-----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, A9bOj5p6hXsnTWYcUdh4JhgP+ubwXsDmqRs7ougGbCJrEr39b6nso9GMyW1+EmLb FB/EC8q2B8mO2HltmZt32g== 0001047469-99-031919.txt : 19990816 0001047469-99-031919.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031919 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 001-10521 FILM NUMBER: 99688828 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, 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, 1999 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.) City National Center 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, 1999: 45,576,001 PART 1 - FINANCIAL INFORMATON ITEM 1. FINANCIAL STATEMENTS CITY NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1999 1998 1998 - -------------------------------------------- ------------- ---------------- ------------- A S S E T S Cash and due from banks .................................................. $ 264,476 $ 285,843 $ 401,092 Federal funds sold ....................................................... 50,000 405,000 - Investment securities (fair value $204,102 at June 30, 1998) ............. - - 202,477 Securities available-for-sale (cost $1,042,300; $990,152 and $584,607 at June 30, 1999, December 31, 1998 and June 30, 1998, respectively) ........................................................ 1,023,582 1,012,526 598,719 Trading account securities ............................................... 41,979 35,015 49,048 Loans .................................................................... 4,722,739 4,530,427 4,228,226 Less allowance for credit losses ......................................... 140,185 135,339 135,837 ------------- ---------------- ------------- Net loans ............................................................ 4,582,554 4,395,088 4,092,389 Premises and equipment, net .............................................. 59,019 55,766 51,706 Customers' acceptance liability .......................................... 2,404 1,759 4,519 Deferred tax asset ....................................................... 56,604 45,738 52,328 Goodwill and core deposit intangibles .................................... 69,916 73,706 65,888 Bank owned life insurance ................................................ 43,626 42,545 41,043 Affordable housing investments ........................................... 45,719 13,262 11,978 Other assets ............................................................. 62,229 61,533 56,647 ------------- ---------------- ------------- Total assets ......................................................... $ 6,302,108 $ 6,427,781 $ 5,627,834 ------------- ---------------- ------------- ------------- ---------------- ------------- L I A B I L I T I E S Demand deposits .......................................................... $ 2,148,956 $ 2,382,724 $ 2,004,952 Interest checking deposits ............................................... 399,631 452,249 359,232 Money market deposits .................................................... 892,096 927,651 894,393 Savings deposits ......................................................... 193,560 183,353 161,413 Time deposits-under $100,000 ............................................. 177,933 187,710 197,731 Time deposits-$100,000 and over .......................................... 872,149 753,715 768,534 ------------- ---------------- ------------- Total deposits ....................................................... 4,684,325 4,887,402 4,386,255 Federal funds purchased and securities sold under repurchase agreements .. 458,642 276,311 297,736 Other short-term borrowings .............................................. 196,137 317,001 88,979 Subordinated debt ........................................................ 123,359 123,265 124,030 Long-term debt ........................................................... 230,000 200,000 125,000 Other liabilities ........................................................ 45,825 60,240 64,903 Acceptances outstanding .................................................. 2,404 1,759 4,519 ------------- ---------------- ------------- Total liabilities .................................................... 5,740,692 5,865,978 5,091,422 ------------- ---------------- ------------- C O M M I T M E N T S A N D C O N T I N G E N C I E S S H A R E H O L D E R S' E Q U I T Y Preferred Stock authorized - 5,000,000 : none outstanding ................ - - - Common Stock-par value-$1.00; authorized - 75,000,000; issued - 46,885,182 46,885 46,885 46,885 Additional paid-in capital ............................................... 279,373 287,363 294,423 Accumulated other comprehensive income (loss) ............................ (10,793) 12,901 8,362 Retained earnings ........................................................ 280,196 243,275 206,065 Treasury shares, at cost - 1,097,112; 877,945 and 532,731 shares at June 30, 1999, December 31, 1998 and June 30, 1998, respectively) ........................................................ (34,245) (28,621) (19,323) ------------- ---------------- ------------- Total shareholders' equity ........................................... 561,416 561,803 536,412 ------------- ---------------- ------------- Total liabilities and shareholders' equity ........................... $ 6,302,108 $ 6,427,781 $ 5,627,834 ------------- ---------------- ------------- ------------- ---------------- -------------
See accompanying Notes to the Unaudited Consolidated Financial Statements 2 CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- In thousands, except per share amounts 1999 1998 1999 1998 - -------------------------------------- ----------- ----------- ----------- ----------- Interest Income Loans ........................................................................... $ 92,868 $ 89,631 $ 187,667 $ 179,705 Securities ...................................................................... 16,187 12,022 31,873 24,281 Trading account securities ...................................................... 836 809 1,338 1,414 Federal funds sold and securities purchased under resale agreements ............. 479 897 984 1,407 --------- --------- --------- --------- Total interest income ....................................................... 110,370 103,359 221,862 206,807 --------- --------- --------- --------- INTEREST EXPENSE Deposits ........................................................................ 21,083 21,493 40,824 42,325 Federal funds purchased and securities sold under repurchase agreements ......... 6,379 4,675 13,949 9,567 Other short-term borrowings ..................................................... 1,433 1,338 2,718 3,337 Subordinated debt ............................................................... 1,965 2,016 4,005 3,792 Other long-term debt ............................................................ 3,398 1,565 6,574 2,690 --------- --------- --------- --------- Total interest expense ...................................................... 34,258 31,087 68,070 61,711 --------- --------- --------- --------- Net interest income ............................................................. 76,112 72,272 153,792 145,096 Provision for credit losses ..................................................... - - - - --------- --------- --------- --------- Net interest income after provision for credit losses ........................... 76,112 72,272 153,792 145,096 --------- --------- --------- --------- NONINTEREST INCOME Service charges on deposit accounts ............................................. 4,090 4,178 8,165 9,210 Investment services ............................................................. 4,619 3,727 8,939 7,418 Trust fees ...................................................................... 4,474 2,211 8,865 4,453 International services .......................................................... 2,395 2,037 4,386 3,723 Bank owned life insurance ....................................................... 541 586 1,080 1,043 Gain on sale of assets .......................................................... 1,121 1,645 1,179 1,658 Gain on sale of securities ...................................................... 1,192 235 2,445 1,209 Other ........................................................................... 3,255 2,727 5,773 4,997 --------- --------- --------- --------- Total noninterest income .................................................... 21,687 17,346 40,832 33,711 --------- --------- --------- --------- NONINTEREST EXPENSE Salaries and other employee benefits ............................................ 32,313 27,841 64,826 57,583 Professional .................................................................... 4,926 5,764 9,711 11,674 Net occupancy of premises ....................................................... 4,486 3,386 7,972 6,335 Information services ............................................................ 2,938 2,090 5,459 4,698 Marketing and advertising ....................................................... 2,581 2,917 5,145 5,354 Depreciation .................................................................... 2,705 2,049 5,149 4,079 Office services ................................................................. 2,029 1,872 3,865 3,983 Equipment ....................................................................... 473 501 1,124 1,009 Amortization of goodwill and core deposit intangibles ........................... 1,911 1,747 3,971 3,382 Other operating ................................................................. 3,419 4,936 6,425 9,327 Other real estate (income) ...................................................... 53 (130) 88 (85) --------- --------- --------- --------- Total noninterest expense ................................................... 57,834 52,973 113,735 107,339 --------- --------- --------- --------- Income before income taxes ...................................................... 39,965 36,645 80,889 71,468 Income taxes .................................................................... 13,859 13,009 28,782 25,363 --------- --------- --------- --------- NET INCOME ...................................................................... 26,106 23,636 52,107 46,105 --------- --------- --------- --------- Other comprehensive income Unrealized gains (loss) on securities available-for-sale .................... (23,196) 3,603 (42,129) 4,452 Reclassification adjustment for gains (losses) included in noninterest income 511 (202) 1,035 381 Income taxes (benefits) ..................................................... (9,606) 1,182 (17,400) 1,820 --------- --------- --------- --------- Other comprehensive income (loss) ............................................... (13,079) 2,219 (23,694) 3,013 --------- --------- --------- --------- Comprehensive income ............................................................ $ 13,027 $ 25,855 $ 28,413 $ 49,118 --------- --------- --------- --------- --------- --------- --------- --------- Net income per share, basic .................................................... $ 0.57 $ 0.51 $ 1.14 $ 0.99 --------- --------- --------- --------- --------- --------- --------- --------- Net income per share, diluted .................................................. $ 0.55 $ 0.49 $ 1.10 $ 0.95 --------- --------- --------- --------- --------- --------- --------- --------- Shares used to compute income per share, basic .................................. 45,739 46,604 45,864 46,640 --------- --------- --------- --------- --------- --------- --------- --------- Shares used to compute income per share, diluted ................................ 47,121 48,517 47,229 48,608 --------- --------- --------- --------- --------- --------- --------- ---------
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, --------------------------- DOLLARS IN THOUSANDS 1999 1998 - -------------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................... $ 52,107 $ 46,105 Adjustments to net income: Gain on sales of ORE ............................................ 35 256 Depreciation .................................................... 5,149 4,079 Amortization of goodwill and core deposit intangibles ........... 3,971 3,665 Net increase (decrease) in trading securities ................... 6,964 (18,514) Deferred income tax (benefit) ................................... (7,869) (7,970) Gain on sale of securities ...................................... 2,445 1,209 Net increase in other liabilities (assets) ...................... (53,137) 24,286 Other, net ...................................................... 9,674 12,927 ------------- ------------- Net cash provided by operating activites .................... 19,339 66,043 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale ............................ (152,772) (237,209) Sales of securities available-for-sale ............................... 42,158 208,537 Maturities of securities available-for-sale .......................... 58,113 51,911 Maturities of investment securities .................................. - 26,667 Purchase of investment securities .................................... - (3,040) Purchase of residential mortgage loans ............................... - (32,396) Sale of residential mortgage loans ................................... 41,357 - (Loan originations) and principal collections, net ................... (236,288) (232,135) Proceeds from sales of ORE ........................................... 1,162 1,478 Purchase of premises and equipment ................................... (9,367) (10,059) Net cash from acquisitions ........................................... - 43,622 Bank owned life insurance premium paid ............................... (11) (40,000) Other, net ........................................................... 352 483 ------------- ------------- Net cash used by investing activities ........................... (255,296) (222,141) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements ..................................... 32,331 (58,691) Net decrease in deposits ............................................. (203,077) (47,693) Net increase in short-term borrowings ................................ 29,136 26,404 Net increase in other long-term debt ................................. 30,000 75,000 Net proceeds of subordinated debt .................................... - 124,004 Proceeds from exercise of stock options .............................. 5,295 8,202 Stock repurchases .................................................... (20,549) (36,758) Cash dividends paid .................................................. (15,186) (13,129) Other, net ........................................................... 1,640 2,453 ------------- ------------- Net cash provided (used) by financing activities ................ (140,410) 79,792 ------------- ------------- Net decrease in cash and cash equivalents ............................ (376,367) (76,306) Cash and cash equivalents at beginning of year ....................... 690,843 477,398 ------------- ------------- Cash and cash equivalents at end of period ........................... $ 314,476 $ 401,092 ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................................... $ 67,932 $ 54,812 Income taxes ................................................ 26,800 6,450 Non-cash investing activities: Transfer from loans to foreclosed assets .................... 158 1,867
See accompanying Notes to the Unaudited Consolidated Financial Statements 4 CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------- Dollars in thousands 1999 1998 - -------------------- ------------- ------------- Common Stock Balance, beginning of period ........................ $ 46,885 $ 46,701 Stock issued for acquisitions ....................... - 131 Stock options exercised ............................. - 53 ------------- ------------- Balance, end of period .............................. 46,885 46,885 ------------- ------------- Additional paid-in capital Balance, beginning of period ........................ 287,363 297,654 Tax benefit from stock options ...................... 1,640 2,454 Excess of cost of treasury shares reissued over stock option exercise amounts ............. (9,630) (12,592) Excess of market value of shares issued for acquisitions over historical cost .......... - 6,907 ------------- ------------- Balance, end of period .............................. 279,373 294,423 ------------- ------------- Accumulated other comprehensive income Balance, beginning of period ........................ 12,901 5,349 Other comprehensive income (loss) net of income taxes (23,694) 3,013 ------------- ------------- Balance, end of period .............................. (10,793) 8,362 ------------- ------------- Retained earnings Balance, beginning of period ........................ 243,275 173,089 Net income .......................................... 52,107 46,105 Dividends paid ...................................... (15,186) (13,129) ------------- ------------- Balance, end of period .............................. 280,196 206,065 ------------- ------------- Treasury shares Balance, beginning of period ........................ (28,621) (14,123) Purchase of shares .................................. (20,549) (36,758) Issuance of shares for acquisitions ................. - 10,817 Issuance of shares for stock options ................ 14,925 20,741 ------------- ------------- Balance, end of period .............................. (34,245) (19,323) ------------- ------------- Total shareholders' equity ................................ $ 561,416 $ 536,412 ------------- ------------- ------------- -------------
See accompanying Notes to the Unaudited Consolidated Financial Statements 5 CITY NATIONAL CORPORATION NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 1998. 2. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This Statement is effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No.133" (SFAS 137), which extended the effective date to fiscal years beginning after June 15, 2000. The Company uses interest rate swaps to manage interest rate exposure, which are accounted for as hedging activities and does not believe that the implementation will have a significant impact on the Company's financial position, net income or net comprehensive income. 3. Trading account securities are stated at market value. Investments not classified as trading 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 net income and are reported as comprehensive income included as a separate component of shareholders' equity net of taxes. 4. Certain prior periods' data have been reclassified to conform to current period presentation. 5. Under the Company's current one million-share common stock buyback program, which was announced on July 29, 1999, no shares were repurchased as of July 31, 1999. Under the Company's buyback program announced on September 8, 1998 and completed on July 28, 1999, a total of one million shares were purchased at a cost of $32.2 million. Shares purchased under the buyback program will be reissued upon the exercise of stock options and for other general corporate purposes. 6. On June 4, 1999, the company announced a definitive agreement for the acquisition of $0.4 billion American Pacific State Bank in an all cash transaction valued at approximately $89 million. The transaction is expected to close in the second half of the year. 7. The Bank has requested regulatory approval from the Office of the Comptroller of the Currency to close its Fountain Valley branch that was acquired in the Company's acquisition of Harbor Bancorp in 1998. 8. Payments were made in the first half of 1999 for $0.3 million of purchase price adjustments recorded as part of the acquisition of North American Trust Company in 1998. Reserves for excess space of $0.5 million still exist to be used over the remaining 6.5 years of a lease. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS City National Corporation (the Corporation) is the holding Company for City National Bank (the Bank). Because the Bank comprises substantially all of the business of the Corporation, references to the "Company" in this Item 2 reflect the consolidated activities of the Corporation and the Bank. See "Cautionary Statement for Purposes of the `Safe Harbor' Provision of the Private Securities Litigation Reform Act of 1995", on page 18 in connection with "forward looking" statements included in the Overview section of Results of Operations and in the Loan Portfolio section of the Balance Sheet Analysis. The Company regularly evaluates, and holds discussions with, various potential acquisition candidates. As a general rule the Company does not publicly announce such acquisitions until after a definitive agreement has been reached, as in the June 4, 1999 announcement of the acquisition of $0.4 billion American Pacific State Bank for approximately $89.0 million in an all cash transaction. Also as a matter of policy, the Company generally does not make any specific projections as to future earnings nor does it endorse any projections regarding future performance which may be made by others. RESULTS OF OPERATIONS OVERVIEW The Company recorded consolidated net income of $26.1 million, or $0.55 per diluted common share, in the second quarter of 1999, compared to $23.6 million, or $0.49 per diluted common share, in the second quarter of 1998. Increased net income was primarily due to $3.8 million in higher net interest income, and $4.3 million higher noninterest income, partially offset by $4.9 million in higher noninterest expense. Net income for the first six months of 1999 totaled $52.1 million, or $1.10 per diluted common share compared with $46.1 million or $.95 per diluted common share in the 1998 period. The six-month increase resulted largely from a $8.7 million increase in net interest income and a $7.1 million increase in noninterest income partially offset by a $6.4 million increase in noninterest expense. Return on average assets for the second quarter and first half of 1999 were 1.68% and 1.71% respectively compared with 1.73% and 1.72% for the corresponding periods of 1998. Return on average equity for the second quarter and first half of 1999 increased to 18.62% and 18.65% from 17.66% and 17.33% in 1998. Earnings before the amortization of goodwill and core deposits intangibles (net of applicable taxes) ("cash" earnings) for the quarter and six months ended June 30, 1999 were $27.6 million or $0.58 per diluted common share and $55.2 million or $1.17 per diluted common share, respectively compared to $25.0 million or $0.52 per diluted common share and $49.0 million or $1.01 per diluted common share in the corresponding periods of 1998. On the same basis, the returns on average assets were 1.79% and 1.82% for the quarter and six months ended June 30, 1999, respectively compared to 1.85% and 1.84% in 1998. Cash return on average common equity were 21.94% and 22.06% for the quarter and six months ended June 30, 1999, respectively compared to 20.94% and 20.47% for the year ago periods. "Cash" earnings are presented because they measure the Company's ability to support growth, pay dividends and repurchase stock. The Company's "cash" earnings per share and other ratios are not necessarily comparable to similarly titled measures reported by other companies. Net interest income on a fully taxable-equivalent basis increased 5.3% to $78.7 million in the second quarter of 1999 compared with $74.8 million in the year-ago quarter, but decreased 1.7% from $80.1 million in the prior quarter. The year-over-year increase resulted from the 14.8% increase in average interest earning assets between quarters. Interest recovered on nonaccrual and charged-off loans was $4.1 million in the first six months of 1999 compared with $5.1 million for the same period a year ago. The second quarter fully taxable-net interest spread and the net interest margin decreased to 4.02% and 5.48%, respectively from 4.33% and 5.95%, for the comparable period a year ago. The combination of strong growth in earning assets, which outpaced growth in lower cost core deposits, and the slightly lower prime rate that took effect in the fourth quarter of 1998, contributed to a decrease in net interest 7 margin. The Company announced on July 1, 1999 that it had raised its prime rate by 25 basis points to 8.00%. Management expects modest growth in net interest income for the remainder of 1999 from the first half 1999 levels, assuming, among other things, that loan balances will continue to grow. Actual results may vary if the assumption proves to be incorrect. Average loans increased $491.3 million (12.0%) in the second quarter to $4,602.6 million compared to the prior-year quarter and $91.7 million (2.0%) from the first quarter of 1999. The year-over-year growth was driven primarily by increases in commercial and construction loans. Commercial loan average balances increased $375.0 million (17.8%) to $2,486.6 million while construction loan average balances also increased $126.1 million (87.0%) to $271.8 million as a result of continued strength in the Southern California economy. Total loans at June 30, 1999 were $4.7 billion compared with $4.5 billion at both March 31, 1999 and December 31, 1998. Relationship-originated loans increased $345.0 million in the first half of 1999 while non-relationship- syndicated loans, which continue to be less than 10.0% of the portfolio, and purchased residential mortgage loans declined $153.0 million due to repayments and a $41.4 million loan sale in the second quarter. Total average deposits increased $352.4 million (8.4%) between second quarters due primarily to increased deposit levels generated by banking offices and the Bank's specialty deposit department. Total average securities increased $278.4 million (32.3%). Total deposits as of June 30, 1999 increased $298.1 million (6.8%) compared to June 30, 1998 and were $80.6 million (1.8%) higher than March 31, 1999. The Company recorded no credit loss provision for the quarters and six months ended June 30, 1999 and 1998 due to changes in the portfolio and net credit recoveries of $4.9 million in the first half of 1999 compared with net credit losses of $4.7 million in the first half of 1998. Loans charged off in the second quarter of 1999 were $1.5 million, compared to $4.1 million in the second quarter of 1998. Recoveries were $3.0 million and $2.9 million in the quarters ended June 30, 1999 and 1998, respectively. The allowance for credit losses was 2.97% of total loans at June 30, 1999 compared to 3.21% at June 30, 1998 and 3.07% at March 31, 1999. The provision for credit losses is expected to remain at reduced levels but not necessarily at zero for the remainder of 1999. This assumes that general economic conditions in Southern California will not deteriorate materially during the balance of 1999, and if this assumption proves to be inaccurate, a higher provision for credit losses may be required. The provision levels for the balance of 1999 will depend on numerous factors including the general economic conditions that impact borrowers. Noninterest income of $21.7 million for the second quarter of 1999 continued a sustained growth trend, increasing by $4.4 million (25.4%) over the $17.3 million reported in the same period a year ago and by $2.5 million (13.3%) over the $19.1 million for the first quarter of 1999. Investment services and trust fees increased in the second quarter of 1999 compared to the year-earlier quarter as a result of strong, internally generated new business as well as new revenue generated from the North American Trust Company ("NATC") acquisition, which was completed at the end of 1998. Essentially, all categories of noninterest income increased over the first quarter. Noninterest income is expected to maintain its growth trend over prior year results for the remainder of 1999. Gains on sale of assets and securities amounted to $2.3 million for the quarter compared with $1.9 million in the year ago quarter and $1.3 million in the first quarter of 1999. Included in the total gains on sale of securities and assets in the second quarter of 1999 was a $1.0 million gain from the sale of $41.4 million of purchased residential mortgage loans. Noninterest expense totaled $57.8 million in the second quarter of 1999, an increase of $4.9 million (9.2%) from the second quarter of 1998. For the first half of 1999 noninterest expense totaled $113.7 million, an increase of $6.4 million (6.0%) from the first half of 1998. Salaries and other employee benefits increased $4.5 million (16.1%) and $7.2 million (12.6%) for the quarter and six months ended June 30, 1999 from the comparable periods in 1998. This increase is primarily due to the additional personnel added as a result of the acquisition of NATC, the hiring of additional personnel related to new branch openings and other growth opportunities, and a more performance based compensation structure. The expense categories other than staff were up 2% quarter to quarter and were down 2% for the six months ended June 30, 1999 from the comparable periods in 1998. All of the $0.2 million of NATC integration expenses accrued in 1998 were paid in the first half of 1999. Noninterest expense levels for the remainder of 1999 are expected to be higher than in 1998 reflecting the growth of the Company and the acquisition of NATC. 8 The Year 2000 issue is the result of computer programs written using two digits (rather than four) to define years. Computers or other equipment with date-sensitive software may recognize "00" as 1900 rather than 2000. This could result in system failure or miscalculations. If the Company or significant customers, suppliers or other third parties fail to properly address Year 2000 issues, the Company's ability to operate could be affected. The Company's Year 2000 Readiness discussion follows: During the first half of 1999, efforts continued to address Year 2000 matters in accordance with the Company's five-phase project plan, which covers information technology as well as embedded systems. The five phases are awareness, assessment, renovation, validation and implementation with contingency planning as a part of the validation phase. As previously reported, the first two phases of awareness and assessment have been completed. The Company has now completed its renovation, validation and implementation phases. As an additional precaution the Company has developed a contingency plan for each of its mission critical business units which establishes trigger dates for implementation of the plan for each software application. The contingency plans will provide for field testing to validate the contingency plans. However, these plans do not guarantee that circumstances beyond the Company's control will not adversely impact operations. At this time, based on assessments and testing to date, the Company does not foresee any Year 2000 issues that would materially impair the Bank's ability to conduct business. The Company is engaged in the ongoing process of considering and examining whether or not there would be a material effect on its business, net income or balance sheet if its vendors, suppliers and customers do not become Year 2000 compliant in a timely manner. With regard to customer readiness, the Company has queried and continues to query all commercial borrowers with loans of $1.0 million and over. For those customers having responded, it has been determined that their compliance efforts at this time appear satisfactory or their business would have no significant impact by Year 2000 matters. In addition, there is a group of customers who have indicated their compliance will be in the future and the Company continues to monitor their progress. The Company is also considering customized action plans and disengagement strategies for any high risk borrowers. The Company in its review of the adequacy of its allowance for credit losses has considered the potential for Year 2000 risks to its borrowers. Where the Company is a third party vendor to customers, as in the area of cash management, the Company appears to have reached year 2000 readiness. The Company is continuing to evaluate its risk and responsibilities with respect to the premises it occupies. The Company's analysis of the corporate counterparties for its investments and current hedging position was also completed in the first quarter of 1999. In the first half of 1999, approximately $1.4 million was directly and indirectly expensed on Year 2000 matters. This amount excludes hardware and software that was replaced in the normal course of business. Total direct and indirect expenses are expected to be approximately $2.2 million for all of 1999. The Company's effective tax rate of 34.7% in the second quarter of 1999 was slightly lower than the previous year's second quarter and for all of 1998 reflecting an increase in state tax credits received as an incentive for making or renewing loans in certain designated areas in and around Los Angeles. It is expected that the Company's tax rate will remain in the 35.0% range for the remainder of 1999 due to state tax credits and the Company's additional investment in affordable housing limited partnerships. 9 The following table presents the components of net interest income on a fully taxable equivalent basis for the three months ended June 30, 1999 and 1998.
NET INTEREST INCOME SUMMARY JUNE 30, 1999 JUNE 30, 1998 ---------------------------------------- --------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE - -------------------- -------------- ----------- --------- -------------- ----------- -------- A S S E T S Earning assets (1) Loans: Commercial $ 2,486,626 $ 51,441 8.30 % $ 2,112,175 $ 46,936 8.91 % Residential first mortgages 1,018,360 18,313 7.21 1,050,142 19,401 7.41 Real estate - construction 271,802 6,517 9.62 145,739 4,097 11.28 Real estate - commercial mortgage 776,706 16,746 8.65 750,962 18,928 10.11 Installment 49,120 1,239 10.12 52,335 1,416 10.85 -------------- ------------ -------------- ------------ Total loans (2) 4,602,614 94,256 8.21 4,111,353 90,778 8.86 Securities 1,060,974 17,428 6.59 802,369 13,303 6.65 Federal funds sold and securities purchased under resale agreements 37,925 479 5.07 61,203 897 5.88 Trading account securities 79,992 833 4.18 60,170 863 5.75 -------------- ------------ -------------- ------------ Total earning assets 5,781,505 112,996 7.84 5,035,095 105,841 8.43 ------------ ------------ Allowance for credit losses (139,832) (136,407) Cash and due from banks 275,716 311,800 Other nonearning assets 301,708 275,745 -------------- -------------- Total assets $ 6,219,097 $ 5,486,233 -------------- -------------- -------------- -------------- L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Interest-bearing deposits: Interest checking accounts $ 407,123 558 0.55 $ 387,318 962 1.00 Money market accounts 948,835 6,858 2.90 860,745 6,573 3.06 Savings deposits 190,546 2,157 4.54 167,468 1,477 3.54 Time deposits - under $100,000 178,001 2,056 4.63 203,770 2,677 5.27 Time deposits - $100,000 and over 838,562 9,454 4.52 746,843 9,804 5.27 -------------- ------------ -------------- ------------ Total interest - bearing deposits 2,563,067 21,083 3.30 2,366,144 21,493 3.64 Federal funds purchased and securities sold under repurchase agreements 530,200 6,379 4.83 346,605 4,675 5.41 Other borrowings 505,962 6,796 5.39 326,710 4,919 6.04 -------------- ------------ -------------- ------------ Total interest - bearing liabilities 3,599,229 34,258 3.82 3,039,459 31,087 4.10 ------------ ------------ Noninterest - bearing deposits 2,001,168 1,845,647 Other liabilities 56,271 64,191 Shareholders' equity 562,429 536,936 -------------- -------------- Total liabilities and shareholders' equity $ 6,219,097 $ 5,486,233 -------------- -------------- -------------- -------------- Net interest spread 4.02 % 4.33 % -------- ------- -------- ------- Fully taxable equivalent net interest income $ 78,738 $ 74,754 ------------ ------------ ------------ ------------ Net interest margin 5.48 % 5.95 % -------- ------- -------- -------
(1) Includes average nonaccrual loans of $22,585 and $34,641 for 1999 and 1998, respectively. (2) Loan income includes loan fees of $3,669 and $3,179 for 1999 and 1998, respectively. 10 The following table presents the components of net interest income on a fully taxable equivalent basis for the six months ended June 30, 1999 and 1998.
NET INTEREST INCOME SUMMARY JUNE 30, 1999 JUNE 30, 1998 ---------------------------------------- --------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE - -------------------- -------------- ----------- --------- -------------- ----------- -------- A S S E T S Earning assets (1) Loans: Commercial $ 2,460,056 $104,250 8.55 % $2,071,038 $ 94,751 9.23 % Residential first mortgages 1,027,516 37,026 7.27 1,029,031 38,718 7.59 Real estate - construction 258,728 12,478 9.73 149,525 8,220 11.09 Real estate - commercial mortgage 761,954 34,309 9.08 760,515 37,399 9.92 Installment 48,780 2,369 9.79 51,338 2,850 11.19 -------------- ------------ -------------- ------------ Total loans (2) 4,557,034 190,432 8.43 4,061,447 181,938 9.03 Securities 1,050,636 34,262 6.58 808,238 27,169 6.78 Federal funds sold and securities purchased under resale agreements 37,397 984 5.31 50,347 1,407 5.64 Trading account securities 65,872 1,259 3.85 52,029 1,537 5.96 -------------- ------------ -------------- ------------ Total earning assets 5,710,939 226,937 8.01 4,972,061 212,051 8.60 ------------ ------------ Allowance for credit losses (139,161) (138,586) Cash and due from banks 285,960 312,389 Other nonearning assets 302,539 272,931 --------------- -------------- Total assets $6,160,277 $5,418,795 --------------- -------------- --------------- -------------- L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Interest-bearing deposits: Interest checking accounts $ 404,486 1,157 0.58 $ 387,987 1,921 1.00 Money market accounts 944,108 13,593 2.90 846,714 12,737 3.03 Savings deposits 186,895 4,133 4.46 170,623 2,978 3.52 Time deposits - under $100,000 181,866 4,237 4.70 210,546 5,466 5.24 Time deposits - $100,000 and over 781,875 17,704 4.57 734,121 19,223 5.28 -------------- ------------ -------------- ------------ Total interest - bearing deposits 2,499,230 40,824 3.29 2,349,991 42,325 3.63 Federal funds purchased and securities sold under repurchase agreements 581,360 13,949 4.84 355,232 9,567 5.43 Other borrowings 487,080 13,297 5.51 327,251 9,819 6.05 -------------- ------------ -------------- ------------ Total interest - bearing liabilities 3,567,670 68,070 3.85 3,032,474 61,711 4.10 ------------ ------------ Noninterest - bearing deposits 1,967,893 1,789,535 Other liabilities 61,359 63,251 Shareholders' equity 563,355 533,535 ---------------- -------------- Total liabilities and shareholders' equity $6,160,277 $5,418,795 --------------- -------------- --------------- -------------- Net interest spread 4.16 % 4.50 % -------- -------- -------- -------- Fully taxable equivalent net interest income $158,867 $150,340 ------------ ------------ ------------ ------------ Net interest margin 5.55 % 6.10 % -------- -------- -------- --------
(1) Includes average nonaccrual loans of $23,334 and $35,131 for 1999 and 1998, respectively. (2) Loan income includes loan fees of $8,260 and $5,698 for 1999 and 1998, respectively. 11 The following tables set forth the changes in net interest income on a fully taxable equivalent basis broken down by volume and rates. The change in interest due to both volume and in rate 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.
CHANGES IN NET INTEREST INCOME FOR THE THREE FOR THE THREE MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30, DOLLARS IN THOUSANDS 1999 VS 1998 1998 VS 1997 - --------------------- ---------------------------------------- -------------------------------------- INCREASE (DECREASE) NET INCREASE (DECREASE) NET DUE TO INCREASE DUE TO INCREASE -------------------------- -------------------------- VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ------------ ----------- ----------- ------------ ----------- ---------- Interest earned on: Loans $ 10,411 $ (6,933) $ 3,478 $ 16,887 $ (1,883) $ 15,004 Securities 4,246 (121) 4,125 (443) (354) (797) Trading account securities 241 (271) (30) 34 (104) (70) Federal funds sold and securities purchased under resale agreements (307) (111) (418) 617 9 626 ------------ ----------- ----------- ------------ ----------- ---------- Total interest-earning assets 14,591 (7,436) 7,155 17,095 (2,332) 14,763 ------------ ----------- ----------- ------------ ----------- ---------- Interest paid on: Interest checking deposits 47 (451) (404) 16 (13) 3 Money market deposits 643 (358) 285 458 81 539 Savings deposits 223 457 680 (94) 146 52 Other time deposits 831 (1,802) (971) 2,678 189 2,867 Other borrowings 4,714 (1,133) 3,581 1,352 370 1,722 ------------ ----------- ----------- ------------ ----------- ---------- Total interest-bearing liabilities 6,458 (3,287) 3,171 4,410 773 5,183 ------------ ----------- ----------- ------------ ----------- ---------- $ 8,133 $ (4,149) $ 3,984 $ 12,685 $ (3,105) $ 9,580 ------------ ----------- ----------- ------------ ----------- ---------- ------------ ----------- ----------- ------------ ----------- ---------- FOR THE SIX FOR THE SIX MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30, DOLLARS IN THOUSANDS 1999 VS 1998 1998 VS 1997 - --------------------- ---------------------------------------- -------------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO NET DUE TO NET -------------------------- INCREASE -------------------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ------------ ----------- ----------- ------------ ----------- ---------- Interest earned on: Loans $ 21,147 $ (12,653) $ 8,494 $ 37,109 $ (1,618) $ 35,491 Securities 7,918 (825) 7,093 (943) 157 (786) Trading account securities 348 (626) (278) 83 78 161 Federal funds sold and securities purchased under resale agreements (345) (78) (423) 789 35 824 ------------ ----------- ----------- ------------ ----------- ---------- Total interest-earning assets 29,068 (14,182) 14,886 37,038 (1,348) 35,690 ------------- ----------- ----------- ------------ ----------- ---------- Interest paid on: Interest checking deposits 78 (842) $ (764) 79 (35) 44 Money market deposits 1,419 (563) 856 869 78 947 Savings deposits 304 851 1,155 (36) 232 196 Other time deposits 490 (3,238) (2,748) 6,217 395 6,612 Other borrowings 10,028 (2,168) 7,860 3,488 986 4,474 ------------- ----------- ----------- ------------ ----------- ---------- Total interest-bearing liabilities 12,319 (5,960) 6,359 10,617 1,656 12,273 ------------- ----------- ----------- ------------ ----------- ---------- $ 16,749 $ (8,222) $ 8,527 $ 26,421 $ (3,004) $ 23,417 ------------- ----------- ----------- ------------ ----------- ---------- ------------- ----------- ----------- ------------ ----------- ----------
12 BALANCE SHEET ANALYSIS AVAILABLE-FOR-SALE SECURITY PORTFOLIO Comparative period-end available-for-sale security portfolio balances are presented below:
JUNE 30, DECEMBER 31, JUNE 30, 1999 1998 1998 ------------------------------ ----------------------------- --------------------------- DOLLARS IN THOUSANDS COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE - -------------------- ------------- -------------- ------------ -------------- ------------ ------------ U.S. Gov. and federal agency $ 263,000 $ 262,571 $ 268,838 $ 275,145 $ 270,080 $ 272,775 Mortgage-backed 385,870 375,673 348,826 351,469 145,843 147,203 State and Municipal 151,293 149,094 121,743 123,845 2,180 2,185 Other debt 142,765 136,26 145,852 152,692 43,331 45,965 ------------- -------------- ------------ -------------- ------------ ------------ Total debt securities 942,928 923,600 885,259 903,151 461,434 468,128 Marketable equity securities 99,372 99,982 104,893 109,375 123,173 130,591 -------------- -------------- ------------ -------------- ------------ ------------ Total securities $ 1,042,300 $ 1,023,582 $ 990,152 $ 1,012,526 $ 584,607 $ 598,719 -------------- -------------- ------------ -------------- ------------ ------------ -------------- -------------- ------------ -------------- ------------ ------------
The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the available-for-sale portfolio as of June 30, 1999.
ONE YEAR OVER 1 YEAR OVER 5 YEARS OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL ----------------- ------------------- ------------------- ------------------- ------------------ DOLLARS IN THOUSANDS AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) - -------------------- -------- -------- --------- -------- --------- -------- --------- -------- --------- -------- U.S. Gov. and federal agency $ 70,378 6.20 $ 142,202 5.98 $ 49,991 6.11 $ - - $ 262,571 6.06 Mortgage-backed - - - - 14,456 6.14 361,217 6.56 375,673 6.55 State and Municipal 22,107 6.40 57,727 6.87 66,698 6.30 2,562 6.37 149,094 6.54 Other debt - - 103 7.00 89,839 7.50 46,320 7.82 136,262 7.61 -------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Total debt securities $ 92,485 6.25 $ 200,032 6.23 $ 220,984 6.73 $ 410,099 6.70 $ 923,600 6.56 -------- --------- --------- --------- --------- -------- --------- --------- --------- --------- Amortized cost $ 91,995 $ 199,457 $ 229,795 $ 421,681 $ 942,928 -------- --------- --------- --------- --------- -------- --------- --------- --------- ---------
Dividend income included in interest income on securities in the Consolidated Statement of Income and Comprehensive Income in the second quarter of 1999 and 1998 were $1.3 million and $2.1 million, and for the six months were $2.6 million and $4.6 million, respectively. 13 LOAN PORTFOLIO A comparative period-end loan table is presented below:
LOANS JUNE 30, DECEMBER 31, JUNE 30, DOLLARS IN THOUSANDS 1999 1998 1998 - -------------------- -------------------- ------------------- ------------------- Commercial $ 2,537,110 $ 2,457,946 $ 2,186,855 Residential first mortgage 1,044,656 1,038,229 1,039,802 Real estate - construction 288,501 237,015 203,936 Real estate - mortgage 802,246 747,711 744,512 Installment 50,226 49,526 53,121 -------------------- ------------------- ------------------- Total loans, gross 4,722,739 4,530,427 4,228,226 Less: Allowance for credit losses (140,185) (135,339) (135,837) -------------------- ------------------- ------------------- Total loans, net $ 4,582,554 $ 4,395,088 $ 4,092,389 -------------------- ------------------- ------------------- -------------------- ------------------- -------------------
Gross loans at June 30, 1999 amounted to $4,722.7 million, up $494.5 million (11.7%) from June 30, 1998 and up $192.3 million (4.2%) from December 31, 1998. During the quarter, relationship-originated loans increased $260.9 million while purchased residential first mortgages and non-relationship syndicated loans fell $56.7 million due to repayments and loan sales. Contributing to the $350.3 million increase in commercial loans from June 30, 1998 were loan originations and the purchase of syndicated corporate loans. Construction loans also increased by $84.6 million from June 30, 1998 as the Company continued to expand its lending for residential construction development. The $4.9 million increase in residential first mortgage loans from the year ago quarter resulted from the Bank's own originations. The Company expects that the Bank's loan portfolio will increase from second quarter 1999 levels due primarily to its own internal loan generation activities but could include some higher yielding residential loan purchases. The following table presents information concerning nonaccrual loans, ORE, and restructured loans.
NONACCRUAL LOANS, ORE AND RESTRUCTURED LOANS JUNE 30, DECEMBER 31, JUNE 30, DOLLARS IN THOUSANDS 1999 1998 1998 - -------------------- ------------ ------------ ------------ Nonaccrual loans: Commercial $ 11,250 $ 4,763 $ 12,578 Real estate 14,569 17,204 20,576 Installment 714 1,171 - ------------ ------------ ------------ Total 26,533 23,138 33,154 ORE 1,696 3,480 2,195 ------------ ------------ ------------ Total nonaccrual loans and ORE $ 28,229 $ 26,618 $ 35,349 ------------ ------------ ------------ ------------ ------------ ------------ Restructured loans, accruing $ 1,771 $ 1,982 $ 2,868 ------------ ------------ ------------ ------------ ------------ ------------ Total non accrual loans as a percentage of total loans......................... 0.56 % 0.51 % 0.78 % Total non accrual loans and ORE as a percentage of total loans and ORE................. 0.60 0.59 0.84 Allowance for credit losses to total loans.............. 2.97 2.99 3.21 Allowance for credit losses to nonaccrual loans............................... 528.34 584.92 409.72
14 The table below summarizes the approximate changes in nonaccrual loans for the quarters and six months ended June 30, 1999 and June 30, 1998.
CHANGES IN NONACCRUAL LOANS FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- ---------------------------------- Dollars in millions 1999 1998 1999 1998 - ------------------- ----------- ------------ ------------ ------------ Balance, beginning of period $ 23.3 $ 36.8 $ 23.1 $ 27.6 Additions from acquisitions - - - 3.1 Loans placed on nonaccrual 10.9 4.4 14.9 24.8 Charge offs (0.3) (2.3) (0.7) (7.6) Loans returned to accrual status (0.1) - (0.2) - Repayments (including interest applied to principal) (7.3) (5.7) (10.6) (14.7) ----------- ------------ ------------ ------------ Balance, end of period $ 26.5 $ 33.2 $ 26.5 $ 33.2 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
At June 30, 1999, in addition to loans disclosed above as nonaccrual or restructured, management had also identified $4.5 million of problem loans about which the ability of the borrowers to comply with the present loan repayment terms in the future is questionable. ALLOWANCE FOR CREDIT LOSSES The following table summarizes average loans outstanding and changes in the allowance for credit losses for the periods presented:
CHANGES IN ALLOWANCE FOR CREDIT LOSSES FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- -------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - -------------------------------------- ------------- ------------- ------------- ------------ Average amount of loans outstanding $ 4,602.6 $ 4,111.4 $ 4,557.0 $ 4,061.4 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Balance of allowance for credit losses, beginning of period $ 138.7 $ 137.0 $ 135.3 $ 137.8 Loans charged off: Commercial 1.4 3.8 2.4 11.2 Real estate 0.1 0.3 0.2 0.6 ------------- ------------- ------------- ------------ Total loans charged off 1.5 4.1 2.6 11.8 ------------- ------------- ------------- ------------ Less recoveries of loans previously charged off: Commercial 2.8 2.9 7.2 7.1 Real estate 0.2 - 0.3 - ------------- ------------- ------------- ------------ Total recoveries 3.0 2.9 7.5 7.1 ------------- ------------- ------------- ------------ Net loans (charged off) / recovered 1.5 (1.2) 4.9 (4.7) Additions to allowance from operating expenses - - - - Additions to allowance from acquisitions - - - 2.7 ------------- ------------- ------------- ------------ Balance, end of period $ 140.2 $ 135.8 $ 140.2 $ 135.8 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Ratio of net charge-offs to average loans N/M 0.03% N/M 0.12% ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Ratio of allowance for credit losses to total period end loans 2.97% 3.21% ------------ ----------- ------------ -----------
15 CAPITAL ADEQUACY REQUIREMENT The following table presents the regulatory standards for "well capitalized" institutions and the capital ratios for the Company and the Bank at June 30, 1999, December 31, 1998 and June 30, 1998.
Regulatory Well Capitalized June 30, December 31, June 30, Standards 1999 1998 1998 -------------------- ----------------- ------------------- -------------- City National Corporation - ------------------------------- Tier 1 leverage 4.00 % 8.18 % 7.99 % 8.49 % Tier 1 risk-based capital 6.00 9.82 9.43 10.18 Total risk-based capital 10.00 13.53 13.20 14.19 City National Bank - ------------------------------- Tier 1 leverage 4.00 % 7.92 % 7.53 % 7.78 % Tier 1 risk-based capital 6.00 9.51 8.90 9.31 Total risk-based capital 10.00 13.20 12.65 13.34
Under the Company's current one million-share common stock buyback program, which was announced on July 29, 1999 no shares were repurchased as of July 31, 1999. Under the Company's buyback program announced on September 8 1998 and completed on July 28, 1999, a total of one million shares were purchased at a cost of $32.2 million. Shares purchased under the buyback program will be reissued upon the exercise of stock options and for other general corporate purposes. On July 29, 1999, the Company declared a regular quarterly dividend of $0.165 per share, payable August 23, 1999 to shareholders of record as of August 11, 1999. ASSET/LIABILITY MANAGEMENT The principal objectives of asset/liability management are to maximize net interest margin subject to margin volatility and liquidity constraints. Margin volatility results when the rate reset (or repricing) characteristics of assets are materially different from those of the Company's liabilities. Liquidity risk results from the mismatching of asset and liability cash flows. Management chooses asset/liability strategies that promote stable earnings and reliable funding. Interest rate risk and funding positions are kept within limits established by the Company's board of directors to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company has established three measurement processes to quantify and manage exposure to interest rate risk: net interest income simulation modeling, gap analysis, and present value of equity analysis. Net interest income simulations are used to identify the direction and severity of interest rate risk exposure across a twelve month forecast horizon. Gap analysis provides insight into structural mismatches of assets and liability repricing characteristics and reflects the attrition and prepayment behavior of deposit and loan customers. Present value of equity calculations are used to estimate the theoretical price sensitivity of shareholder equity to changes in interest rates. Generally, an asset sensitive gap indicates that net interest income will improve during a period of rising interest rates. The gap report is based on the contractual cash flows of all asset and liability balances on the Company's books. The contractual life of those balances may differ substantially from their expected lives however. For example, checking accounts are all subject to immediate withdrawal. Experience suggests that these accounts will have an average life of several years. Also, certain loans (such as first mortgages) are subject to prepayment. The cash flows in the gap report are adjusted to reflect these behaviors. The gap report also includes the effects that interest rate swaps have had on the repricing profile of the Company. 16 The use of interest rate swaps to manage interest rate exposure involves the risk of dealing with counterparties and their ability to meet contractual terms. These counterparties must receive appropriate credit approval before the Company enters into an interest rate contract. Notional principal amounts express the volume of these transactions, although the amounts potentially subject to credit and market risks are much smaller. At June 30, 1999, the Company's interest rate swaps were entered into as hedges against a decrease in interest income generated from prime based loans if the prime decreased or to convert fixed rate deposits and debt into floating rate liabilities. The Company has not entered into transactions involving any other interest rate derivative financial instruments, such as interest rate floors, caps and interest rate futures contracts. At June 30, 1999, the one-year cumulative gap was a net liability position of $(585.5) million (9% of total assets) compared with a net liability position of $(407.0) million (6% of total assets) at December 31, 1998. The decrease resulted from continuing interest rate risk mitigation activities and relatively low holdings of short-term rate-sensitive assets. As of June 30, 1999, the Company has $945.0 million of notional principal in receive fixed-pay LIBOR interest rate swaps, of which $515.0 million have maturities greater than one year. The Company's interest-rate risk-management instruments had a fair value of $(1.8) million and $6.4 million and an exposure to credit risk of $0.7 million and $6.4 million at June 30, 1999 and December 31, 1998, respectively. The credit exposure represents the cost to replace, on a present value basis and at current market rates, the net positive value of all contracts for each counterparty that were outstanding at the end of the period. The Company's swap agreements require the deposit of collateral to mitigate the amount of credit risk if certain credit exposure thresholds are exceeded. As of June 30, 1999 the Company had deposited $2.0 million par value in securities to mitigate credit exposure. Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the Company's interest rate sensitivity position. To supplement traditional gap analysis, the Company uses simulation modeling to estimate the potential effects of changing interest rates. This process allows the Company to fully explore the complex relationships within the gap over time and various interest rate scenarios. At June 30, 1999, the Company's outstanding foreign exchange contracts totaled $25.6 million. The Company enters into foreign exchange contracts with its customers and counterparty banks solely for the purpose of offsetting or hedging transaction and economic exposures arising out of commercial transactions. The Company's policies prohibit outright speculation by the Company and its employees. The Company actively manages its foreign exchange exposures within prescribed risk limits and controls. All foreign exchange contracts outstanding at June 30, 1999 had remaining maturities of six months or less. LIQUIDITY MANAGEMENT The Company continues to manage its liquidity through the 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 availabie-for-sale. Liquidity is also provided by maturing investment securities and loans. Average core deposits and shareholders' equity comprised 69.0% of total funding in the second quarter of 1999, compared to 72.9% in the second quarter of 1998. This decrease has required that the Company increase its use of more costly alternative funding sources. Despite the decrease in percentage of funding derived from core deposits and shareholders' equity, the Company has not faced any liquidity constraints. 17 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 interest rates will remain flat or slightly higher. If interest rates vary substantially from present levels, this may cause the Company's results to 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 policies 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 competition change, such as the merger of competing financial institutions. - --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 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 business 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. 18 PART 11. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On April 21, 1999, the Registrant held its annual meeting of stockholders. The stockholders elected the four Class III directors listed in the Registrant's proxy statement; approved the Registrant's 1999 Omnibus Plan and the reservation of 3,500,000 shares of Common Stock for issuance or delivery under the plan; and approved the Registrant's Variable Bonus Plan to enable bonuses paid thereunder to qualify as deductible, performance-based compensation under Section 162(m) of the Internal Revenue Code. 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 1999 Omnibus Plan and the Variable Bonus Plan, as well as the number of abstentions. Broker non-votes were treated as not present at the meeting and had no effect.
DIRECTORS FOR WITHHELD --------------------------------- ---------------- ----------------- Bram Goldsmith 40,762,224 142,966 Richard L. Bloch 40,770,289 134,901 Charles E. Rickershauser, Jr. 40,767,761 137,429 Kenneth Ziffren 40,788,529 116,661 MATTERS FOR AGAINST ABSTENTION --------------------------------- ---------------- ----------------- ----------------- 1999 Omnibus Plan 26,575,173 6,941,129 7,388,888 Variable Bonus Plan 39,503,227 1,185,325 216,638
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.2.3 First Amendment to Employment Agreement made as of June 1, 1999, by and between Bram Goldsmith and City National Bank, including Seventh Amendment to Split Dollar Life Insurance Agreement Collateral Assignment Plan between City National Bank and the Goldsmith 1980 Insurance Trust, dated June 1, 1999. (b) Reports on Form 8-K The Company filed a report on Form 8-K on April 9, 1999 under item 5 containing a press release dated April 9, 1999 relating to an error in its current Proxy Statement concerning the value of unexercised stock options for certain executives, and a revised table of "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values" appearing on page 12 of the Company's 1999 Proxy Statement. 19 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 13, 1999 /s/ FRANK P. PEKNY --------------- ------------------------- FRANK P. PEKNY Executive Vice President and Chief Financial Officer 20 EX-10.2-3 2 EXHIBIT 10.2-3 EXHIBIT 10.2.3 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to Employment Agreement is made and entered into as of the 1st day of June, 1999, by and between Bram Goldsmith ("Goldsmith") on the one hand, and City National Corporation, a Delaware corporation ("CNC") and City National Bank, a national banking association ("CNB"), with reference to the following: A. Goldsmith, CNC and CNB are parties to that certain Employment Agreement ("Agreement") dated as of March 18,1998. B. Goldsmith, CNC and CNB wish to amend the Agreement, to insure that Goldsmith's maximum compensation, with respect to any one fiscal year of CNB and CNC, shall not exceed $925,000. NOW, THEREFORE, Goldsmith, CNC and CNB hereby agree as follows: (1) The period following the first sentence of Section 5, "INCENTIVE BONUS", of the Agreement shall be deleted and the following shall be added following the word "Committee": ", but in no event shall the total amount paid to Mr. Goldsmith pursuant to Sections 4 and 5 of this Agreement with respect to any one fiscal year of CNC and CNB exceed $925,000. The parties hereto recognize that incentive bonuses paid by CNB for services rendered during a fiscal year are generally paid during the first quarter of the fiscal year following the fiscal year in which such services were performed. In such event, the annual compensation paid to Goldsmith with respect to each fiscal year pursuant to Section 4 of the Agreement, will be added to the incentive bonus paid in the following fiscal year, for purposes of calculating whether the $925,000 limit has been reached." (2) Section 6, "LIFE INSURANCE", of the Agreement shall be deleted and replaced by the following: "6. LIFE INSURANCE. CNB has previously provided Goldsmith with a whole life insurance policy on the joint lives of Goldsmith and Mrs. Elaine Goldsmith in an insured amount of Seven Million Dollars ($7,000,000) (the "Joint Policy"). The Joint Policy is owned by the Goldsmith 1980 Life Insurance Trust ("Trust"). The Joint Policy, or the proceeds thereof, and possession of the Joint Policy and all rights therein, including the right to designate the beneficiary, shall be vested completely in the Trust; provided however, that CNB shall be entitled to receive from the proceeds of such Joint Policy a sum equal to the aggregate amount of premiums, without interest, paid by CNB on account of said Joint Policy pursuant to the terms of the Split Dollar Life Insurance Agreement, as amended, and Collateral Assignment of Policy attached hereto and marked as Exhibit A. Furthermore, pursuant to the Seventh Amendment to the Split Dollar Life Insurance Agreement, CNB shall pay an annual premium for the Joint Policy for each year while either Goldsmith or Mrs. Elaine Goldsmith is then living, in an amount equal to the greater of Sixty Thousand Dollars ($60,000) or an amount necessary to maintain a then current death benefit for the Joint Policy of Seven Million Dollars ($7,000,000), whichever amount is greater. CNB hereby acknowledges that, as of the date of this Amendment to the Employment Agreement, CNB has paid premiums with respect to the Joint Policy, including premiums paid for the Connecticut General Policy and subsequently applied to the Joint Policy, totaling Six Hundred Thousand Eight Hundred Forty-Two Dollars ($600,842)." -2- Except as otherwise set forth, the Agreement remains in full force and effect in accordance to its terms. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date and year first set forth above. CITY NATIONAL CORPORATION By: /s/ Richard H. Sheehan, Jr. /s/ Bram Goldsmith ------------------------------ ------------------------------ RICHARD H. SHEEHAN, JR. BRAM GOLDSMITH Senior Vice President and General Counsel CITY NATIONAL BANK By: /s/ Richard H. Sheehan, Jr. ------------------------------ RICHARD H. SHEEHAN, JR. Senior Vice President and General Counsel -3- SEVENTH AMENDMENT TO SPLIT DOLLAR LIFE INSURANCE AGREEMENT COLLATERAL ASSIGNMENT PLAN This Seventh Amendment to Split Dollar Life Insurance Agreement Collateral Assignment Plan is made and entered into as of the 1st day of June, 1999 by and between The Goldsmith 1980 Insurance Trust (the "Trust") and City National Bank, a national banking association ("CNB") with reference to the following: A. The Trust and CNB are parties to that certain Split Dollar Life Insurance Agreement Collateral Assignment Plan dated as of June 15, 1980 as amended to date (the "Agreement"), by which the Trust granted CNB certain rights with respect to a personal life insurance policy owned by the Trust insuring the life of Bram Goldsmith. B. Pursuant to the Third Amendment to the Agreement, dated as of December 19, 1990, the Trust and CNB agreed to replace the insurance policy then in effect, issued by Connecticut General Life Insurance Company (the "Connecticut General Policy"), with a policy insuring the joint lives of Bram Goldsmith and Elaine Goldsmith issued by Transamerica Occidental Life Insurance Co. (the "Joint Policy"), by surrendering the Connecticut General Policy to the insurer and applying the cash surrender value therefrom to the premium paid for the Joint Policy. The Third Amendment to the Agreement further provided that any premium for the Joint Policy in excess of the cash surrender value of the Connecticut General Policy would be paid by the Trust, provided that CNB could pay such premiums if the Trust failed to do so. C. As of the date of this Seventh Amendment, CNB has paid premiums with respect to the Joint Policy, including premiums paid for the Connecticut General Policy and subsequently applied to the Joint Policy, totaling $600,842. D. The Trust and CNB wish to further amend the Agreement to insure that effective as of the date of the Seventh Amendment, CNB shall be obligated to pay additional annual premiums for the Joint Policy in an amount equal to the greater of Sixty Thousand Dollars ($60,000) each year of the amount of premium required each year to maintain a death benefit on the Joint Policy of Seven Million Dollars ($7,000,000) for as long as either Bram Goldsmith or Elaine Goldsmith is then living. NOW, THEREFORE, CNB and the Trust hereby agree as follows: The second sentence of Section 1. of the Third Amendment to the Agreement which begins with the words "Any premium" and ends with the words "sole discretion" is hereby deleted and the following language is hereby inserted in its place: "Effective June 1, 1999, CNB shall pay an annual premium for the Joint Policy for each year while either Bram Goldsmith or Elaine Goldsmith is then living, in an amount equal to the greater of Sixty Thousand Dollars ($60,000) or an amount necessary to maintain a then current death benefit for the Joint Policy of Seven Million Dollars ($7,000,000), whichever amount is greater. The Trust and CNB hereby acknowledge that as of the date of this Seventh Amendment, CNB has paid premiums with respect to the Joint Policy, including premiums paid for the Connecticut General Policy and subsequently applied to the Joint Policy, totaling Six Hundred Thousand Eight Hundred Forty-Two Dollars ($600,842)." Except as otherwise set forth above, the Agreement, as amended to date, remains in full force and effect according to its terms. -2- IN WITNESS WHEREOF, the parties hereto have executed this Seventh Amendment as of the date and year first set forth above. CITY NATIONAL BANK THE GOLDSMITH 1980 INSURANCE TRUST a national banking association By: /s/ Richard H. Sheehan, Jr. By: /s/ Bruce Leigh Goldsmith, Trustee ---------------------------------- ---------------------------------- RICHARD H. SHEEHAN, JR. BRUCE LEIGH GOLDSMITH, TRUSTEE SENIOR VICE PRESIDENT AND GENERAL COUNSEL By: /s/ Russell Goldsmith, Trustee ---------------------------------- RUSSELL GOLDSMITH, TRUSTEE By: CITY NATIONAL BANK, a national banking association, as Trustee By: /s/ Vergel V. Tan ---------------------------------- Its: Vice President ---------------------------------- -3- EX-27 3 EXHIBIT 27
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 264,476 2,535,369 50,000 41,979 1,023,582 0 0 4,722,739 140,185 6,302,108 4,684,325 654,779 48,229 353,359 0 0 46,885 514,531 6,302,108 187,667 31,873 2,322 221,862 40,824 68,070 153,792 0 2,445 113,735 80,889 0 0 0 52,107 1.14 1.10 5.55 26,533 8,904 1,771 4,542 135,339 2,619 7,465 140,185 140,185 0 0
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