City National 10-Q 2001 Q2 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File Number 1-10521

CITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	95-2568550 (I.R.S. Employer Identification No.)
City National Center 400 North Roxbury Drive, Beverly Hills, California (Address of principal executive offices)	90210 (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, 2001: 47,991,575

PART I—FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)

			June 30, 2001		December 31, 2000			June 30, 2000
(Dollars in thousands, except per share amounts)
Assets
	Cash and due from banks		$	441,665	$	386,814		$	448,501
	Federal funds sold			10,000		165,000			50,000
	Securities available-for-sale (cost $1,672,423; $1,567,676 and $1,449,993 at June 30, 2001, December 31, 2000 and June 30, 2000, respectively)			1,667,037		1,547,844			1,395,739
	Trading account securities			14,196		46,078			46,369
	Loans			6,567,370		6,527,145			6,345,195
	Less allowance for credit losses			133,883		135,435			140,484
		Net loans		6,433,487		6,391,710			6,204,711
	Premises and equipment, net			64,508		63,010			59,072
	Customers' acceptance liability			7,348		14,736			14,532
	Deferred tax asset			52,571		65,986			72,308
	Goodwill			165,202		171,559			161,698
	Core deposit intangibles			21,341		24,148			26,957
	Bank owned life insurance			54,275		52,820			51,520
	Affordable housing investments			55,644		58,585			46,936
	Other assets			136,319		108,379			98,425
		Total assets	$	9,123,593	$	9,096,669		$	8,676,768
Liabilities
	Demand deposits		$	3,134,792	$	3,276,203		$	2,678,556
	Interest checking deposits			522,480		619,332			549,850
	Money market deposits			1,576,758		1,344,244			1,326,943
	Savings deposits			242,219		244,707			236,502
	Time deposits-under $100,000			245,724		247,797			261,335
	Time deposits-$100,000 and over			1,358,661		1,676,387			1,341,668
		Total deposits		7,080,634		7,408,670			6,394,854
	Federal funds purchased and securities sold under repurchase agreements			261,849		139,841			243,604
	Other short-term borrowings			653,125		315,125			955,163
	Subordinated debt			118,939		123,641			123,547
	Long-term debt			94,255		205,000			180,000
	Other liabilities			91,603		146,008			93,046
	Acceptances outstanding			7,348		14,736			14,532
		Total liabilities		8,307,753		8,353,021			8,004,746
Commitments and contingencies
Shareholders' Equity
	Preferred Stock authorized—5,000,000 : none outstanding			—		—			—
	Common Stock-par value-$1.00; authorized—75,000,000; Issued—47,888,923; 47,785,345; and 47,623,014 shares at June 30, 2001, December 31, 2000 and June 30, 2000, respectively			47,889		47,785			47,623
	Additional paid-in capital			293,412		292,358			286,405
	Accumulated other comprehensive income (loss)			2,256		(11,493	)		(31,441	)
	Retained earnings			472,283		420,024			369,435
	Treasury shares, at cost—0; 155,355 and 0 shares at June 30, 2001, December 31, 2000 and June 30, 2000, respectively			—		(5,026	)		—
		Total shareholders' equity		815,840		743,648			672,022
		Total liabilities and shareholders' equity	$	9,123,593	$	9,096,669		$	8,676,768

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 ended June 30,						For the six months ended June 30,
			2001			2000			2001			2000
(In thousands, except per share amounts)
Interest Income
	Loans		$	129,266		$	140,341		$	268,110		$	262,305
	Federal funds sold and securities purchased under resale agreements			868			892			1,471			1,680
	Securities available-for-sale			25,742			22,056			49,758			40,402
	Trading account			614			787			1,343			1,756
		Total interest income		156,490			164,076			320,682			306,143
Interest Expense
	Deposits			36,672			35,871			78,574			66,620
	Federal funds purchased and securities sold under repurchase agreements			3,055			4,527			8,291			8,563
	Other short-term borrowings			8,415			14,793			16,040			25,682
	Subordinated debt			1,633			1,929			3,392			3,817
	Other long-term debt			1,666			2,312			4,419			4,570
		Total interest expense		51,441			59,432			110,716			109,252
	Net interest income			105,049			104,644			209,966			196,891
	Provision for Credit Losses			6,500			4,000			14,000			4,000
	Net interest income after provision for credit losses			98,549			100,644			195,966			192,891
Noninterest Income
	Trust fees and investment fee revenue			14,779			11,825			28,452			22,782
	Cash management and deposit transaction fees			7,583			5,749			14,131			11,306
	International services			3,840			3,749			7,399			7,057
	Bank owned life insurance			697			657			1,421			1,278
	Gain on sale of loans and assets / debt repurchase			891			—			1,648			5
	Gain (loss) on sale of securities			539			(5	)		1,516			218
	Other			4,565			4,815			9,588			8,387
		Total noninterest income		32,894			26,790			64,155			51,033
Noninterest Expense
	Salaries and other employee benefits			42,711			41,587			85,485			80,438
	Net occupancy of premises			6,628			5,743			12,972			10,548
	Professional			6,358			6,306			12,122			11,691
	Amortization of goodwill			3,220			2,974			6,427			5,232
	Amortization of core deposit intangibles			1,405			1,405			2,809			2,636
	Information services			4,088			3,409			7,917			6,996
	Depreciation			3,413			3,241			6,750			6,281
	Marketing and advertising			3,316			3,621			5,897			6,324
	Office services			2,424			2,776			4,634			4,842
	Equipment			603			737			1,099			1,202
	Acquisition integration			—			13			—			1,322
	Other operating			4,781			4,236			9,952			7,674
	Other real estate (income)			65			26			(448	)		(27	)
		Total noninterest expense		79,012			76,074			155,616			145,159
	Income before income taxes			52,431			51,360			104,505			98,765
	Income taxes			16,087			17,915			34,570			34,312
	Net income			36,344			33,445			69,935			64,453
	Other comprehensive income
		Unrealized gain (loss) on securities available-for-sale		(6,103	)		(8,175	)		13,932			(7,719	)
		Initial gain on cash flow hedges from implementation of FAS 133		—			—			2,404			—
		Additional unrealized gain on cash flow hedges		3,043			—			8,325			—
		Less: reclassification adjustment for gain (loss) included in net income		2,097			2			944			(385	)
		Income taxes (benefits)		(2,084	)		(3,440	)		9,968			(3,086	)
	Other comprehensive gain (loss)			(3,073	)		(4,737	)		13,749			(4,248	)
	Comprehensive income		$	33,271		$	28,708		$	83,684		$	60,205
	Net income per share, basic		$	0.76		$	0.70		$	1.47		$	1.38
	Net income per share, diluted		$	0.74		$	0.68		$	1.43		$	1.34
	Shares used to compute income per share, basic			47,768			47,540			47,726			46,792
	Shares used to compute income per share, diluted			49,219			48,937			49,027			47,986
	Dividends per share		$	0.185		$	0.175		$	0.370		$	0.350

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,
			2001			2000
(Dollars in thousands)
Cash Flows From Operating Activities
Net income			$	69,935		$	64,453
Adjustments to net income:
	Provision for credit losses			14,000			4,000
	Amortization of goodwill and core deposit intangibles			9,236			7,868
	Depreciation			6,750			6,281
	Deferred income tax			7,342			447
	Gain on sales of ORE			(55	)		(50	)
	Gain on sales of loans and assets / debt repurchase			(1,648	)		(5	)
	Gain on sale of securities			(1,516	)		(218	)
	Net (increase) decrease in other assets			(61,270	)		10,479
	Net (increase) decrease in trading securities			31,882			(18,655	)
	Other, net			5,663			13,431
		Net cash provided by operating activities		80,319			88,031
Cash Flows From Investing Activities
Purchase of securities				(758,781	)		(536,680	)
Sales of securities available-for-sale				231,491			202,440
Maturities of securities				424,776			157,115
Purchase of residential mortgage loans				(3,813	)		(25,280	)
Sales of loans				53,701			—
Loan originations net of principal collections				(112,873	)		(355,537	)
Proceeds from sales of ORE				10			1,104
Purchase of premises and equipment				(10,160	)		(2,937	)
Net cash from acquisitions				—			78,715
Other, net				2			(2,525	)
		Net cash used by investing activities		(175,647	)		(483,585	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits				(328,036	)		23,752
Proceeds from issuance of other long-term debt				—			100,000
Net increase in federal funds purchased and securities sold under repurchase agreements				122,008			148,117
Net increase in short-term borrowings, net of transfers from long-term debt				223,000			383,424
Repayment of long-term debt				—			(25,000	)
Repurchase of subordinated debt				(8,467	)		—
Proceeds from exercise of stock options				7,429			4,028
Stock repurchases				(3,079	)		(14,216	)
Cash dividends paid				(17,676	)		(16,228	)
		Net cash provided (used) by financing activities		(4,821	)		603,877
Net increase (decrease) in cash and cash equivalents				(100,149	)		208,323
Cash and cash equivalents at beginning of year				551,814			290,178
Cash and cash equivalents at end of period			$	451,665		$	498,501
Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Interest	$	119,782		$	105,101
		Income taxes		58,200			6,921
	Non-cash investing activities:
		Transfer from loans to foreclosed assets	$	162		$	156
		Transfer from long-term debt to short-term borrowing		115,000			75,000

See accompanying Notes to the Consolidated Financial Statements.

4

CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

		For the six months ended June 30,
		2001			2000
(Dollars in thousands)
Common Stock
	Balance, beginning of period	$	47,785		$	46,885
	Stock issued for acquisitions		—			650
	Stock options exercised		104			88
	Balance, end of period		47,889			47,623
Additional paid-in capital
	Balance, beginning of period		292,358			276,464
	Tax benefit from stock options		1,834			1,318
	Excess of cost of treasury shares reissued over stock option exercise amounts		(780	)		(526	)
	Excess of market value of shares issued for acquisitions over historical cost		—			9,149
	Balance, end of period		293,412			286,405
Accumulated other comprehensive income (loss)
	Balance, beginning of period		(11,493	)		(27,193	)
	Other comprehensive income (loss) net of income taxes/benefit		13,749			(4,248	)
	Balance, end of period		2,256			(31,441	)
Retained earnings
	Balance, beginning of period		420,024			321,210
	Net income		69,935			64,453
	Dividends paid		(17,676	)		(16,228	)
	Balance, end of period		472,283			369,435
Treasury shares
	Balance, beginning of period		(5,026	)		(45,720	)
	Purchase of shares		(3,079	)		(14,216	)
	Issuance of shares for acquisitions		—			55,381
	Issuance of shares for stock options		8,105			4,555
	Balance, end of period		—			—
Total shareholders' equity		$	815,840		$	672,022

See accompanying Notes to the Unaudited Consolidated Financial Statements.

5

CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

City National Corporation (the "Corporation") is the holding company for City National Bank (the "Bank"). In light of the fact that the Bank comprises substantially all of the business of the Corporation, references to the "Company" mean the Corporation and the Bank together.

2.

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 the interim period presented. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000.

3.

In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of

6

each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its asset (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in earnings.

As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $158.7 million and unamortized identifiable intangible assets in the amount of $18.5 million all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $11.2 million and $6.4 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonable estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

4.

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, net of taxes are excluded from net income and are reported as other comprehensive income included as a separate component of shareholders' equity.

5.

Certain prior periods' data have been reclassified to conform to current period presentation.

6.

On December 29, 2000, the Corporation completed the acquisition of Reed, Conner & Birdwell, Inc. ("RCB"), an investment management firm with $1.1 billion in total client assets under management on the date of acquisition. Total consideration was valued at $15.4 million and includes equity participation notes payable to the sellers due in 2003 and 2005. This acquisition was accounted for under the purchase method of accounting and resulted in the recording of goodwill of $14.6 million.

7.

On February 29, 2000, the Corporation acquired The Pacific Bank, N.A. ("Pacific Bank"). In that transaction, Pacific Bank merged into the Bank and the Corporation paid consideration equal to $145.2 million (including the consideration for stock options), 47.0% of which was paid in the Corporation's common stock and 53.0% of which was paid in cash. The transaction was accounted for as a purchase. Pacific Bank had total assets, loans, and deposits of $782.0 million, $488.0 million, and $702.0 million, respectively, at the date of acquisition. The acquisition of Pacific Bank resulted in the recording of goodwill and intangibles of approximately $69.3 million. Included in goodwill as purchase price adjustments were $4.3 million of accrued severance and change of control costs, of which $0.1 million remain unpaid as of June 30, 2001, $1.3 million of paid transaction-related expenses and $3.2 million of exit costs of which approximately $1.8 million remain unpaid as of June 30, 2001. Results reflect the operations of Pacific Bank from February 29, 2000, the date of acquisition.

8.

Reserves established as a purchase price adjustment for the August 27, 1999 acquisition of American Pacific State Bank ("APSB") of $0.1 million for exit costs remain as of June 30, 2001.

9.

Under the October 26, 2000 stock buyback program of one million shares, 291,700 shares have been repurchased at an average price of $33.02 per share. No treasury shares were purchased in

7

the second quarter of 2001. The shares purchased under the buyback program have been reissued for acquisitions, upon the exercise of stock options, and for other general corporate purposes. There were no treasury shares at June 30, 2001.

10.

The Company uses interest rate swaps to mitigate risks associated with changes 1) to the fair value of certain fixed rate deposits and borrowings and 2) to certain cash flows related to future interest payments on variable rate loans. As of January 1, 2001, the Company had $800.0 million of notional amount of interest rate swaps which had a fair value of $7.5 million. Of the $800.0 million of interest rate swaps, $450.0 million were fair value hedges of various fixed rate deposits and borrowings and $350.0 million were cash flow hedges related to periodic future interest payments on specific portions of a $1.2 billion variable rate LIBOR based loan portfolio. The positive mark-to-market on the fair value hedges resulted in the recognition of other assets and an increase in the hedged deposits and borrowings of $5.1 million as of January 1, 2001. The positive mark-to market on the cash flow hedges of variable rate loans resulted in the recognition of other assets and comprehensive income of $2.4 million, before taxes of $1.0 million as of January 1, 2001. As of June 30, 2001, the Company had $881.4 million of interest rate swaps, of which $231.4 million were fair value hedges and $650.0 million were cash flow hedges. The positive mark-to-market on the fair value hedges resulted in the recognition of other assets and an increase in hedged deposits and borrowings of $6.8 million. The positive mark-to-market on the cash flow hedges of variable rate loans resulted in the recognition of other assets and comprehensive income of $9.3 million, before taxes of $3.9 million. There was no transition adjustment at January 1, 2001 or any ineffectiveness gain or loss that impacted net income for the first half of 2001. Amounts to be paid or received on the interest rate swaps will be reclassified into earnings upon receipt of interest payments on the underlying hedged loans, including amounts totaling $1.6 million and $1.7 million that were reclassified into net interest income during the three and six months ended June 30, 2001, respectively. All comprehensive income is expected to be reclassified into net interest income within the next 12 months.

8

CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)

		At or for the three months ended									Percentage change June 30, 2001 from
		June 30, 2001			March 31, 2001			June 30, 2000			March 31, 2001		June 30, 2000
(Dollars in thousands, except per share amounts)
For The Quarter
	Net income	$	36,344		$	33,591		$	33,445		8	%	9	%
	Net income per common share, basic		0.76			0.70			0.70		9		9
	Net income per common share, diluted		0.74			0.69			0.68		7		9
	Dividends, per common share		0.185			0.185			0.175		0		6
	Cash net income		40,300			37,532			37,154		7		8
	Cash net income per common share, basic		0.84			0.79			0.78		6		8
	Cash net income per common share, diluted		0.82			0.77			0.76		6		8
At Quarter End
	Assets	$	9,123,593		$	8,933,803		$	8,676,768		2		5
	Deposits		7,080,634			6,870,817			6,394,854		3		11
	Loans		6,567,370			6,505,090			6,345,195		1		4
	Securities		1,681,233			1,567,734			1,442,108		7		17
	Shareholders' equity		815,840			784,783			672,022		4		21
	Book value per share		17.04			16.46			14.11		4		21
Average Balances
	Assets	$	9,132,024		$	8,920,281		$	8,525,861		2		7
	Deposits		6,975,066			6,786,666			6,277,831		3		11
	Loans		6,537,375			6,521,714			6,331,721		0		3
	Securities		1,690,786			1,557,039			1,381,920		9		22
	Shareholders' equity		797,398			764,712			660,325		4		21
Selected Ratios
	Return on average assets		1.60	%		1.53	%		1.58	%	5		1
	Return on average shareholders' equity		18.28			17.81			20.37		3		(10	)
	Tier 1 leverage		6.97			6.71			6.19		4		13
	Tier 1 risk-based capital		8.76			8.33			7.49		5		17
	Total risk-based capital		11.64			11.35			10.56		3		10
	Dividend payout ratio, per share		24.39			26.22			24.85		(7	)	(2	)
	Net interest margin		5.23			5.40			5.58		(3	)	(6	)
	Efficiency ratio		55.87			55.32			56.51		1		(1	)
	Cash return on average assets		1.81			1.74			1.79		4		1
	Cash return on average shareholders' equity		26.40			26.21			31.28		1		(16	)
	Cash efficiency ratio		52.60			52.01			53.26		1		(1	)
Asset Quality Ratios
	Nonaccrual loans to total loans		0.56	%		0.81	%		0.55	%	(31	)	2
	Nonaccrual loans and ORE to toal loans and ORE		0.58			0.83			0.56		(30	)	4
	Allowance for credit losses to total loans		2.04			2.07			2.21		(1	)	(8	)
	Allowance for credit losses to non accrual loans		361.02			255.51			400.50		41		(10	)
	Net charge-offs to average loans — annualized		(0.45	)		(0.51	)		(0.25	)	(12	)	80

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    See "Cautionary Statement for Purposes of the "Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995", below relating to "forward-looking" statements included in this report.

RESULTS OF OPERATIONS

Overview

    The Corporation recorded net income of $36.3 million for the second quarter of 2001, up 9 percent from $33.4 million for the second quarter of 2000 and 8 percent from the first quarter of 2001. Net income per diluted common share of $0.74 increased 9 percent from $0.68 per share in the second quarter of 2000 and 7 percent from $0.69 per share in the first quarter of 2001, and includes approximately $0.025 related to the reduction in the expected full year effective income tax rate attributable to first quarter 2001 pre-tax income.

    For the first half of 2001, the Corporation recorded net income of $69.9 million, an increase of 9 percent over net income of $64.5 million for the first half of 2000. Net income per diluted common share was $1.43 per share, an increase of 7 percent compared with $1.34 per share in the first half of 2000.

    Cash net income per diluted common share, which excludes the amortization of core deposit intangibles and goodwill from acquisitions, rose 8 percent to $0.82, compared with $0.76 per share in the second quarter of 2000 and was up 6 percent compared with $0.77 per share in the first quarter of 2001. For the first half of 2001, cash net income per diluted common share was $1.59 per share, an increase of 7 percent from $1.48 per share for the first half of 2000.

    The Corporation's return on average assets in the second quarter of 2001 was 1.60 percent, compared with 1.58 percent in the second quarter of 2000 and 1.53 percent in the first quarter of 2001. The return on average shareholders' equity was 18.28 percent for the second quarter of 2001, compared with 20.37 percent for the prior-year second quarter and 17.81 percent for the first quarter of 2001. For the first half of 2001, the return on average assets was 1.56 percent and the return on average shareholders' equity was 18.05 percent compared with a 1.60 percent return on average assets and a 20.60 percent return on average shareholders' equity for the first half of 2000. The lower return on average shareholders' equity in the current period compared with a year ago is due primarily to a higher level of shareholders' equity from increased unrealized securities gains and the positive mark-to-market valuation of interest rate swaps treated as cash flow hedges.

    On a cash basis (which excludes goodwill and the after-tax impact of nonqualifying core deposit intangibles from average assets and average shareholders' equity), the return on average assets in the second quarter of 2001 was 1.81 percent, compared with 1.79 percent in the second quarter of 2000, and 1.74 percent for the first quarter of 2001. The return on average shareholders' equity on a cash basis was 26.40 percent for the second quarter of 2001, compared with 31.28 percent for the prior-year second quarter and 26.21 percent for the first quarter of 2001. On a cash basis, for the first half of 2001, the return on average assets was 1.78 percent and the return on average shareholders' equity was 26.19 percent, compared with a 1.80 percent return on average assets and 29.00 percent return on average shareholders' equity for the first half of 2000.

    Management currently expects that net income per diluted common share for 2001 will be approximately 8 percent to 11 percent higher than 2000.

10

Net Interest Income

    Net interest income on a fully taxable-equivalent basis rose 1 percent to $108.4 million in the second quarter of 2001, compared with $107.8 million for the second quarter of 2000. Second quarter 2001 net interest income was slightly higher than the $108.1 million for the first quarter of 2001. Fully taxable-equivalent net interest income for the first half of 2001 was $216.5 million, an increase of 7 percent over $203.1 million for the first half of 2000. Interest income recovered on nonaccrual and charged-off loans included above was $0.6 million in the second quarter of 2001, compared with $1.3 million for the second quarter a year ago and $1.6 million for the first quarter of 2001. Interest recovered in the first half of 2001 was $2.2 million compared with $2.3 million for the first half of 2000.

    The fully taxable-equivalent net interest margin in the second quarter of 2001 was 5.23 percent, compared with 5.58 percent for the second quarter of 2000 and 5.40 percent for the first quarter of 2001. The net interest margin for the first half of 2001 was 5.32 percent compared with 5.53 percent for the first half of 2000. The decrease from prior periods was primarily due to a lower prime rate, and a lag in the re-pricing of time deposits and interest rate swaps. The Bank's prime rate was 6.75 percent at June 30, 2001, compared with 9.50 percent a year earlier, and 8.00 percent at March 31, 2001.

    The following tables present the components of net interest income on a fully taxable-equivalent basis for the three and six months ended June 30, 2001 and 2000. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

11

Net Interest Income Summary

					For the three months ended June 30, 2001							For the three months ended June 30, 2000
					Average Balance			Interest income/ expense (2)		Average interest rate		Average Balance			Interest income/ expense (2)		Average interest rate
(Dollars in thousands)
Assets
	Interest-earning assets
		Loans
			Commercial		$	2,948,989		$	60,473	8.23	%	$	2,815,521		$	67,369	9.62	%
			Residential first mortgages			1,338,909			23,813	7.13			1,225,906			22,281	7.31
			Real estate construction			446,949			9,036	8.11			403,339			10,377	10.35
			Real estate mortgages			1,594,040			33,694	8.48			1,336,108			31,693	9.54
			Installment			74,691			1,807	9.70			62,441			1,420	9.15
				Total relationship loans		6,403,578			128,823	8.07			5,843,315			133,140	9.16
			Syndicated non-relationship			133,797			1,997	5.99			488,406			8,695	7.16
			Total loans(1)			6,537,375			130,820	8.03			6,331,721			141,835	9.01
		Securities available-for-sale				1,618,582			27,526	6.82			1,321,064			23,676	7.21
		Federal funds sold and securities purchased under resale agreements				80,083			868	4.35			54,679			892	6.56
		Trading account securities				72,204			628	3.49			60,856			816	5.39
			Total interest-earning assets			8,308,244			159,842	7.72			7,768,320			167,219	8.66
		Allowance for credit losses				(136,115	)						(140,330	)
		Cash and due from banks				402,822							347,346
		Other nonearning assets				557,073							550,525
			Total assets		$	9,132,024						$	8,525,861
Liabilities and Shareholders' Equity
	Interest-bearing deposits
		Interest checking accounts			$	574,476			485	0.34		$	544,627			697	0.51
		Money market accounts				1,510,340			12,643	3.36			1,327,780			12,082	3.66
		Savings deposits				245,213			2,006	3.28			232,602			2,346	4.06
		Time deposits—under $100,000				247,594			3,141	5.09			263,212			3,665	5.60
		Time deposits—$100,000 and over				1,464,960			18,397	5.04			1,205,730			17,081	5.70
			Total interest—bearing deposits			4,042,583			36,672	3.64			3,573,951			35,871	4.04
		Federal funds purchased and securities sold under repurchase agreements				292,735			3,055	4.19			290,032			4,527	6.28
		Other borrowings				965,523			11,714	4.87			1,196,552			19,034	6.40
			Total interest—bearing liabilities			5,300,841			51,441	3.89			5,060,535			59,432	4.72
	Noninterest—bearing deposits					2,932,483							2,703,880
	Other liabilities					101,302							101,121
	Shareholders' equity					797,398							660,325
			��	Total liabilities and shareholders' equity	$	9,132,024						$	8,525,861
Net interest spread										3.83	%						3.94	%
Fully taxable-equivalent net interest income								$	108,401						$	107,787
Net interest margin										5.23	%						5.58	%

(1)

Includes average nonaccrual loans of $45,176 and $34,526 for 2001 and 2000, respectively.

(2)

Loan income includes loan fees of $5,688 and $5,049 for 2001 and 2000, respectively.

12

								Net Interest Income Summary
					For the six months ended June 30, 2001							For the six months ended June 30, 2000
					Average Balance			income/ expense (2)		Average interest rate		Average Balance			Interest income/ expense (2)		Average interest rate
(Dollars in thousands)
Assets
	Interest-earning assets
		Loans
			Commercial		$	2,970,896		$	127,958	8.69	%	$	2,611,147		$	121,130	9.33	%
			Residential first mortgages			1,315,175			48,134	7.38			1,216,906			44,056	7.28
			Real estate construction			457,939			19,869	8.75			390,386			19,722	10.16
			Real estate mortgages			1,557,778			66,693	8.63			1,238,711			57,558	9.34
			Installment			73,961			3,537	9.64			62,614			2,883	9.26
				Total relationship loans		6,375,749			266,191	8.38			5,519,764			245,349	8.84
			Syndicated non-relationship			153,838			5,024	6.59			516,266			19,923	7.76
			Total Loans (1)			6,529,587			271,215	8.38			6,036,030			265,272	8.84
		Securities available-for-sale				1,556,157			53,207	6.89			1,226,818			43,600	7.15
		Federal funds sold and securities purchased under resale agreements				59,053			1,471	5.02			55,937			1,680	6.04
		Trading account securities				68,125			1,365	4.04			68,582			1,815	5.32
			Total interest-earning assets			8,212,922			327,258	8.04			7,387,367			312,367	8.50
		Allowance for credit losses				(136,457	)						(138,910	)
		Cash and due from banks				395,604							333,741
		Other nonearning assets				554,669							511,538
			Total assets		$	9,026,738						$	8,093,736
Liabilities and Shareholders' Equity
	Interest-bearing deposits
		Interest checking accounts			$	571,307			1,182	0.42		$	505,382			1,243	0.49
		Money market accounts				1,406,865			23,928	3.43			1,253,273			21,343	3.42
		Savings deposits				246,314			4,151	3.40			228,796			4,584	4.03
		Time deposits—under $100,000				248,240			6,765	5.50			265,387			7,096	5.38
		Time deposits—$100,000 and over				1,559,294			42,548	5.50			1,180,168			32,354	5.51
			Total interest—bearing deposits			4,032,020			78,574	3.93			3,433,006			66,620	3.90
		Federal funds purchased and securities sold under repurchase agreements				334,719			8,291	5.00			290,406			8,563	5.93
		Other borrowings				903,276			23,851	5.32			1,101,593			34,069	6.22
			Total interest—bearing liabilities			5,270,015			110,716	4.24			4,825,005			109,252	4.55
	Noninterest—bearing deposits					2,849,366							2,544,091
	Other liabilities					126,211							95,394
	Shareholders' equity					781,146							629,246
			Total liabilities and shareholders' equity		$	9,026,738						$	8,093,736
Net interest spread										3.80	%						3.95	%
Fully taxable-equivalent net interest income								$	216,542						$	203,115
Net interest margin										5.32	%						5.53	%

(1)

Includes average nonaccrual loans of $51,710 and $31,352 for 2001 and 2000, respectively.

(2)

Loan income includes loan fees of $11,250 and $8,959 for 2001 and 2000, respectively.

    Average loans rose to $6.5 billion for the second quarter of 2001, an increase of 3 percent over the prior-year second quarter. Average relationship loans increased $560.3 million, or 10 percent, this quarter over the year-ago quarter. Conversely, average syndicated non-relationship loans fell to $133.8 million for the second quarter of 2001, down significantly from both the second quarter of 2000, as well as the first quarter of 2001. For the first half of 2001, average relationship loans increased 16 percent to $6.4 billion from $5.5 billion for the first half of 2000.

13

    The growth in average relationship loans over the year-ago quarter was driven primarily by increases in real estate mortgage, commercial and residential first mortgage loans. Compared with the prior-year second quarter, real estate mortgage loan average balances rose 19 percent to $1.6 billion from $1.3 billion, commercial loan averages rose 5 percent to $2.9 billion from $2.8 billion and residential first mortgage loans rose 9 percent to $1.3 billion, from $1.2 billion. Other relationship loan categories also contributed to loan growth over the prior-year second quarter.

    Average securities increased $308.9 million, or 22 percent, to $1.7 billion for the second quarter of 2001 compared with the second quarter of 2000 and increased 9 percent from the first quarter of 2001. For the first half of 2001, average securities increased $328.9 million, or 25 percent, to $1.6 billion from the first half of 2000

    Average deposits during the second quarter of 2001 increased 11 percent to $7.0 billion over the second quarter of 2000, and were $188.4 million higher than the first quarter of 2001. During the first half of 2001, average deposits increased 15 percent to $6.9 billion, compared with $6.0 billion for the first half of 2000.

    During the second quarter of 2001, average core deposits, which provide a stable source of low cost funding, were $5.5 billion, an increase of 9 percent over the $5.1 billion in the second quarter of 2000, and 7 percent higher than the $5.1 billion for the first quarter of 2001. Average core deposits represented 79 percent of the total average deposit base for the quarter. For the first half of 2001, average core deposits were $5.3 billion compared with $4.8 billion for the first half of 2000, an increase of 11 percent. Internal growth, increased sales of cash management products and a reduction in the earnings credit on analyzed deposit accounts resulting from lower interest rates, all contributed to the growth in deposits.

    Net interest income is impacted by the volume and rate of interest-earning assets and interest-bearing liabilities. The following table shows changes in net interest income on a fully taxable-equivalent basis between the second quarter and the first six months of 2001 and the second quarter and the first six months of 2000, as well as between the second quarter and the first six months of 2000 and the second quarter and the first six months of 1999.

14

Changes In Net Interest Income

		For the three months ended June 30, 2001 vs 2000									For the three months ended June 30, 2000 vs 1999
		Increase (decrease) due to									Increase (decrease) due to
								Net increase (decrease)									Net increase (decrease)
		Volume			Rate						Volume			Rate
(Dollars in thousands)
Interest earned on:
Loans		$	4,572		$	(15,587	)	$	(11,015	)	$	37,759		$	9,820		$	47,579
Securities available-for-sale			5,173			(1,323	)		3,850			4,512			1,736			6,248
Trading account securities			134			(322	)		(188	)		(226	)		209			(17	)
Federal funds sold and securities purchased under resale agreements			334			(358	)		(24	)		248			165			413
Total interest-earning assets			10,213			(17,590	)		(7,377	)		42,293			11,930			54,223
Interest paid on:
Interest checking deposits			35			(247	)		(212	)		181			(42	)		139
Money market deposits			1,594			(1,033	)		561			3,151			2,073			5,224
Savings deposits			124			(464	)		(340	)		436			(247	)		189
Other time deposits			3,259			(2,467	)		792			5,899			3,337			9,236
Other borrowings			(3,266	)		(5,526	)		(8,792	)		6,596			3,790			10,386
	Total interest-bearing liabilities		1,746			(9,737	)		(7,991	)		16,263			8,911			25,174
		$	8,467		$	(7,853	)	$	614		$	26,030		$	3,019		$	29,049

		For the six months ended June 30, 2001 vs 2000									For the six months ended June 30, 2000 vs 1999
		Increase (decrease) due to									Increase (decrease) due to
								Net increase (decrease)								Net increase (decrease)
		Volume			Rate						Volume		Rate
(Dollars in thousands)
Interest earned on:
Loans		$	20,485		$	(14,542	)	$	5,943		$	65,110	$	9,730		$	74,840
Securities			11,251			(1,644	)		9,607			6,163		3,175			9,338
Trading account securities			(12	)		(438	)		(450	)		54		502			556
Federal funds sold and securities purchased under resale agreements			89			(298	)		(209	)		546		150			696
	Total interest-earning assets		31,813			(16,922	)		14,891			71,873		13,557			85,430
Interest paid on:
Interest checking deposits			139			(200	)		(61	)		276		(190	)		86
Money market deposits			2,525			60			2,585			5,012		2,738			7,750
Savings deposits			328			(761	)		(433	)		874		(423	)		451
Other time deposits			9,791			72			9,863			12,586		4,923			17,509
Other borrowings			(4,457	)		(6,033	)		(10,490	)		9,305		6,081			15,386
Total interest-bearing liabilities			8,326			(6,862	)		1,464			28,053		13,129			41,182
		$	23,487		$	(10,060	)	$	13,427		$	43,820	$	428		$	44,248

15

    Management expects the net interest margin for all of 2001 will be modestly lower than the 5.44 percent reported for 2000, but slightly above the current quarterly level of 5.23 percent, as time deposits and interest rate swaps re-price on a lagged basis. This expectation is contingent on rates remaining stable for the rest of the year; further modest reductions in rates would not be anticipated to materially alter that margin.

Provision for Credit Losses

    The Company recorded a provision for credit losses of $6.5 million and $14.0 million for the second quarter and first half of 2001, respectively, compared with $4.0 million for both the second quarter and first half of 2000. The provision for credit losses in the first quarter of 2001 was $7.5 million. The provision for credit losses primarily reflects the levels of net loan charge-offs and nonaccrual loans, as well as management's ongoing assessment of the credit quality of the portfolio and the year-over-year growth of the loan portfolio.

    The provision for credit losses to be taken in the balance of 2001 will reflect management's assessment of the above factors, as well as the economic environment at each reporting date. Based on its current assessment of these factors, management anticipates that a provision for credit losses of approximately $28 million to $38 million may be required for all of 2001. However, no assurance may be given that these factors or management's assessment of them will not change in the future. See "— Allowance for Credit Losses."

Noninterest Income

    Reflecting the success of strategic initiatives to grow fee income, noninterest income continued its strong, across-the-board growth, increasing 23 percent to $32.9 million in the second quarter of 2001, from $26.8 million in the second quarter of 2000, and 5 percent from the $31.3 million for the first quarter of 2001. Noninterest income of $64.2 million for the first half of 2001 increased 26 percent over the $51.0 million for the first half of 2000. Noninterest income for the second quarter and first half of 2001 was 24 percent and 23 percent of total revenues, compared with 20 percent and 21 percent, respectively, for the second quarter and first half of 2000.

    Trust and investment fee revenue was helped by the acquisition of Reed, Conner & Birdwell, which closed at year-end 2000, and an increase in new business within City National Investments (CNI). Assets under administration totaled $18.5 billion at June 30, 2001, including $7.2 billion under management, compared with $15.5 billion and $5.4 billion, respectively, at June 30, 2000, and $17.9 billion and $6.6 billion, respectively, at March 31, 2001. Assets under management at June 30, 2001 and March 31, 2001 included $1.2 billion and $1.1 billion, respectively, of assets managed by Reed, Conner & Birdwell. The remaining year-over-year increase in assets under management is primarily attributable to increased participation in the CNI Charter Funds, City National's family of mutual funds.

    The other key component in the growth of noninterest income is cash management and deposit transaction fees. These increased as the result of strong internal growth in deposits, in many cases attributable to higher sales of new online cash management products.

    International services income rose primarily as a result of an increase in fee income associated with standby letters of credit and foreign exchange.

    Gains on the sale of assets and the repurchase of debt and gains (losses) on the sale of securities amounted to $1.4 million for the second quarter of 2001, compared with no material gain or loss for the same period a year earlier, and gains of $1.7 million for the first quarter of 2001. The repurchase of $8.7 million of subordinated debt along with the cancellation of the related interest rate swaps resulted in a $0.9 million gain in the second quarter of 2001. For the first half of 2001, $3.2 million in

16

gains on the sale of assets and the repurchase of debt and gains on the sale of securities were realized, compared with $0.2 million for the first half of 2000.

    Management expects growth in noninterest income to range from 15 percent to 20 percent for 2001.

Noninterest Expense

    Noninterest expense was $79.0 million in the second quarter of 2001, up 4 percent from $76.1 million for the second quarter of 2000, and 3 percent from $76.6 million for the first quarter of 2001. The increase over the year-ago quarter was primarily the result of the Corporation's growth, including expenses related to Reed, Conner & Birdwell, new offices and additional colleagues. Noninterest expense for the first half of 2001 was $155.6 million, an increase of 7 percent compared with $145.2 million for the first half of 2000. Amortization of goodwill reduced net income by $3.2 million for the second quarter and $6.4 million for the first half of 2001.

    The Corporation's cash efficiency ratio for the second quarter of 2001 improved to 52.60 percent, from 53.26 percent for the second quarter of 2000. The 1 percent improvement is due to both increased revenues and the Corporation's ongoing efforts to improve efficiency and productivity. The cash efficiency ratio for the current quarter rose slightly from the 52.01 percent for the first quarter of 2001. For the first half of 2001, the cash efficiency ratio was 52.31 percent compared with 54.03 percent for the first half of 2000.

    Management currently anticipates that 2001 noninterest expense will increase between 5 percent and 8 percent from 2000.

Income Taxes

    The effective tax rate, including the impact of the reduction in the expected full-year effective income tax rate attributable to first quarter 2001 pre-tax income, was 30.7 percent for the second quarter, and 33.1 percent for the first half of 2001. This compares with 34.9 percent for the second quarter and 34.7 percent for the first half of 2000. The lower tax rates, compared with prior periods, are due primarily to the formation of a special purpose subsidiary for capital- raising activities during the second quarter of 2001. The Corporation continues to evaluate its long-term plan for its registered investment company subsidiary. Management currently anticipates its effective tax rate may approximate the 32.5 percent to 33.5 percent range for 2001.

Balance Sheet Analysis

    Total average assets reached $9.1 billion in the second quarter of 2001, an increase of 7 percent over the $8.5 billion in average assets for the second quarter of 2000 and an increase of 2 percent over the $8.9 billion in average assets for the first quarter of 2001. Total assets at June 30, 2001 were $9.1 billion, compared with $8.7 billion at June 30, 2000 and $9.1 billion at December 31, 2000. Securities and, to a lesser extent, loans accounted for the increase in assets from last year and the first quarter of 2001.

17

Securities

    Comparative period-end security portfolio balances are presented below:

Securities Available-for-Sale

		June 30, 2001				December 31, 2000				June 30, 2000
		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
(Dollars in thousands)
U.S. Gov. and federal agency		$	357,155	$	360,190	$	646,629	$	648,374	$	595,432	$	590,846
Mortgage-backed			795,577		796,184		438,667		437,221		366,467		350,082
State and Municipal			177,704		180,757		158,983		160,139		162,789		159,511
Other debt securities			167,537		163,175		165,489		150,913		166,662		144,452
	Total debt securities		1,497,973		1,500,306		1,409,768		1,396,647		1,291,350		1,244,891
Marketable equity securities			174,450		166,731		157,908		151,197		158,643		150,848
	Total securities	$	1,672,423	$	1,667,037	$	1,567,676	$	1,547,844	$	1,449,993	$	1,395,739

    At June 30, 2001, securities available-for-sale totaled $1.7 billion, an increase of $271.3 million compared with holdings at June 30, 2000 and an increase of $119.2 million from December 31, 2000. At June 30, 2001, the portfolio had a unrealized net loss of $5.4 million compared with a net loss of $54.3 million and $19.8 million at June 30, 2000 and December 31, 2000, respectively.

    The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the securities portfolio as of June 30, 2001. To compare the tax-exempt assets yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

Debt Securities Available-for-Sale

		One year or less			Over 1 year thru 5 years			Over 5 years thru 10 years			Over 10 years			Total
		Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield
(Dollars in thousands)
U.S. Gov. and federal agency		$	30,391	6.00	$	196,893	6.41	$	132,906	6.25	$	—	—	$	360,190	6.31
Mortgage-backed			—	—		5,774	5.88		8,533	6.30		781,876	6.62		796,184	6.61
State and Municipal			13,020	6.78		59,691	6.77		102,316	6.75		5,731	6.67		180,757	6.77
Other debt securities			—	—		—	—		94,240	7.54		68,935	8.08		163,175	7.77
	Total debt securities	$	43,411	6.23	$	262,358	6.48	$	337,995	6.76	$	856,542	6.73	$	1,500,306	6.67
	Amortized cost	$	42,987		$	257,975		$	340,759		$	856,252		$	1,497,973

    Dividend income included in interest income on securities in the Unaudited Consolidated Statement of Income and Comprehensive Income for the second quarter of 2001 and 2000 was $2.4 million and $2.8 million, and $4.6 million and $5.1 million for the first half of 2001 and 2000, respectively.

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Loan Portfolio

    A comparative period-end loan table is presented below:

Loans

		June 30, 2001			December 31, 2000			June 30, 2000
(Dollars in thousands)
Commercial		$	2,902,807		$	3,056,464		$	2,782,611
Residential first mortgages			1,407,621			1,273,711			1,238,224
Real estate construction			490,146			452,301			421,178
Real estate mortgages			1,582,691			1,479,862			1,395,187
Installment			73,569			73,018			65,702
	Total relationship loans		6,456,834			6,335,356			5,902,902
Syndicated non-relationship loans			110,536			191,789			442,293
	Total loans, gross		6,567,370			6,527,145			6,345,195
Less: Allowance for credit losses			(133,883	)		(135,435	)		(140,484	)
	Total loans, net	$	6,433,487		$	6,391,710		$	6,204,711

    Total loans at June 30, 2001 were $6.6 billion, compared with $6.3 billion at June 30, 2000, and $6.5 billion at December 31, 2000. At June 30, 2001, the commercial loan portfolio contained no direct energy-related borrowings, and technology-related borrowings accounted for less than 1 percent of the commercial loan portfolio.

    At June 30, 2001, syndicated non-relationship loans were $110.5 million, or 1.7 percent of the loan portfolio, compared with $191.8 million at December 31, 2000, and $442.3 million at June 30, 2000. The average outstanding loan balance in the syndicated non-relationship portfolio at June 30, 2001 was $2.6 million, which represents just under half the average commitment amount.

    Management anticipates average relationship loan growth in 2001 will range from 9 percent to 13 percent, reflecting its expectation that the California economy will continue to grow, but at a slower pace than experienced in recent years.

    The following table presents information concerning nonaccrual loans, ORE, and restructured loans. Bank policy requires that a loan be placed on nonaccrual status if either principal or interest payments are ninety days past due, unless the loan is both well secured and in process of collection; if full collection of interest or principal becomes uncertain, regardless of the time period involved; or regulators' ratings of syndicated credits suggest that the loan be placed on nonaccrual.

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Nonaccrual Loans, ORE and Restructured Loans

				June 30, 2001			December 31, 2000			June 30, 2000
(Dollars in thousands)
Nonaccrual loans:
	Commercial
		Relationship		$	19,775		$	30,343		$	17,741
		Syndicated non-relationship			8,143			23,012			3,342
					27,918			53,355			21,083
	Real estate				7,362			8,132			11,056
	Installment				1,805			499			2,938
			Total		37,085			61,986			35,077
ORE					1,212			522			447
	Total nonaccrual loans and ORE			$	38,297		$	62,508		$	35,524
Total non accrual loans as a percentage of total loans					0.56	%		0.95	%		0.55	%
Total non accrual loans and ORE as a percentage of total loans and ORE					0.58			0.96			0.56
Allowance for credit losses to total loans					2.04			2.07			2.21
Allowance for credit losses total nonaccrual loans					361.02			218.49			400.50
Loans past due 90 days or more on accrual status:
	Commercial			$	12,120		$	1,404		$	5,058
	Real estate				800			4,361			195
	Installment				187			159			450
		Total		$	13,107		$	5,924		$	5,703
Restructured loans:
	On accrual status			$	659		$	829		$	2,424
	On nonaccrual status				804			740			108
		Total		$	1,463		$	1,569		$	2,532

    Total nonperforming assets (nonaccrual loans and ORE) were $38.3 million, or 0.58 percent of total loans and ORE, at June 30, 2001, compared with $35.5 million, or 0.56 percent, at June 30, 2000, and $62.5 million, or 0.96 percent, at December 31, 2000. Nonperforming assets decreased 39 percent from year-end 2000.

    Total nonperforming relationship assets were $30.2 million, or 0.47 percent of total relationship loans and ORE, at June 30, 2001, compared with $32.2 million, or 0.55 percent, at June 30, 2000, and $39.5 million, or 0.62 percent, at December 31, 2000, and do not contain any concentration of credits within a specific industry sector. Total syndicated non-relationship loans on nonaccrual status totaled $8.1 million at June 30, 2001 and consisted of two loans, compared with five loans totaling $23.0 million that were outstanding at December 31, 2000.

    The table below summarizes the changes in nonaccrual loans for the three and six months ended June 30, 2001.

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Changes in Nonaccrual Loans

		For the three months ended June 30,						For the six months ended June 30,
		2001			2000			2001			2000
		(Dollars in thousands)
Balance, beginning of period		$	52,729		$	32,330		$	61,986		$	25,288
Additions from acquisitions			—			—			—			4,428
Loans placed on nonaccrual
	Relationship		5,920			13,821			17,522			16,096
	Syndicated non-relationship		4,349			—			4,349			4,408
			10,269			13,821			21,871			20,504
Charge offs			(7,578	)		(4,101	)		(16,529	)		(5,304	)
Loans returned to accrual status			—			(109	)		(956	)		(109	)
Repayments (including interest applied to principal)			(18,173	)		(6,864	)		(29,125	)		(9,730	)
Transferred to ORE			(162	)		—			(162	)		—
Balance, end of period		$	37,085		$	35,077		$	37,085		$	35,077

    In addition to loans disclosed above as nonaccrual or restructured, management has also identified $14.6 million of problem loans about which the ability of the borrowers to comply with the present loan repayment terms in the future is questionable. Included in the $14.6 million is one syndicated non-relationship loan of $6.6 million and $8.0 million in loans to ten borrowers. Potential problem loans were $7.3 million at June 30, 2000 and $5.4 million at December 31, 2000.

    Management's classification of a loan as a nonaccrual, restructured or problem loan does not necessarily indicate that the principal of the loan is uncollectable in whole or in part.

Allowance for Credit Losses

    The allowance for credit losses at June 30, 2001 totaled $133.9 million, or 2.04 percent of outstanding loans. This compares with an allowance of $140.5 million, or 2.21 percent of outstanding loans, at June 30, 2000, and an allowance of $135.4 million, or 2.07 percent of outstanding loans at December 31, 2000. The allowance for credit losses as a percentage of nonaccrual loans was 361 percent at June 30, 2001, compared with 401 percent at June 30, 2000 and 218 percent at December 31, 2000.

    Net loan charge-offs were $7.3 million and $4.0 million for the second quarters of 2001 and 2000, respectively. Net loan charge-offs for the first quarter of 2001 were $8.2 million. For the first six months of 2001 and 2000, net loan charge-offs were $15.6 million and $7.5 million, respectively.

    Relationship loan net charge-offs were $4.3 million for the second quarter of 2001, compared with $0.8 million for the second quarter of 2000 and $6.3 million for the first quarter of 2001. Second quarter 2001 syndicated non-relationship loan net charge-offs were $3.1 million, compared with $3.2 million in the second quarter of 2000, and $1.9 million for the first quarter of 2001.

    As a percentage of average loans, annualized net charge-offs were 0.45 percent, 0.25 percent and 0.51 percent for the second quarters of 2001 and 2000, and the first quarter of 2001, respectively. Relationship loan annualized net charge-offs were 0.27 percent of average relationship loans outstanding for the second quarter of 2001, compared with 0.06 percent for the second quarter of 2000, and 0.40 percent for the first quarter of 2001.

    The allowance for credit losses is maintained at a level which management deems appropriate based on a thorough analysis of numerous factors, including levels of net charge-offs and nonaccrual loans and continuing growth in the loan portfolio. Credit quality will be influenced by underlying trends

21

in the economic cycle, particularly in California, and other factors which may be beyond management's control. No assurances can be given that the Company will not sustain credit losses, in any particular period, that are sizable in relation to the allowance for credit losses. Based on known information available to it at the date of this report, management believes the allowance for credit losses is adequate to cover risks inherent in the portfolio at June 30, 2001. Subsequent evaluation of the loan portfolio, in light of factors then prevailing, by the Company and its regulators will dictate the level of provisions required to maintain the adequacy of the allowance for credit losses.

    The table below summarizes the changes in the allowance for credit losses for the second quarter of 2001 and 2000.

Changes in Allowance for Credit Losses

			For the three months ended June 30,						For the six months ended June 30,
			2001			2000			2001			2000
(Dollars in thousands)
Average amount of loans outstanding			$	6,537,375		$	6,331,721		$	6,529,587		$	6,036,030
Balance of allowance for credit losses, beginning of period			$	134,727		$	140,450		$	135,435		$	134,077
Loans charged off:
	Commercial
		Relationship		(7,235	)		(5,645	)		(16,330	)		(9,478	)
		Syndicated non-relationship		(3,113	)		(3,166	)		(5,214	)		(4,232	)
				(10,348	)		(8,811	)		(21,544	)		(13,710	)
	Real estate and other			(490	)		(43	)		(1,378	)		(703	)
		Total loans charged off		(10,838	)		(8,854	)		(22,922	)		(14,413	)
Less recoveries of loans previously charged off:
	Commercial			3,349			3,482			3,373			5,214
	Real estate and other			145			1,406			3,997			1,679
		Total recoveries		3,494			4,888			7,370			6,893
Net loans (charged off) recovered				(7,344	)		(3,966	)		(15,552	)		(7,520	)
Additions to allowance charged to operating expense				6,500			4,000			14,000			4,000
Additions to allowance from acquisitions				—			—			—			9,927
		Balance, end of period	$	133,883			140,484			133,883			140,484
Total net charge-offs to average loans (annualized)				(0.45	)%		(0.25	)%		(0.48	)%		(0.25	)
Ratio of allowance for credit losses to total period end loans										2.04	%		2.21	%

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Other Assets

    Other assets included the following:

		Other Assets
		June 30, 2001		December 31, 2000		June 30, 2000
(Dollars in thousands)
Accrued interest receivable		$	53,633	$	53,423	$	50,044
Claim in receivership			21,771		18,950		17,200
Swap mark-to-market.			16,150		—		—
Loans held-for-sale			11,910		7,173		—
Other			32,855		28,833		31,181
	Total other assets	$	136,319	$	108,379	$	98,425

    The claim in receivership was acquired in the acquisition of Pacific Bank and is expected to be partially realized in 2001.

Deposits

    Deposits totaled $7.1 billion at June 30, 2001, compared with $6.4 billion at June 30, 2000, and $7.4 billion at December 31, 2000. The year-over-year increase resulted from the Company's increased marketing efforts and the nature of the Company's relationship business, which allows customers to maintain balances as compensation for banking services. Demand deposits accounted for 44 percent of total deposits at June 30, 2001. Core deposits which continued to provide substantial benefits to the Bank's cost of funds were 81 percent of total deposits at June 30, 2001. See "— Net Interest Income."

    Management expects average deposit growth in 2001, compared with 2000, to be in the range of 8 percent to 12 percent.

CAPITAL ADEQUACY REQUIREMENT

    The following table presents the regulatory standards for well capitalized institutions and the capital ratios for the Corporation and the Bank at June 30, 2001, December 31, 2000 and June 30, 2000.

		Regulatory Well Capitalized Standards		June 30, 2001		December 31, 2000		June 30, 2000
City National Corporation
	Tier 1 leverage	4.00	%	6.97	%	6.49	%	6.19	%
	Tier 1 risk-based capital	6.00		8.76		7.84		7.49
	Total risk-based capital	10.00		11.64		10.85		10.56
City National Bank
	Tier 1 leverage	4.00	%	6.51	%	6.23	%	5.96	%
	Tier 1 risk-based capital	6.00		8.19		7.55		7.22
	Total risk-based capital	10.00		11.08		10.57		10.29

    On July 25, 2001, the Corporation declared a regular quarterly cash dividend on common stock at a rate of $0.185 per share to shareholders of record on August 8, 2001, payable on August 20, 2001.

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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 available-for-sale. Liquidity is also provided by maturing securities and loans.

    Average core deposits and shareholders' equity comprised 69 percent of total funding in the second quarter of 2001, compared with 67 percent in the second quarter of 2000. This increase allowed the Company to decrease its use of more costly alternative funding sources. See "— Net Interest Income."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ASSET/LIABILITY MANAGEMENT

    The principal objective of asset/liability management is to maximize net interest income 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 Board of Directors to ensure that risk taking is not excessive and that liquidity is properly managed.

    A quantitative and qualitative discussion about market risk is included on pages A-14 to A-17 of the Corporation's Form 10-K for the year ended December 31, 2000. During the second quarter of 2001, the Company's interest rate position remained slightly asset sensitive, and at all times remained within the limits set by the Board of Directors.

    As of June 30, 2001, the Company had $881.4 million of notional principal in receive fixed-pay LIBOR interest rate swaps, of which $581.4 million have maturities greater than one year. The Company's interest-rate risk-management instruments had a fair value and credit exposure risk of $16.1 million and $18.1 million at June 30, 2001 and March 31, 2001, 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 market value exposure thresholds are exceeded. As of June 30, 2001, the Company had received securities with a total market value of $15.4 million to reduce counterparty exposure.

    At June 30, 2001, the Company's outstanding foreign exchange contracts for both those purchased as well as sold totaled $94.3 million. The Company enters into foreign exchange contracts with its clients and counterparty banks primarily for the purpose of offsetting or hedging for clients' 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, 2001 have remaining maturities of 12 months or less.

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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

    We have made forward-looking statements in this document that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of our management, and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, and statements preceded by, followed by, or that include the words "will," believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions.

    Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on the forward-looking statements, since they are based on current expectations. Actual results may differ materially from those currently expected or anticipated.

    Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Many of the factors described below that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.

    An economic slowdown in California could hurt our business.  A continuing economic slowdown in California attributable to energy supply and cost issues, a slowing of activities in the technology, communications and manufacturing sectors, or any other unforeseen events could have the following consequences, any of which could hurt our business:

•

Loan delinquencies may increase;



•

Problem assets and foreclosures may increase;



•

Demand for our products and services may decline; and



•

Collateral for loans made by us, especially real estate, may decline in value, in turn reducing clients' borrowing power, and reducing the value of assets and collateral associated with our existing loans.

    Changes in interest rates affect our profitability.  The Federal Reserve has lowered interest rates six times in the last year, and accordingly, we have lowered our interest rates on some loan and deposit products to maintain a competitive position. Changes in prevailing rates may hurt our business. We derive our income mainly from the difference or "spread" between the interest earned on loans, securities, and other interest-earning assets, and interest paid on deposits, borrowings, and other interest-bearing liabilities. In general, the wider the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities fluctuates. This causes decreases in our spread and affects our income. In addition, interest rates affect how much money we lend. For example, when interest rates rise, loan originations tend to decrease.

    Significant changes in the provision or applications of laws on regulations affecting our business could materially affect our business.  The banking industry is subject to extensive federal and state regulations, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially. Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements. A material change in these conditions would affect our results. Parts of our business are also subject to federal and state securities laws and regulations. Significant changes in these laws and regulations would also affect our business. Recent new laws affecting our business include the implementation of the Gramm-Leach-Bliley Act, and the adoption of new regulations by the banking

25

agencies under this new law. The long term impact of compliance with these new laws, and other related privacy initiatives is difficult to predict at this time.

    We face strong competition from financial service companies and other companies that offer banking services which can hurt our business.  Increased competition in our market may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the banking services that we offer in our service area. These competitors include national, regional, and community banks. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries. Recently passed legislation will make it easier for other types of financial institutions to compete with us.

    Our results would be adversely affected if we suffered higher than expected losses on our loans.  We assume risk from the possibility that we will suffer losses because borrowers, guarantors, and related parties fail to perform under the terms of their loans. We try to minimize this risk by adopting and implementing what we believe are effective underwriting and credit policies and procedures, including how we establish and review the allowance for credit losses. We assess the likelihood of nonperformance, track loan performance, and diversify our credit portfolio. Those policies and procedures may still not prevent unexpected losses that could adversely affect our results.

26

PART II.  OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

    On April 25, 2001, the Registrant held its annual meeting of stockholders. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statement, and all of such nominees were elected. The following table sets forth the number of votes cast for, or withheld with respect to, each director nominated for election.

Directors	For	Withheld
Russell Goldsmith	43,703,311	1,215,489
Michael L. Meyer	43,662,792	1,256,008
Ronald L. Olson	43,494,550	1,424,250

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

No.
10.2.4	Employment Agreement made as of May 15, 2001 by and between Bram Goldsmith and the Registrant and City National Bank, including Eighth Amendment to Split Dollar Life Insurance Agreement Collateral Assignment Plan between City National Bank and The Goldsmith 1980 Insurance Trust dated May 15, 2001.

    (b) Reports on Form 8-K

    On April 18, 2001, the Corporation filed a report on Form 8-K under item 5 regarding the financial results for the quarter ended March 31, 2001. Included in the report was a press releases dated April 17, 2001.

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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 14, 2001	/s/ FRANK P. PEKNY   Frank P. Pekny Executive Vice President and Chief Financial Officer/Treasurer (Authorized Officer and Principal Financial Officer)

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QuickLinks

PART I—FINANCIAL INFORMATON ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K