City National Corp. CEO RUSSELL D GOLDSMITH bought 1250000 shares on 11-13-2008 at $42.12
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 Beverly Hills, California and operating through 62 offices, including 15 full-service regional centers, in Southern California, the San Francisco Bay area, Nevada and New York City. As of December 31, 2007, the Corporation had a majority ownership interest in eight asset management affiliates and a minority interest in one other asset management firm. At December 31, 2007, the Company had consolidated total assets of $15.9 billion, loan balances of $11.6 billion, and assets under management or administration (excluding the minority-owned asset manager) of $58.5 billion. The Company focuses on providing affluent individuals and entrepreneurs, their businesses and their families with complete financial solutions. The organization's mission is to provide this banking and financial experience through an uncommon dedication to extraordinary service, proactive advice and total financial solutions.
On February 28, 2007, the Company completed the acquisition of Business Bank Corporation ("BBC"), the parent of Business Bank of Nevada ("BBNV") and an unconsolidated subsidiary, Business Bancorp Capital Trust I, in a cash and stock transaction valued at $167 million. BBNV operated as a wholly owned subsidiary of City National Corporation until after the close of business on April 30, 2007, at which time it was merged into the Bank. Refer to the "Management's Discussion and Analysis" section of this report for further details regarding this acquisition.
On May 1, 2007, the Corporation completed the acquisition of Lydian Wealth Management in an all-cash transaction. The wealth and investment advisory firm is headquartered in Rockville, Maryland and currently manages or advises on client assets totaling $8.9 billion. Lydian Wealth Management changed its name to Convergent Wealth Advisors ("Convergent Wealth") and became a subsidiary of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003. Refer to the "Management's Discussion and Analysis" section of this report for further details regarding this acquisition.
The Company has three reportable segments, Commercial and Private Banking, Wealth Management, and Other. 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 21 to the Consolidated Financial Statements beginning on page A-45 of this report as well as in the "Management's Discussion and Analysis" beginning on page 28 of this report. In addition, the following information is provided to assist the reader in understanding the Company's business segments:
The Bank's principal client base comprises small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. The Bank serves its clients through relationship banking. The Bank'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 Bank 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 Bank also advises and makes available mutual funds under the name of CNI Charter Funds. The Corporation's asset management subsidiaries and the Bank's Wealth Management Division 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.
At December 31, 2007, the Company had 2,914 full-time equivalent employees.
There is significant competition among commercial banks and other financial institutions in the Company's market areas. California, New York and Nevada are highly competitive environments for banking and other financial organizations providing private and business banking and wealth management services. The Bank 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 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 profitability, like most financial institutions, is highly dependent on interest rate differentials. 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. Energy and commodity prices and the value of the dollar are additional primary sources of risk and volatility. The impact that future changes in domestic and foreign economic conditions might have on the Company cannot be predicted. See Item 1Aâ€”Risk Factors.
The Company's business and earnings are 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
The Corporation, the Bank and the Corporation's non-banking subsidiaries are subject to extensive regulation under both federal and state law. This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the 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.
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 Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, 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 its operations by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and also by the Federal Reserve and the Federal Deposit Insurance Corporation.
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, the SEC under the Investment Advisors Act of 1940. City National Securities, Inc. ("CNS") is regulated by the SEC, the Financial Industry Regulatory Authority ("FINRA") and state securities regulators.
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.
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 at least "satisfactory" 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 Community Reinvestment Act. (See the section captioned "Community Reinvestment Act" included elsewhere in this item.)
Financial holding companies that do not continue to meet all of the requirements for such status will, depending on which requirement they fail to meet, face not being able to undertake new activities or acquisitions that are financial in nature, or losing their 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 more than 5 percent of the voting shares of a commercial bank or its parent holding company. 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 Community Reinvestment Act (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.
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 make good 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 OCC has extensive examination, supervision and enforcement authority over all national banks, including the Bank. If, as a result of an examination of a bank, the OCC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the OCC. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank's deposit insurance.
The OCC, as well as other federal banking agencies, has adopted regulations and guidelines establishing safety and soundness standards, including but not limited to such matters as loan underwriting and documentation, risk management, internal controls and audit systems, interest rate risk exposure, asset quality and earnings and compensation and other employee benefits.
Various other requirements and restrictions under the laws of the United States affect the operations of the Bank. Statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements.
Anti-Money Laundering and OFAC Regulation
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 ("BSA") and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, 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 the U.S. Treasury Department 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.
Richard L. Bloch
President, PiĂ±on Farm, Inc. and co-management partner of CLB Partners for more than the past five years.
Chairman of the Board, City National Corporation, for more than the past five years.
President, Chairman, Pacifica Companies for more than the past five years.
Partner, Ziffren, Brittenham, Branca, Fischer, Gilbert-Lurie, Stiffelman, Cook, Johnson, Lande & Wolf LLP, law firm, for more than the past five years.
Kenneth L. Coleman
Non-executive Chairman of the Board, Accelrys, Inc., since February 2006 (served as a director since May 2003). From May 2002 to January 2006, Chairman and Chief Executive Officer, ITM Software. Director of Accelrys, Inc., MIPS Technologies and United Online.
President, Warner Bros. Television Group, since September 2005. Executive Vice President, Television, Warner Bros., from 1999 to September 2005.
Peter M. Thomas
Managing Partner, Thomas & Mack Co., a commercial real estate development company for more than the past five years. From 1992 to 1995, President and Chief Operating Officer of Bank of America-Nevada; and from 1982 to 1992, President and Chief Operating Officer of Valley Bank of Nevada. Director of Boyd Gaming Corporation.
Christopher J. Warmuth
Executive Vice President, City National Corporation and President, City National Bank since May 2005. Executive Vice President and Chief Credit Officer, City National Bank from June 2002 to May 2005.
Chief Executive Officer of City National Corporation and Chairman of the Board and Chief Executive Officer, City National Bank since October 1995. President of City National Corporation since May 2005. Vice Chairman of City National Corporation from October 1995 to May 2005.
President and CEO, Griego Enterprises, Inc., a business management company, since 1986, which company includes 644 Figueroa Restaurant Partners and ZAPGO Entertainment LLC, a television programming company. Managing Director, Oso Ranch & Lodge LLC, lodging operation, since 2000. Director of AECOM Technology Corporation, CBS Corporation and Southwest Water Company.
Michael L. Meyer
Managing Principal, AMG Realty Investors, LLC and Chief Executive Officer, Michael L. Meyer Company, real estate investment companies, since October 1999. From 1974 to 1998, Managing Partner, Orange County, Ernst & Young LLP Real Estate Group. Director of Paladin Realty Income Properties, Inc.
Ronald L. Olson
Partner, Munger, Tolles & Olson, law firm, for more than the past five years. Director, Edison International, Berkshire Hathaway, Inc., The Washington Post Company and Western Asset Trust.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
Critical Accounting Policies
The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles. The Companyâ€™s accounting policies are fundamental to understanding managementâ€™s discussion and analysis of results of operations and financial condition. The Company has identified seven policies as being 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. Circumstances and events that differ significantly from those underlying the Companyâ€™s estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates. The Companyâ€™s critical accounting policies include those that address the accounting for securities, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, stock-based compensation plans, goodwill and other intangible assets, derivatives and hedging activities, income taxes, and the valuation of financial assets and liabilities reported at fair value. The Company has not made any significant changes in its critical accounting policies or its estimates and assumptions from those disclosed in its 2007 Annual Report other than the adoption of SFAS 157 effective January 1, 2008. The Company has revised certain assumptions related to the adoption of SFAS 157 as discussed below and in Note 5 to the consolidated financial statements.
The Company, with the concurrence of the Audit & Risk Committee, has reviewed and approved these critical accounting policies, which are further described in Managementâ€™s Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) of the Notes to The Consolidated Financial Statements in the Companyâ€™s Form 10-K as of December 31, 2007. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.
There were several new accounting pronouncements in the first nine months of 2008. See Note 4 of the Notes to The Consolidated Financial Statements in this Form 10-Q and Note 1 of the Notes to The Consolidated Financial Statements in the Companyâ€™s Form 10-K as of December 31, 2007 for further details. The Company does not anticipate these pronouncements will have a significant impact on its financial statements.
The Company recorded net income of $16.6 million, or $0.34 per share, for the third quarter of 2008. The Company earned $1.22 per share in the third quarter of 2007, and $0.73 per share in the second quarter of 2008. Excluding securities impairment charges of $19.6 million, or $0.40 per share, third-quarter net income amounted to $36.2 million, or $0.74 per share. Management believes that it is useful for investors to understand the impact of the impairment charges on the Companyâ€™s results of operations. Although third-quarter earnings were challenged by securities impairment charges stemming from unprecedented disruption in the financial markets, City Nationalâ€™s fundamentals are solid and capital, liquidity and credit reserves remain strong. The Company is not burdened by many of the highly publicized problems affecting other financial institutions. City National Bank does not make subprime residential mortgage loans, nor does the Company hold any subprime loans or subprime collateralized debt obligations in its loan or securities portfolio.
â€˘ Average loans and leases for the second quarter of 2008 grew to $12.2 billion, up 9 percent from the same period a year ago.
â€˘ Average core deposits were $10.5 billion, up 1 percent from the third quarter of 2007.
â€˘ Third-quarter 2008 net income reflects a $35 million provision for credit losses. Taking into account net charge-offs of $12.8 million, the third-quarter provision added an incremental $23 million to the Companyâ€™s allowance for loan and lease losses. At September 30, 2008, the Companyâ€™s allowance was $208.0 million, or 169 basis points of total loans and leases. The Company made no provision for credit losses in the third quarter of 2007.
â€˘ Noninterest income decreased to $50.1 million for the current quarter from $81.5 million for the year-earlier quarter. Excluding securities impairment charges, noninterest income totaled $82.7 million, an increase of 2 percent from the third quarter of 2007.
â€˘ The Companyâ€™s net interest margin averaged 4.23 percent in the third quarter of 2008, unchanged from the second quarter of this year.
â€˘ The Company remained well capitalized. Its period-end ratio of equity-to-total assets at September 30, 2008 was 10.2 percent, compared to 10.5 percent at September 30, 2007 and 10.2 percent at June 30, 2008.
The Company had a profitable third quarter, as most of its businesses continued to perform in line with expectations. The Companyâ€™s credit reserves, capital and liquidity remain strong.
Looking to the fourth quarter of 2008, the Company expects noninterest income to slow due to declines in the equity markets. The Company also anticipates more subdued loan growth and additional pressure on its net interest margin due to lower interest rates.
The Company expects 2008 earnings per share of between $2.65 and $2.75. Excluding the after-tax impairment charges of $19.6 million, or $0.40 per share, the Company expects 2008 earnings per share of between $3.05 and $3.15.
As previously disclosed, on October 27, 2008 the Company received preliminary approval of its application for the United States Treasury Department to invest approximately $395 million in the Companyâ€™s preferred stock and warrants. This investment will increase the Companyâ€™s Tier 1 capital ratio to approximately 12 percent.
Net Interest Income
Fully taxable-equivalent net interest income totaled $157.1 million for the third quarter of 2008, compared to $158.1 million for the same period last year and $154.4 million in the second quarter of 2008.
The Companyâ€™s yield on earning assets for the third quarter of 2008 was 5.38 percent down from 5.42 percent in the second quarter of 2008 and 6.55 percent in the third quarter of 2007. The bankâ€™s prime rate was 5.00 percent on September 30, 2008, down from 2.75 percent from September 30, 2007 and unchanged from June 30, 2008. The net interest margin for the third quarter of 2008 was 4.23 percent, compared to 4.23 percent and 4.42 percent for the quarters ended June 30, 2008 and September 30, 2007, respectively. The decline from the prior year is attributable primarily to reductions in short-term interest rates and growth in average loan and leases.
Third-quarter average loan and lease balances reached $12.2 billion, an increase of 9 percent over the same period last year and 1 percent from the second quarter of 2008. The commercial loan portfolio grew 10 percent over the third quarter of 2007 and 1 percent from the second quarter of 2008. Average single family residential mortgage loans to the Companyâ€™s private banking clients increased 9 percent from the third quarter of last year and 2 percent from the second quarter of 2008. The residential mortgage loan portfolio has an average loan-to-value ratio of 50 percent at origination and continues to perform well. Commercial real estate loans grew 10 percent from the third quarter of 2007 but were virtually unchanged from the second quarter of 2008. Real estate construction loans outstanding increased 4 percent from the same period a year ago and decreased 4 percent from the second quarter of 2008. Within the construction portfolio, there is weakness in consumer-oriented property types, including for-sale housing and, to a lesser extent, retail projects. These portfolios are diverse in terms of geography and product type. They consist primarily of recourse loans to well-established real estate developers and are generally located in established urban markets. Most of these developers are clients with whom the Bank has significant long-term relationships.
The Companyâ€™s average deposits totaled $11.7 billion in the third quarter of 2008, a 6 percent decrease from the third quarter of 2007 as the Company was able to reduce its holdings of higher-cost non-core time deposits. Average deposits grew slightly from the second quarter of 2008.
As part of its long-standing asset and liability management strategies, the Company uses â€śplain vanillaâ€ť interest rate swaps to hedge loans, deposits, and borrowings. The notional value of these swaps was $715.9 million at September 30, 2008, unchanged from September 30, 2007, and down slightly from $0.9 billion at December 31, 2007.
Recent decreases in interest rates are expected to reduce interest income on variable rate loans. This reduction will be partially offset by the income from existing swaps qualifying as cash flow hedges. The net interest accrual on these swaps over the next 12 months is projected to be $1.6 million based on current market conditions. Both the income for the quarter and the projected income for the next 12 months should be viewed in context with the benefit the Company has received from increases in interest rates in the past and the decline in income the Company will experience from decreases in interest rates.
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. The following table presents the components of net interest income on a fully taxable-equivalent basis for the three and nine-month periods ended September 30, 2008 and 2007.
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 shows changes in net interest income on a fully taxable-equivalent basis between the third quarter and first nine months of 2008 and 2007, as well as between the third quarter and first nine months of 2007 and 2006.
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.
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 is the expense recognized in the income statement to adjust the allowance and the reserve for off-balance sheet credit commitments to the level deemed appropriate by management, as determined through application of the Companyâ€™s allowance methodology procedures (see â€śCritical Accounting Policiesâ€ť on page 29 of the Companyâ€™s Form 10-K for the year ended December 31, 2007).
The Company recorded a $35 million provision for credit losses in the quarter ended September 30, 2008. The provision for credit losses reflects managementâ€™s ongoing assessment of the current credit environment and was significantly influenced by current period net charge-offs, the level of criticized assets and, to a lesser extent, growth in loans and leases and credit commitments. For the three months ended September 30, 2008, December 31, 2007, and September 30, 2007, net charge-offs totaled $12.8 million, $3.9 million, and $3.6 million, respectively. For these same periods, nonaccrual loans at period end totaled $150.9 million, $75.6 million, and $26.2 million, respectively. While a majority of new nonaccrual loans are centered in the homebuilder portfolio, there was an increase in the number of nonaccrual loans in the commercial portfolio. Although there is significant economic uncertainty, we anticipate the rate of increase in non-accrual loans to moderate through 2009 based on a decrease in the residential construction portfolio as loans are restructured, payoff and/or are charged off.
Third-quarter 2008 noninterest income of $50.1 million was 38 percent lower than the third quarter of 2007 due primarily to impairment charges resulting from unprecedented disruptions in the financial markets. Third quarter results include a $21.9 million write-down of Fannie Mae and Freddie Mac perpetual preferred investments and a $10.7 million write down of other securities held in the Companyâ€™s $2.2 billion available-for-sale securities portfolio.
The Bank provides various trust, investment and wealth advisory services to its individual and business clients. The Company delivers these services through the Bankâ€™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. A portion 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 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. Trust and investment fees decreased 11 percent over the third quarter of 2007 and 2 percent from the prior quarter. The 25 percent increase in brokerage and mutual fund fees for the current quarter compared with the year-earlier period is due to growth in money market funds and managed fixed income accounts.
Assets under management (AUM) 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 it clients. Assets under administration are assets the Company holds in a fiduciary capacity or for which it provides non-advisory services. The table below provides a summary of AUM:
Assets under management fell 11 percent from the year-earlier period and 2 percent from the prior quarter. Assets under management or administration fell 12 percent from the year-earlier period and 2 percent from the prior quarter. Growth in the Companyâ€™s money market funds and managed fixed income accounts, resulting from a flight to safety by investors during a time of market volatility, was offset by declines in assets under management at the Companyâ€™s wealth management affiliates. The decline in AUM at the affiliates is due in part to an anticipated shift of funds by the former owner of an institutional asset management affiliate to its in-house investment manager. The level of AUM is also significantly impacted by lower market valuations.
On a percentage basis, the investment mix of assets generally does not change significantly on a quarter to quarter basis. Over the past year, there has been some shift from equities to fixed income and cash due to the relative difference in equity returns versus cash and fixed income returns in addition to the loss of certain institutional equity assets.
Other Noninterest Income
Cash management and deposit transaction fees for the third quarter of 2008 grew 41 percent from the same period last year and 2 percent from the second quarter of 2008, due to the impact of declining interest rates on compensating deposit balances and the sale of additional cash management services.
International service fees for the third quarter of 2008 grew 3 percent from the same period last year reflecting increased demand for both foreign exchange services and letters of credit, and remained unchanged from the second quarter of 2008. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection and other fee income. International services fees are recognized when earned, except for the fees on commercial and standby letters of credit, which are generally deferred and recognized in income over the terms of the letters of credit.
Other service charges and fees for the third quarter of 2008 amounted to $8.4 million, up 16 percent, from the same period one year ago. These fees were up $0.2 million or 3 percent from the second quarter of 2008.
Thank you. Good afternoon. Here to discuss City Nationalâ€™s third quarter highlights are Russell Goldsmith, our President and Chief Executive Officer and Chris Carey, our Chief Financial Officer.
This call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the companyâ€™s future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the safe harbor provisions contained in the Securities Litigation Reform Act of 1995.
For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from expected results, see the companyâ€™s annual report on Form 10-K for the year ended December 31, 2007.
This afternoon City National issued a news release outlining its financial results for the third quarter of 2008 and year-to-date. To obtain a copy please visit our website at www.cnb.com. After comments by management today, weâ€™ll open this call to your questions. Now Iâ€™ll turn it over to our CEO, Russell Goldsmith.
Good afternoon. Thank you all for joining us again. A few minutes ago City National announced year-to-date earnings of $96 million on revenue of more than $$660 million. Third quarter earnings came to $16.6 million or $0.34 a share after taking $19.6 million in after tax impairment charges, stemming largely from the previously disclosed write down that we incurred due to the blow up in value of Fannie Mae and Freddie Mac preferred securities earlier in the quarter.
Excluding those unusual charges, City Nationalâ€™s third quarter earnings totaled $36.2 million or $0.74 a share. The company also declared its regular quarterly cash dividend of $0.48 per share. City National remains profitable, well capitalized and well reserved. All in all itâ€™s fair to say that City Nationalâ€™s third quarter operating results reflect real strength in our ongoing business.
Let me get into a little more detail. Average loans in the third quarter grew to a record
$12.2 billion, up 9% from the prior year and up 1% from the previous quarter. Most of the linked quarter to quarter growth came from mortgage loans to our private banking clients. I think itâ€™s worth noting in this environment, and itâ€™s indicative of City National, that our mortgage portfolio of today does not have a single delinquency anywhere in the entire mortgage portfolio that weâ€™ve originated. And of course, as I think you know, we have no sub-prime mortgages and City National has never bought brokered mortgages.
Our mortgage borrowers are principally our private banking clients. In the quarter, our commercial loans also grew slightly, but construction and commercial real estate lending together were essentially unchanged on a combined basis from the second quarter.
Regarding deposits, thereâ€™s no question that economic uncertainty has produced a flight to quality in the third quarter and City National as a result has benefited from that by adding a larger than usual number of new clients and new funds from existing clients. As evidenced by the addition in this quarter of approximately $1 billion of additional funds here at City National in clients, securities, deposits, and money market investments.
We added a net total of $271 million out of that $1 billion in deposits. And this is in spite of the fact that City National is not a retail bank and we are not out there in our markets promoting high price CDâ€™s like some of our competitors. Overall, City Nationalâ€™s credit quality has remained sound. Non-accrual loans are up as you can see, but two-thirds of them still involve home construction, which has shrunk to less than 4% of our companyâ€™s $12 billion loan portfolio.
The good news is that third quarter net charge offs fell 32% from the second quarter of this year. While we do anticipate further write downs in our home construction portfolio, we believe they will remain manageable. Most of our home builder borrowers are long term clients, and nearly all of these loans to them are guaranteed or are supported by some form of credit enhancement.
Itâ€™s also worth noting, given all the publicity that California and Nevada get, that the projects in our portfolio are concentrated largely in greater Los Angeles, as well as in the San Francisco Bay area, two geographies in these two states that have held up relatively well.
As has been the case for the past year, away from residential housing, City Nationalâ€™s loan portfolio continues to perform satisfactorily. Despite a stagnant economy, our CNI portfolio also continues to perform reasonably well. Our loan loss reserve remains strong and as of this quarter is now even stronger. Weâ€™ve taken the conservative approach of continuing to build our loan loss reserve, both to accommodate our loan growth and to provide a cushion against further economic deterioration, which we anticipate.
Year-to-date after charge-offs, weâ€™ve added a net total of $43 million to our allowance, bringing it to 169 basis points of total loans. Obviously thatâ€™s had a real impact on our earnings, particularly in the year-over-year comparison when you consider the fact that City National did not need a provision during the first nine months of 2007. So this is the last year-over-year quarter where we are comparing ourselves against a zero provision.
Credit quality and capital strength remain paramount, and City National is strong on both fronts. We intend to stay that way. Let me reiterate that City National has avoided many of the highly publicized problems afflicting other financial institutions. We have no sub-prime loans, no brokered or option adjustable rate mortgages. We have no credit default swaps and no sub-prime based CDOâ€™s, no auto loans, and we have no issues in our modest credit card portfolio, which we have for some of our private banking clients.
In this third quarter, City National opened a new banking office in the affluent Los Angeles suburb of Manhattan Beach, California. We also relocated and upgraded our South Orange County office to new space in one of Southern Californiaâ€™s premier business corridors. We expanded our commercial banking team with a few new key people in our San Francisco Bay region in the office we have in Fremont, and we also announced plans to open a second banking office in San Franciscoâ€™s financial district early next year.
Convergent wealth advisors, the most recent addition to City Nationalâ€™s family of investment affiliates, hired two outstanding teams of well known, ultra high net worth advisors who fit perfectly within the convergent wealth advisor value proposition and business model. And they are already making meaningful contributions to the growth of CWA.
Following the official launch of our preferred banking program in our retail branch system, which is a high end banking system, weâ€™re making good progress we believe in our efforts to capture more of the emerging wealth market. Clearly todayâ€™s economic conditions are challenging. We all know that. And theyâ€™re likely to deteriorate further over the next six to 12 months. At City National weâ€™re very focused on that and have been for quite some time, and remain vigilant about credit quality and costs.
At the same time, we feel good about City National and its outlook. In addition to a strong capital position and strong credit reserves, City National has an exceptional deposit base with 90% of our deposits in core deposits. Our markets remain some of the best in the world, and we are very focused upon taking advantage of many attractive, long term opportunities in those markets. As I think everyone knows, City National is a conservative bank that knows and understands its clients.
A bank that has succeeded by virtue of a long tradition of exceptional client service combined with outstanding state of the art products, technology, capabilities, investment performance, prudent underwriting standards, responsible balance sheet management, an outstanding team of people in this organization, who together have avoided most of the mistakes that everyone is understandably concerned about when the subject of banks comes up today.
City National remains profitable, well reserved and well capitalized. Our liquidity is strong. Weâ€™re adding clients and carefully and strategically investing for the future. Iâ€™m actually encouraged by the progress that weâ€™re making even in these difficult and volatile economic times.
Speaking of that, let me cover one last timely subject, the federal governmentâ€™s key economic stabilization plans and how as we see it today they stand to affect City National Bank. There are five key programs Iâ€™d like to just touch on quickly.
First, the Troubled Asset Relief Program, so-called TARP. Fortunately, City National does not have any assets that we would anticipate would be participating in this program.
Second, the FDICâ€™s Temporary Liquidity Guarantee Program. We do intend to purchase insurance coverage of non-interest bearing deposit transaction accounts exceeding $250,000 when the current 30-day coverage expires.
Third, the Money Market Guarantee Program. City National has applied and been approved for this program.
Fourth, the Money Market Investor Funding Facility. City National also intends to take advantage of this program, which provides liquidity support to money market funds by purchasing assets issued by a select group of highly rated issuers. Our money market funds I might add have held up extremely well and are in very sound shape.
Fifth, the treasury capital purchase program. Fortunately as you know and Iâ€™ve said City National is well capitalized. This appears to be a very good program and weâ€™re taking a close look at it but really canâ€™t comment on it beyond that.
Let me turn to our dynamic CFO, Chris Carey, for some more detail on our third quarter results.
Christopher J. Carey
Thank you Russell and good afternoon all. I want to add a few words about the margin, deposit trends, non-interest income and expense control. Iâ€™ll also talk briefly about our guidance for the remainder of the year.
City Nationalâ€™s net interest margin remains stable, averaging 423 basis points in the third quarter. Itâ€™s held up very well in spite of lower, short-term rates and reasonable loan grow. Weâ€™re seeing better loan pricing virtually in all of our markets now but unfortunately deposit pricing is still very competitive and that appears to reflect the premium that the industry in general is placing on liquidity.
Looking at deposits in the third quarter of 2008, our core deposit balances came to $10.5 million and as Russell mentioned - $10.5 billion and as Russell mentioned, 90% of these are core and that goes a long way to explaining our strong liquidity and low cost of funds. Title and escrow deposits were down $209 million from third quarter 2007 and $25 million from the second quarter. Overall, though, this business has been stable this year and should increase deposit balances over the long term.
Weâ€™ve also seen signs that todayâ€™s economic conditions, coupled with lower interest rates, may be encouraging deposit formation. Obviously thatâ€™s something we expect to continue to take advantage in the coming quarters.
Now turning to non-interest income, that unfortunately declined significantly in the third quarter due to the conditions in the financial markets. These conditions produced several impairment charges. One was the previously disclosed $21.9 million write down of Fannie Mae and Freddie Mac.
We also took a $7.2 million impairment charge related to a discreet portfolio bank trust preferred full securities. This portfolioâ€™s remaining book value is $25 million. We also recorded charges of
$3.5 million principally for the impairment of securities that are held in a $55 million equity portfolio.
Over the years our company has consistently invested in the strategies of its banks and affiliated wealth management businesses and at times we have seeded new products. Both of these areas are small components of City Nationalâ€™s $2.2 billion investment portfolio, which has held up reasonably well overall.
Financial turmoil also took its toll on our wealth management business in some respects. Trust and investment management fee revenue fell 11% from the third quarter last year and 2% from the second quarter of this year. The good news is City National asset management captured additional assets from conservative clients looking to move money into money market funds and fixed income accounts.
At the same time, however, one of our affiliates that permanently manages equity for institutional clients lost some more of its assets to a former owner. Much of that was expected as we told you last quarter but it helped to bring down assets under management.
All in all, investment fees income was stable from the previous year thanks largely to an increase in our brokerage and mutual fund fees. Cash management and international fees also continued to grow. As you can see from the release, income from cash management and deposit transaction fees grew 41% in the third quarter of â€™07. That was largely due to falling short term interest rates and the income on deposit balances that many of our business clients use to pay for services, along with increased product sales.
Letâ€™s turn to expenses. They were up 6% from the third quarter of â€™07 and just 4% excluding higher FDIC costs that started this year, and we also had a $1.6 million for a legal settlement involving a patent infringement dispute that targeted most of the nationâ€™s top 50 banks, a number of which have already settled and some for some fairly large amounts. Overall expenses should remain well under control during the remainder of the year.
Turning to the guidance, excluding impairment charges we outlined today we expect earnings per share between $3.05 and $3.15 in 2008. The change to the previous guidance reflects our expectations for lower short-term interest rates, weakness in the equity markets and subdued loan growth due to a slow economy.
Looking further ahead, we are confident in our business and our prospects for growth when the economy recovers as it eventually will. In conclusion, City Nationalâ€™s underlying business is very good. We have a strong balance sheet, a premier deposit base and a conservative approach to credit quality and capital management. We are investing in our businesses. We have the means to grow as economic conditions improve.
That concludes our report on City Nationalâ€™s financial results. Now Russell and I will be happy to take your questions.