City National 10-Q 2001 Q3 Quarterly report

QuickLinks -- Click here to rapidly navigate through this document

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 September 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)	92-2568550 (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 October 31, 2001:48,126,956

PART 1—FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited)

Dollars in thousands , except per share amounts			September 30, 2001			December 31, 2000			September 30, 2000
Assets
	Cash and due from banks		$	418,830		$	386,814		$	393,669
	Federal funds sold			311,500			165,000			30,000
	Securities available-for-sale—cost $1,721,902; $1,567,676 and $1,636,932 at September 30, 2001, December 31, 2000 and September 30, 2000, respectively			1,752,985			1,547,844			1,598,277
	Trading account securities			44,913			46,078			61,805
	Loans			6,850,982			6,527,145			6,426,792
	Less allowance for credit losses			137,239			135,435			139,195
		Net loans		6,713,743			6,391,710			6,287,597
	Premises and equipment, net			66,890			63,010			60,458
	Customers' acceptance liability			6,829			14,736			14,972
	Deferred tax asset			36,511			65,986			66,892
	Goodwill			161,987			171,559			158,881
	Core deposit intangibles			19,935			24,148			25,553
	Bank owned life insurance			55,009			52,820			52,166
	Affordable housing investments			58,566			58,585			60,072
	Other assets			138,376			108,379			103,613
		Total assets	$	9,786,074		$	9,096,669		$	8,913,955
Liabilities
	Demand deposits		$	3,275,183		$	3,276,203		$	2,743,717
	Interest checking deposits			514,998			619,332			568,178
	Money market deposits			1,672,733			1,344,244			1,446,375
	Savings deposits			246,002			244,707			246,146
	Time deposits—under $100,000			246,047			247,797			253,853
	Time deposits—$100,000 and over			1,445,389			1,676,387			1,615,244
		Total deposits		7,400,352			7,408,670			6,873,513
	Federal funds purchased and securities sold under repurchase agreements			149,701			139,841			132,750
	Other short-term borrowings			785,125			315,125			740,638
	Subordinated debt			274,493			123,641			123,594
	Long-term debt			194,995			205,000			205,000
	Other liabilities			99,174			146,008			112,830
	Acceptances outstanding			6,829			14,736			14,972
		Total liabilities		8,910,669			8,353,021			8,203,297
Commitments and contingencies
Shareholders' Equity
	Preferred Stock authorized—5,000,000: none outstanding			—			—			—
	Common Stock-par value-$1.00; authorized—75,000,000; Issued—48,118,566; 47,785,345; and 47,765,807 shares at September 30, 2001, December 31, 2000 and September 30, 2000, respectively			48,119			47,785			47,766
	Additional paid-in capital			300,434			292,358			290,009
	Accumulated other comprehensive income (loss)			27,948			(11,493	)		(22,402	)
	Retained earnings			500,886			420,024			395,285
	Treasury shares, at cost—50,000; 155,355 and 0 shares at September 30, 2001, December 31, 2000 and September 30, 2000, respectively			(1,982	)		(5,026	)		—
		Total shareholders' equity		875,405			743,648			710,658
		Total liabilities and shareholders' equity	$	9,786,074		$	9,096,669		$	8,913,955

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 September 30,						For the nine months ended September 30,
In thousands, except per share amounts
			2001			2000			2001			2000
Interest Income
	Loans		$	128,744		$	144,371		$	396,854		$	406,676
	Federal funds sold and securities purchased under resale agreements			554			463			2,025			2,143
	Securities available-for-sale			26,849			24,935			76,577			65,337
	Trading account			369			1,158			1,742			2,914
		Total interest income		156,516			170,927			477,198			477,070
Interest Expense
	Deposits			30,325			42,609			108,899			109,229
	Federal funds purchased and securities sold under repurchase agreements			4,005			3,882			12,296			12,445
	Other short-term borrowings			7,346			15,544			23,386			41,226
	Subordinated debt			2,074			2,135			5,466			5,952
	Other long-term debt			1,637			2,756			6,056			7,326
		Total interest expense		45,387			66,926			156,103			176,178
	Net interest income			111,129			104,001			321,095			300,892
	Provision for credit losses			10,000			7,000			24,000			11,000
	Net interest income after provision for credit losses			101,129			97,001			297,095			289,892
Noninterest Income
	Trust fees and investment fee revenue			14,896			12,028			43,348			34,810
	Cash management and deposit transaction charges			8,068			5,888			22,199			17,194
	International services			3,756			3,967			11,155			11,024
	Bank owned life insurance			714			646			2,135			1,924
	Gain (loss) on sale of loans and assets/debt repurchase			(355	)		(82	)		1,293			(77	)
	Gain on sale of securities			916			1,819			2,432			2,037
	Other			4,287			4,256			13,875			12,643
		Total noninterest income		32,282			28,522			96,437			79,555
Noninterest Expense
	Salaries and other employee benefits			42,476			40,506			127,961			120,944
	Net occupancy of premises			6,434			7,235			19,406			17,783
	Professional			6,203			5,047			18,325			16,738
	Information services			4,111			3,369			12,028			10,365
	Depreciation			3,510			3,203			10,260			9,484
	Amortization of goodwill			3,220			2,957			9,647			8,190
	Marketing and advertising			2,375			2,503			8,272			8,827
	Office services			2,159			2,302			6,793			7,144
	Amortization of core deposit intangibles			1,405			1,404			4,214			4,039
	Equipment			497			537			1,596			1,739
	Other operating			4,939			4,921			14,443			13,890
		Total noninterest expense		77,329			73,984			232,945			219,143
	Income before income taxes			56,082			51,539			160,587			150,304
	Income taxes			18,598			17,378			53,168			51,690
	Net income			37,484			34,161			107,419			98,614
	Other comprehensive income
		Unrealized gain on securities available-for-sale		31,341			15,254			45,837			7,535
		Initial gain on cash flow hedges from implementation of FAS 133		—			—			2,404			—
		Additional unrealized gain on cash flow hedges		10,733			—			19,058			—
		Less: reclassification adjustment for gain (loss) included in net income		(2,256	)		(344	)		(748	)		(729	)
		Income taxes		18,638			6,559			28,606			3,473
	Other comprehensive income			25,692			9,039			39,441			4,791
	Comprehensive income		$	63,176		$	43,200		$	146,860		$	103,405
	Net income per share, basic		$	0.78		$	0.72		$	2.25		$	2.09
	Net income per share, diluted		$	0.75		$	0.70		$	2.18		$	2.04
	Shares used to compute income per share, basic			48,016			47,694			47,822			47,093
	Shares used to compute income per share, diluted			49,804			49,082			49,286			48,352
	Dividends per share		$	0.185		$	0.175		$	0.555		$	0.525

See accompanying Notes to the Unaudited Consolidated Financial Statements.

3

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

			For the nine months ended September 30,
Dollars in thousands
			2001			2000
Cash Flows From Operating Activities
Net income			$	107,419		$	98,614
Adjustments to net income:
	Provision for credit losses			24,000			11,000
	Amortization of goodwill and core deposit intangibles			13,861			12,229
	Depreciation			10,260			9,484
	Deferred income tax			869			5,548
	Loss (gain) on sales of ORE			24			(3	)
	Gain on sales of loans and assets / debt repurchase			(1,293	)		—
	Gain on sale of securities			(2,432	)		(2,037	)
	Net increase in other assets			(49,880	)		(17,576	)
	Net (increase) decrease in trading securities			1,165			(34,091	)
	Other, net			20,842			15,536
		Net cash provided by operating activities		124,835			98,704
Cash Flows From Investing Activities
Purchase of securities				(989,880	)		(1,101,389	)
Sales of securities available-for-sale				311,948			223,235
Maturities of securities				526,299			518,375
Purchase of residential mortgage loans				(7,129	)		—
Sales of loans				53,701			20,054
Loan originations net of principal collections				(401,678	)		(466,938	)
Proceeds from sales of ORE				10			1,260
Purchase of premises and equipment				(17,078	)		(8,327	)
Net cash from acquisitions				—			78,715
Other, net				5			(6,810	)
	Net cash used by investing activities			(523,802	)		(741,825	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits				(8,318	)		502,411
Proceeds from issuance of other long-term debt				100,000			150,000
Net increase in federal funds purchased and securities sold
under repurchase agreements				9,860			37,263
Net increase in short-term borrowings, net of transfers from long-term debt				355,000			143,899
Repayment of long-term debt				—			(25,000	)
Repurchase of subordinated debt				(8,467	)		—
Net proceeds from issuance of subordinated debt				148,202			—
Proceeds from exercise of stock options				12,824			6,807
Stock repurchases				(5,061	)		(14,229	)
Cash dividends paid				(26,557	)		(24,539	)
	Net cash provided by financing activities			577,483			776,612
Net increase in cash and cash equivalents				178,516			133,491
Cash and cash equivalents at beginning of year				551,814			290,178
Cash and cash equivalents at end of period			$	730,330		$	423,669
Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Interest	$	170,670		$	171,207
		Income taxes		68,700			9,321
	Non-cash investing activities:
		Transfer from loans to foreclosed assets	$	162		$	156
		Transfer from long-term debt to short-term borrowings		115,000			100,000

See accompanying Notes to the Unaudited Consolidated Financial Statements.

4

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

		For the nine months ended September 30,
Dollars in thousands
		2001			2000
Common Stock
	Balance, beginning of period	$	47,785		$	46,885
	Stock issued for acquisitions		—			650
	Stock options exercised		334			231
	Balance, end of period		48,119			47,766
Additional paid-in capital
	Balance, beginning of period		292,358			276,464
	Tax benefit from stock options		3,691			2,388
	Stock options exercised		4,385			2,008
	Excess of market value of shares issued for acquisitions over historical cost		—			9,149
	Balance, end of period		300,434			290,009
Accumulated other comprehensive income (loss)
	Balance, beginning of period		(11,493	)		(27,193	)
	Other comprehensive income net of income taxes		39,441			4,791
	Balance, end of period		27,948			(22,402	)
Retained earnings
	Balance, beginning of period		420,024			321,210
	Net income		107,419			98,614
	Dividends paid		(26,557	)		(24,539	)
	Balance, end of period		500,886			395,285
Treasury shares
	Balance, beginning of period		(5,026	)		(45,720	)
	Purchase of shares		(5,061	)		(14,229	)
	Issuance of shares for acquisitions		—			55,381
	Issuance of shares for stock options		8,105			4,568
	Balance, end of period		(1,982	)		—
Total shareholders' equity		$	875,405		$	710,658

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. The results for the 2001 interim periods are not necessarily indicative of the results expected for the full year.

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

6

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 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 $9.6 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably 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.

In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of Statement No. 143 are effective for fiscal years beginning after June 15, 2002. Management has not yet determined the impact, if any, of adoption of Statement No. 143.

In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For long-lived assets to be held and used, Statement No. 144 retains the requirements to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, Statement No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-asset" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to owners in a spinoff), Statement No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spinoff if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, Statement No. 144 retains the requirement to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they occur. Statement No. 144 broadens the presentation of discontinued

7

operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to "held and used." The provisions of Statement No. 144 are effective for fiscal years beginning after December 15, 2001. Management has not yet determined the impact, if any, of adoption of Statement No. 144.

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 September 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 September 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 September 30, 2001.

9.

Under the October 26, 2000 stock buyback program of one million shares, 341,700 shares have been repurchased at an average price of $33.99 per share including 50,000 shares purchased at an average price of $39.63 during the third quarter of 2001. The shares purchased under the buyback program will be reissued for acquisitions, upon the exercise of stock options, and for other general corporate purposes. Treasury shares at September 30, 2001 totaled 50,000 shares.

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

8

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 September 30, 2001, the Company had $706.4 million of notional amount of interest rate swaps, of which $156.4 million were fair value hedges and $550.0 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 $11.9 million. In addition, deposits and borrowing included $2.6 million and comprehensive income included $3.3 million, before taxes of $1.4 million relating to interest rate swaps terminated with positive benefit during the quarter. These amounts will be amortized into income over the designated hedged period. 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 $13.8 million, before taxes of $5.8 million. There was no transition adjustment at January 1, 2001 or any ineffectiveness gain or loss that impacted net income for the first nine months of 2001. Amounts to be paid or received on the cash flow hedge interest rate swaps will be reclassified into earnings upon receipt of interest payments on the underlying hedged loans, including amounts totaling $2.9 million and $4.6 million that were reclassified into net interest income during the three and nine months ended September 30, 2001, respectively. Comprehensive income expected to be reclassified into net interest income within the next 12 months is $12.1 million.

11.

On August 30, 2001, the Bank issued $150 million of 6.75 percent, ten-year, subordinated notes which qualifies as Tier 2 capital. The proceeds were used for general corporate purposes.

9

CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)

		At or for the three months ended									Percentage change September 30, 2001 from
Dollars in thousands, except per share amounts		September 30, 2001			June 30, 2001			September 30, 2000			June 30, 2001		September 30, 2000
For The Quarter
	Net income	$	37,484		$	36,344		$	34,161		3	%	10	%
	Net income per common share, basic		0.78			0.76			0.72		3		8
	Net income per common share, diluted		0.75			0.74			0.70		1		7
	Dividends, per common share		0.185			0.185			0.175		0		6
	Cash net income		41,439			40,300			37,853		3		9
	Cash net income per common share, basic		0.86			0.84			0.79		2		9
	Cash net income per common share, diluted		0.83			0.82			0.77		1		8
At Quarter End
	Assets	$	9,786,074		$	9,123,593		$	8,913,955		7		10
	Deposits		7,400,352			7,080,634			6,873,513		5		8
	Loans		6,850,982			6,567,370			6,426,792		4		7
	Securities		1,797,898			1,681,233			1,660,082		7		8
	Shareholders' equity		875,405			815,840			710,658		7		23
	Book value per share		18.21			17.04			14.88		7		22
Average Balances
	Assets	$	9,419,018		$	9,132,024		$	8,757,790		3		8
	Deposits		6,947,324			6,975,066			6,501,125		0		7
	Loans		6,759,975			6,537,375			6,430,471		3		5
	Securities		1,782,906			1,690,786			1,558,339		5		14
	Shareholders' equity		844,931			797,398			692,436		6		22
Selected Ratios
	Return on average assets		1.58	%		1.60	%		1.55	%	(1	)	2
	Return on average shareholders' equity		17.60			18.28			19.63		(4	)	(10	)
	Tier 1 leverage		7.17			6.97			6.41		3		12
	Tier 1 risk-based capital		9.06			8.76			7.85		3		15
	Total risk-based capital		13.93			11.64			10.88		20		28
	Dividend payout ratio, per share		23.68			24.39			24.33		(3	)	(3	)
	Net interest margin		5.28			5.23			5.32		1		(1	)
	Efficiency ratio		52.64			55.87			54.44		(6	)	(3	)
	Cash return on average assets		1.78			1.81			1.75		(2	)	2
	Cash return on average shareholders' equity		25.09			26.40			29.13		(5	)	(14	)
	Cash efficiency ratio		49.49			52.60			51.23		(6	)	(3	)
Asset Quality Ratios
	Nonaccrual loans to total loans		0.59	%		0.56	%		0.73	%	5		(19	)
	Nonaccrual loans and ORE to toal loans and ORE		0.59			0.58			0.73		2		(19	)
	Allowance for credit losses to total loans		2.00			2.04			2.17		(2	)	(8	)
	Allowance for credit losses to non accrual loans		342.11			361.02			296.90		(5	)	15
	Net charge-offs to average loans—annualized		(0.39	)		(0.45	)		(0.51	)	(13	)	(24	)

10

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 $37.5 million for the third quarter of 2001, up 10 percent from $34.2 million for the third quarter of 2000 and 3 percent from the second quarter of 2001. Net income per diluted common share of $0.75 increased 7 percent from $0.70 per share in the third quarter of 2000 and was slightly above the $0.74 per share in the second quarter of 2001.

    For the first nine months of 2001, the Corporation recorded net income of $107.4 million, an increase of 9 percent over net income of $98.6 million for the first nine months of 2000. Net income per diluted common share was $2.18, an increase of 7 percent compared with $2.04 per share in the first nine months 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 $0.83 per share, compared with $0.77 per share in the third quarter of 2000 and was up slightly compared with $0.82 per share in the second quarter of 2001. For the first nine months of 2001, cash net income per diluted common share was $2.42, an increase of 8 percent from $2.25 per share for the first nine months of 2000.

    The Corporation's return on average assets for the third quarter of 2001 was 1.58 percent, compared with 1.55 percent for the third quarter of 2000 and 1.60 percent for the second quarter of 2001. The return on average shareholders' equity was 17.60 percent for the third quarter of 2001, compared with 19.63 percent for the prior-year third quarter and 18.28 percent for the second quarter of 2001. For the first nine months of 2001, the return on average assets was 1.57 percent and the return on average shareholders' equity was 17.89 percent compared with a 1.58 percent return on average assets and a 20.25 percent return on average shareholders' equity for the first nine months of 2000. The lower return on average shareholders' equity compared with a year ago is due primarily to a higher level of shareholders' equity, which resulted 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 third quarter of 2001 was 1.78 percent, compared with 1.75 percent in the third quarter of 2000, and 1.81 percent for the second quarter of 2001. The return on average shareholders' equity on a cash basis was 25.09 percent for the third quarter of 2001, compared with 29.13 percent for the prior-year third quarter and 26.40 percent for the second quarter of 2001. On a cash basis, for the first nine months of 2001, the return on average assets was 1.78 percent and the return on average shareholders' equity was 25.60 percent, compared with a 1.79 percent return on average assets and 30.09 percent return on average shareholder's equity for the first nine months of 2000.

    Management's estimates of business and economic levels and the related affect on earnings during this period of economic uncertainty are subject to a greater degree of variability than normal given current world events and their impact on the economy. Based on the information available, management continues to expect that net income per diluted common share for 2001 will be approximately 8 percent to 11 percent higher than 2000.

11

    In anticipation of the elimination of goodwill amortization in 2002, it should be noted that the amortization of goodwill net of tax benefits reduced net income by $3.1 million for the third quarter and $9.4 million for the first nine months of 2001.

Net Interest Income

    Net interest income on a fully taxable-equivalent basis rose 7 percent to $114.7 million in the third quarter of 2001, compared with $107.3 million for the third quarter of 2000. Third quarter 2001 net interest income was 6 percent higher than the $108.4 million recorded for the second quarter of 2001. Fully taxable-equivalent net interest income for the first nine months of 2001 was $331.2 million, an increase of 7 percent over $310.4 million for the first nine months of 2000. Interest income recovered on nonaccrual and charged-off loans included above was $1.4 million in the third quarter of 2001, compared with $0.8 million for the third quarter a year ago and $0.6 million for the second quarter of 2001. Interest recovered in the first nine months of 2001 was $3.6 million compared with $3.1 million for the first nine months of 2000.

    The fully taxable-equivalent net interest margin in the third quarter of 2001 was 5.28 percent, compared with 5.32 percent for the third quarter of 2000 and 5.23 percent for the second quarter of 2001. The net interest margin for the first nine months of 2001 was 5.30 percent compared with 5.46 percent for the first nine months of 2000. The Bank's prime rate was 6.00 percent at September 30, 2001, compared with 9.50 percent a year earlier and 6.75 percent at June 30, 2001. The prime rate was further reduced to 5.50 percent effective October 3, 2001 and 5.00 percent effective November 7, 2001.

    The following tables present the components of net interest income on a fully taxable-equivalent basis for the three and nine months ended September 30, 2001 and September 30, 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.

12

Net Interest Income Summary

					For the three months ended September 30, 2001							For the three months ended September 30, 2000
Dollars in thousands					Average Balance			Interest income/ expense(2)		Average interest rate		Average Balance			Interest income/ expense(2)		Average interest rate
Assets
	Interest-earning assets
		Loans
			Commercial		$	2,972,774		$	58,063	7.75	%	$	2,848,223		$	68,859	9.62	%
			Real estate mortgages			1,591,224			32,230	8.04			1,416,387			32,466	9.12
			Residential first mortgages			1,482,327			26,457	7.08			1,245,026			22,799	7.29
			Real estate construction			539,409			9,947	7.32			430,538			11,348	10.49
			Installment			72,509			1,698	9.29			67,336			1,566	9.25
				Total relationship loans		6,658,243			128,395	7.65			6,007,510			137,038	9.07
			Syndicated non-relationship			101,732			1,948	7.60			422,961			8,971	8.44
			Total loans(1)			6,759,975			130,343	7.65			6,430,471			146,009	9.03
		Securities available-for-sale				1,735,887			28,781	6.58			1,481,735			26,547	7.13
		Federal funds sold and securities purchased under resale agreements				73,625			554	2.99			28,817			463	6.39
		Trading account securities				47,019			378	3.19			76,604			1,171	6.08
			Total interest-earning assets			8,616,506			160,056	7.37			8,017,627			174,190	8.64
		Allowance for credit losses				(135,649	)						(140,990	)
		Cash and due from banks				396,452							342,911
		Other nonearning assets				541,709							538,242
			Total assets		$	9,419,018						$	8,757,790
Liabilities and Shareholders' Equity
	Interest-bearing deposits
		Interest checking accounts			$	527,300			530	0.40		$	572,731			717	0.50
		Money market accounts				1,566,201			11,075	2.81			1,353,948			12,656	3.72
		Savings deposits				249,068			1,612	2.57			244,837			2,724	4.43
		Time deposits—under $100,000				245,271			2,584	4.18			257,536			3,840	5.93
		Time deposits—$100,000 and over				1,376,944			14,524	4.18			1,500,383			22,672	6.01
			Total interest-bearing deposits			3,964,784			30,325	3.03			3,929,435			42,609	4.31
		Federal funds purchased and securities sold under repurchase agreements				450,911			4,005	3.52			239,353			3,882	6.45
		Other borrowings				1,073,127			11,057	4.09			1,208,006			20,435	6.73
			Total interest-bearing liabilities			5,488,822			45,387	3.28			5,376,794			66,926	4.95
	Noninterest-bearing deposits					2,982,540							2,571,690
	Other liabilities					102,725							116,870
	Shareholders' equity					844,931							692,436
			Total liabilities and shareholders' equity		$	9,419,018						$	8,757,790
	Net interest spread									4.09	%						3.69	%
	Fully taxable-equivalent net interest income							$	114,669						$	107,264
	Net interest margin									5.28	%						5.32	%

(1)

Includes average nonaccrual loans of $40,002 and $38,022 for 2001 and 2000, respectively.

(2)

Loan income includes loan fees of $6,306 and $4,549 for 2001 and 2000, respectively.

13

Net Interest Income Summary

					For the nine months ended September 30, 2001							For the nine months ended September 30, 2000
Dollars in thousands					Average Balance			Interest income/ expense(2)		Average interest rate		Average Balance			Interest income/ expense(2)		Average interest rate
Assets
	Interest-earning assets
		Loans
			Commercial		$	2,971,530		$	186,021	8.37	%	$	2,690,750		$	188,689	9.37	%
			Real estate mortgages			1,569,050			98,923	8.43			1,298,368			90,024	9.26
			Residential first mortgages			1,371,504			74,591	7.27			1,226,347			66,855	7.28
			Real estate construction			485,394			29,816	8.21			403,868			31,070	10.28
			Installment			73,472			5,235	9.53			64,199			4,449	9.26
				Total relationship loans		6,470,950			394,586	8.15			5,683,532			381,087	8.96
			Syndicated non-relationship			136,279			6,972	6.84			484,937			30,194	8.32
			Total loans (1)			6,607,229			401,558	8.13			6,168,469			411,281	8.91
		Securities available-for-sale				1,616,725			81,958	6.78			1,312,411			70,147	7.14
		Federal funds sold and securities purchased under resale agreements				63,964			2,025	4.23			46,831			2,143	6.11
		Trading account securities				61,012			1,773	3.89			71,275			2,986	5.60
			Total interest-earning assets			8,348,930			487,314	7.80			7,598,986			486,557	8.55
		Allowance for credit losses				(136,185	)						(139,609	)
		Cash and due from banks				395,890							336,820
		Other nonearning assets				550,300							520,505
			Total assets		$	9,158,935						$	8,316,702
Liabilities and Shareholders' Equity
	Interest-bearing deposits
		Interest checking accounts			$	556,477			1,712	0.41		$	527,996			1,960	0.50
		Money market accounts				1,460,561			35,003	3.20			1,287,076			33,999	3.53
		Savings deposits				247,243			5,763	3.12			234,181			7,308	4.17
		Time deposits—under $100,000				247,239			9,349	5.06			262,751			10,936	5.56
		Time deposits—$100,000 and over				1,497,842			57,072	5.09			1,287,685			55,026	5.71
			Total interest-bearing deposits			4,009,362			108,899	3.63			3,599,689			109,229	4.05
		Federal funds purchased and securities sold under repurchase agreements				373,876			12,296	4.40			273,264			12,445	6.08
		Other borrowings				960,516			34,908	4.86			1,137,323			54,504	6.40
			Total interest-bearing liabilities			5,343,754			156,103	3.91			5,010,276			176,178	4.70
	Noninterest-bearing deposits					2,894,244							2,553,359
	Other liabilities					118,297							102,603
	Shareholders' equity					802,640							650,464
			Total liabilities and shareholders' equity		$	9,158,935						$	8,316,702
	Net interest spread									3.89	%						3.85	%
	Fully taxable-equivalent net interest income							$	331,211						$	310,379
	Net interest margin									5.30	%						5.46	%

(1)

Includes average nonaccrual loans of $47,807 and $33,575 for 2001 and 2000, respectively.

(2)

Loan income includes loan fees of $17,556 and $13,508 for 2001 and 2000, respectively.

14

    Average loans rose to $6.8 billion for the third quarter of 2001, an increase of 5 percent over the prior-year third quarter. Average relationship loans increased $0.7 billion, or 11 percent, this quarter over the year-ago quarter. Conversely, average syndicated non-relationship loans fell to $101.7 million for the third quarter of 2001, down significantly from both the third quarter of 2000, as well as the second quarter of 2001. This is consistent with the Bank's objective of reducing its exposure to syndicated non-relationship loans.

    For the first nine months of 2001, average relationship loans increased 14 percent to $6.5 billion from $5.7 billion for the first nine months of 2000. The growth in average relationship loans over the year-ago period was driven primarily by increases in residential first mortgage loans, real estate mortgage, construction and commercial loans. Compared with the prior-year third quarter averages, residential first mortgage loans rose 19 percent to $1.5 billion from $1.2 billion; real estate mortgage loans rose 12 percent to $1.6 billion from $1.4 billion; construction loans rose 25 percent to $0.5 billion from $0.4 billion; and commercial loans rose 4 percent to $3.0 billion from $2.8 billion.

    Average securities increased $224.6 million, or 14 percent, to $1.8 billion for the third quarter of 2001 compared with the third quarter of 2000 and increased 5 percent from the second quarter of 2001. For the first nine months of 2001, average securities increased $294.1 million, or 21 percent, to $1.7 billion from the first nine months of 2000.

    Average deposits during the third quarter of 2001 increased 7 percent to $6.9 billion over the third quarter of 2000, but were slightly lower than the second quarter of 2001. During the first nine months of 2001, average deposits increased 12 percent to $6.9 billion, compared with $6.2 billion for the first nine months of 2000.

    During the third quarter of 2001, average core deposits, which provide a stable source of low cost funding, were $5.6 billion, an increase of 11 percent over the $5.0 billion in the third quarter of 2000, and were slightly higher than the second quarter of 2001. Average core deposits represented 80 percent of the total average deposit base for the quarter. For the first nine months of 2001, average core deposits were $5.4 billion compared with $4.9 billion for the first nine months 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 from last year.

    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 third quarter and the first nine months of 2001 and the third quarter and the first nine months of 2000, as well as between the third quarter and the first nine months of 2000 and the third quarter and the first nine months of 1999.

15

Changes In Net Interest Income

		For the three months ended September 30, 2001 vs 2000									For the three months ended September 30, 2000 vs 1999
		Increase (decrease) due to									Increase (decrease) due to
Dollars in thousands								Net increase (decrease)									Net increase (decrease)
		Volume			Rate						Volume			Rate
Interest earned on:
Loans		$	7,284		$	(22,950	)	$	(15,666	)	$	34,887		$	7,883		$	42,770
Securities available-for-sale			4,371			(2,137	)		2,234			8,262			959			9,221
Trading account securities			(356	)		(437	)		(793	)		102			270			372
Federal funds sold and securities purchased under resale agreements			435			(344	)		91			(57	)		88			31
	Total interest-earning assets		11,734			(25,868	)		(14,134	)		43,194			9,200			52,394
Interest paid on:
Interest checking deposits			(53	)		(134	)		(187	)		217			55			272
Money market deposits			1,805			(3,386	)		(1,581	)		3,315			2,135			5,450
Savings deposits			46			(1,158	)		(1,112	)		274			1,286			1,560
Other time deposits			(1,912	)		(7,492	)		(9,404	)		8,677			3,062			11,739
Other borrowings			1,233			(10,488	)		(9,255	)		5,358			4,700			10,058
	Total interest-bearing liabilities		1,119			(22,658	)		(21,539	)		17,841			11,238			29,079
		$	10,615		$	(3,210	)	$	7,405		$	25,353		$	(2,038	)	$	23,315

		For the nine months ended September 30, 2001 vs 2000									For the nine months ended September 30, 2000 vs 1999
		Increase (decrease) due to									Increase (decrease) due to
Dollars in thousands								Net increase (decrease)								Net increase (decrease)
		Volume			Rate						Volume		Rate
Interest earned on:
Loans		$	27,921		$	(37,644	)	$	(9,723	)	$	99,687	$	17,923		$	117,610
Securities			15,509			(3,698	)		11,811			14,438		4,121			18,559
Trading account securities			(389	)		(824	)		(1,213	)		148		780			928
Federal funds sold and securities purchased under resale agreements			652			(770	)		(118	)		481		246			727
	Total interest-earning assets		43,693			(42,936	)		757			114,754		23,070			137,824
Interest paid on:
Interest checking deposits			107			(355	)		(248	)		456		(98	)		358
Money market deposits			4,346			(3,342	)		1,004			8,288		4,912			13,200
Savings deposits			387			(1,932	)		(1,545	)		1,246		765			2,011
Other time deposits			7,743			(7,284	)		459			21,264		7,984			29,248
Other borrowings			(3,461	)		(16,284	)		(19,745	)		14,677		10,767			25,444
	Total interest-bearing liabilities		9,122			(29,197	)		(20,075	)		45,931		24,330			70,261
		$	34,571		$	(13,739	)	$	20,832		$	68,823	$	(1,260	)	$	67,563

    Management expects the net interest margin for 2001 will be slightly less than the 5.30 percent year-to-date margin, as time deposits and interest rate swaps re-price on a lagged basis. This expectation is contingent on rates remaining relatively stable for the rest of the year.

16

Provision for Credit Losses

    The Corporation recorded a provision for credit losses of $10.0 million and $24.0 million for the third quarter and first nine months of 2001, respectively, compared with $7.0 million and $11.0 million for the third quarter and first nine months of 2000. The provision for credit losses in the second quarter of 2001 was $6.5 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 growth of the loan portfolio during the quarter.

    The provision for credit losses to be taken in the fourth quarter of 2001 will reflect management's assessment of the above factors, as well as changes in the economic environment during this period. Based on its current assessment, management anticipates that a provision for credit losses for all of 2001 could fall within the $31 million to $38 million range. 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, rising 13 percent to $32.3 million in the third quarter of 2001, from $28.5 million in the third quarter of 2000. Noninterest income of $96.4 million for the first nine months of 2001 increased 21 percent compared with the $79.6 million for the first nine months of 2000.

    Trust and investment fee revenue benefited from the acquisition of Reed, Conner & Birdwell, which closed at year-end 2000, and an increase in new business from City National Investments (CNI). Assets under administration totaled $18.3 billion at September 30, 2001, including $7.2 billion under management, compared with $16.7 billion and $5.3 billion, respectively, at September 30, 2000, and $18.5 billion and $7.2 billion, respectively, at June 30, 2001. Assets under management included $1.2 billion of assets managed by Reed, Conner & Birdwell at September 30, 2001 and June 30, 2001. 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 growth in deposits, in many cases attributable to higher sales of new online cash management products.

    Gains (losses) on the sale of assets and the repurchase of debt and gains on the sale of securities amounted to $0.6 million for the third quarter of 2001, compared with a $l.7 million gain for the same period a year earlier, and gains of $1.4 million for the second quarter of 2001. For the first nine months of 2001, $3.7 million in gains on the sale of assets and the repurchase of debt and gains on the sale of securities were realized, compared with $2.0 million for the first nine months of 2000.

    Noninterest income for the third quarter and first nine months of 2001 was 23 percent of total revenues compared with 22 percent and 21 percent, respectively, for the third quarter and first nine months of 2000.

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

Noninterest Expense

    Noninterest expense was $77.3 million in the third quarter of 2001, up 5 percent from $74.0 million for the third quarter of 2000, and down 2 percent from $79.0 million for the second quarter of 2001. The increase over the year-ago quarter was primarily the result of the Corporation's

17

growth, including expenses related to Reed, Conner & Birdwell and additional colleagues. Noninterest expense for the first nine months of 2001 was $232.9 million, an increase of 6 percent compared with $219.1 million for the first nine months of 2000.

    The Corporation's cash efficiency ratio for the third quarter of 2001 improved to 49.49 percent, from 51.23 percent for the third quarter of 2000. The 3 percent improvement over the prior-year quarter and the 6 percent improvement from the 52.60 percent for the second quarter of 2001 is due to both increased revenues and the Corporation's ongoing efforts to improve efficiency and productivity. For the first nine months of 2001, the cash efficiency ratio was 51.34 percent compared with 53.06 percent for the first nine months 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, was 33.2 percent for the third quarter, and 33.1 percent for the first nine months of 2001. This compares with 33.7 percent for the third quarter and 34.4 percent for the first nine months 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 fall within a range of 32.5 percent to 33.5 percent for 2001.

Balance Sheet Analysis

    Total average assets reached $9.4 billion in the third quarter of 2001, up 8 percent from the $8.8 billion in average assets for the third quarter of 2000 and up 3 percent from the $9.1 billion in average assets for the second quarter of 2001. Total assets at September 30, 2001 were $9.8 billion, compared with $8.9 billion at September 30, 2000 and $9.1 billion at June 30, 2001. Loans and, to a lesser extent, federal funds sold and securities accounted for the increase in assets from last year and from the second quarter of 2001.

Securities

    Comparative period-end security portfolio balances are presented below:

Securities Available-for-Sale

		September 30, 2001				December 31, 2000				September 30, 2000
Dollars in thousands
		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
U.S. Gov. and federal agency		$	341,206	$	352,247	$	646,629	$	648,374	$	734,181	$	733,642
Mortgage-backed			874,443		896,392		438,667		437,221		421,391		411,330
State and Municipal			190,267		196,023		158,983		160,139		159,894		158,148
Other debt securities			114,976		113,433		165,489		150,913		166,633		147,450
	Total debt securities		1,520,892		1,558,095		1,409,768		1,396,647		1,482,099		1,450,570
Marketable equity securities			201,010		194,890		157,908		151,197		154,833		147,707
	Total securities	$	1,721,902	$	1,752,985	$	1,567,676	$	1,547,844	$	1,636,932	$	1,598,277

    At September 30, 2001, securities available-for-sale totaled $1.8 billion, an increase of $154.7 million compared with holdings at September 30, 2000 and an increase of $205.1 million from

18

December 31, 2000. At September 30, 2001, the portfolio had a unrealized net gain of $31.1 million compared with a net loss of $38.7 million and $19.8 million at September 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 September 30, 2001. 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.

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
Dollars in thousands		Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield	Amount		(%) Yield
U.S. Gov. and federal agency		$	25,011	6.10	$	164,977	6.23	$	162,259	6.14	$	—	—	$	352,247	6.18
Mortgage-backed			—	—		1,309	6.25		5,402	6.30		889,681	6.55		896,392	6.55
State and Municipal			13,406	6.79		63,007	6.74		105,456	6.73		14,154	6.84		196,023	6.75
Other debt securities			—	—		—	—		76,366	7.54		37,067	8.08		113,433	7.72
	Total debt securities	$	38,417	6.34	$	229,293	6.37	$	349,483	6.63	$	940,902	6.61	$	1,558,095	6.57
	Amortized cost	$	37,852		$	221,566		$	342,872		$	918,602		$	1,520,892

    Dividend income included in interest income on securities in the Unaudited Consolidated Statement of Income and Comprehensive Income for the third quarter of 2001 and 2000 was $2.4 million and $2.3 million, and $7.1 million and $7.4 million for the first nine months of 2001 and 2000, respectively.

Loan Portfolio

    A comparative period-end loan table is presented below:

Loans

Dollars in thousands			September 30, 2001		December 31, 2000		September 30, 2000
Commercial			$	2,952,076	$	3,056,464	$	2,920,518
Real estate mortgages				1,608,086		1,479,862		1,438,814
Residential first mortgages				1,528,505		1,273,711		1,254,557
Real estate construction				596,081		452,301		408,749
Installment				72,862		73,018		69,528
		Total relationship loans		6,757,610		6,335,356		6,092,166
Syndicated non-relationship loans				93,372		191,789		334,626
		Total loans, gross		6,850,982		6,527,145		6,426,792
Less allowance for credit losses				137,239		135,435		139,195
	Total loans, net		$	6,713,743	$	6,391,710	$	6,287,597

    Total loans at September 30, 2001 were $6.9 billion, compared with $6.4 billion at September 30, 2000, and $6.5 billion at December 31, 2000.

    At September 30, 2001, syndicated non-relationship loans totaled $93.4 million, or slightly over 1 percent of the loan portfolio, compared with $110.5 million at June 30, 2001, $191.8 million at

19

December 31, 2000, and $334.6 million at September 30, 2000. The average outstanding loan balance in the syndicated non-relationship portfolio at September 30, 2001 was $2.5 million, which represents just under half the average commitment amount.

    Average relationship loan growth is expected to slow during the fourth quarter of 2001 and will range between 9 percent to 13 percent for the full year as the performance of the California economy slows to more closely resemble the economic results of the nation.

20

    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.

Nonaccrual Loans, ORE and Restructured Loans

Dollars in thousands				September 30, 2001			December 31, 2000			September 30, 2000
Nonaccrual loans:
	Commercial
		Relationship		$	21,120		$	30,343		$	19,583
		Syndicated non-relationship			8,641			23,012			17,166
					29,761			53,355			36,749
	Real estate				9,298			8,132			9,032
	Installment				1,056			499			1,102
			Total		40,115			61,986			46,883
ORE					10			522			133
	Total nonaccrual loans and ORE			$	40,125		$	62,508		$	47,016
Total non accrual loans as a percentage of total loans					0.59	%		0.95	%		0.73
Total non accrual loans and ORE as a percentage of total loans and ORE					0.59			0.96			0.73
Allowance for credit losses to total loans					2.00			2.07			2.17
Allowance for credit losses to nonaccrual loans					342.11			218.49			296.90
Loans past due 90 days or more on accrual status:
	Commercial			$	2,211		$	1,404		$	4,817
	Real estate				764			4,361			426
	Installment				487			159			132
		Total		$	3,462		$	5,924		$	5,375
Restructured loans:
	On accrual status			$	—		$	829		$	2,411
	On nonaccrual status				795			740			—
				$	795		$	1,569		$	2,411

    Total nonperforming assets (nonaccrual loans and ORE) were $40.1 million, or 0.59 percent of total loans and ORE, at September 30, 2001, compared with $47.0 million, or 0.73 percent, at September 30, 2000, and $62.5 million, or 0.96 percent, at December 31, 2000. Nonperforming assets increased 5 percent from the second quarter 2001, but decreased 36 percent from year-end 2000.

    Total nonperforming relationship assets were $31.5 million, or 0.47 percent of total relationship loans and ORE, at September 30, 2001, compared with $29.9 million, or 0.49 percent, at September 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 $8.6 million at September 30, 2001 and consisted of three loans, compared with five loans totaling $23.0 million that were outstanding at December 31, 2000.

    The following table summarizes the changes in nonaccrual loans for the three and nine months ended September 30, 2001 and September 30, 2000.

21

Changes in Nonaccrual Loans

		For the three months ended September 30,						For the nine months ended September 30,
Dollars in thousands
		2001			2000			2001			2000
Balance, beginning of period		$	37,085		$	35,077		$	61,986		$	25,288
Additions from acquisitions			—			—			—			4,428
Loans placed on nonaccrual
	Relationship		8,924			8,665			26,446			25,885
	Syndicated non-relationship		7,877			13,882			12,226			17,166
			16,801			22,547			38,672			43,051
Charge offs			(5,445	)		(4,278	)		(21,974	)		(9,582	)
Loans returned to accrual status			—			(563	)		(956	)		(673	)
Repayments (including interest applied to principal)			(8,326	)		(5,900	)		(37,451	)		(15,629	)
Transferred to ORE			—			—			(162	)		—
Balance, end of period		$	40,115		$	46,883		$	40,115		$	46,883

    In addition to loans disclosed above as nonaccrual or restructured, management has also identified $5.5 million of problem loans to eight borrowers about which the ability of the borrowers to comply with the present loan repayment terms in the future is questionable. Potential problem loans were $31.4 million at September 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 September 30, 2001 totaled $137.2 million, or 2.00 percent of outstanding loans. This compares with an allowance of $139.2 million, or 2.17 percent of outstanding loans, at September 30, 2000, and an allowance of $133.9 million, or 2.04 percent of outstanding loans at June 30, 2001. The allowance for credit losses as a percentage of nonaccrual loans was 342 percent at September 30, 2001, compared with 297 percent at September 30, 2000 and 218 percent at December 31, 2000.

    Net loan charge-offs were $6.6 million and $8.3 million for the third quarters of 2001 and 2000, respectively. Net loan charge-offs for the second quarter of 2001 were $7.3 million. For the first nine months of 2001 and 2000, net loan charge-offs were $22.2 million and $15.8 million, respectively.

    Relationship loan net charge-offs were $3.9 million for the third quarter of 2001, compared with $3.6 million for the third quarter of 2000 and $4.3 million for the second quarter of 2001. Third quarter 2001 syndicated non-relationship loan net charge-offs were $2.7 million, compared with $4.7 million in the third quarter of 2000, and $3.0 million for the second quarter of 2001.

    As a percentage of average loans, annualized net charge-offs were 0.39 percent and 0.51 percent for the third quarters of 2001 and 2000, respectively. Relationship loan annualized net charge-offs were 0.23 percent of average relationship loans outstanding for the third quarter of 2001, compared with 0.24 percent for the third quarter of 2000.

    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 in the economic cycle, particularly in California, and other factors which may be beyond management's

22

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 September 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 three and nine months ended September 30, 2001 and September 30, 2000.

Changes in Allowance for Credit Losses

				For the three months ended September 30,						For the nine months ended September 30,
Dollars in thousands
				2001			2000			2001			2000
Average amount of loans outstanding				$	6,759,975		$	6,430,471		$	6,607,229		$	6,168,469
Balance of allowance for credit losses, beginning of period				$	133,883		$	140,484		$	135,435		$	134,077
Loans charged off:
	Commercial
		Relationship			(2,599	)		(4,781	)		(18,929	)		(14,259	)
		Syndicated non-relationship			(3,302	)		(4,690	)		(8,516	)		(8,922	)
					(5,901	)		(9,471	)		(27,445	)		(23,181	)
	Real estate and other				(2,608	)		(279	)		(3,986	)		(982	)
			Total loans charged off		(8,509	)		(9,750	)		(31,431	)		(24,163	)
Less recoveries of loans previously charged off:
	Commercial
		Relationship			646			994			4,979			6,208
		Syndicated non-relationship			574			—			849			—
					1,220			994			5,828			6,208
	Real estate and other				645			467			3,407			2,146
			Total recoveries		1,865			1,461			9,235			8,354
Net loans charged off					(6,644	)		(8,289	)		(22,196	)		(15,809	)
Additions to allowance charged to operating expense					10,000			7,000			24,000			11,000
Additions to allowance from acquisitions					—			—			—			9,927
			Balance, end of period	$	137,239			139,195		$	137,239			139,195
Total net charge-offs to average loans (annualized)					(0.39	)%		(0.51	)%		(0.45	)%		(0.34	)
Ratio of allowance for credit losses to total period end loans											2.00	%		2.17	%

23

Other Assets

    Other assets included the following:

Other Assets

Dollars in thousands		September 30, 2001		December 31, 2000		September 30, 2000
Accrued interest receivable		$	51,841	$	53,423	$	56,101
Swap mark-to-market			25,656		—		—
Claim in receivership			22,156		18,950		17,200
Loans held-for-sale			9,523		7,173		—
Other			29,200		28,833		30,312
	Total other assets	$	138,376	$	108,379	$	103,613

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

Deposits

    Deposits totaled $7.4 billion at September 30, 2001, compared with $6.9 billion at September 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 September 30, 2001. Core deposits which continued to provide substantial benefits to the Bank's cost of funds were 80 percent of total deposits at September 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 September 30, 2001, December 31, 2000 and September 30, 2000.

		Regulatory Well Capitalized Standards		September 30, 2001		December 31, 2000		September 30, 2000
City National Corporation
	Tier 1 leverage	4.00	%	7.17	%	6.49	%	6.41	%
	Tier 1 risk-based capital	6.00		9.06		7.84		7.85
	Total risk-based capital	10.00		13.93		10.85		10.88
City National Bank
	Tier 1 leverage	4.00	%	6.51	%	6.23	%	6.14	%
	Tier 1 risk-based capital	6.00		8.24		7.55		7.53
	Total risk-based capital	10.00		13.13		10.57		10.57

24

    On October 31, 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 November 9, 2001, payable on November 19, 2001.

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 68 percent of total funding in the third quarter of 2001, compared with 65 percent in the third 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 third quarter of 2001, the Company maintained a generally "neutral" interest rate position, and at all times remained within the limits set by the Board of Directors.

    As of September 30, 2001, the Company had $706.4 million of notional principal in receive fixed-pay LIBOR interest rate swaps, of which $391.4 million have maturities greater than one year. The Company's interest-rate risk-management instruments had a fair value and credit exposure risk of $25.7 million and $16.1 million at September 30, 2001 and June 30, 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 September 30, 2001, the Company had received securities with a total market value of $16.7 million to reduce counterparty exposure.

    At September 30, 2001, the Company's outstanding foreign exchange contracts for both those purchased as well as sold totaled $137.0 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 also permit limited proprietary currency positioning. The Company actively manages its foreign exchange exposures within prescribed risk limits and controls. All foreign exchange contracts outstanding at September 30, 2001 have remaining maturities of 12 months or less.

25

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.

A number of factors, some of which are beyond the Corporation's ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. These factors include (1) a continued economic slowdown in the national and California economies attributable to various ongoing developments such as declining retail sales, declines in consumer confidence, reduced industrial production, declining business inventories, reduced capacity utilization, and declining occupancy in commercial and residential real estate resulting in declines in underlying value of real estate assets, or other unforeseen adverse changes in national and regional economic activity, (2) increased economic uncertainty created by the most recent terrorist attacks on the United States, (3) economic uncertainty created by the military, diplomatic and humanitarian actions of the United States and allied nations in Afghanistan in response to the terrorists acts, (4) the increased prospect of additional terrorist acts within the United States and the uncertain effect of these events on our national and regional economies 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 ten times this 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.

26

Significant changes in the provision or applications of laws or 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 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.

Our tax provision could be adversely affected if our plans for our registered investment company subsidiary change.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Reports on Form 8-K
	On July 18, 2001, the Corporation filed a report on Form 8-K under item 5 regarding the financial results for the quarter and six months ended June 30, 2001. Included in the report was a press releases dated July 17, 2001.

27

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: November 14, 2001	By:	/s/ FRANK P. PEKNYFRANK P. PEKNY Executive Vice President and Chief Financial Officer/Treasurer (Authorized Officer and Principal Financial Officer)

28

QuickLinks

FORM 10-Q
PART 1—FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited)
CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
CITY NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
CITY NATIONAL CORPORATION NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CITY NATIONAL CORPORATION FINANCIAL HIGHLIGHTS (Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Income Summary
Changes In Net Interest Income
Securities Available-for-Sale
Debt Securities Available-for-Sale
Loans
Nonaccrual Loans, ORE and Restructured Loans
Changes in Nonaccrual Loans
Changes in Allowance for Credit Losses
Other Assets
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 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES