		$	111,264

Selected Average Balances:
Loans and leases, excluding covered loans	$	15,068,756		$	—	$	54,691		$	15,123,447
Covered loans	949,370			—		—			949,370
Total assets	16,247,389			648,561		10,692,758			27,588,708
Deposits	22,126,242			113,563		527,035			22,766,840
Goodwill	393,177			249,445		—			642,622
Customer-relationship intangibles, net	5,543			40,794		—			46,337

	For the six months ended June 30, 2012
	Commercial and		Wealth					Consolidated
(in thousands)	Private Banking		Management		Other			Company

Earnings Summary:
Net interest income	$	356,572	$	1,264	$	59,356		$	417,192
Provision for credit losses on loans and leases, excluding covered loans	1,000		—		—			1,000
Provision for losses on covered loans	20,759		—		—			20,759
Noninterest income	96,974		79,337		(25,843		)	150,468
Depreciation and amortization	6,997		2,984		8,864			18,845
Noninterest expense	336,785		72,262		(32,656		)	376,391
Income before income taxes	88,005		5,355		57,305			150,665
Provision for income taxes	28,740		1,536		18,714			48,990
Net income	59,265		3,819		38,591			101,675
Less: Net income attributable to noncontrolling interest	—		652		—			652
Net income attributable to City National Corporation	$	59,265	$	3,167	$	38,591		$	101,023

Selected Average Balances:
Loans and leases, excluding covered loans	$	12,726,026	$	—	$	53,054		$	12,779,080
Covered loans	1,389,877		—		—			1,389,877
Total assets	14,433,156		533,956		9,036,610			24,003,722
Deposits	20,050,801		97,937		434,083			20,582,821
Goodwill	347,547		162,367		—			509,914
Customer-relationship intangibles, net	8,568		26,103		—			34,671