-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LkMEDAi7I9hVvT9pRkHFbhSxYBl7KYTyPbPhQ7xZuA3Lmw2mGFM8kPhR1ezptqeL gHgLTjWnznQdR3zgTRTgUg== 0000912057-97-027272.txt : 19970813 0000912057-97-027272.hdr.sgml : 19970813 ACCESSION NUMBER: 0000912057-97-027272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY NATIONAL CORP CENTRAL INDEX KEY: 0000201461 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [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: 97656973 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 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 1997 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 (310) 888-6000 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, 1997: 46,128,283 CITY NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS
JUNE 30, DECEMBER 31, JUNE 30, 1997 1996 1996 ---------- --------- ---------- (DOLLARS IN THOUSANDS) Cash and due from banks .. . . . . . . . . . . . . . . . . . . . $ 295,281 $ 331,046 $ 339,813 Interest-bearing deposits in other banks . . . . . . . . . . . . 444 10,978 30,709 Federal funds sold and securities purchased under resale agreements . . . . . . . . . . . . . . . . . . . . . . - 151,200 25,000 Investment securities (market values $232,773; $194,655 and $191,294 at June 30, 1997, December 31, 1996 and June 30, 1996, respectively) . . . . . . . . . . . . . . . . . 233,506 195,229 193,669 Securities available for sale (cost $594,601; $619,580 and $666,485 at June 30, 1997, December 31, 1996 and June 30, 1996, respectively) . . . . . . . . . . . . . . . . 592,935 615,863 655,818 Trading account securities . . . . . . . . . . . . . . . . . . 47,259 32,129 26,798 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,446,452 2,839,435 2,547,725 Less allowance for credit losses . . . . . . . . . . . . . . . 132,885 130,089 127,294 ------------ ------------ ------------ Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . 3,313,567 2,709,346 2,420,431 Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . 5,549 6,147 6,614 Premises and equipment, net . . . . . . . . . . . . . . . . . 36,719 24,196 23,611 Customers' acceptance liability . . . . . . . . . . . . . . . 4,810 2,339 2,686 Other real estate . . . . . . . . . . . . . . . . . . . . . . 10,238 15,116 15,691 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 51,463 65,291 65,040 Goodwill and core deposit intangibles . . . . . . . . . . . . 62,341 10,083 10,514 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 56,332 47,533 41,490 ------------ ------------ ------------ Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 4,710,444 $ 4,216,496 $ 3,857,884 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES Demand deposits . . . . . . . . . . . . . . . . . . . . . . . $ 1,589,349 $ 1,642,558 $ 1,204,233 Interest checking deposits . . . . . . . . . . . . . . . . . . 356,995 386,211 294,383 Money market accounts . . . . . . . . . . . . . . . . . . . . 777,986 714,127 730,703 Savings deposits . . . . . . . . . . . . . . . . . . . . . . . 173,988 136,691 134,638 Time deposits - under $100,000 . . . . . . . . . . . . . . . . 228,576 146,076 136,175 Time deposits - $100,000 and over . . . . . . . . . . . . . . 530,176 360,860 350,867 ------------ ------------ ------------ Total deposits . . . . . . . . . . . . . . . . . . . . . . . . 3,657,070 3,386,523 2,850,999 Federal funds purchased and securities sold under repurchase agreements . . . . . . . . . . . . . . . . . 248,384 194,549 279,543 Other short-term borrowings . . . . . . . . . . . . . . . . . 267,931 148,642 275,000 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 9,800 34,800 34,800 Other liabilities . . . . . . . . . . . . . . . . . . . . . . 50,234 48,896 46,798 Acceptances outstanding . . . . . . . . . . . . . . . . . . . 4,810 2,339 2,686 ------------ ------------ ------------ Total liabilities . . . . . . . . . . . . . . . . . . . . . . 4,238,229 3,815,749 3,489,826 ------------ ------------ ------------ Commitments and contingencies SHAREHOLDERS' EQUITY Preferred Stock authorized-5,000,000, none outstanding . . . . - - - Common stock- par value- $100; authorized - 75,000,000 Issued-46,700,891; 46,302,782 and 45,927,151 at June 30, 1997, December 31, 1996 and June 30, 1996, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 46,700 46,303 45,927 Additional paid-in capital . . . . . . . . . . . . . . . . . 299,749 275,610 270,758 Unrealized loss on available for sale securities . . . . . . (958) (2,149) (6,143) Retained earnings . . . . . . . . . . . . . . . . . . . . . . 140,654 113,266 86,460 Treasury shares, at cost - 628,249; 2,394,600 and 2,211,200 at June 30, 1997, December 31, 1996 and June 30, 1996, respectively . . . . . . . . . . . . . . . . . . . . . . . . (13,930) (32,283) (28,944) ------------ ------------ ------------ Total shareholders' equity . . . . . . . . . . . . . . . . . . 472,215 400,747 368,058 ------------ ------------ ------------ Total liabilities and shareholders' equity . . . . . . . . . . $ 4,710,444 $ 4,216,496 $ 3,857,884 ------------ ------------ ------------ ------------ ------------ ------------
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, -------------------- ------------------ 1997 1996 1997 1996 ------- ------- ------- ------- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) INTEREST INCOME: Interest and fees on loans . . . . . . . . . . . . . . . . . . . . $75,017 $53,826 $145,028 $107,049 Interest on federal funds sold and securities purchased under resale agreements . . . . . . . . . . . . . . . . . . . . . 271 758 583 2,165 Interest on investment securities: U.S. Treasury and federal agency securities .. . . . . . . . . . . 1,739 1,873 3,406 3,460 Municipal securities . . . . . . . . . . . . . . . . . . . . . . . 1,194 612 2,301 932 Other securities . . . . . . . . . . . . . . . . . . . . . . . . . 153 596 407 1,167 Interest on securities available for sale. . . . . . . . . . . . . 9,609 9,731 19,126 20,474 Interest on trading account securities . . . . . . . . . . . . . . 713 373 1,152 843 ------- ------- ------- ------- Total .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,696 67,769 172,003 136,090 ------- ------- ------- ------- INTEREST EXPENSE: Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . 18,032 13,192 34,526 26,625 Interest on federal funds purchased and securities sold under repurchase agreements .. . . . . . . . . . . . . . . . . . . 3,486 5,107 6,408 9,534 Interest on other short-term borrowings .. . . . . . . . . . . . . 3,223 895 6,833 1,772 Interest on long-term debt . . . . . . . . . . . . . . . . . . . . 1,163 511 1,672 935 ------- ------- ------- ------- Total .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,904 19,705 49,439 38,866 ------- ------- ------- ------- NET INTEREST INCOME .. . . . . . . . . . . . . . . . . . . . . . . 62,792 48,064 122,564 97,224 PROVISION FOR CREDIT LOSSES . . . . . . . . . . . . . . . . . . . - - - - ------- ------- ------- ------- Net interest income after provision for credit losses . . . . . . 62,792 48,064 122,564 97,224 ------- ------- ------- ------- NONINTEREST INCOME: Service charges on deposit accounts . . . . . . . . . . . . . . . 3,325 2,757 6,629 5,403 Investment services income .. . . . . . . . . . . . . . . . . . . 3,093 2,783 6,144 5,252 Trust fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,154 1,732 4,170 3,453 International services income . . . . . . . . . . . . . . . . . . 1,841 1,219 3,367 2,202 Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . .- - - 1,039 688 Gain (loss) on sales of securities . . . . . . . . . . . . . . . (262) (450) (539) 292 All other income . . . . . . . . . . . . . . . . . . . . . . . . . 3,263 1,914 5,229 4,052 ------- ------- ------- ------- Total noninterest income.. . . . . . . . . . . . . . . . . . . . . 13,414 9,955 26,039 21,342 ------- ------- ------- ------- NONINTEREST EXPENSE: Salaries and other employee benefits . . . . . . . . . . . . . . . 24,617 18,172 48,113 38,311 Net occupancy of premises .. . . . . . . . . . . . . . . . . . . . 2,735 2,143 5,097 4,957 Data processing .. . . . . . . . . . . . . . . . . . . . . . . . . 2,654 2,190 4,806 4,373 Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,246 3,411 8,828 6,550 FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 117 1 205 2 Office supplies .. . . . . . . . . . . . . . . . . . . . . . . . . 1,576 1,373 3,132 2,527 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,379 1,305 2,736 2,583 Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,679 3,722 2,824 Equipment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 614 633 1,195 1,113 Amortization of goodwill and core deposit intangibles .. . . . . . 1,820 435 3,201 870 Other operating . . . . . . . . . . . . . . . . . . . . . . . . . 3,967 2,707 8,237 5,926 Other real estate income . . . . . . . . . . . . . . . . . . . . . (411) (215) (33) (41) ------- ------- ------- ------- Total noninterest expense. . . . . . . . . . . . . . . . . . . . . 45,314 33,834 89,239 69,995 ------- ------- ------- ------- Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . 30,892 24,185 59,364 48,571 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334 8,169 21,803 16,703 ------- ------- ------- ------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,558 $16,016 $37,561 $31,868 ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $0.41 $0.36 $0.79 $0.71 ------- ------- ------- ------- ------- ------- ------- ------- Shares used to compute net income per share . . . . . . . . . . . . 47,748 44,765 47,678 44,848 ------- ------- ------- ------- ------- ------- ------- -------
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, ------------------------- 1997 1996 --------- ---------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,561 $ 31,868 Adjustment to net income: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,736 2,583 Amortization of goodwill and core deposit intangibles. . . . . . . 3,201 870 Net (increase) in trading securities. . . . . . . . . . . . . . . (15,130) 2,930 Net decrease in deferred tax benefits. . . . . . . . . . . . . . . 13,828 (620) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (709) (11,578) ---------- ---------- Net cash provided (used) by operating activites. . . . . . . . . . 41,487 26,053 ---------- ---------- INVESTING ACTIVITIES Net decrease in short-term investments . . . . . . . . . . . . . . . 10,534 49,987 Purchase of securities available for sale. . . . . . . . . . . . . . (228,297) (370,776) Sales and maturities of securities available for sale. . . . . . . . 308,516 563,212 Maturities of investment securities. . . . . . . . . . . . . . . . . 4,382 16,897 Purchase of investment securities. . . . . . . . . . . . . . . . . . (41,996) (104,118) Purchase of residential mortgage loans.. . . . . . . . . . . . . . . (74,681) (200,171) Sale of residential mortgage loans . . . . . . . . . . . . . . . . . 47,513 - Other loan originations net of principal collections . . . . . . . . (236,105) (14,223) Proceeds from sales of ORE.. . . . . . . . . . . . . . . . . . . . . 13,547 806 Proceeds from sale of leveraged leases.. . . . . . . . . . . . . . . - 1,824 Net cash provided by acquisitions. . . . . . . . . . . . . . . . . . 42,876 - Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,712 20,705 ---------- ---------- Net cash from investing activities.. . . . . . . . . . . . . . . . (151,999) (35,857) ---------- ---------- FINANCING ACTIVITIES Net increase in federal funds purchased and securities sold under repurchase agreements . . . . . . . . . . . . 12,636 21,190 Net decrease in deposits . . . . . . . . . . . . . . . . . . . . . . (180,632) (397,036) Net increase in short term borrowings. . . . . . . . . . . . . . . . 119,289 79,900 Proceeds from (repayment) of long term debt. . . . . . . . . . . . . (15,200) 9,800 Proceeds from issuance of stock. . . . . . . . . . . . . . . . . . . 6,949 3,788 Purchase of treasury shares. . . . . . . . . . . . . . . . . . . . . (14,720) (19,045) Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . (10,173) (7,926) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,398 (7,584) ---------- ---------- Net cash used in financing activities. . . . . . . . . . . . . . . (76,453) (316,913) ---------- ---------- Net decrease in cash and cash equivalents. . . . . . . . . . . . . . (186,965) (326,717) Cash and cash equivalents at beginning of year . . . . . . . . . . . 482,246 691,540 ---------- ---------- Cash and cash equivalents at end of year.. . . . . . . . . . . . . . $ 295,281 $ 364,823 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,656 $ 37,924 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,202 9,750 Non cash investing activities: Transfer from loans to ORE . . . . . . . . . . . . . . . . . . . . 10,296 9,507
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, ----------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Common Stock Balance, beginning of period . . . . . . . . . . . . . . . . . . . $ 46,303 $45,554 Stock options exercised . . . . . . . . . . . . . . . . . . . . . 397 373 -------- -------- Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 46,700 45,927 -------- -------- Additional paid-in capital Balance, beginning of period . . . . . . . . . . . . . . . . . . . 275,610 266,829 Stock options exercised . . . . . . . . . . . . . . . . . . . . . 4,122 3,415 Tax benefit from stock options . . . . . . . . . . . . . . . . . . 1,830 514 Excess of market value of treasury shares issued for acquisitions over historical cost . . . . . . . . . . . . . . 18,187 - -------- -------- Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 299,749 270,758 -------- -------- Treasury shares Balance, beginning of period .. . . . . . . . . . . . . . . . . . (32,283) (9,899) Purchase of shares .. . . . . . . . . . . . . . . . . . . . . . . (14,720) (19,045) Issuance of shares for acquisitions .. . . . . . . . . . . . . . . 30,643 - Issuance of shares for stock options . . . . . . . . . . . . . . . 2,430 - -------- -------- Balance, end of period . . . . . . . . . . . . . . . . . . . . . . (13,930) (28,944) -------- -------- Unrealized net gains (losses) on securities available for sale Balance, beginning of period .. . . . . . . . . . . . . . . . . . (2,149) 1,955 Change during period . . . . . . . . . . . . . . . . . . . . . . . 1,191 (8,098) -------- -------- Balance, end of period . . . . . . . . . . . . . . . . . . . . . . (958) (6,143) -------- -------- Retained earnings Balance, beginning of period . . . . . . . . . . . . . . . . . . . 113,266 62,518 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,561 31,868 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (10,173) (7,926) -------- -------- Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 140,654 86,460 -------- -------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . $472,215 $368,058 -------- -------- -------- --------
See accompanying Notes to the Unaudited Consolidated Financial Statements -5- NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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, 1996. 2. 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, and reported as a net amount after taxes, in a separate component of shareholders' equity, until realized. 3. On January 17, 1997, the Company completed its acquisition of Ventura County National Bancorp (VCNB) for $49.1 million by issuing 1,344,095 treasury shares with an aggregate market value of $28.1 million and paying $21.0 million in cash. VCNB had shareholders' equity of $30.2 million at closing. This acquisition was accounted for under the purchase method of accounting. On January 24, 1997, the Company completed its acquisition of Riverside National Bank (RNB) for $41.3 million. The Company issued 963,430 treasury shares with an aggregate market value of $20.7 million as well as paying $20.6 million in cash. RNB had shareholders' equity of $22.5 million at closing. This acquisition was accounted for under the purchase method of accounting. 4. On March 17, 1997, the Company announced a program for repurchase of up to 1.5 million shares of its common stock. Shares purchased under the buyback program will be issued upon the exercise of stock options and for other general purposes. 5. 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. -6- 6. Certain prior year data have been reclassified to conform with current year presentation. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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. RESULTS OF OPERATIONS The Company recorded consolidated net income of $19.6 million, or $.41 per share, in the second quarter of 1997, compared to a net income of $16.0 million, or $.36 per share, in the second quarter of 1996. Most of the change between second quarters resulted from an increase in net interest income of $14.7 million and an increase in noninterest income of $3.5 million offset in part by a $11.5 million increase in noninterest expenses due to the acquisitions of Ventura County National Bancorp (VCNB) and Riverside National Bank (RNB) in January 1997 and the strong growth in business. Net income for the first six months of 1997 totaled $37.6 million, or $.79 per share compared with $31.9 million, or $.71 per share in the 1996 period. The six month increase resulted largely from a $25.3 million increase in net interest income and a $4.7 million increase in non-interest income, partially offset by a $19.2 million increase in non-interest expense. Returns on average assets for the second quarter and first half of 1997 were 1.67% and 1.66%, respectively, compared with 1.73% for both the second quarter and first half of 1996. Returns on average equity for the second quarter and first half of 1997 decreased to 16.87% and 16.56%, respectively, from 17.90% and 17.64% in 1996 as a result of the increase in average equity caused by the issuance of 2.3 million shares of treasury stock for the two acquisitions completed in January 1997, and retained earnings for the last twelve months. Taxable equivalent net interest income was $65.2 million in the second quarter of 1997, up 31.8% from the year-ago quarter. The increase resulted from a 36.4% increase in average loans between quarters as well as a 28.0% increase in non-interest bearing deposits. The net interest spread increased from 4.47% to 4.72% and the net interest margin increased from 5.83% to 6.15% due to the strong increase in loans, improved yields from securities and good growth -8- in core deposits. Management expects modest growth in quarterly net interest income for the remainder of 1997 from first half 1997 levels. The foregoing forward-looking statement assumes, among other things, that short term interest rate levels will increase somewhat in 1997 and is based on anticipated growth in loans. Actual results may differ materially if either of those assumptions proves to be incorrect. See "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below. Average loans increased $893.4 million (36.4%) between second quarters to $3,345.5 million for the quarter ended June 30, 1997. This increase reflected higher average commercial and residential first mortgage loans outstanding, up $535.7 million (50.9%) and $168.7 million (21.7%), respectively. The increase in commercial loans resulted from the Bank's internal loan generation, the acquisitions of VCNB and RNB in January 1997 and purchases of syndicated corporate loans. The increase in residential first mortgage loans resulted from both the Bank's internal loan generation and bulk purchases of residential first mortgage loans. Average construction loans increased $41.3 million (48.8%) from the second quarter of 1996, and average real estate mortgage loans increased $135.8 million (26.9%), due primarily to the acquisitions of VCNB and RNB. Total average investments and available for sale securities decreased by $7.1 million between second quarters due to strong loan demand. Total average deposits increased $776.3 million (27.6%) between second quarters due primarily to the acquisitions of VCNB and RNB as well as increased deposit levels generated by the Bank's existing branches. For the first half of 1997, average loans increased $834.2 million (34.8%), and total average investment and available for sale securities decreased $3.6 million (.4%). Total deposits for the six months ended June 30, 1997 increased $675.0 million (24.0%) compared to the 1996 period. The changes in the six month average balances resulted from the same factors that caused the changes between the second quarter average balances. The provision for credit losses was zero for the six months ended June 30, 1997 and 1996. Loans charged off in the second quarter of 1997 were $7.9 million, compared to $7.8 million in the second quarter of 1996. Recoveries were $3.2 million in the second quarter of 1997, compared to $6.1 million in the second quarter of 1996. The provision for credit losses is expected to remain at reduced levels for the remainder of 1997. This forward-looking statement is based on an -9- assumption that general economic conditions in Southern California will not deteriorate materially in 1997, and if this assumption proves to be inaccurate, an increased provision for credit losses may be required. See "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below. Non-interest income excluding gains and losses on the sale of securities and assets totaled $13.7 million for the second quarter of 1997, up $3.3 million (31.4%) from a year earlier. For the six months ended June 30, 1997, non-interest income excluding gains and losses on the sale of securities and assets totaled $25.5 million, an increase of $5.2 million (25.4%) from last year's total of $20.4 million. Service charges on deposit accounts increased $.6 million (20.6%) and $1.2 million (22.7%), respectively, for the quarter and six months ended June 30, 1997 due primarily to the acquisitions of VCNB and RNB. Investment services income increased $.3 million (11.1%) and $.9 million (17.0%) for the quarter and six months ended June 30, 1997 due to new customers and new investment products offered to customers. Trust fees increased $.4 million (24.4%) and $.7 million (20.8%) for the quarter and six months ended June 30, 1997 due to higher amounts of new business. International fees increased $.6 million (51.0%) and $1.2 million (52.9%) for the quarter and six months ended June 30, 1997 due to business generated by the addition of several additional foreign exchange traders in mid-1996 and the Bank's increased marketing efforts. Included in all other income in the second quarter of 1997 was a $.9 settlement of a lawsuit with a borrower. Management expects modest growth in non-interest income from first half 1997 levels during the remainder of 1997. See "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below. Excluding net ORE results, non-interest expense totaled $45.7 million in the second quarter of 1997, an increase of $11.7 million (34.3%) from the second quarter of 1996. For the first half of 1997, excluding net ORE results, non-interest expense totaled $89.3 million, an increase of $19.2 million (27.5%) from the first half of 1996. Salaries and other employee benefits increased $6.4 million (35.5%) and $9.8 million (25.6%) for the quarter and six months ended June 30, 1997 from the comparable period in 1996, due primarily to the additional personnel added as a result of the acquisition of VCNB and RNB and the hiring of additional personnel to internally grow the business. -10- The expense categories other than staff increased $5.2 million (32.9%) and $9.4 million (29.7%) for the quarter and six months ended June 30, 1997 from the comparable period in 1996. The increases in professional expenses resulted primarily from higher consulting and legal fees. The increase in promotion expenses resulted from the Company's expanded advertising program. Other noninterest expense for the first half of 1997 included charges totaling $1.8 million and $.4 million during the first and second quarters, respectively, for the unreserved portion of the cost of a buyout of the Company's then existing data processing contract, the write-off of unamortized software and hardware connected with that contract and conversion expenses incurred to date to convert to a new data processing provider. In March 1997, the Company reached agreements with its insurance carriers regarding a lender liability lawsuit which it settled with a former bank customer in the fourth quarter of 1996. The insurance reimbursements of $2.5 million have been credited to other noninterest expense. The remaining other increases resulted from the acquisitions of VCNB and RNB. Amortization of goodwill and core deposit intangibles increased to $1.8 and $3.2 million for the second quarter and first six months of 1997 from $.4 million and $.9 million in the applicable periods in 1996. In April 1997, the Company signed a seven year contract with its new data processing provider which is expected to reduce its data processing expense after completion of the conversion. Noninterest expense levels for the second half of 1997 are expected to decrease from first half 1997 levels with the completion of the integration of VCNB and RNB into City National Bank and the completion of the conversion to the new data processing provider. See "Cautionary Statement For Purposes of the 'Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995", below. The Company's effective tax rate increased to 36.7% in the second quarter of 1997 from 33.8% in the second quarter of 1996. The increase resulted from the recognition of $.9 million in previously unrecognized deferred tax benefits in the second quarter of 1996. The Company expects the effective tax rate for the remainder of 1997 to remain near 1997 first half levels. See "Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below. -11- NET INTEREST INCOME SUMMARY The following table presents the components of net interest income for the quarters ended June 30, 1997 and 1996.
DOLLARS IN THOUSANDS JUNE 30, 1997 JUNE 30, 1996 ------------------------------ ----------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST BALANCE EXPENSE (1) RATE BALANCE EXPENSE (1) RATE ---------- -------- ------- -------- ----------- ------- ASSETS (2) Earning assets Loans: (3) Commercial loans $1,588,036 $ 36,583 9.24% $1,052,305 $ 23,582 9.01% Real estate - construction 125,739 3,593 11.46 84,477 2,458 11.70 Real estate - mortgage 640,506 15,898 9.96 504,714 11,673 9.30 Residential first mortgages 944,954 18,379 7.80 776,237 15,677 8.12 Installment loans 46,250 1,321 11.46 34,336 900 10.54 ---------- -------- ----- ---------- -------- ----- Total loans 3,345,485 75,774 9.08 2,452,069 54,290 8.90 ---------- -------- ----- ---------- -------- ----- Due from banks-interest bearing 411 2 1.95 29,625 444 6.03 State and municipal investment securities 106,101 1,860 7.03 53,614 953 7.15 Taxable investment securities 116,352 1,890 6.52 128,695 2,025 6.33 Securities available for sale 613,588 10,480 6.85 660,782 10,229 6.23 Federal funds sold and securities purchased under resale agreements 19,073 271 5.70 56,025 758 5.44 Trading account securities 48,678 801 6.60 31,053 453 5.87 ---------- -------- ----- ---------- -------- ----- Total earning assets 4,249,688 91,078 8.60 3,411,863 69,152 8.15 ---------- -------- ----- ---------- -------- ----- Allowance for credit losses (136,139) (128,503) Cash and due from banks 346,521 279,912 Other nonearning assets 225,633 159,724 ---------- ---------- Total assets $4,685,703 $3,722,996 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest - bearing deposits $1,485,023 - - $1,160,406 - - Interest-bearing deposits: Interest checking accounts 383,216 969 1.01 316,049 790 1.01 Money market accounts 800,412 6,034 3.02 710,069 5,252 2.97 Savings deposits 174,019 1,415 3.26 132,472 1,026 3.12 Time deposits - under $100,000 237,541 3,025 5.11 136,827 1,760 5.17 Time deposits - $100,000 and over 508,182 6,589 5.20 356,260 4,364 4.93 ---------- -------- ----- ---------- -------- ----- Total interest - bearing deposits 2,103,370 18,032 3.44 1,651,677 13,192 3.21 ---------- -------- ----- ---------- -------- ----- Total deposits 3,588,393 2,812,083 Federal funds purchased and securities sold under repurchase agreements 260,892 3,486 5.36 400,807 5,107 5.12 Other borrowings 315,993 4,386 5.57 98,087 1,406 5.77 ---------- -------- ----- ---------- -------- ----- Total interest - bearing liabilities 2,680,255 25,904 3.88 2,150,571 19,705 3.69 ---------- -------- ----- ---------- -------- ----- Other liabilities 55,279 52,092 Shareholders' equity 465,146 359,927 ---------- ---------- Total liabilities and shareholders' equity $4,685,703 $3,722,996 ---------- ---------- ---------- ---------- Net interest spread 4.72% 4.47% ----- ----- ----- ----- Fully taxable equivalent net interest income $ 65,174 $49,447 -------- -------- -------- -------- Net interest margin 6.15% 5.83% ----- ----- ----- -----
- ---------- (1) Fully taxable equivalent basis. (2) Includes average nonaccrual loans of $43,820 and $48,603 for 1997 and 1996, respectively. (3) Loan income includes loan fees of $2,214 and $1,798 for 1997 and 1996, respectively. -12- NET INTEREST INCOME SUMMARY The following table presents the components of net interest income for the six months ended June 30, 1997 and 1996.
DOLLARS IN THOUSANDS JUNE 30, 1997 JUNE 30, 1996 ------------------------------ ----------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST BALANCE EXPENSE (1) RATE BALANCE EXPENSE (1) RATE ---------- -------- ------- -------- ----------- ------- ASSETS (2) Earning assets Loans: (3) Commercial loans $1,528,747 $ 70,698 9.24% $1,046,552 $ 47,431 9.11% Real estate - construction 117,537 6,682 11.46 82,332 4,793 11.71 Real estate - mortgage 617,117 30,475 9.96 517,432 25,050 9.74 Residential first mortgages 924,204 36,107 7.88 718,318 28,780 8.06 Installment loans 46,984 2,485 10.67 35,725 1,847 10.40 ---------- -------- ----- ---------- -------- ----- Total loans 3,234,589 146,447 9.09 2,400,359 107,901 9.04 ---------- -------- ----- ---------- -------- ----- Due from banks-interest bearing 4,051 98 4.88 28,223 836 5.96 State and municipal investment securities 102,428 3,584 7.06 40,513 1,452 7.21 Taxable investment securities 114,527 3,715 6.54 117,897 3,791 6.47 Securities available for sale 619,973 20,698 6.73 682,161 21,468 6.33 Federal funds sold and securities purchased under resale agreements 22,060 583 5.33 78,467 2,165 5.55 Trading account securities 44,251 1,237 5.64 31,421 940 6.02 ---------- -------- ----- ---------- -------- ----- Total earning assets 4,141,879 176,362 8.55 3,379,041 138,553 8.25 ---------- -------- ----- ---------- -------- ----- Allowance for credit losses (136,390) (130,300) Cash and due from banks 332,578 289,837 Other nonearning assets 218,052 160,558 ---------- ---------- Total assets $4,556,119 $3,699,136 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest - bearing deposits $1,447,517 - - $1,154,006 - - Interest-bearing deposits: Interest checking accounts 375,312 1,877 1.01 321,534 1,606 1.00 Money market accounts 788,541 11,789 3.01 720,773 10,608 2.96 Savings deposits 170,530 2,782 3.29 132,499 2,033 3.09 Time deposits - under $100,000 228,182 5,763 5.09 133,607 3,455 5.20 Time deposits - $100,000 and over 478,767 12,315 5.19 351,442 8,923 5.11 ---------- -------- ----- ---------- -------- ----- Total interest - bearing deposits 2,041,332 34,526 3.41 1,659,855 26,625 3.23 ---------- -------- ----- ---------- -------- ----- Total deposits 3,488,849 2,813,861 Federal funds purchased and securities sold under repurchase agreements 247,129 6,408 5.23 369,386 9,534 5.19 Other borrowings 310,780 8,505 5.52 94,392 2,707 5.77 ---------- -------- ----- ---------- -------- ----- Total interest - bearing liabilities 2,599,241 49,439 3.84 2,123,633 38,866 3.68 ---------- -------- ----- ---------- -------- ----- Other liabilities 52,039 58,130 Shareholders' equity 457,322 363,367 ---------- ---------- Total liabilities and shareholders' equity $4,556,119 $3,699,136 ---------- ---------- ---------- ---------- Net interest spread 4.71% 4.57% ----- ----- ----- ----- Fully taxable equivalent net interest income $126,923 $ 99,687 -------- ---------- -------- ---------- Net interest margin 6.15% 5.93% ----- ----- ----- -----
- ------------- (1) Fully taxable equivalent basis. (2) Includes average nonaccrual loans of $43,272 and $49,583 for 1997 and 1996, respectively. (3) Loan income includes loan fees of $3,976 and $3,542 for 1997 and 1996, respectively. -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.
DOLLARS IN THOUSANDS QUARTER ENDED JUNE 30, QUARTER ENDED JUNE 30, 1997 VS 1996 1996 VS 1995 ------------------------------ ----------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO (1): NET DUE TO (1): NET -------------------- INCREASE -------------------- INCREASE FULLY TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ---------- -------- ---------- ---------- -------- ---------- Interest earned on: Interest-bearing deposits in other banks $ (262) $ (180) $ (442) $ 428 $ 11 $ 439 Loans 20,357 1,127 21,484 17,714 (4,994) 12,720 Taxable investment securities (196) 61 (135) (6,860) 1,236 (5,624) Non-taxable investment securities 923 (16) 907 517 1 518 Securities available for sale (748) 999 251 8,758 (153) 8,605 Trading account securities 286 62 348 (130) 17 (113) Federal funds sold and securities purchased under resale agreements (522) 35 (487) (758) (160) (918) -------- ------- --------- --------- -------- -------- Total interest-earning assets 19,838 2,088 21,926 19,669 (4,042) 15,627 -------- ------- --------- --------- -------- -------- Interest paid on: Interest checking 179 0 179 109 27 136 Money market deposits 691 91 782 805 216 1,021 Savings deposits 340 49 389 336 298 634 Other time deposits 3,273 217 3,490 3,622 66 3,688 Other borrowings 1,073 286 1,359 2,211 (551) 1,660 -------- ------- --------- --------- -------- -------- Total interest-bearing liabilities 5,556 643 6,199 7,083 56 7,139 -------- ------- --------- --------- -------- -------- $ 14,282 $ 1,445 $ 15,727 $ 12,586 $ (4,098) $ 8,488 -------- ------- --------- --------- -------- -------- -------- ------- --------- --------- -------- --------
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 VS 1996 1996 VS 1995 ------------------------------ ----------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO (1): NET DUE TO (1): NET DOLLARS IN THOUSANDS - -------------------- INCREASE -------------------- INCREASE FULLY TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ---------- -------- ---------- ---------- -------- ---------- Interest earned on: Interest-bearing deposits in other banks $ (608) $ (130) $ (738) $ 798 $ 30 $ 828 Loans 37,469 1,077 38,546 34,591 (6,210) 28,381 Taxable investment securities (115) 39 (76) (14,752) 2,915 (11,837) Non-taxable investment securities 2,163 (31) 2,132 555 15 570 Securities available for sale (2,055) 1,285 (770) 18,562 (460) 18,102 Trading account securities 360 (63) 297 (80) (48) (128) Federal funds sold and securities purchased under resale agreements (1,499) (83) (1,582) (409) (303) (712) -------- ------- --------- --------- -------- -------- Total interest-earning assets 35,715 2,094 37,809 39,265 (4,061) 35,204 -------- ------- --------- --------- -------- -------- Interest paid on: Interest checking 256 15 271 254 44 298 Money market deposits 1,001 180 1,181 1,554 743 2,297 Savings deposits 611 138 749 635 593 1,228 Other time deposits 5,628 72 5,700 7,242 629 7,871 Other borrowings 2,486 186 2,672 4,548 (799) 3,749 -------- ------- --------- --------- -------- -------- Total interest-bearing liabilities 9,982 591 10,573 14,233 1,210 15,443 -------- ------- --------- --------- -------- -------- $ 25,733 $ 1,503 $ 27,236 $ 25,032 $ (5,271) $ 19,761 -------- ------- --------- --------- -------- -------- -------- ------- --------- --------- -------- --------
- ----------- (1) 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- BALANCE SHEET ANALYSIS LOAN PORTFOLIO A comparative period-end loan table is presented below: (dollars in thousands) June 30, December 31, June 30, 1997 1996 1996 ---------- ---------- ---------- Commercial $1,660,474 $1,334,577 $1,104,420 Residential first mortgage 951,616 882,573 823,046 Real estate- construction 125,799 92,322 96,083 Real estate-mortgage 660,877 499,377 490,850 Installment 47,686 30,586 33,326 ---------- ---------- ---------- Total loans, gross 3,446,452 2,839,435 2,547,725 Less: Allowance for credit loss (132,885) (130,089) (127,294) ---------- ---------- ---------- Total Loans, net $3,313,567 $2,709,346 $2,420,431 ---------- ---------- ---------- ---------- ---------- ---------- Gross loans at June 30, 1997 amounted to $3,446.5 million, up $898.7 million (35.3%) from June 30, 1996. Approximately $300.0 million of the increase was due to the acquisitions of VCNB and RNB. The $556.1 million increase in commercial loans was due to the Bank's own loan originations, the acquisitions of VCNB and RNB and the purchase of syndicated corporate loans. The $128.6 million increase in residential first mortgage loans resulted from the Bank's own originations, which were supplemented by purchases of residential first mortgages originated by third parties. Construction loans also increased significantly from June 30, 1996, up $29.7 million to $125.8 million at June 30, 1997 as the Company continued to expand its lending for residential construction development. The Company expects that the Bank's loan portfolio will continue to increase from second quarter 1997 levels due primarily to its own internal loan generation activities. See "Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below. -15- The following table presents information concerning nonaccrual loans, ORE, and restructured loans. June 30, December 31, June 30, 1997 1996 1996 ---------- ---------- ---------- (Dollars in thousands) Nonaccrual loans: Real estate - mortgages $ 22,498 $ 25,661 $ 38,254 Commercial 18,284 15,882 8,598 Installment - - - --------- --------- --------- Total 40,782 41,543 46,852 ORE 10,238 15,116 15,691 --------- --------- --------- Total nonaccrual loans and ORE $ 51,020 $ 56,659 $ 62,543 --------- --------- --------- --------- --------- --------- Restructured loans, accrual status $ 5,617 $ 2,569 $ 3,146 --------- --------- --------- --------- --------- --------- Ratio of nonaccrual loans to total loans 1.18% 1.46% 1.84% Ratio of nonperforming assets to total assets 1.08 1.34 1.62 Ratio of allowance for credit losses to nonaccrual loans 325.84 313.14 271.69 The table below summarizes the approximate changes in nonaccrual loans for the quarters and six months ended June 30, 1997 and June 30, 1996. Quarter ended Six months ended June 30, June 30, -------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (Dollars in millions) Balance, beginning of period $ 40.7 $ 52.7 $ 41.5 $ 48.1 Additions from acquisitions - - 2.4 - Loans placed on nonaccrual 11.4 6.8 20.5 25.0 Charge offs (5.8) (5.4) (8.8) (9.8) Loans returned to accrual status (2.5) (0.1) (3.1) (2.2) Repayments (including interest applied to principal) (3.0) (3.9) (9.1) (5.9) Transfer to ORE - (3.2) (2.6) (8.3) ------- ------- ------- ------- Balance, end of period $ 40.8 $ 46.9 $ 40.8 $ 46.9 ------- ------- ------- ------- ------- ------- ------- ------- At June 30, 1997, in addition to loans disclosed above as nonaccrual or restructured, management had also identified $10.8 million of potential problem loans about which the ability of the borrowers to comply with the present loan repayment terms in the future is questionable. -16- 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, June 30, -------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (Dollars in millions) Average amount of loans outstanding $3,345.5 $2,452.1 $3,234.6 $2,400.4 -------- -------- -------- -------- -------- -------- -------- -------- Balance of allowance for credit losses, beginning of period 137.6 $128.9 $ 130.1 $131.5 Loans charged off: Commercial 6.8 5.5 8.2 11.0 Real estate loans - construction - - - - Real estate loans - mortgage 1.1 2.3 3.5 2.3 Installment - - - - -------- -------- -------- -------- Total loans charged off 7.9 7.8 11.7 13.3 -------- -------- -------- -------- Less recoveries of loans previously charged off Commercial 2.1 3.0 6.3 5.9 Real estate loans - construction - - - - Real estate loans - mortgage 1.1 3.1 1.2 3.1 Installment - - - - -------- -------- -------- -------- Total recoveries 3.2 6.1 7.5 9.0 -------- -------- -------- -------- Net loans charged off 4.7 1.7 4.2 4.3 Provisions charged to operating expense - - - - Additions: From acquisition of VCNB - - 4.6 - From acquisition of RNB - - 2.4 - -------- -------- -------- -------- Balance, end of period $ 132.9 $ 127.2 132.9 127.2 -------- -------- -------- -------- -------- -------- -------- -------- Ratio of net charge-offs to average loans 0.56% 0.28% 0.26% 0.36% -------- -------- -------- -------- -------- -------- -------- -------- Ratio of allowance for credit losses to total period end loans 3.86% 5.00% 3.86% 5.00% -------- -------- -------- -------- -------- -------- -------- -------- -17- NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Upon adoption of SFAS No. 128, the Company anticipates that its basic EPS disclosures will be increased as compared to the primary EPS disclosures presently required by APB Opinion 15. The Company does not expect its diluted EPS disclosures will differ materially from the fully-diluted disclosures presently required by APB Opinion 15. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129 consolidates existing reporting standards for disclosing information about an entity's capital structure. SFAS No. 129 must be adopted for financial statements for periods ending after December 15, 1997. The impact on the Company of adopting SFAS No. 129 is not expected to be material as, the Company's existing disclosures are generally in compliance with the disclosure requirements in SFAS No. 129. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for -18- fiscal years beginning after December 15, 1997. The impact on the Company of adopting SFAS No. 130 is not expected to be material to the Company's existing disclosure. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting selected information about operating segments in annual financial statements and requires reporting interim reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997, and requires comparative information for earlier years to be restated. The Company is currently assessing the potential impact of SFAS No. 131. The Securities and Exchange Commission has approved rule amendments to clarify and expand existing disclosure requirements for derivative financial instruments. The amendments require expanded disclosure of accounting policies for derivative financial instruments in the footnotes to the financial statements, and quantitative and qualitative information about market risk inherent in market risk sensitive instruments. The required quantitative and qualitative information should be disclosed outside the financial statements and related notes thereto. The enhanced accounting policy disclosure requirements are effective for the quarterly period ended June 30, 1997. As the Company believes that the derivative financial instrument disclosures contained within the notes to the financial statements of its 1996 Form 10-K substantially conform with the accounting policy requirements of these rule amendments, no further interim period disclosure has been provided. The rule amendments that require expanded disclosure of quantitative and qualitative information about market risk are effective with the 1997 Form 10-K. CAPITAL ADEQUACY REQUIREMENTS As of June 30, 1997, the Company had a ratio of Tier 1 capital to risk-weighted assets (Tier 1 risk-based capital ratio) of 11.82%, a ratio of total capital to risk weighted assets (total risk-based capital ratio) of 13.10%, and a ratio of Tier 1 capital to average adjusted total assets (Tier 1 leverage ratio) of 9.00%, while the Bank had a Tier 1 risk-based capital ratio of 10.20%, a total risk-based capital ratio of 11.48% and a Tier 1 leverage ratio of 7.72%. -19- On March 17, 1997, the Company announced a program for repurchase of up to 1.5 million shares of its common stock. Through June 30, 1997, the Company had repurchased 663,500 shares at a total cost of $14.7 million. Shares purchased under the buyback program will be reissued upon the exercise of stock options and for other general purposes. At June 30, 1997, 628,249 shares were held in treasury with a total cost of $13.9 million. On July 23, 1997, the Company declared a regular quarterly dividend of $.11 per share, payable August 14, 1997 to shareholders of record as of August 4, 1997. LIQUIDITY The Company continues to manage its liquidity through a combination of core deposits, federal funds purchased, repurchase agreements, collateralized borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco, and a portfolio of securities available for sale. Liquidity is also provided by maturing investment securities and loans. Average core deposits comprised 73.9% of total funding in the second quarter of 1997, compared to 74.2% in the second quarter of 1996. This decrease has required the Company to increase its use of more costly alternative funding sources. Despite the decrease in percentage of funding derived from core deposits, the Company has not faced any liquidity constraints. The following table shows that the Company's cumulative one year interest rate sensitivity gap decreased from ($473.2) million at June 30, 1996 to ($612.4) million at June 30, 1997. This change resulted from the Company's effort to lower its exposure to decreases in net interest income due to a rapid decline in interest rates. The Company has increased its portfolio of loans that reprice after one year by $533.5 million during the last twelve months. In addition, the Company has entered into interest rate swap contracts, with maturities in excess of one year, totaling $250.0 million to reduce its asset sensitivity. At June 30, 1997 the unrealized loss on the Company's interest rate swap contracts were $.7 million. The Company's liability sensitive position during a period of slowly rising interest rates is not expected to have a significant negative impact on net interest income since rates paid on the Company's large base of interest checking, savings and money market deposit accounts historically have not increased proportionately with increases in interest rates. -20- INTEREST RATE SENSITIVITY MANAGEMENT At June 30, 1997 and 1996, the Company's distribution of rate-sensitive assets and liabilities was as follows:
MATURING OR REPRICING ---------------------------------------------------------------- AFTER 3 AFTER 1 YEAR IN 3 MONTHS MONTHS BUT BUT WITHIN AFTER OR LESS WITHIN 1 YEAR 5 YEARS 5 YEARS TOTAL ----------- ------------- ------------ ------- --------- (DOLLARS IN MILLIONS) JUNE 30, 1997 Rate-sensitive assets: Interest-bearing deposits in other banks. . . $ 0.4 $ - $ - $ - $ 0.4 Loans . . . . . . . . . . . . . . . . . . . . 1,715.6 349.4 384.1 956.6 3,405.7 Investment securities . . . . . . . . . . . . 8.6 5.3 155.8 63.8 233.5 Securities available for sale . . . . . . . . 12.5 1.0 259.4 320.0 592.9 Trading account . . . . . . . . . . . . . . . 47.3 - - 47.3 Interest rate swap. . . . . . . . . . . . . . (400.0) 150.0 250.0 0.0 Federal funds sold and securities purchased with agreement to resell. . . . . - - - - 0.0 -------- -------- --------- --------- -------- Total rate-sensitive assets. . . . . . . 1,384.4 505.7 1,049.3 1,340.4 4,279.8 -------- -------- --------- --------- -------- Rate-sensitive liabilities: (1) Interest checking . . . . . . . . . . . . . . 357.0 - - - 357.0 Money market deposits . . . . . . . . . . . . 778.0 - - - 778.0 Savings deposits. . . . . . . . . . . . . . . 174.0 - - - 174.0 Other time deposits . . . . . . . . . . . . . 335.6 331.8 87.2 4.1 758.7 Short-term borrowings . . . . . . . . . . . . 516.3 - - - 516.3 Long-term debt. . . . . . . . . . . . . . . . - 9.8 9.8 -------- -------- --------- --------- -------- Total rate-sensitive liabilities . . . . 2,160.9 341.6 87.2 4.1 2,593.8 -------- -------- --------- --------- -------- Interest rate sensitivity gap . . . . . . . . . . $ (776.5) $ 164.1 $ 962.1 $ 1,336.3 $1,686.0 ======== ======== ========= ========= ======== Cumulative interest rate sensitivity gap. . . . . $ (776.5) $ (612.4) $ 349.7 $ 1,686.0 ======== ======== ========= ========= Cumulative ratio of rate-sensitive assets to rate-sensitive liabilities . . . . . . . . . 64% 76% 114% 165% 165% ======== ======== ========= ========= ========
MATURING OR REPRICING ---------------------------------------------------------------- AFTER 3 AFTER 1 YEAR IN 3 MONTHS MONTHS BUT BUT WITHIN AFTER OR LESS WITHIN 1 YEAR 5 YEARS 5 YEARS TOTAL ----------- ------------- ------------ ------- --------- (DOLLARS IN MILLIONS) JUNE 30, 1996 Rate-sensitive assets: Interest-bearing deposits in other banks . . $ 30.7 $ - $ - $ - $ 30.7 Loans. . . . . . . . . . . . . . . . . . . . 1,352.0 341.7 200.7 606.5 2,500.9 Investment securities. . . . . . . . . . . . 5.2 1.0 101.7 85.8 193.7 Securities available for sale. . . . . . . . 37.0 25.1 356.2 237.5 655.8 Trading account. . . . . . . . . . . . . . . 26.8 - - - 26.8 Interest rate swap . . . . . . . . . . . . . (250.0) 100.0 150.0 0.0 Federal funds sold and securities purchased with agreement to resell . . . . 25.0 - - - 25.0 -------- -------- --------- --------- -------- Total rate-sensitive assets . . . . . . 1,226.7 467.8 808.6 929.8 3,432.9 -------- -------- --------- --------- -------- Rate-sensitive liabilities: (1) Interest checking. . . . . . . . . . . . . . 294.4 - - - 294.4 Money market deposits. . . . . . . . . . . . 730.7 - - - 730.7 Savings deposits . . . . . . . . . . . . . . 134.6 - - - 134.6 Other time deposits. . . . . . . . . . . . . 247.0 206.5 32.8 0.7 487.0 Short-term borrowings. . . . . . . . . . . . 554.5 - - - 554.5 Long-term debt.. . . . . . . . . . . . . . . - - 34.8 - 34.8 -------- -------- --------- --------- -------- Total rate-sensitive liabilities. . . . 1,961.2 206.5 67.6 - 2,236.0 -------- -------- --------- --------- -------- Interest rate sensitivity gap. . . . . . . . . . $ (734.5) $ 261.3 $ 741.0 $ 929.8 $1,196.9 ======== ======== ========= ========= ======== Cumulative interest rate sensitivity gap . . . . $ (734.5) $ (473.2) $ 267.8 $ 1,197.6 ======== ======== ========= ========= Cumulative ratio of rate-sensitive assets to rate-sensitive liabilities. . . . . . . . . 63% 78% 112% 154% 154% ======== ======== ========= ========= ========
- ----------- (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. -21- CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company wishes to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as to "forward looking" statements in this Quarterly Report which are not historical facts. The Company cautions readers that the following important factors could affect the Company's business and cause actual results to differ materially from those expressed in any forward looking statement made by, or on behalf of, the Company. - -- Economic conditions. The Company's results are strongly influenced by general economic conditions in its market area, Southern California, and a deterioration in these conditions could have a material adverse impact on the quality of the Bank's loan portfolio and the demand for its products and services. In particular, changes in economic conditions in the real estate and entertainment industries may affect the Company's performance. - -- Interest rates. Management anticipates that short term interest rate levels will increase in 1997, but if interest rates vary substantially from this expectation, the Company's results could differ materially. - -- Government regulation and monetary policy. All forward-looking statements presume a continuation of the existing regulatory environment and U. S. Government monetary policies. The banking industry is subject to extensive federal and state regulations, and significant new laws or changes in, or repeal of, existing laws may cause results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Bank, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing and bank reserve requirements, and a material change in these conditions would be likely to have an impact on results. - -- Competition. The Bank competes with numerous other domestic and foreign financial institutions and non-depository financial intermediaries. Results may differ if circumstances affecting the nature or level of competitive change, such as the merger of competing financial institutions or the acquisition of California institutions by out-of-state companies. - -- Credit quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in -22- accordance with the terms of their loans. The Bank has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Bank's credit portfolio, but such policies and procedures may not prevent unexpected losses that could adversely affect the Company's results. - -- Other risks. From time to time, the Company details other risks to its businesses and/or its financial results in its filings with the Securities and Exchange Commission. While management believes that its assumptions regarding these and other factors on which forward-looking statements are based are reasonable, such assumptions are necessarily speculative in nature, and actual outcomes can be expected to differ to some degree. Consequently, there can be no assurance that the results described in such forward-looking statements will, in fact, be achieved. -23- PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. On April 16, 1997, the Registrant held its annual meeting of stockholders. The stockholders elected the three Class I directors listed in the Registrant's proxy statement and approved an amendment to the Registrant's 1995 Omnibus Plan revising the method by which stock options are awarded to the Registrant's non-employee directors. The following table sets forth the number of votes cast for, or withheld with respect to, each director nominated for election. 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 a nominee. Additionally, the table sets forth the number of votes cast for or against the 1995 Omnibus Plan amendment, as well as the number of abstentions. Broker non-votes were treated as not present at the meeting and had no effect. NAME FOR WITHHELD ---- --- -------- George H. Benter, Jr. 42,474,276 365,184 Stuart D. Buchalter 42,459,213 380,247 Andrea L. Van De Kamp 42,492,253 347,207 MATTER FOR WITHHELD ABSTENTION ------ --- -------- ---------- Amendment to 1995 30,218,947 11,097,347 734,804 Omnibus Plan ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -24- (a) Exhibits None (b) Reports on Form 8-K None 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 12, 1997 /s/ Frank P. Pekny ------------------- --------------------------- FRANK P. PEKNY Executive Vice President and Chief Financial Officer -25- EX-27 2 EXHIBIT 27
9 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 295,281 444 0 47,259 592,935 233,506 232,773 3,446,452 132,885 4,710,444 3,657,070 516,315 55,044 9,800 0 0 46,700 425,515 4,710,444 145,028 25,240 1,735 172,003 34,526 49,439 122,564 0 (539) 89,239 59,364 0 0 0 37,561 .79 .79 8.55 40,782 19,856 5,617 0 137,105 11,661 7,441 132,885 0 0 0 ADJUSTED FOR ACQUISITION OF VENTURA, FRONTIER & RIVERSIDE BANKS
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