-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, d/NSzyusKE9TeOUBvA91uu3p74uf+I8IFjAJr5Rk5r/0Ur4qxoJ2wGgthFqxz0N7 3WZKzeCO175KCx79VU6kuw== 0000898430-94-000603.txt : 19940817 0000898430-94-000603.hdr.sgml : 19940817 ACCESSION NUMBER: 0000898430-94-000603 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY NATIONAL CORP CENTRAL INDEX KEY: 0000201461 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 952568550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10521 FILM NUMBER: 94544074 BUSINESS ADDRESS: STREET 1: 400 N ROXBURY DR CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3108584270 MAIL ADDRESS: STREET 1: 400 N ROXBURY DR CITY: BEVERLY HILLS STATE: CA ZIP: 90210 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended June 30, 1994 Commission File Number 1-10521 CITY NATIONAL CORPORATION - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2568550 - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 North Roxbury Drive, Beverly Hills, California 90210 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (213) 550-5400 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 X NO --------- ---------- Number of shares of common stock outstanding at July 31, 1994: 45,099,777 This Form 10-Q contains 30 pages. CITY NATIONAL CORPORATION Consolidated Balance Sheet (Unaudited)
ASSETS June 30 December 31 June 30 1994 1993 1993 ---------- ----------- ---------- (Dollars in thousands) Cash and due from banks ...................................... $ 209,608 $ 234,504 $ 249,636 Interest-bearing deposits in other banks...................... 643 649 615 Federal funds sold and securities purchased under resale agreements........................................... 215,000 265,000 387,900 Investment securities (market values $681,973, $902,738 and $417,464 at June 30, 1994, December 31, 1993 and June 30, 1993, respectively)................................ 705,392 902,481 412,244 Securities available for sale (cost $227,426 and $2,000 at June 30, 1994 and December 31, 1993, respectively, and market value of $19,082 at June 30, 1993)................... 222,525 2,000 18,739 Trading account securities.................................... 34,213 39,765 23,763 Loans......................................................... 1,490,442 1,620,556 1,690,496 Less allowance for credit losses.............................. 105,380 110,499 124,053 ---------- ---------- ---------- Net loans .................................................. 1,385,062 1,510,057 1,566,443 Leveraged leases.............................................. 10,042 13,852 13,732 Premises and equipment, net................................... 18,115 20,359 21,705 Customers' acceptance liability............................... 3,322 5,150 6,771 Other real estate............................................. 7,564 5,559 9,581 Deferred tax asset............................................ 22,600 18,050 30,320 Assets held for accelerated disposition....................... - 17,450 64,758 Other assets.................................................. 34,553 65,750 58,500 ---------- ---------- ---------- Total assets ............................................... $2,868,639 $3,100,626 $2,864,707 ========== ========== ========== LIABILITIES Demand deposits .............................................. $ 954,336 $1,088,026 $ 935,775 Interest checking deposits.................................... 270,169 324,034 258,450 Money market accounts......................................... 732,681 742,381 730,579 Savings deposits.............................................. 94,977 107,221 96,299 Time deposits - under $100,000................................ 87,428 96,672 106,721 Time deposits - $100,000 and over............................. 146,155 168,433 197,202 ---------- ---------- ---------- Total deposits ............................................. 2,285,746 2,526,767 2,325,026 Federal funds purchased and securities sold under repurchase agreements................................. 185,955 202,459 211,038 Other short-term borrowings................................... 50,000 15,000 15,000 Mortgages payable............................................. - 26,319 - Other liabilities............................................. 31,334 26,857 16,826 Acceptances outstanding....................................... 3,322 5,150 6,771 ---------- ---------- ---------- Total liabilities .......................................... 2,556,357 2,802,552 2,574,661 ---------- ---------- ---------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred Stock, authorized-5,000,000 shares none outstanding Common stock- par value- $1.00 Authorized-75,000,000 shares Outstanding-45,095,496, 45,027,417 and 45,021,360 at June 30, 1994, December 31, 1993 and June 30, 1993, respectively................................. 45,095 45,027 45,021 Additional paid-in capital.................................... 262,905 262,471 262,507 Unrealized losses on securities available for sale............ (3,183) - - Accumulated earnings (deficit)................................ 7,465 (9,424) (17,482) ---------- ---------- ---------- Total shareholders' equity.................................. 312,282 298,074 290,046 ---------- ---------- ---------- Total liabilities and shareholders' equity ................. $2,868,639 $3,100,626 $2,864,707 ========== ========== ==========
See accompanying Notes to the Unaudited Consolidated Financial Statements 2 CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the three months For the six months ended June 30 ended June 30 -------------------------- -------------------- 1994 1993 1994 1993 ------------ ------------ --------- --------- (Dollars in thousands) (Dollars in thousands) Interest income: Interest and fees on loans .................. $31,656 $32,489 $61,155 $68,607 Interest on federal funds sold and securities purchased under resale agreements ......... 1,705 2,298 3,353 3,900 Interest on investment securities: U.S. Treasury and federal agency securities 8,358 5,235 16,960 11,142 Municipal securities ....................... 189 - 347 - Other securities ........................... 864 126 1,351 339 Interest on securities available for sale..... 1,881 332 2,011 785 Interest on trading account securities........ 215 220 429 496 ------- ------- ------- ------- Total ...................................... 44,868 40,700 85,606 85,269 ------- ------- ------- ------- Interest expense: Interest on deposits ......................... 7,230 8,533 14,397 17,902 Interest on federal funds purchased and securities sold under repurchase agreements ................................. 2,027 1,682 3,506 4,316 Interest on other short-term borrowings ...... 186 105 289 224 ------- ------- ------- ------- Total ...................................... 9,443 10,320 18,192 22,442 ------- ------- ------- ------- Net interest income .......................... 35,425 30,380 67,414 62,827 Provision for credit losses .................. 3,000 7,500 6,000 19,000 ------- ------- ------- ------- Net interest income after provision for credit 32,425 22,880 61,414 43,827 ------- ------- ------- ------- Noninterest income: Service charges on deposit accounts .......... 2,395 2,689 5,166 5,393 Trust fees ................................... 1,708 1,803 3,518 3,833 Customer trading account income .............. 1,750 1,624 3,209 3,333 Gain on sale of Equity Line of Credit loans... - 4,472 - 4,472 All other income ............................. 3,021 3,880 5,971 7,266 Gain on sale of leverage leases .............. - - 1,331 - Gain on sale of merchant draft business ...... - 91 - 1,941 ------- ------- ------- ------- Total noninterest income.................... 8,874 14,559 19,195 26,238 ------- ------- ------- ------- Noninterest expense: Salaries and other employee benefits ......... 15,724 17,730 32,457 36,110 Net occupancy of premises .................... 2,742 2,882 5,383 5,578 Data processing .............................. 1,834 1,989 3,578 3,984 Professional ................................. 1,809 1,611 3,395 3,255 FDIC insurance ............................... 1,500 1,951 3,000 4,042 Office supplies .............................. 1,145 1,250 2,341 2,542 Depreciation ................................. 1,032 1,108 2,093 2,224 Promotion .................................... 735 443 1,546 830 Equipment .................................... 585 582 1,121 1,054 Other operating .............................. 2,295 2,660 5,121 5,014 Other real estate expense (income)............ (774) (72) (5,300) 40,264 ------- ------- ------- -------- Total noninterest expense................... 28,627 32,134 54,735 104,897 ------- ------- ------- -------- Income (loss) before taxes...................... 12,672 5,305 25,874 (34,832) Income taxes (benefit) ......................... 4,443 1,543 8,985 (12,740) ------- ------- ------- -------- Net income (loss) from continuing operations.... 8,229 3,762 16,889 (22,092) Net income from gain on sale of discontinued operations ................................... - 7,128 - 7,128 ------- ------- ------- -------- Net income (loss) .............................. $8,229 $10,890 $16,889 ($14,964) ======= ======= ======= ======== Income (loss) per share from continuing operations.................................... $0.18 $0.11 $0.37 ($0.65) ======= ======= ======= ======== Income (loss) per share ........................ $0.18 $0.30 $0.37 ($0.44) ======= ======= ======= ======== Shares used to compute earnings (loss) per share 45,848 35,808 45,550 34,048 ======= ======= ======= ========
See accompanying Notes to the Unaudited Consolidated Financial Statements 3 CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30 --------------------- 1994 1993 --------- --------- (Dollars in thousands) Operating Activities Net income (loss) ........................................... $ 16,889 $ (14,964) Adjustment to net income (loss): Provision for credit losses .............................. 6,000 19,000 Writedowns of ORE ........................................ - 39,705 Gain on sales of ORE and Disposition Program assets....... (5,361) - Gain on sale of leveraged leases.......................... (1,331) - Depreciation ............................................. 2,093 2,224 Net (increase) decrease in trading securities ............ 5,552 (13,505) Net (increase) decrease in deferred tax benefits ......... (4,550) 6,800 Tax refunds............................................... 24,955 30,023 Other, net ............................................... 13,830 15,676 -------- -------- Net cash provided by operating activities.............. 58,077 84,959 -------- -------- Investing Activities Net decrease in short-term investments ...................... 6 14,341 Purchases of securities available for sale .................. (226,528) - Maturities of investment securities ......................... 407,821 132,436 Purchases of investment securities........................... (219,210) (120,407) Loans originations and principal collections, net ........... 103,154 220,943 Proceeds from sales of loans ................................ - 73,699 Proceeds from sales of ORE and Disposition Program assets ... 7,368 4,521 Proceeds from sale of leveraged lease........................ 5,141 - Other, net .................................................. 14,481 (523) -------- -------- Net cash provided by investing activities ................ 92,233 325,010 -------- -------- Financing Activities Net decrease in federal funds purchased and securities sold under repurchase agreements .............................. (16,504) (128,111) Net decrease in deposits .................................... (241,021) (586,250) Net increase in short term borrowings........................ 35,000 - Proceeds from issuance of stock.............................. 444 77,017 Other, net .................................................. (3,125) 5,094 -------- -------- Net cash used in financing activities .................... (225,206) (632,250) -------- -------- Net decrease in cash and cash equivalents ................... (74,896) (222,281) Cash and cash equivalents at beginning of period ............ 499,504 859,817 -------- -------- Cash and cash equivalents at end of period .................. $424,608 $637,536 ======== ======== Supplemental disclosures of cash flow information Cash paid (received) during the period for: Interest............................................... $ 18,319 $ 23,260 Income taxes........................................... (15,970) (30,023) Non-Cash Investing activities: Transfer from loans to OREO and Disposition Program.... 1,595 70,225
See accompanying Notes to the Unaudited Consolidated Financial Statements 4 CITY NATIONAL CORPORATION STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the six months ended June 30 ------------------------ 1994 1993 --------- ------------ (Dollars in thousands) Common Stock Balance, beginning of period.......................... $45,027 $32,240 Stock options exercised............................... 68 64 Proceeds from Rights Offering......................... - 12,717 --------- --------- Balance, end of period................................ 45,095 45,021 --------- --------- Additional paid in capital Balance, beginning of period.......................... 262,471 198,222 Stock options exercised............................... 376 383 Tax benefit from stock options........................ 58 49 Proceeds from Rights Offering......................... - 63,853 --------- --------- Balance, end of period................................ 262,905 262,507 --------- --------- Unrealized net losses on securities available for sale Balance, beginning of period.......................... - - Change during period.................................. (3,183) - --------- --------- Balance, end of period................................ (3,183) - --------- --------- Accumulated earnings (deficit) Balance, beginning of period.......................... (9,424) (2,518) Net income (loss)..................................... 16,889 (14,964) -------- -------- Balance, end of period................................ 7,465 (17,482) --------- --------- Total shareholders' equity ............................. $312,282 $290,046 ======== ========
See accompanying Notes to the Unaudited Consolidated Financial Statements 5 NOTES TO THE FINANCIAL STATEMENTS OF THE REGISTRANT 1. The results of operations reflect the interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for such interim periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 2. In March of 1993, the Company adopted a program (the Disposition Program) to accelerate the disposition of certain assets, consisting of other real estate owned (ORE), including in-substance foreclosures, and certain nonaccrual loans. The assets included in the Disposition Program are segregated as "assets held for accelerated disposition" on the consolidated balance sheet. The book value of these assets prior to the adoption of the Disposition Program was $88.9 million of ORE and $30.6 million of nonaccrual loans. A credit loss provision of $4.0 million and additional ORE writedowns and expense accruals of $36.5 million and certain charge offs in the amount of $12.4 million were recorded during the first quarter of 1993 to record the assets at their estimated liquidation values. The Bank signed a definitive agreement to sell, as of November 1, 1993, all six asset pools in the Disposition Program. The sale of the loans contained in the Disposition Program for $48.3 million closed concurrently with the signing of the definitive agreement and a gain of $12.8 million was recognized at that time. During the first and second quarters of 1994, the Company completed the sale of the ORE contained in the Disposition Program. Gains of $3.5 million and $0.7 million, respectively, from the Disposition Program were recognized in the first and second quarters of 1994, respectively. 3. Securities held for investment are classified as investment securities. Because the Company has the ability and management has the intent to hold investment securities until maturity, investment securities are stated at cost, adjusted for amortization of premiums and accretion of discounts. Trading account securities are stated at market value. Investments not classified as trading securities nor as investment securities are classified as securities available for sale and recorded at fair value. Unrealized holding gains or losses for securities available for sale are excluded from earnings 6 and reported as a net amount after taxes, in a separate component of shareholders' equity, until realized. 4. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and securities purchased under resale agreements, and do not include items with original maturities of over 90 days. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion summarizes some of the developments significant to City National Corporation during the second quarter of 1994. However, the Company's consolidated financial statements for the quarter and the entire Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report should be reviewed for a more complete understanding of the Company's financial position and its results of operations. City National Corporation (the Corporation) is the holding company for City National Bank (the Bank). Because the Bank constitutes substantially all of the business of the Company, references to the Company in this Item 2 reflect the consolidated activities of the Company and the Bank. The Company recorded consolidated net income of $8.2 million, or $.18 per share, in the second quarter of 1994, compared to a net income of $10.9 million, or $.30 per share, in the second quarter of 1993, and net income of $8.7 million, or $.19 per share, in the first quarter of 1994. Most of the change between second quarters resulted from one-time gains in the second quarter of 1993 of $4.5 million ($3.0 million after taxes) from the sale of certain Equity Lines of Credit (ELCs) and a $7.1 million net gain from sale of the Bank's data processing division, City National Information Systems (CNIS), whereas no one- time gains occurred in the second quarter of 1994. Partially offsetting the one-time gains in 1993 was an increase in net interest income in the second quarter of 1994 of $5.0 million, a decrease in the provision for credit losses of $4.5 million and a decrease in non-interest expense of $3.5 million. Returns on average assets for the second quarter and the first half of 1994 were 1.16% and 1.20%, respectively. Returns on average equity for the second quarter and the first half of 1994 were 10.67% and 11.15%, respectively. The allowance for credit losses at June 30, 1994 was $105.4 million, or 7.07% of loans outstanding, compared to 7.31% at March 31, 1994 and 7.34% at June 30, 1993. Net charge offs totaled $9.1 million in the second quarter of 1994, or 2.43% of average loans, down from $12.0 million, or 2.75% of average loans, in the second quarter of 1993, but more than 8 the $2.0 million, or .51% of average loans, in the first quarter of 1994. Management does not believe that the increase in the level of net charge offs from the first quarter resulted from any underlying trend in credit quality. Based on its review of the loan portfolio, management anticipates that net charge offs and provisions for credit losses for 1994 will decrease from 1993 levels. Nonaccrual loans totaled $60.7 million at June 30, 1994, or 4.1% of total loans, down from $65.1 million, or 4.3% of total loans, at March 31, 1994, and $105.0 million, or 6.2% of total loans, a year earlier. ORE totaled $7.6 million at June 30, 1994, up from $3.7 million at March 31, 1994 but down from $9.6 million at June 30, 1993. The reduction in nonaccrual loans between second quarters was principally attributable to payments, restoration of loans to accrual status and charge offs. In April 1994, the Bank implemented a consolidation plan to improve efficiency and operational productivity in its branch network. The streamlining reduced the Bank's total number of branches from 22 to 16, while designating four of the remaining locations as regional commercial lending centers. In addition to providing a full array of regular banking services, the centers house teams of lenders specializing in serving mid-size businesses, as well as the Bank's larger, more complex relationships. The consolidation plan is expected to result in an expense savings of approximately $8.0 million per year, before the effect of inflation and other factors. However, this will be partially offset by decreased income resulting from reductions in loans and deposits caused by the consolidation. See "Consolidation Charge Reserve," below. On January 17, 1994 and during the days thereafter, Los Angeles was struck by a series of strong earthquakes. Based on the information currently available, the Bank does not believe that earthquake-related losses, including those related to its facilities, will be material to the Bank's financial position. NET INTEREST INCOME Taxable equivalent net interest income was $35.7 million in the second quarter of 1994, up 16.1% from the year-ago quarter. The increase resulted primarily from a $118.8 million (4.8%) increase in average interest earning assets for the second quarter from the year ago quarter and an increase in the net interest spread from 4.20% to 4.61%. The net 9 interest spread improved because the increases in the prime interest rates during the quarter resulted in higher yields on loans, while rates paid on interest bearing liabilities decreased slightly between quarters. The net interest margin increased from 4.98% in 1993 to 5.52% in 1994. Net interest income was $67.9 million on a fully-taxable equivalent basis in the first half of 1994, up 6.6% from the year-ago period. This increase was due to the increase in the net interest spread from 4.20% to 4.42% caused mainly by decreases in rates paid on interest bearing liabilities and a $26.5 million (1.0%) increase in average interest earning assets. Management expects interest earning assets to increase slightly from the $2.594 billion average level for the second quarter of 1994, primarily due to increased purchases of securities. The increases in interest earning assets and the recent increases in the prime interest rate, if sustained, are expected to result in higher net interest income for the remainder of 1994, as compared to the first half of 1994. Average loans declined $254.7 million (14.5%) between second quarters to $1.497 billion at June 30, 1994. The majority of this decrease reflected lower average commercial loans outstanding, down $161.6 million (15.8%). This decline resulted from decreased loan demand because of continued economic weakness in Southern California. Average construction loans decreased $71.0 million (83.8%) from the second quarter of 1993, primarily as a continuing result of the Bank's significant cutback in new construction loan commitments, beginning in late 1990 and the transfer of certain construction loans to the real estate mortgage category after completion of construction. Average loans for the first half of 1994 declined $332.0 million, or 17.8%, from the first half of 1993. Of this decrease, $185.8 million, $77.5 million and $54.5 million were from commercial, real estate construction and real estate mortgage loans, respectively. Average taxable securities increased $518.0 million (140.1%) between second quarters and $445.1 million, or 115.4%, between first halves, as a result of the investment of the Bank's excess liquidity in government, agency and mortgage backed securities during the last twelve months. Average federal funds sold and securities purchased under resale agreements decreased $130.7 million (43.2%) between second quarters and $68.7 million (26.6%) 10 between first halves. These decreases resulted from the Bank's decision to invest more of its liquidity in taxable securities offering higher yields. Total deposits decreased $58.4 million (2.5%) between second quarters and $105.3 million (4.4%) between first halves, due primarily to decreases of $56.3 million (27.5%) in average time deposits of $100,000 and over between second quarters and $67.2 million (30.5%) between first halves. Average non-interest bearing deposits increased $18.9 million (2.2%) between second quarters, but declined $.8 million (.1%) between first halves. Total average interest bearing core deposits declined $21.0 million (1.7%) between second quarters and $37.3 million (3.0%) between first halves. Average federal funds purchased and securities sold under repurchase agreements decreased $19.0 million (7.9%) between second quarters and $93.8 million (30.8%) between first halves, due to the Company's improved liquidity. 11 NET INTEREST INCOME SUMMARY The following table presents the components of net interest income for the quarters ended June 30, 1994 and 1993.
6-30-94 6-30-93 ----------------------------------- ----------------------------------- Interest Average Interest Average Dollars in thousands-fully Average income/ interest Average income/ interest taxable equivalent basis (1) Balance expense rate Balance expense rate ------------------------------------------------------------------------------------------------------------------- A s s e t s (2) Earning assets Loans: (3) Commercial loans $ 862,402 $18,838 8.81% $1,023,985 $18,552 7.27% Real estate - construction 13,716 309 9.04 84,676 1,422 6.74 Real estate - mortgage 579,954 11,499 7.95 589,166 11,162 7.60 Installment loans 40,733 1,010 9.95 53,727 1,353 10.10 ---------- ------- ---- ---------- ------- ----- Total loans 1,496,805 31,656 8.51 1,751,554 32,489 7.48 ---------- ------- ---- ---------- ------- ----- State and municipal securities 16,274 189 7.19 21,162 332 9.19 Taxable securities 887,769 11,103 5.02 369,767 5,361 5.82 Federal funds sold and securities purchased under resale agreements 171,603 1,705 3.99 302,264 2,298 3.05 Trading account securities 21,194 215 4.06 30,059 220 3.15 --------- ------- ---- ---------- ------- ----- Total earning assets 2,593,645 44,868 6.98 2,474,806 40,700 6.65 ---------- ------- ---- ---------- ------- ----- Reserve for credit losses (112,573) (129,615) Cash and due from banks 243,390 254,422 Other nonearning assets 111,819 207,071 --------- ---------- Total assets $2,836,281 $2,806,684 ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest - bearing deposits $ 890,116 - - $ 871,179 - - Interest-bearing deposits: Interest checking accounts 286,773 688 0.96 277,775 882 1.27 Money market accounts 732,390 4,062 2.22 736,138 4,364 2.38 Savings deposits 98,046 481 1.97 104,786 579 2.22 Time deposits - under $100,000 90,736 810 3.58 110,218 1,039 3.78 Time deposits - $100,000 and over 148,653 1,190 3.21 204,998 1,669 3.27 ---------- ------- ---- ---------- ------- ----- Total interest - bearing deposits 1,356,598 7,231 2.14 1,433,915 8,533 2.39 ---------- ------- ---- ---------- ------- ----- Total deposits 2,246,714 2,305,094 Federal funds purchased and securities sold under repurchase agreements 221,886 2,027 3.66 240,913 1,682 2.80 Other short - term borrowings 18,422 186 4.05 13,752 105 3.06 ---------- ------- ---- ---------- ------- ----- Total interest - bearing liabilities 1,596,906 9,444 2.37 1,688,580 10,320 2.45 ---------- ------- ---- ---------- ------- ----- Other liabilities 39,914 20,727 Shareholders' equity 309,345 226,198 ---------- ---------- Total liabilities and shareholders' equity $2,836,281 $2,806,684 ========== ========== Net interest income/spread $35,425 4.61 $30,380 4.20 ======= ==== ======= ===== Fully taxable equivalent net interest income $35,662 $30,726 ======= ======= Net interest margin (4) 5.52% 4.98%
(1) The interest income and average rate data in this table are presented on a taxable equivalent basis. Interest income exempt from federal income taxes, or income taxed at a rate less than the statutory tax rates, has been adjusted to a taxable equivalent basis using the federal income tax rates in effect during the years presented. (2) Includes average nonaccrual loans of $69,369 and $102,458 for 1994 and 1993, respectively. (3) Loan income includes loan fees of $1,819 and $1,311 for 1994 and 1993, respectively. (4) Fully taxable net interest income divided by interest-earning assets. 12 NET INTEREST INCOME SUMMARY The following table presents the components of net interest income for the six months ended June 30, 1994 and 1993.
6-30-94 6-30-93 ------------------------------------ ---------------------------------- Interest Average Interest Average Dollars in thousands- Average income/ interest Average income/ interest fully taxable equivalent Balance expense rate Balance expense rate - - ---------------------------------------------------------------------------------------------------------------------- A s s e t s (2) Earning assets Loans: (3) Commercial loans $882,273 $35,197 8.10% $1,068,100 $38,424 7.34% Real estate - construction 13,934 556 8.64 91,408 3,184 7.02 Real estate - mortgage 596,071 23,383 7.93 650,601 24,176 7.49 Installment loans 41,883 2,019 9.72 56,065 2,823 10.15 -------- -------- ----- ---------- ------- ----- Total loans 1,534,161 61,155 8.08 1,866,174 68,607 7.46 ---------- --------- ----- ---------- ------- ---- State and municipal securities 13,710 347 7.91 24,636 785 9.38 Taxable securities 830,707 20,322 4.93 385,629 11,481 6.00 Federal funds sold and securities purchased under resale agreements 189,910 3,353 3.60 258,602 3,900 3.04 Trading account securities 23,663 429 5.01 30,575 496 3.63 ---------- ------- ----- ---------- ------- ---- Total earning assets 2,592,151 85,606 6.72 2,565,616 85,269 6.73 ---------- ------- ----- ---------- ------- ---- Reserve for credit losses (113,038) (134,410) Cash and due from banks 248,113 283,862 Other nonearning assets 118,916 223,417 ---------- ---------- Total assets $2,846,142 $2,938,485 ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest - bearing deposits $898,682 - - $899,498 - - Interest-bearing deposits: Interest checking accounts 289,494 1,384 0.96 283,486 1,901 1.35 Money market accounts 732,943 7,991 2.20 751,078 9,115 2.45 Savings deposits 100,186 974 1.96 105,168 1,213 2.33 Time deposits - under $100,000 93,041 1,658 3.59 113,207 2,148 3.83 Time deposits - $100,000 and over 153,327 2,390 3.16 220,555 3,525 3.22 ---------- ------- ----- ---------- ------- ---- Total interest - bearing deposits 1,368,991 14,397 2.12 1,473,494 17,902 2.45 ---------- ------- ----- ---------- ------- ---- Total deposits 2,267,673 2,372,992 Federal funds purchased and securities sold under repurchase agreements 210,483 3,506 3.34 304,266 4,316 2.86 Other short - term borrowings 16,345 289 3.46 14,131 224 3.20 --------- ------- ----- ---------- ------- ---- Total interest - bearing liabilities 1,595,819 18,192 2.30 1,791,891 22,442 2.53 --------- ------- ----- ---------- ------- ---- Other liabilities 46,178 20,258 Shareholders' equity 305,463 226,838 --------- ---------- Total liabilities and shareholders' equity $2,846,142 $2,938,485 ========== ========== Net interest income/spread $67,414 4.42 $62,827 4.20 ======= ==== ======= ==== Fully taxable equivalent net interest income $67,877 $63,685 ======== ======= Net interest margin (4) 5.28% 5.00%
(1) The interest income and average rate data in this table are presented on a taxable equivalent basis. Interest income exempt from federal income taxes, or income taxed at a rate less than the statutory tax rates, has been adjusted to a taxable equivalent basis using the federal income tax rates in effect during the years presented. (2) Includes average nonaccrual loans of $67,410 and $118,441 for 1994 and 1993, respectively. (3) Loan income includes loan fees of $2,904 and $2,493 for 1994 and 1993, respectively. (4) Fully taxable net interest income divided by interest-earning assets. 13 The following tables set forth, for the periods indicated, the changes in interest earned and interest paid resulting from changes in volume and changes in rates. Average balances in all categories in each reported period were used in the volume computations. Average yields and rates in each reported period were used in rate computations.
Quarter Ended June 30 Quarter Ended June 30 1994 vs 1993 1993 vs 1992 ------------------------- ------------------------------- Increase Increase Dollars in thousands - (decrease) (decrease) Fully taxable equivalent basis(1) due to (2): Net due to (2): Net ---------------- increase ------------------ increase Volume Rate (decrease) Volume Rate (decrease) ------- ------- ---------- ------ -------- ---------- Interest earned on: Loans (5,087) 4,180 (907) (11,871) (1,320) (13,191) Taxable securities 6,402 (664) 5,738 (1,878) (1,103) (2,981) Non-taxable securities (102) (74) (176) (1,628) (352) (1,980) Federal funds sold and securities purchased under resale agreements (1,174) 581 (593) (2,558) (988) (3,546) ------- ------- ------- -------- -------- ---------- Total interest-earning assets 39 4,023 4,062 (17,935) (3,763) (21,698) ------- ------- ------- -------- -------- ---------- Interest paid on: Interest checking 27 (221) (194) (305) (580) (885) Money market deposits (21) (281) (302) (2,181) (1,907) (4,088) Savings deposits (35) (63) (98) (29) (261) (290) Other time deposits (631) (77) (708) (3,503) (1,287) (4,790) Short-term borrowings (106) 532 426 (2,224) (879) (3,103) ------- ------- ------- -------- -------- ---------- Total interest-bearing liabilities (766) (110) (876) (8,242) (4,914) (13,156) ------- ------- ------- -------- -------- ---------- $ 805 $ 4,133 $ 4,938 $ (9,693) $ 1,151 $ (8,542) ======= ======= ======= ======== ======== ==========
Six Months Ended June 30 Six Months Ended June 30 1994 vs 1993 1993 vs 1992 ------------------------- ------------------------------- Increase Increase Dollars in thousands - (decrease) (decrease) Fully taxable equivalent basis(1) due to (2): Net due to (2): Net ---------------- increase ----------------- increase Volume Rate (decrease) Volume Rate (decrease) ------- ------- ---------- -------- -------- ---------- Interest earned on: Loans (9,148) 1,487 (7,661) (22,102) (4,698) (26,800) Taxable securities 9,293 (518) 8,775 (4,171) (2,363) (6,534) Non-taxable securities (476) (147) (623) (3,391) (324) (3,715) Federal funds sold and securities purchased under resale agreements (742) 195 (547) (4,920) (2,020) (6,940) ------- ------- ------ -------- -------- ---------- Total interest-earning assets (1,073) 1,017 (56) (34,584) (9,405) (43,989) ------- ------- ------ -------- -------- ---------- Interest paid on: Interest checking 2 (519) (517) (569) (1,176) (1,745) Money market deposits (215) (909) (1,124) (4,431) (4,207) (8,638) Savings deposits (55) (184) (239) 12 (483) (471) Other time deposits (1,434) (191) (1,625) (7,666) (3,308) (10,974) Short-term borrowings (958) 213 (745) (3,544) (1,881) (5,425) Total interest-bearing ------- ------- ------ -------- -------- ---------- liabilities (2,660) (1,590) (4,250) (16,198) (11,055) (27,253) ------- ------- ------ -------- -------- ---------- $ 1,587 $ 2,607 $ 4,194 $(18,386) $ 1,650 $ (16,736) ======= ======= ======= ======== ======== ==========
(1) The changes in interest income in this table are presented on a fully taxable equivalent basis. Interest income exempt from federal income taxes, or income taxed at a rate less than the statutory tax rates, has been adjusted to a fully taxable equivalent basis using the federal income tax rates in effect in the periods presented. (2) The change in interest due to both rate and volume has been allocated to change due to volume and rate in proportion to the relationship of the absolute dollar amounts of the change in each. 14 PROVISION FOR CREDIT LOSSES The provision for credit losses was $3.0 million in each of the first and second quarters of 1994, compared to $11.5 million, $7.5 million, $5.5 million and $5.5 million for the first quarters through fourth quarters of 1993. The provision for credit losses in the first quarter of 1993 included $4.0 million resulting from the Bank's Disposition Program (see "Accelerated Asset Disposition Program," below). Loans charged off in the second quarter of 1994 were $17.4 million, compared to $17.2 million in the second quarter of 1993 and $8.9 million in the first quarter of 1994. Management does not believe that the increase in the level of charge offs from the first quarter resulted from any underlying trend in credit quality. Recoveries were $8.3 million in the second quarter of 1994, compared to $5.2 million in the second quarter of 1993 and $6.9 million in the first quarter of 1994. The provision for credit losses charged to operations reflects management's judgment of the adequacy of the allowance for credit losses, and is determined through periodic analysis of the loan portfolio. This analysis includes a detailed review of the classification and categorization of problem and potential problem loans and loans to be charged off; an assessment of the overall quality and collectability of the portfolio; and consideration of the loan loss experience, trends in problem loans and concentrations of credit risk, as well as current and expected future economic conditions, particularly in Southern California. The Bank has an internal risk analysis and review staff that reports to the Board of Directors and continuously reviews loan quality. Such reviews also assist management in establishing the level of the allowance for credit losses. Unless there is significant deterioration in economic conditions, management anticipates, based on its review of the loan portfolio, that net charge offs and provisions for credit losses for 1994 will continue to decrease from 1993 levels. However, no assurance can be given that the Bank will not in any particular period sustain credit losses that are sizable in relation to the allowance for credit losses, or that subsequent evaluations of the loan portfolio, in light of the factors then prevailing, including economic conditions and further declines in property values, will not require significant increases in the allowance for credit losses. 15 NON-INTEREST INCOME Non-interest income for the second quarter of 1994 totaled $8.9 million, down $5.7 million (39.0%) from a year earlier. Non-interest income for the first half of 1994 was $19.2 million, a decrease of $7.0 million (26.8%) from the first half of 1993. Service charges on deposit accounts decreased slightly, $.3 million (10.9%) and $.2 million (4.2%), respectively, for the quarter and six months ended June 30, 1994. Due to the effect of recent increases in interest rates utilized for purposes of account analysis, future service charge income on deposit accounts may be less than second quarter 1994 levels. Trust fees decreased $.1 million (5.3%) and $.3 million (8.2%) for the quarter and six months ended June 30, 1994 due to lower volumes. Other income in 1994 included a pre-tax gain of $1.3 million from the sale of two leveraged leases in the first quarter, while other income in 1993 included $1.9 million from sale of the Bank's merchant credit card business in the first quarter and $4.5 million from the Bank's sale of $73.7 million in ELC loans in the second quarter. All other income decreased $.9 million (22.1%) and $1.3 million (17.8%) for the quarter and six months ended June 30, 1994, because of lower escrow, foreign exchange, letter of credit and proof of deposit fees. Management does not expect a significant increase in non-interest income from second quarter 1994 levels during the remainder of 1994. NON-INTEREST EXPENSE Excluding net ORE results, non-interest expense totaled $29.4 million in the second quarter of 1994, a decrease of $2.8 million (8.7%) from the second quarter of 1993, and $60.0 million for the first half of 1994, a decrease of $4.6 million (7.1%) from the first half of 1993. Salaries and other employee benefits decreased $2.0 million (11.3%) and $3.7 million (10.1%) for the quarter and six months ended June 30, 1994, respectively, from comparable periods in 1993. This decrease was due primarily to decreases in full-time equivalent staff levels, which have declined from approximately 1,650 at December 31, 1992 to 1,220 at June 30, 1994. The remaining expense categories other than staff decreased $.8 million (5.5%) and $.9 million (3.3%) for the quarter and six months ended June 30, 1994, respectively, from the comparable periods in 1993. These decreases resulted from the continued realization of savings from the Company's expense management efforts and from the implementation 16 of the branch consolidation program. See "Consolidation Charge Reserve," below. The increases in promotion expenses resulted from the Company's increased advertising program. The increases in professional expenses were due to higher legal fees for defense and collection matters. Net ORE result in the second quarter of 1994 was a credit of $.8 million, resulting primarily from the completion of the Disposition Program, compared to a credit of $.1 million in the prior year. For the first half of 1994, net ORE result was a credit of $5.3 million, of which $4.2 million represented gains on the sale of assets in the Disposition Program, compared to expense of $40.3 million in the first half of 1993, $36.5 million of which resulted from the initiation of the Disposition Program in March 1993. INCOME TAXES The second quarter 1994 effective tax rate was 35.1%, compared to 29.1% for the second quarter of 1993. The effective tax expense (benefit) rates for the first half of 1994 and 1993 were 34.7% and (36.6%), respectively. The effective rates differed from the statutory federal tax rates of 34% for 1993 and 35% for 1994 due primarily to tax exempt income and, in 1994, due also to the California alternative minimum tax. As a result of the Company's net operating loss carry-forwards, no regular California franchise tax provision was recorded in 1994, nor was any benefit taken in 1993. At June 30, 1994, the Company had a California net operating loss carry-forward of $14.3 million, of which $3.5 million will expire in 1997 and $10.8 million will expire in 1998. At June 30, 1994, the Company had unrecognized California tax benefits of $13.5 million. Realization of the tax benefits of the Company's deductible California temporary differences and California operating loss and tax credit carry-forwards depends on having sufficient taxable income within the applicable carry-forward periods. Recognition of deferred tax assets is permitted when it is more likely than not that the tax benefits will be realized. Depending on the Company's level of future profitability and the timings of the reversals of temporary differences, some or all of the Company's unrecognized California tax benefits may be recognized in the second half of 1994. 17 BALANCE SHEET ANALYSIS Loan Portfolio A comparative period-end loan table is presented below:
June 30, March 31, December 31, June 30, 1994 1994 1993 1993 ---------- ---------- ---------- ---------- (Dollars in thousands) Commercial and financial(1) $ 868,346 $ 876,716 $ 939,719 $ 991,378 Real estate - construction 14,622 12,651 11,699 82,384 Real estate - mortgage(2) 529,793 580,000 617,067 562,069 Residential first mortgage 38,135 13,380 6,586 2,604 Installment 39,546 42,106 45,485 52,061 ---------- ---------- ---------- ---------- Total loans, gross 1,490,442 1,524,853 1,620,556 1,690,496 Less: Allowance for credit losses (105,380) (111,461) (110,499) (124,053) ---------- ---------- ---------- ---------- Total loans, net $1,385,062 $1,413,392 $1,510,057 $1,566,443 ========== ========== ========== ==========
(1) Commercial and financial loans include unsecured loans to real estate developers and customers involved in real estate investments and commercial loans where real estate partially secures the borrowing. (2) Does not include first mortgages on residential properties. Gross loans at June 30, 1994 amounted to $1,490 million, down $200 million (11.8%) from June 30, 1993. The decrease in loans resulted from decreased loan demand because of continued economic weakness in Southern California. Commercial loans continue to constitute the major portion of the Bank's lending activity, 58.3% at June 30, 1994 and 58.6% at June 30, 1993. Real estate construction loans decreased $67.8 million, or 82.3%, between June 30, 1993 and June 30, 1994, because new construction lending was curtailed beginning in late 1990, and certain construction loans were transferred to the real estate mortgage category after completion of construction. Real estate mortgage loans decreased $32.3 million, or 5.7%, between June 30, 1993 and 1994, due to paydowns. However, residential first mortgage loans increased $35.5 million between June 30, 1993 and 1994, as a result of the Bank's entry into residential first mortgage lending in late 1993 and purchases of residential mortgages originated by third parties. Substantially all of the Bank's loans are in Southern California. At June 30, 1994, real estate construction and mortgage loans constituted 36.5% of the Bank's loan portfolio. No other industry comprised 10% or more of the portfolio. 18 REAL ESTATE CONSTRUCTION LOANS BY TYPE
June 30, March 31, December 31, June 30, 1994 1994 1993 1993 ---------- ---------- ---------- ---------- (Dollars in thousands) Office building $ 7,997 $ 7,517 $ 7,282 $24,930 Condominium and apartment - - - 19,915 Shopping center - - - 17,015 1-4 family 1,482 832 594 7,615 Industrial - - - 6,179 Other 5,143 4,302 3,823 6,730 ------- ------- ------- ------- $14,622 $12,651 $11,699 $82,384 ======= ======= ======= =======
REAL ESTATE MORTGAGE LOANS BY TYPE
June 30, March 31, December 31, June 30, 1994 1994 1993 1993 ---------- ---------- ----------- --------- (Dollars in thousands) Equity lines of credit $ 30,323 $ 31,878 $ 47,279 $ 64,783 Industrial 113,942 118,849 123,594 137,369 Office building 103,613 104,142 110,183 102,525 Shopping center 63,964 62,309 68,236 64,109 Land, residential 22,486 26,641 30,761 27,358 Condominium and apartment 43,208 45,010 54,040 37,174 Land, non-residential 10,114 32,242 32,885 29,089 Other 142,143 158,929 150,089 99,662 -------- -------- -------- -------- $529,793 $580,000 $617,067 $562,069 ======== ======== ======== ========
19 RISK ELEMENTS Nonaccrual, Past Due and Restructured Loans The following table presents information concerning nonaccrual loans, ORE, accruing loans which are contractually past due 90 days or more as to interest or principal payments and still accruing, and restructured loans.
June 30, March 31, December 31, June 30, 1994 1994 1993 1993 ---------- ---------- ---------- -------- (Dollars in thousands) Nonaccrual loans: Real estate - construction $ - $ - $ - $ 14,996 Real estate - mortgage 46,179 47,333 48,016 39,268 Commercial 14,509 17,807 23,040 50,736 Installment - - - - ------- ------- ------- -------- Total 60,688 65,140 71,056 105,000 ORE 7,564 3,677 5,559 9,581 ------- ------- ------- -------- Total nonaccrual loans and ORE $68,252 $68,817 $76,615 $114,581 ======= ======= ======= ======== Assets held for accelerated disposition - $ 2,779 $17,450 $ 64,758 ======= ======= ======= ======== In-substance foreclosures - intangible assets $ 4,097 $ 4,530 $ 4,740 $ 5,119 ======= ======= ======= ======== Ratio of nonaccrual loans to total loans 4.07% 4.27% 4.38% 6.21% Ratio of nonaccrual loans and ORE to total loans and ORE 4.56 4.50 4.71 6.74 Ratio of allowance for credit losses to nonaccrual loans 173.64 171.11 155.51 118.15 Accruing loans past due 90 days or more: Real estate $19,125 $18,046 $17,412 $ 34,748 Commercial 10,599 10,453 11,382 3,948 Installment 137 138 155 167 ------- ------- ------- -------- Total $29,861 $28,637 $28,949 $ 38,863 ======= ======= ======= ======== Restructured loans; all on accrual status $ 2,125 $ 1,907 $ 958 $ 1,014 ======= ======= ======= ========
20 NONACCRUAL LOANS The table below summarizes the approximate changes in nonaccrual loans for the quarters ended June 30, 1994, March 31, 1994, and June 30, 1993, and for the six month periods ended June 30, 1994 and 1993.
Quarter ended Six months ended ----------------------------- ---------------- June 30, March 31, June 30, June 30, 1994 1994 1993 1994 1993 --------- --------- --------- --------- ------- (Dollars in millions) Balance, beginning of period $ 65.1 $ 71.1 $113.8 $ 71.1 $160.3 Loans placed on nonaccrual 30.5 19.0 33.2 49.5 73.5 Charge offs (12.3) (6.5) (13.9) (18.8) (36.2) Loans returned to accrual (6.0) (6.4) (12.0) (12.4) (29.5) Repayments (including interest applied to principal) (15.9) (12.1) (11.5) (28.0) (30.2) Transfers to ORE (.7) - (4.6) (.7) (11.6) Transfer to Disposition Program, net - - - (21.3) ------ ------ ------ ------ ------ Balance, end of period $ 60.7 $ 65.1 $105.0 $ 60.7 $105.0 ====== ====== ====== ====== ======
The additional interest income that would have been recorded from nonaccrual loans (including restructured loans on nonaccrual status), if the loans had not been on nonaccrual status, was $1.6 million and $2.6 million for the quarters and $2.0 million and $5.8 million for the six-month periods ended June 30, 1994 and 1993, respectively. Interest payments received on nonaccrual loans are generally applied to principal, unless there is no doubt as to the ultimate full repayment of principal, in which case the interest payment is recognized as interest income. Interest income included $.8 million and $.5 million for the quarters and $2.1 million and $1.1 million for the six-month periods ended June 30, 1994 and 1993, respectively, from the collection of interest related to nonaccrual loans, including loans paid off during the quarter. Interest income not recognized on nonaccrual loans reduced the net interest margin by 25 and 44 basis points for the quarters and 16 and 46 basis points for the six-month periods ended June 30, 1994 and 1993, respectively. 21 Potential Problem Loans At June 30, 1994, in addition to loans disclosed above as past due, nonaccrual or restructured, management had also identified $32 million of loans about which it had serious doubts as to the ability of the borrowers to comply with the present loan payment terms in the future. This amount was determined based on analysis of information known to management about the borrower's financial condition and current and expected economic conditions. If economic conditions change, or if additional information relating to borrowers' financial condition come to light, then the amount of such potential problem loans may change significantly. Currently estimated potential losses from these potential problem loans have been considered in determining the adequacy of the allowance for credit losses. Other Real Estate The following tables summarize the changes in the Company's ORE balances and ORE by type: CHANGES IN ORE BALANCES
Quarter ended Six months ------------------------------ ended June 30, June 30, March 31, June 30, -------------------- 1994 1994 1993 1994 1993 --------- --------- --------- --------- --------- (Dollars in thousands) Balance, beginning of period $3,677 $ 5,559 $ 7,324 $ 5,559 $ 94,065 Additions 2,498 - 5,288 2,498 12,240 Sales (195) (1,817) (1,893) (2,012) (4,521) Writedowns - - (85) - (39,705) Payments and other reductions (118) (65) (1,053) (183) (3,609) Transfer from (to) Disposition Program 1,702 - - 1,702 (48,889) ------ ------- ------- ------- -------- Balance, end of period $7,564 $ 3,677 $ 9,581 $ 7,564 $ 9,581 ====== ======= ======= ======= ========
22 ALLOWANCE FOR CREDIT LOSSES The following table summarizes average loans outstanding and changes in the allowance for credit losses for the periods presented:
Quarter ended Six months ended ----------------------------------- ---------------------- June 30, March 31, June 30, June 30, June 30, 1994 1994 1993 1994 1993 ---------- ---------- ---------- ---------- ---------- (Dollars in millions) Average amount of loans outstanding $1,496.8 $1,571.9 $1,751.6 $1,534.2 $1,866.2 ======== ======== ======== ======== ======== Balance of allowance for credit losses, beginning of period $ 111.5 $ 110.5 $ 130.1 $ 110.5 $ 136.1 -------- -------- -------- -------- -------- Loans charged off: Commercial 10.2 5.3 13.0 15.5 21.0 Real estate loans - construction - - .4 - 2.8 Real estate loans - mortgage 7.0 3.4 3.6 10.4 17.0 Installment .2 .2 .2 .4 .7 -------- -------- -------- -------- -------- Total loans charged off 17.4 8.9 17.2 26.3 41.5 -------- -------- -------- -------- -------- Less recoveries of loans previously charged off: Commercial 7.9 6.7 4.9 14.6 11.7 Real estate loans - construction - .1 - .1 - Real estate loans - mortgage .1 - .1 .1 .1 Installment .3 .1 .2 .4 .2 -------- -------- -------- -------- -------- Total recoveries 8.3 6.9 5.2 15.2 12.0 -------- -------- -------- -------- -------- Net loans charged off 9.1 2.0 12.0 11.1 29.5 Provisions charged to operating expense 3.0 3.0 7.5 6.0 19.0 Other(1) - - (1.5) - (1.5) -------- -------- -------- -------- -------- Balance, end of period $ 105.4 $ 111.5 $ 124.1 $ 105.4 $ 124.1 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans 2.43% .51% 2.75% 1.45% 3.19% ======== ======== ======== ======== ========
(1) Credit loss allowance allocated to $73.7 million of equity line of credit loans sold in April 1993. The allowance for credit losses decreased from $124.1 million at June 30, 1993 to $105.4 million at June 30, 1994, primarily due to net charge offs in excess of provisions for credit losses during the twelve months ended June 30, 1994. At June 30, 1994, the allowance for credit losses was 7.07% of gross loans, compared to 7.34% at June 30, 1993. The allowance at June 30, 1994 was equal to 173.6% of total nonaccrual loans, as compared to 118.1% at June 30, 1993. 23 Management believes that the adoption of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," upon its January 1, 1995, effective date will not have a material impact on the Company's results of operations or shareholders' equity. INVESTMENT SECURITIES A comparative period-end table is presented below:
June 30, December 31, June 30, 1994 1993 1993 ---------- ------------ ---------- (Dollars in thousands) Investment securities: Cost $705,392 $902,481 $412,244 ======== ======== ======== Market $681,973 $902,738 $417,463 ======== ======== ======== Market in excess of (below) cost $(23,419) $ 257 $ 5,220 ======== ======== ========
The Company has the ability and management has the intent to hold its investment securities until maturity. Due to the rise in interest rates in 1994, the market value of the Company's investment securities portfolio is $23.4 million (3.3%) lower than its carrying value. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," unrealized gains or losses on investment securities do not affect shareholders' equity until realized. SECURITIES AVAILABLE FOR SALE Securities available for sale amounted to $222.5 million at market (cost of $227.4 million) at June 30, 1994, compared to $2.0 million (both cost and market) at December 31, 1993 and $18.7 million (market value $19.1 million) at June 30, 1993. Because of its excess liquidity and in order to provide flexibility with respect to future loan funding, the Company has designated certain securities purchased during the first six months of 1994 as securities available for sale. DEFERRED TAX ASSETS Deferred tax assets amounted to $22.6 million at June 30, 1994 and $30.3 million at June 30, 1993. These deferred tax assets were primarily due to the inability of the Bank to 24 take loan loss deductions for income tax purposes with respect to anticipated loan losses for which an allowance had been established on its financial accounting records. It is more likely than not that the reversing deductible temporary differences, net of the recorded valuation allowances, at June 30, 1994 will be realized by the availability of reversing taxable temporary differences, recovery of taxes paid in applicable carry-back years, and projected taxable income for the next year. ASSETS HELD FOR ACCELERATED DISPOSITION In March 1993, the Bank adopted an Accelerated Asset Disposition Program (the "Disposition Program") to aggressively dispose of ORE and certain problem loans with an aggregate book value before the Disposition Program of $119.5 million. The Bank signed a definitive agreement to sell, as of November 1, 1993, all six asset pools in the Disposition Program to WHC-THREE Investors, L.P. ("WHC-THREE"), a limited partnership. The sale of the loans contained in the Disposition Program for $48.3 million closed concurrently with the signing of the definitive agreement and a gain of $12.8 million was recognized at that time, net of disposition expenses and reserves. The sale of most of the Disposition Program ORE closed in the first quarter of 1994, and a pre-tax gain of $3.5 million was recognized at that time. During the second quarter, the sale of one additional Disposition Program ORE asset was closed, the Bank cancelled the sale of two assets and repurchased two other assets to resolve all of the remaining issues regarding the sale of these assets, and recognized an additional gain of $.7 million. The Bank provided 75% financing for the sale of assets in the Disposition Program at terms comparable with other real estate loans in its portfolio. At June 30, 1994, the remaining balance was $53.1 million. The terms of the notes require annual pay downs and payment of the remaining principal in five years, in addition to payments when individual real estate assets securing the loans are sold or refinanced. CONSOLIDATION CHARGE RESERVE In November 1993, the Bank announced a consolidation plan to improve efficiency and operational productivity in its branch network. To cover the costs associated with this 25 action, the Bank recorded a consolidation charge of $12.0 million in the fourth quarter of 1993, consisting of $7.5 million for the disposition of lease commitments, $1.5 million for the disposition of fixed assets and $3.0 million for severance costs and other costs directly related to the consolidation. At June 30, 1994, the balance remaining in the consolidation reserve was $9.8 million. The Bank is continuing to negotiate settlements of lease commitments and believes the reserve balance at June 30, 1994 is adequate to cover these lease liabilities and the remaining expenses expected to be incurred as part of the consolidation program. Capital Adequacy Requirements As of June 30, 1994, the Company had a ratio of Tier 1 capital to risk-weighted assets (Tier 1 risk-based capital ratio) of 18.44%, a ratio of total capital to risk weighted assets (total risk-based capital ratio) of 19.75%, and a ratio of Tier 1 capital to average adjusted total assets (Tier 1 leverage ratio) of 11.14%, while the Bank had a Tier 1 risk-based capital ratio of 17.40%, a total risk-based capital ratio of 18.71% and a Tier 1 leverage ratio of 10.53%. Based on the availability of recovery of taxes paid in prior years and projected taxable income for the next twelve months, there is no limitation on the amount of recorded deferred tax assets includable in regulatory capital at June 30, 1994 under OCC guidelines. LIQUIDITY A fundamental aspect of the asset/liability management strategy of the Company is adequate liquidity -- the ability to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. For most financial institutions, the most manageable sources of liquidity are composed of liabilities, especially core deposits. Average core deposits increased to 84.4% of total funding in the second quarter of 1994, compared to 82.0% in the second quarter of 1993. Liquidity is also provided by assets such as federal funds sold, securities purchased under resale agreements and trading account securities which may be immediately converted into cash at a minimal cost. Liquidity may also be provided by maturing investment 26 securities. At June 30, 1994, investment securities maturing within one year amounted to $100.7 million, and securities available for sale amounted to $222.5 million. Maturing loans also provide liquidity, and $.8 billion of the Bank's loans are scheduled to mature in the next twelve months. City National Corporation has no outstanding debt obligations and limited financial requirements. At June 30, 1994, it had repurchase agreements with the Bank of $2.7 million and securities of $16.4 million. Interest sensitivity is related to liquidity because both are affected by the interrelationships of maturing assets and liabilities. Interest rate sensitivity management, however, is concerned with the timing and magnitude of repricing assets compared to liabilities. It is the objective of interest rate- sensitivity management to control the risks associated with interest rate movement. The interest rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative gap tends to adversely affect net interest income, while a positive gap tends to result in an increase in net interest income. During a period of falling interest rates, a negative gap tends to result in an increase in net interest income, while a positive gap tends to affect net interest income adversely. The following table shows that the Company's positive interest rate sensitivity gap increased from $813.8 million at June 30, 1993 to $1,040.0 million at June 30, 1994. This increase was due primarily to a $178.5 million increase in rate sensitive assets, especially securities. The Company's highly asset sensitive position in this period of rising interest rates will have a positive effect on net interest income. However, while the interest rate sensitivity gap is a useful measure and contributes towards effective asset and liability management, it is difficult to predict the net interest margin based solely on that measure. 27 At June 30, 1994 and 1993, the Company's distribution of rate-sensitive assets and liabilities was as follows:
Maturing or repricing in -------------------------------------------------------------- After 3 After months 1 year but but 3 months within within After or less 1 year 5 years 5 years Total -------- ------- ------- -------- -------- (Dollars in millions) June 30, 1994 Rate-sensitive assets: Interest-bearing deposits in other banks... $ 0.6 $ $ $ - $ 0.6 Loans...................................... 1,227.2 65.2 86.5 50.9 1,429.8 Investment securities...................... 63.1 131.3 308.9 202.1 705.4 Securities available for sale.............. - 4.0 166.5 52.0 222.5 Trading account securities................. 34.2 - - - 34.2 Federal funds sold and securities purchased under resale agreements....... 215.0 - - - 215.0 -------- -------- ------ -------- -------- Total rate-sensitive assets............. 1,540.1 200.5 561.9 305.0 2,607.5 -------- -------- ------ -------- -------- Rate-sensitive liabilities: (1) Interest checking.......................... 270.2 - - - 270.2 Money market deposits...................... 732.7 - - - 732.7 Savings deposits........................... 95.0 - - - 95.0 Other time deposits........................ 120.6 76.3 36.7 - 233.6 Short-term borrowings...................... 236.0 - - - 236.0 -------- ------- ------ -------- -------- Total rate-sensitive liabilities........ 1,454.5 76.3 36.7 - 1,567.5 -------- ------- ------ -------- -------- Interest rate sensitivity gap................. $ 85.6 $ 124.2 $525.2 $ 305.0 $1,040.0 ======== ======= ====== ======== ======== Cumulative interest rate sensitivity gap...... $ 85.6 $ 209.8 $735.0 $1,040.0 ======== ======= ====== ======== Cumulative ratio of rate-sensitive assets to rate-sensitive liabilites................ 106% 114% 147% 166% 166% ======== ======= ====== ======== ========
Maturing or repricing in ------------------------------------------------------------- After 3 After months 1 year but but 3 months within within After or less 1 year 5 years 5 years Total --------- -------- -------- ------- --------- June 30, 1993 (Dollars in millions) Rate-sensitive assets: Interest-bearing deposits in other banks... $ 0.6 $ $ $ - $ 0.6 Loans...................................... 1,275.8 70.4 216.5 23.1 1,585.8 Investment securities...................... 47.0 176.1 160.4 28.7 412.2 Securities available for sale.............. 5.4 7.6 5.6 0.1 18.7 Trading account securities................. 23.8 - - - 23.8 Federal funds sold and securities purchased under resale agreements....... 387.9 - - - 387.9 -------- -------- -------- --------- -------- Total rate-sensitive assets............. 1,740.5 254.1 382.5 51.9 2,429.0 -------- -------- -------- --------- -------- Rate-sensitive liabilities: (1) Interest checking.......................... 258.4 - - - 258.4 Money market deposits...................... 730.6 - - - 730.6 Savings deposits........................... 96.3 - - - 96.3 Other time deposits........................ 185.7 82.7 35.5 - 303.9 Short-term borrowings...................... 226.0 - - - 226.0 -------- -------- -------- -------- -------- Total rate-sensitive liabilities........ 1,497.0 82.7 35.5 - 1,615.2 -------- -------- -------- -------- -------- Interest rate sensitivity gap................. $ 243.5 $ 171.4 $ 347.0 $ 51.9 $ 813.8 ======== ======== ======== ======== ======== Cumulative interest rate sensitivity gap...... $ 243.5 $ 414.9 $ 761.9 $ 813.8 ======== ======== ======== ======== Cumulative ratio of rate-sensitive assets to rate-sensitive liabilities............... 116% 126% 147% 150% 150% ======== ======== ======== ======== ========
(1) Customer deposits which are subject to immediate withdrawal are presented as repricing within 3 months or less. The distribution of other time deposits is based on scheduled maturities. 28 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. On April 19, 1994, the Registrant held its annual meeting of shareholders. The shareholders elected the 12 directors listed in the Registrant's proxy statement. The following table sets forth the number of votes cast for or withheld with respect to each director. Under applicable Delaware law, votes withheld have the same effect as votes cast against a nominee, and for this reason, the ballot did not offer a separate opportunity to vote against nominees. No measures other than the election of directors were voted on, and the election tally consequently does not include any abstentions or broker non-votes.
Name or Matter For Withheld - - -------------- ---------- -------- George H. Benter, Jr. 38,998,952 256,488 Richard L. Bloch 38,967,591 287,849 Mirion P. Bowers, M.D. 38,943,754 311,686 Steven D. Broidy 39,001,152 254,288 Stuart D. Buchalter 38,965,220 290,220 Bram Goldsmith 38,980,555 274,885 Russell D. Goldsmith 38,983,935 271,505 Burton S. Horwitch 38,986,355 269,085 Charles E. Rickershauser, Jr. 38,996,091 259,349 Edward Sanders 38,990,968 264,472 Andrea L. Van De Kamp 38,944,713 310,727 Kenneth Ziffren 38,995,197 260,243
ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 29 SIGNATURES Pursuant to the requirements 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) DATE: August 15, 1994 ----------------- -------------------------- FRANK P. PEKNY Executive Vice President and Treasurer 30 -----END PRIVACY-ENHANCED MESSAGE-----