Note 18. 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, retirement, 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 City National Rochdale Funds. Both the asset management affiliates and the Bank’s Wealth Management division provide proprietary and nonproprietary products and offer a full spectrum of investment solutions in multiple 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 administration 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 or usage 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, 2014
	Commercial and			Wealth					Consolidated
(in thousands)	Private Banking			Management		Other			Company

Earnings Summary:
Net interest income	$	208,413		$	474	$	10,215		$	219,102
(Reversal of) provision for credit losses on loans and leases, excluding covered loans	(1,000		)	—		—			(1,000		)
(Reversal of) provision for losses on covered loans	(1,461		)	—		—			(1,461		)
Noninterest income	40,926			69,471		(9,298		)	101,099
Depreciation and amortization	2,774			1,766		4,799			9,339
Noninterest expense	179,904			57,159		(20,780		)	216,283
Income before income taxes	69,122			11,020		16,898			97,040
Provision for income taxes	21,360			3,248		5,221			29,829
Net income	47,762			7,772		11,677			67,211
Less: Net income attributable to noncontrolling interest	—			510		—			510
Net income attributable to City National Corporation	$	47,762		$	7,262	$	11,677		$	66,701

Selected Average Balances:
Loans and leases, excluding covered loans	$	17,901,508		$	—	$	57,683		$	17,959,191
Covered loans	643,690			—		—			643,690
Total assets	18,705,693			693,473		10,579,781			29,978,947
Deposits	25,584,025			73,784		254,272			25,912,081
Goodwill	393,177			249,445		—			642,622
Customer-relationship intangibles, net	2,692			35,778		—			38,470

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

Earnings Summary:
Net interest income	$	185,040		$	247	$	17,632		$	202,919
(Reversal of) 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	171,254			48,720		(18,725		)	201,249
Income before income taxes	52,644			8,123		24,859			85,626
Provision for income taxes	15,715			2,287		7,420			25,422
Net income	36,929			5,836		17,439			60,204
Less: Net income attributable to noncontrolling interest	—			463		—			463
Net income attributable to City National Corporation	$	36,929		$	5,373	$	17,439		$	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	16,503,312			652,737		10,313,532			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 six months ended June 30, 2014
	Commercial and			Wealth					Consolidated
(in thousands)	Private Banking			Management		Other			Company

Earnings Summary:
Net interest income	$	398,206		$	800	$	19,894		$	418,900
(Reversal of) provision for credit losses on loans and leases, excluding covered loans	(1,000		)	—		—			(1,000		)
Provision for losses on covered loans	3,194			—		—			3,194
Noninterest income	89,140			133,564		(20,357		)	202,347
Depreciation and amortization	5,595			3,513		9,546			18,654
Noninterest expense	351,972			109,892		(40,003		)	421,861
Income before income taxes	127,585			20,959		29,994			178,538
Provision for income taxes	40,375			6,250		9,492			56,117
Net income	87,210			14,709		20,502			122,421
Less: Net income attributable to noncontrolling interest	—			1,209		—			1,209
Net income attributable to City National Corporation	$	87,210		$	13,500	$	20,502		$	121,212

Selected Average Balances:
Loans and leases, excluding covered loans	$	17,594,167		$	—	$	56,353		$	17,650,520
Covered loans	669,781			—		—			669,781
Total assets	18,473,951			675,663		10,554,566			29,704,180
Deposits	25,319,356			80,738		243,238			25,643,332
Goodwill	393,177			249,445		—			642,622
Customer-relationship intangibles, net	2,912			36,346		—			39,258

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

Earnings Summary:
Net interest income	$	369,017		$	565	$	34,410		$	403,992
(Reversal of) 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	342,201			95,749		(35,465		)	402,485
Income before income taxes	102,426			14,965		41,604			158,995
Provision for income taxes	30,273			4,113		12,297			46,683
Net income	72,153			10,852		29,307			112,312
Less: Net income attributable to noncontrolling interest	—			1,048		—			1,048
Net income attributable to City National Corporation	$	72,153		$	9,804	$	29,307		$	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	16,244,521			648,561		10,695,626			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