City National 10-Q 2002 Q1 Quarterly report

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

FORM 10-Q

(Mark One)

ý
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

or

o
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.

YESý            NOo

Number of shares of common stock outstanding at April 30, 2002: 49,980,913

PART 1—FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)

Dollars in thousands, except per share amounts			March 31, 2002		December 31, 2001		March 31, 2001
Assets
	Cash and due from banks		$	426,846	$	328,018	$	423,366
	Federal funds sold			484,000		395,000		—
	Securities available-for-sale—cost $1,905,948; $1,810,890 and $1,549,328 at March 31, 2002, December 31, 2001 and March 31, 2001, respectively			1,901,824		1,814,839		1,550,682
	Trading account securities			163,125		78,266		17,052
	Loans			7,752,024		7,159,206		6,505,090
	Less allowance for credit losses			155,657		142,862		134,727
		Net loans		7,596,367		7,016,344		6,370,363
	Premises and equipment, net			63,404		66,414		62,547
	Customers' acceptance liability			8,329		7,924		8,037
	Deferred tax asset			54,413		36,230		50,389
	Goodwill			230,881		158,769		168,341
	Core deposit intangibles			33,015		18,530		22,744
	Bank owned life insurance			59,738		55,734		53,559
	Affordable housing investments			57,933		60,185		56,962
	Other assets			137,474		140,063		149,761
		Total assets	$	11,217,349	$	10,176,316	$	8,933,803
Liabilities
	Demand deposits		$	3,690,225	$	3,846,789	$	2,956,454
	Interest checking deposits			583,507		576,651		568,177
	Money market deposits			2,551,833		1,893,383		1,294,558
	Savings deposits			241,541		240,376		250,900
	Time deposits—under $100,000			251,417		229,643		248,176
	Time deposits—$100,000 and over			1,338,701		1,344,360		1,552,552
		Total deposits		8,657,224		8,131,202		6,870,817
	Federal funds purchased and securities sold under repurchase agreements			179,140		171,531		230,844
	Other short-term borrowings			793,625		415,858		663,125
	Subordinated debt			267,449		272,236		130,879
	Long-term debt			194,389		193,938		144,177
	Other liabilities			118,190		93,050		101,141
	Acceptances outstanding			8,329		7,924		8,037
		Total liabilities		10,218,346		9,285,739		8,149,020
Commitments and contingencies
Shareholders' Equity
	Preferred Stock authorized—5,000,000: none outstanding			—		—		—
	Common Stock—par value—$1.00; authorized—75,000,000; Issued—49,681,899; 48,149,998; and 47,785,345 shares at March 31, 2002, December 31, 2001 and March 31, 2001, respectively			49,682		48,150		47,785
	Additional paid-in capital			381,041		301,022		290,618
	Accumulated other comprehensive income			2,719		10,674		5,329
	Retained earnings			565,561		530,731		444,807
	Treasury shares, at cost—0 shares at March 31, 2002 and December 31, 2001; and 111,175 shares at March 31, 2001			—		—		(3,756	)
		Total shareholders' equity		999,003		890,577		784,783
		Total liabilities and shareholders' equity	$	11,217,349	$	10,176,316	$	8,933,803

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 March 31,
In thousands, except per share amounts			2002			2001
Interest Income
	Loans		$	120,618		$	138,844
	Federal funds sold and securities purchased under resale agreements			507			603
	Securities available-for-sale			27,028			24,016
	Trading account			205			729
		Total interest income		148,358			164,192
Interest Expense
	Deposits			18,943			41,902
	Federal funds purchased and securities sold under repurchase agreements			780			5,236
	Other short-term borrowings			3,604			7,625
	Subordinated debt			2,195			1,759
	Other long-term debt			1,141			2,753
		Total interest expense		26,663			59,275
	Net interest income			121,695			104,917
	Provision for credit losses			11,000			7,500
	Net interest income after provision for credit losses			110,695			97,417
Noninterest Income
	Trust fees and investment fee revenue			14,274			13,673
	Cash management and deposit transaction charges			10,369			6,548
	International services			3,791			3,559
	Bank owned life insurance			673			724
	Gain on sale of loans and assets			1,679			757
	Gain on sale of securities			688			977
	Other			4,469			5,023
		Total noninterest income		35,943			31,261
Noninterest Expense
	Salaries and employee benefits			47,470			42,774
	Net occupancy of premises			6,180			6,344
	Professional			5,229			5,764
	Information services			4,360			3,829
	Depreciation			3,392			3,337
	Amortization of goodwill			—			3,206
	Marketing and advertising			2,788			2,581
	Office services			2,098			2,210
	Amortization of core deposit intangibles			1,515			1,405
	Acquistion integration			1,300			—
	Equipment			482			496
	Other operating			3,959			4,658
		Total noninterest expense		78,773			76,604
	Income before income taxes			67,865			52,074
	Income taxes			23,629			18,483
	Net income			44,236			33,591
	Other comprehensive income
		Unrealized gain (loss) on securities available-for-sale		(10,252	)		20,598
		Initial gain on cash flow hedges from implementation of FAS 133		—			2,404
		Additional unrealized gain (loss) on cash flow hedges		(3,277	)		5,282
		Less: reclassification adjustment for gain (loss) included in net income		193			(590	)
		Income taxes (benefit)		(5,767	)		12,052
	Other comprehensive gain (loss)			(7,955	)		16,822
	Comprehensive income		$	36,281		$	50,413
	Net income per share, basic		$	0.91		$	0.70
	Net income per share, diluted		$	0.87		$	0.69
	Shares used to compute income per share, basic			48,690			47,683
	Shares used to compute income per share, diluted			50,803			48,835
	Dividends per share		$	0.195		$	0.185

See accompanying Notes to the Unaudited Consolidated Financial Statements.

3

CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

			For the three months ended March 31,
Dollars in thousands			2002			2001
Cash Flows From Operating Activities
Net income			$	44,236		$	33,591
Adjustments to net income:
	Provision for credit losses			11,000			7,500
	Amortization of core deposit intangibles			1,515			1,405
	Amortization of goodwill			—			3,206
	Depreciation			3,392			3,337
	Deferred income tax			12,416			3,545
	Gain on sales of loans and assets			(1,679	)		(757	)
	Gain on sale of securities			(688	)		(977	)
	Net increase in other assets			(40,740	)		(66,557	)
	Net (increase) decrease in trading securities			(84,859	)		29,026
	Other, net			32,165			13,438
		Net cash (used) provided by operating activities		(23,242	)		26,757
Cash Flows From Investing Activities
Purchase of securities				(213,688	)		(458,430	)
Sales of securities available-for-sale				19,229			180,791
Maturities of securities				131,271			298,166
Purchase of residential mortgage loans				—			(12,084	)
Sales of loans				—			51,844
Loan originations net of principal collections				(233,151	)		(38,060	)
Purchase of premises and equipment				(1,405	)		(3,801	)
Net cash from acquisition				35,633			—
Other, net				2			13
		Net cash (used) provided by investing activities		(262,109	)		18,439
Cash Flows From Financing Activities
Net increase (decrease) in deposits				87,559			(537,853	)
Net increase in federal funds purchased and securities sold under repurchase agreements				7,609			91,003
Net increase in short-term borrowings, net of transfers from long-term debt				378,500			283,000
Proceeds from exercise of stock options				8,917			2,081
Stock repurchases				—			(3,067	)
Cash dividends paid				(9,406	)		(8,808	)
		Net cash provided (used) by financing activities		473,179			(173,644	)
Net increase (decrease) in cash and cash equivalents				187,828			(128,448	)
Cash and cash equivalents at beginning of year				723,018			551,814
Cash and cash equivalents at end of period			$	910,846		$	423,366
Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Interest	$	30,376		$	61,639
		Income taxes		11,000			38,500
	Non-cash investing activities:
		Transfer from loans to foreclosed assets	$	530		$	—
		Transfer from long-term debt to short-term borrowings		—			65,000

See accompanying Notes to the Unaudited Consolidated Financial Statements.

4

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

		For the three months ended March 31,
Dollars in thousands		2002			2001
Common Stock
	Balance, beginning of period	$	48,150		$	47,785
	Issuance of shares for acquisition		1,207			—
	Stock options exercised		325			—
	Balance, end of period		49,682			47,785
Additional paid-in capital
	Balance, beginning of period		301,022			292,358
	Tax benefit from stock options		2,687			516
	Stock options exercised		8,592			—
	Excess of cost of treasury shares reissued over stock option exercise amounts		—			(2,256	)
	Issuance of shares for acquisition		68,740			—
	Balance, end of period		381,041			290,618
Accumulated other comprehensive income
	Balance, beginning of period		10,674			(11,493	)
	Other comprehensive income (loss) net of income taxes		(7,955	)		16,822
	Balance, end of period		2,719			5,329
Retained earnings
	Balance, beginning of period		530,731			420,024
	Net income		44,236			33,591
	Dividends paid		(9,406	)		(8,808	)
	Balance, end of period		565,561			444,807
Treasury shares
	Balance, beginning of period		—			(5,026	)
	Purchase of shares		—			(3,067	)
	Issuance of shares for stock options		—			4,337
	Balance, end of period		—			(3,756	)
Total shareholders' equity		$	999,003		$	784,783

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, 2001. The results for the 2002 interim period are not necessarily indicative of the results expected for the full year.

3.

Acquisition, Goodwill and Other Intangible Assets.

The Company adopted the FASB's Statement No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. The Company evaluated its existing intangible assets and goodwill and determined that no reclassifications were necessary to separate any intangible assets apart from goodwill. The Company also reassessed the useful lives of all intangible assets acquired in purchase business combinations, which consisted only of core deposit intangibles, and determined that no amortization period adjustments were necessary. The Company assessed whether there was an indication that goodwill was impaired and determined that there were no indications of impairment.

The following table summarizes the Company's goodwill and other intangible assets as of January 1, 2002 and March 31, 2002.

(Dollars in thousands)		January 1, 2002			Additions		Reductions		March 31, 2002
Goodwill		$	193,155		$	72,278	$	166	$	265,267
Accumulated Amortization			(34,386	)		—		—		(34,386	)
	Net	$	158,769		$	72,278	$	166	$	230,881
Core Deposit Intangibles		$	39,326		$	16,000	$	—	$	55,326
Accumulated Amortization			(20,796	)		—		1,515		(22,311	)
	Net	$	18,530		$	16,000	$	1,515	$	33,015

On February 28, 2002, the Corporation acquired Civic BanCorp ("Civic"). In that transaction, Civic merged into the Bank and the Corporation paid consideration equal to $123.5 million (including the consideration for stock options), 53.5 percent of which was paid in the Corporation's common stock and 46.5 percent of which was paid in cash. Civic had total assets, loans and deposits of $502.8 million, $368.4 million, and $438.5 million, respectively, at the date of acquisition. The acquisition of Civic resulted in the recording of goodwill of $72.3 million and core deposit intangibles of $16.0 million. Included in goodwill as purchase price adjustments were $1.3 million of accrued severance, essentially all of which remain unpaid as of March 31, 2002, $0.8 million of paid transaction-related expenses and $0.8 million of exit costs of which approximately all remain unpaid as of March 31, 2002. Results reflect the operations of Civic from February 28, 2002, the date of acquisition.

At March 31, 2002, the estimated aggregate amortization, in thousands of dollars, for the remainder of 2002 and annually through 2007 is $6,008, $7,904, $5,739, $4,291, $3,447, and $2,460, respectively.

6

The reduction in goodwill related to the sale of a small minority ownership position in one of the Corporation's non-bank subsidiaries.

Following is a reconciliation of net income to adjusted net income to reflect all periods on a comparable basis for the impact of adopting Statement 142:

	For the three months ended March 31,
(Dollars in thousands except for earnings per share amounts)	2002		2001
Net income	$	44,236	$	33,591
Add back: Goodwill amortization		—		3,206
Adjusted net income	$	44,236	$	36,797
Basic net income per share:
Net income	$	0.91	$	0.70
Goodwill amortization		—		0.07
Adjusted net income	$	0.91	$	0.77
Diluted net income per share:
Net income	$	0.87	$	0.69
Goodwill amortization		—		0.06
Adjusted net income	$	0.87	$	0.75

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.

Reserves established as a purchase price adjustment for the February 29, 2000 acquisition of The Pacific Bank N.A. of $1.8 million for exit costs relating to surplus space remain as of March 31, 2002.

7.

Under the October 26, 2000 stock buyback program of 1 million shares, 348,700 shares have been repurchased at an average price of $34.10 per share. There were no shares repurchased during the first quarter of 2002. 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 March 31, 2002.

8.

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 143 are effective for fiscal years beginning after June 15, 2002. Management does not expect that the adoption of Statement 143 will have an effect on the Company's financial statements.

7

CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)

		At or for the three months ended									Percentage change March 31, 2002 from
Dollars in thousands, except per share amounts		March 31, 2002			December 31, 2001			March 31, 2001			December 31, 2001		March 31, 2001
For The Quarter
	Net income	$	44,236		$	38,751		$	33,591		14	%	32	%
	Net income per common share, basic		0.91			0.81			0.70		12		29
	Net income per common share, diluted		0.87			0.78			0.69		12		27
	Dividends, per common share		0.195			0.185			0.185		5		5
	Adjusted net income		44,236			41,972			36,797		5		20
	Adjusted net income per share, basic		0.91			0.87			0.77		4		18
	Adjusted net income per share, diluted		0.87			0.85			0.75		2		16
	Cash net income		45,115			42,707			37,532		6		20
	Cash net income per common share, basic		0.93			0.89			0.79		4		18
	Cash net income per common share, diluted		0.89			0.86			0.77		3		16
At Quarter End
	Assets	$	11,217,349		$	10,176,316		$	8,933,803		10		26
	Deposits		8,657,224			8,131,202			6,870,817		6		26
	Loans		7,752,024			7,159,206			6,505,090		8		19
	Securities		2,064,949			1,893,105			1,567,734		9		32
	Shareholders' equity		999,003			890,577			784,783		12		27
	Book value per share		20.11			18.50			16.46		9		22
Average Balances
	Assets	$	10,344,129		$	9,831,716		$	8,920,281		5		16
	Deposits		7,933,481			7,555,753			6,786,666		5		17
	Loans		7,465,430			7,028,107			6,521,714		6		14
	Securities		1,924,543			1,764,794			1,557,039		9		24
	Shareholders' equity		945,778			892,712			764,712		6		24
Selected Ratios
	Return on average assets		1.73	%		1.56	%		1.53	%	11		13
	Return on average shareholders' equity		18.97			17.22			17.81		10		7
	Adjusted return on average assets		1.73			1.69			1.67		2		4
	Adjusted return on average shareholders' equity		18.97			18.65			19.51		2		(3	)
	Corporation's tier 1 leverage		7.31			7.26			6.71		1		9
	Corporation's tier 1 risk-based capital		9.05			9.32			8.33		(3	)	9
	Corporation's total risk-based capital		13.55			14.08			11.35		(4	)	19
	Dividend payout ratio, per share		21.27			22.97			26.22		(7	)	(19	)
	Net interest margin		5.34			5.12			5.40		4		(1	)
	Efficiency ratio		48.89			52.69			55.32		(7	)	(12	)
	Adjusted efficiency ratio		48.89			51.00			53.02		(4	)	(8	)
	Cash return on average assets		1.80			1.75			1.74		3		3
	Cash return on average shareholders' equity		23.60			23.50			26.21		0		(10	)
	Cash efficiency ratio		47.95			49.66			52.01		(3	)	(8	)
Asset Quality Ratios
	Nonaccrual loans to total loans		0.65	%		0.54	%		0.81	%	20		(20	)
	Nonaccrual loans and ORE to toal loans and ORE		0.65			0.54			0.83		21		(21	)
	Allowance for credit losses to total loans		2.01			2.00			2.07		0		(3	)
	Allowance for credit losses to non accrual loans		310.47			370.46			255.51		(16	)	22
	Net charge-offs to average loans—annualized		(0.38	)		(0.30	)		(0.51	)	27		(26	)

8

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 $44.2 million for the first quarter of 2002 compared with net income of $33.6 million for the first quarter of 2001. Net income per diluted common share was $0.87 compared with $0.69 reported for the first quarter of 2001. This year's first-quarter results reflect one month of operations of Civic BanCorp ("Civic") from February 28, 2002, the date of the completion of this acquisition, and the new accounting standard for goodwill.

        The Company's first quarter 2002 net income of $44.2 million was up 20 percent compared to $36.8 million a year earlier, adjusted to exclude the amortization of goodwill from the prior reported period. On the same basis, results were up 5 percent from the fourth quarter of 2001. As a result, net income per diluted common share of $0.87 rose 16 percent from $0.75 in the first quarter a year ago and was 2 percent higher than the $0.85 in the fourth quarter of 2001 on a comparable basis.

        Cash net income, which in 2002 only excludes the amortization of core deposit intangibles, was $45.1 million, or $0.89 per diluted common share in the first quarter of 2002 compared with $37.5 million, or $0.77, in the first quarter of 2001.

        The Company's return on average assets for the first quarter of 2002 was 1.73 percent, compared with 1.67 percent for the first quarter of 2001 and 1.69 percent for the fourth quarter of 2001 on an adjusted basis. The return on average shareholders' equity was 18.97 percent, compared with 19.51 percent for the prior-year first quarter and 18.65 percent for the fourth quarter of 2001 on an adjusted basis.

        On a cash basis (which in 2002 only excludes the after-tax impact of nonqualifying core deposit intangibles from average assets and average shareholders' equity), the return on average assets was 1.80 percent and the return on average shareholders' equity was 23.60 percent for the first quarter of 2002, compared with 1.74 percent and 26.21 percent, respectively, for the first quarter of 2001 and 1.75 percent and 23.50 percent, respectively, for the fourth quarter of 2001.

        All guidance in this discussion is consistent with the Corporation's press release of April 16, 2002. Excluding the impact of the amortization of goodwill for 2001 with no tax effect, management expects net income per diluted common share to be approximately 8 percent to 11 percent higher than adjusted net income per diluted common share for 2001.

        Also, as previously announced, the retirement of Chief Credit Officer, Robert A. Moore, was effective April 30, 2002. Robert Patterson, member of the Executive Committee, Co-Chair of the Bank's Credit Quality Initiative, and long-standing member of the Bank's Credit Planning and Executive Loan Committee is serving as interim Chief Credit Officer. Mr. Patterson has been with City National since 1989 and has senior credit management experience during a banking career spanning over 30 years. The Company has an active recruitment program in process to select a new Chief Credit Officer and expects to name a successor by the end of the year.

Net Interest Income

        Fully taxable-equivalent net interest income for the first quarter of 2002 was $125.4 million, an increase of 16 percent over $108.1 million for the first quarter of 2001. Interest income recovered on

9

nonaccrual and charged-off loans included above was $0.4 million for the first quarter of 2002, compared with $1.6 million for the first quarter of 2001 and $0.7 million for the fourth quarter of 2001.

        The fully taxable-equivalent net interest margin for the first quarter of 2002 was 5.34 percent compared with 5.40 percent for the first quarter of 2001 and 5.12 percent for the fourth quarter of 2001. The increase from the fourth quarter was primarily due to a lower cost of funds and a reduced level of average federal funds sold. Interest rates began to decline during the first quarter of 2001, led by the Federal Reserve Board's rate reductions, which totaled 475 basis points for 2001. The Bank's prime rate was 4.75 percent as of March 31, 2002, compared with 8.00 percent a year earlier and 4.75 percent at December 31, 2001.

        The Company is naturally asset sensitive and 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. In a falling interest rate environment, such as the case in 2001 and during this current lower rate cycle, the Company's interest rate swaps make a positive contribution to net interest income.

        As of March 31, 2002, the Company had $866.4 million of notional amount of interest rate swaps, of which $341.4 million were fair value hedges and $525.0 million were cash flow hedges. The mark-to-market on the fair value hedges resulted in the recognition of other assets of $7.2 million, other liabilities of $3.3 million and an increase in hedged deposits and borrowings of $3.9 million. Net interest income was positively impacted in the first quarter by $3.2 million relating to interest rate swaps qualifying as fair value hedges.

        The mark-to-market on the cash flow hedges of variable rate loans resulted in the recognition of other assets of $6.1 million, other liabilities of $0.6 million and comprehensive income of $5.5 million, before taxes of $2.3 million. In addition, comprehensive income included $1.0 million, before taxes of $0.4 million relating to interest rate swaps terminated with positive benefit during the quarter and $2.3 million before taxes of $1.0 million relating to remaining balances of interest rate swaps terminated with positive benefit during prior periods. These amounts will be amortized into income over the designated hedged period. Amounts 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 $4.7 million that were reclassified into net interest income during the three months ended March 31, 2002. Comprehensive income expected to be reclassified into net interest income within the next twelve months is $7.9 million.

        In total, the Company's "plain vanilla' interest rate swaps added $7.9 million to net interest income in the first quarter of 2002 compared with $1.0 million in the first quarter of 2001 and $6.5 million for the fourth quarter of 2001.

10

        The following tables present the components of net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2002 and 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.

Net Interest Income Summary

				For the three months ended March 31, 2002							For the three months ended March 31, 2001
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	$	3,432,475		$	53,009	6.26	%	$	3,167,150		$	70,512	9.03	%
			Residential first mortgages		1,633,024			28,279	7.02			1,291,176			24,321	7.64
			Real estate construction		610,878			8,394	5.57			469,052			10,833	9.37
			Real estate mortgages		1,717,838			30,897	7.29			1,521,113			32,999	8.80
			Installment		71,215			1,607	9.15			73,223			1,730	9.58
			Total loans(1)		7,465,430			122,186	6.64			6,521,714			140,395	8.73
		Securities available-for-sale			1,863,495			29,154	6.34			1,493,037			25,681	6.98
		Federal funds sold and securities purchased under resale agreements			129,697			507	1.59			37,788			603	6.47
		Trading account securities			61,048			208	1.38			64,002			737	4.67
			Total interest-earning assets		9,519,670			152,055	6.48			8,116,541			167,416	8.37
		Allowance for credit losses			(150,151	)						(136,803	)
		Cash and due from banks			423,346							388,306
		Other nonearning assets			551,264							552,237
			Total assets	$	10,344,129						$	8,920,281
Liabilities and Shareholders' Equity
	Interest-bearing deposits
		Interest checking accounts		$	564,711			353	0.25		$	568,105			697	0.50
		Money market accounts			2,133,778			7,747	1.47			1,302,241			11,285	3.51
		Savings deposits			242,930			727	1.21			247,426			2,145	3.52
		Time deposits—under $100,000			234,302			1,598	2.77			248,892			3,624	5.91
		Time deposits—$100,000 and over			1,332,771			8,518	2.59			1,654,676			24,151	5.92
			Total interest—bearing deposits		4,508,492			18,943	1.70			4,021,340			41,902	4.23
		Federal funds purchased and securities sold under repurchase agreements			201,215			780	1.57			377,171			5,236	5.63
		Other borrowings			1,157,088			6,940	2.43			840,338			12,137	5.86
			Total interest—bearing liabilities		5,866,795			26,663	1.84			5,238,849			59,275	4.59
	Noninterest—bearing deposits				3,424,989							2,765,326
	Other liabilities				106,567							151,394
	Shareholders' equity				945,778							764,712
			Total liabilities and shareholders' equity	$	10,344,129						$	8,920,281
Net interest spread									4.64	%						3.78	%
Fully taxable-equivalent net interest income							$	125,392						$	108,141
Net interest margin									5.34	%						5.40	%

(1)

Includes average nonaccrual loans of $43,592 and $58,244 for 2002 and 2001, respectively.

(2)

Loan income includes loan fees of $6,317 and $5,562 for 2002 and 2001, respectively.

        Average loans rose to $7.5 billion for the first quarter of 2002, an increase of 14 percent over the prior-year first quarter. This increase was driven primarily by the growth of residential and real estate mortgage loans, as well as commercial loans. Compared with prior-year first-quarter averages, residential first mortgage loans rose 26 percent to $1.6 billion from $1.3 billion and real estate

11

mortgage loans rose 13 percent to $1.7 billion from $1.5 billion. Commercial loans rose 8 percent to $3.4 billion from $3.2 billion.

        Average securities increased $367.5 million, or 24 percent, to $1.9 billion for the first quarter of 2002 compared with the first quarter of 2001 and increased 9 percent from the fourth quarter of 2001.

        Average deposits during the first quarter of 2002 were $7.9 billion, an increase of 17 percent over the first quarter of 2001 and 5 percent over the fourth quarter of 2001. During the first quarter of 2002, average core deposits, which provide a stable source of low-cost funding, rose $1.5 billion to $6.6 billion, an increase of 29 percent over the $5.1 billion in the first quarter of 2001 and 7 percent higher than the $6.2 billion for the fourth quarter of 2001. Average core deposits represented 83 percent of the total average deposit base for the first quarter, up from 76 percent for the prior-year quarter. New clients, and a reduction in the earnings credit on analyzed deposit accounts resulting from lower interest rates, combined with the acquisition of Civic, contributed to the growth of 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 first quarter of 2002 and the first quarter of 2001, as well as between the first quarter 2001 and the first quarter of 2000.

Changes In Net Interest Income

			For the three months ended March 31, 2002 vs 2001									For the three months ended March 31, 2001 vs 2000
			Increase (decrease) due to									Increase (decrease) due to
									Net increase (decrease)									Net increase (decrease)
Dollars in thousands			Volume			Rate						Volume			Rate
Interest earned on:
Loans			$	18,463		$	(36,672	)	$	(18,209	)	$	15,871		$	1,087		$	16,958
Securities available-for-sale				5,977			(2,504	)		3,473			6,050			(293	)		5,757
Trading account securities				(33	)		(496	)		(529	)		(153	)		(109	)		(262	)
Federal funds sold and securities purchased under resale agreements				621			(717	)		(96	)		(300	)		115			(185	)
	Total interest-earning assets			25,028			(40,389	)		(15,361	)		21,468			800			22,268
Interest paid on:
Interest checking deposits				(4	)		(340	)		(344	)		116			35			151
Money market deposits				5,006			(8,544	)		(3,538	)		979			1,045			2,024
Savings deposits				(38	)		(1,380	)		(1,418	)		201			(294	)		(93	)
Other time deposits				(4,252	)		(13,407	)		(17,659	)		6,695			2,376			9,071
Other borrowings				1,814			(11,467	)		(9,653	)		(1,274	)		(424	)		(1,698	)
		Total interest-bearing liabilities		2,526			(35,138	)		(32,612	)		6,717			2,738			9,455
			$	22,502		$	(5,251	)	$	17,251		$	14,751		$	(1,938	)	$	12,813

        The impact of interest rate swaps which increases loan interest income and reduces deposit and borrowing interest expense is included in rate changes.

        Although the net interest margin for the first quarter was higher, management expects the net interest margin for 2002 will approximate the 5.26 percent reported for 2001.

Provision for Credit Losses

        The Company recorded a provision for credit losses of $11.0 million for the first quarter of 2002, compared with $7.5 million for the same period in 2001. The provision for credit losses in the fourth quarter of 2001 was $11.0 million. The provision for credit losses this quarter primarily reflects growth of the loan portfolio and the levels of net loan charge-offs and nonaccrual loans. Additional factors affecting the provision include changes in the economic environment during this period, as well as management's ongoing assessment of the credit quality of the portfolio.

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        The provision for credit losses to be taken in 2002 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 continues to anticipate that a provision for credit losses for all of 2002 could fall within the $35.0 million to $50.0 million range. See "—Allowance for Credit Losses."

Noninterest Income

        Noninterest income increased 15 percent to $35.9 million for the first quarter of 2002, compared with the $31.3 million for the first quarter of 2001, but was essentially unchanged compared with the fourth quarter of 2001. Lower income from participating mortgage loans was essentially offset by higher gains on the sales of assets and securities compared with the fourth quarter of 2001.

        Assets under administration totaled $18.8 billion at March 31, 2002, including $7.3 billion under management, compared with $17.9 billion and $6.6 billion, respectively, at March 31, 2001, and $18.8 billion and $7.7 billion, respectively, at December 31, 2001. The quarter-over-quarter increase in assets under management was attributable largely to new fully managed investment portfolios as well as growth in the CNI Charter Funds, City National's family of mutual funds. Total assets under management declined from the fourth quarter of 2001 as some clients rebalanced asset allocations of portfolios, extended maturities from money market accounts to achieve higher yields, or maintained funds as bank deposits to pay for services. Managed money market funds were down $0.6 billion from December 31, 2001 while all other managed funds were up $0.2 billion. As a result, trust and investment fee revenue was higher quarter-over-quarter but declined from the fourth quarter of 2001.

        Cash management and deposit transaction fees increased quarter-over-quarter as the result of strong growth in deposits, including those added by the Civic acquisition, higher sales of new online cash management products, and continuing reductions in the earnings credit on analyzed deposit accounts resulting from lower interest rates.

        Gains on the sale of assets and securities for the first quarter of 2002 were $2.4 million compared with $1.7 million for the same period a year ago, and $1.0 million for the fourth quarter of 2001. First-quarter results included a $2.0 million gain on the sale of a piece of ORE, which had been fully written off, partially offset by a $0.5 million mark-to-market loss on loans available-for-sale.

        Noninterest income for the first quarters of both 2002 and 2001 was 23 percent of total revenues.

        Management expects growth in noninterest income to range from 7 percent to 10 percent for 2002. Last year, the acquisition of Reed, Conner & Birdwell accounted for approximately one- quarter of the 21 percent increase in noninterest income reported for the year. In addition, management expects that a more stable interest rate environment will result in a reduction in the growth rate of cash management and deposit transaction fees for the remainder of 2002.

Noninterest Expense

        After excluding amortization of goodwill from prior reported periods, noninterest expense of $78.8 million for the first quarter of 2002 was up 7 percent from $73.4 million for the first quarter of 2001. The quarter-over-quarter increase was primarily the result of the Company's growth, including the acquisition of Civic and costs associated with additional colleagues. Expenses between the first quarter of 2002 and the fourth quarter of 2001 on a comparable basis were essentially flat, excluding the $1.3 million in Civic integration expenses in the first quarter of 2002.

        The Company's cash efficiency ratio for the first quarter of 2002 improved to 47.95 percent from 52.01 percent for the first quarter of 2001. The improvement over the prior year was driven by both increased revenues and the Company's ongoing efforts to improve efficiency and productivity.

13

        Excluding the amortization of goodwill in 2001, management currently anticipates that 2002 noninterest expense will increase 7 percent to 10 percent over the prior year with the acquisition of Civic accounting for a significant amount of the increase.

Income Taxes

        The effective tax rate for the first quarter was 34.8 percent, compared with 35.5 percent for the first quarter of 2001. A Form N-8F seeking de-registration of the Company's registered investment company has been filed, and management currently expects that de-registration will become effective by the end of May. As a result, the Company did not reflect any tax benefit in the first quarter of 2002 from its registered investment company. Despite this higher effective tax rate in the first quarter, management currently anticipates the Company's effective tax rate for 2002 will fall within a range of 32.0 percent to 34.0 percent due to the anticipated impact of revised business and tax-planning strategies.

Balance Sheet Analysis

        Total average assets reached $10.3 billion for the first quarter of 2002, an increase of 16 percent over the $8.9 billion in average assets for the first quarter of 2001 and 5 percent over the $9.8 billion in average assets for the fourth quarter of 2001. Total assets at March 31, 2002 were $11.2 billion, compared with $8.9 billion at March 31, 2001 and $10.2 billion at December 31, 2001.

Securities

        Comparative period-end security portfolio balances are presented below:

Securities Available-for-Sale

		March 31, 2002				December 31, 2001				March 31, 2001
Dollars in thousands		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
U.S. Government and federal agency		$	328,725	$	330,046	$	300,653	$	306,206	$	450,390	$	456,172
Mortgage-backed			1,114,243		1,115,884		1,070,670		1,075,533		597,505		602,368
State and Municipal			212,298		214,773		187,519		190,201		165,563		168,905
Other			31,911		30,499		31,924		30,266		166,774		159,775
	Total debt securities		1,687,177		1,691,202		1,590,766		1,602,206		1,380,232		1,387,220
Marketable equities			218,771		210,622		220,124		212,633		169,096		163,462
	Total securities	$	1,905,948	$	1,901,824	$	1,810,890	$	1,814,839	$	1,549,328	$	1,550,682

        At March 31 2002, securities available-for-sale totaled $1.9 billion, an increase of $351.1 million compared with holdings at March 31, 2001 and an increase of $87.0 million from December 31, 2001. At March 31, 2002 the portfolio had a unrealized net loss of $4.1 million compared with a net gain of $1.4 million and $3.9 million at March 31, 2001 and December 31, 2001, respectively.

14

        The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the securities portfolio as of March 31, 2002. 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. Government and federal agency		$	29,097	4.45	$	203,262	5.06	$	97,687	6.22	$	—	—	$	330,046	5.35
Mortgage-backed			—	—		1,280	5.79		8,680	6.93		1,105,924	6.27		1,115,884	6.27
State and Municipal			14,363	7.06		72,174	6.70		109,654	6.78		18,582	6.94		214,773	6.79
Other			—	—		—	—		16,450	7.60		14,049	8.04		30,499	7.80
	Total debt securities	$	43,460	5.31	$	276,716	5.49	$	232,471	6.61	$	1,138,555	6.30	$	1,691,202	6.18
	Amortized cost	$	43,169		$	274,260		$	231,548		$	1,138,200		$	1,687,177

        Dividend income included in interest income on securities in the Unaudited Consolidated Statement of Income and Comprehensive Income for the first quarter of 2002 and 2001 was $2.7 million and $2.3 million, respectively.

Loan Portfolio

        A comparative period-end loan table is presented below:

Loans

Dollars in thousands		March 31, 2002		December 31, 2001		March 31, 2001
Commercial		$	3,548,545	$	3,247,320	$	3,088,211
Residential first mortgages			1,679,969		1,587,303		1,288,132
Real estate construction			606,768		586,066		437,431
Real estate mortgages			1,840,060		1,668,114		1,616,188
Installment			76,682		70,403		75,128
	Total loans, gross		7,752,024		7,159,206		6,505,090
Less: allowance for credit losses			155,657		142,862		134,727
	Total loans, net	$	7,596,367	$	7,016,344	$	6,370,363

        Total loans at March 31, 2002 reached $7.8 billion, compared with $6.5 billion at March 31, 2001, and $7.2 billion at December 31, 2001, increases of 19 percent and 8 percent, respectively. The acquisition of Civic added $373.8 million to total loans at March 31, 2002. Syndicated non-relationship loans were $62.2 million, less than 1 percent of the total loan portfolio, at March 31, 2002, compared with $148.3 million at March 31, 2001 and $86.9 million at December 31, 2001.

        Management currently anticipates average loan growth for 2002 will be in the range of 11 percent to 15 percent.

15

        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			March 31, 2002			December 31, 2001			March 31, 2001
Nonaccrual loans:
	Commercial		$	42,368		$	32,615		$	43,550
	Real estate			7,323			5,393			7,338
	Installment			445			555			1,841
		Total		50,136			38,563			52,729
ORE				505			10			1,094
	Total nonaccrual loans and ORE		$	50,641		$	38,573		$	53,823
Total non accrual loans as a percentage of total loans				0.65	%		0.54	%		0.81	%
Total non accrual loans and ORE as a percentage of total loans and ORE				0.65			0.54			0.83
Allowance for credit losses to total loans				2.01			2.00			2.07
Allowance for credit losses to nonaccrual loans				310.47			370.46			255.51
Loans past due 90 days or more on accrual status:
	Commercial		$	1,968		$	1,764		$	8,161
	Real estate			—			878			282
	Installment			663			973			404
		Total	$	2,631		$	3,615		$	8,847
Restructured loans:
	On accrual status		$	—		$	—		$	647
	On nonaccrual status			—			—			711
			$	—		$	—		$	1,358

        Total nonperforming assets (nonaccrual loans and ORE) were $50.6 million, or 0.65 percent of total loans and ORE, at March 31, 2002, compared with $53.8 million, or 0.83 percent, at March 31, 2001 and $38.6 million, or 0.54 percent, at December 31, 2001. Three syndicated non-relationship loans on nonaccrual status totaled $6.5 million at March 31, 2002 and $5.9 million at December 31, 2001. From year-end 2001, nonperforming assets increased due to a $3.3 million remaining loan balance on which a $6.5 million charge off was taken in the first quarter of 2002, another loan for $7.3 million in the telecommunications industry, and $3.5 million in loans acquired from Civic. See "—Allowance for Credit Losses."

16

        The following table summarizes the changes in nonaccrual loans for the three months ended March 31, 2002 and 2001.

Changes in Nonaccrual Loans

		For the three months ended March 31,
Dollars in thousands		2002			2001
Balance, beginning of period		$	38,563		$	61,986
	Additions from acquisition		3,510			—
	Loans placed on nonaccrual		21,665			11,602
	Charge offs		(8,202	)		(8,951	)
	Loans returned to accrual status		(1,159	)		(956	)
	Repayments (including interest applied to principal)		(3,710	)		(10,952	)
	Transferred to ORE		(531	)		—
Balance, end of period		$	50,136		$	52,729

        In addition to loans disclosed above as nonaccrual or restructured, management has also identified $7.0 million of potential 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 $15.2 million at March 31, 2001 and $12.8 million at December 31, 2001. Management has also identified an $8.5 million commitment as a potential problem.

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

Allowance for Credit Losses

        The allowance for credit losses at March 31, 2002 totaled $155.7 million including $8.8 million from the Civic acquisition, or 2.01 percent of outstanding loans. This compares with an allowance of $134.7 million, or 2.07 at March 31, 2001, and an allowance of $142.9 million, or 2.00 percent at December 31, 2001. The allowance for credit losses as a percentage of nonaccrual loans was 310 percent at March 31, 2002, compared with 256 percent at March 31, 2001 and 370 percent at December 31, 2001.

        Net loan charge-offs were $7.0 million and $8.2 million for the first quarters of 2002 and 2001, respectively, and $5.4 million for the fourth quarter of 2001. First-quarter charge-offs included $6.5 million for one loan to a borrower in the telecommunications industry. The remaining $3.3 million balance of this loan is classified as "nonaccrual" and is considered impaired with an allocated allowance for credit losses of $1.0 million.

        As an annualized percentage of average loans, net charge-offs were 0.38 percent, 0.51 percent and 0.30 percent for the first quarters of 2002 and 2001 and the fourth quarter of 2001, respectively.

        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 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 March 31, 2002. Subsequent evaluation of the loan

17

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 months ended March 31, 2002 and 2001.

Changes in Allowance for Credit Losses

			For the three months ended March 31,
(Dollars in thousands)			2002			2001
Average amount of loans outstanding			$	7,465,430		$	6,521,714
Balance of allowance for credit losses, beginning of period			$	142,862		$	135,435
Loans charged off:
	Commercial			8,384			11,196
	Real estate and other			912			888
		Total loans charged off		9,296			12,084
Less recoveries of loans previously charged off:
	Commercial			1,027			1,545
	Real estate and other			1,277			2,331
		Total recoveries		2,304			3,876
Net loans charged off				(6,992	)		(8,208	)
Additions to allowance charged to operating expense				11,000			7,500
Additions to allowance from acquisition				8,787			—
		Balance, end of period	$	155,657			134,727
Total net charge-offs to average loans (annualized)				(0.38	)%		(0.51	)%
Ratio of allowance for credit losses to total period end loans				2.01	%		2.07	%

Other Assets

        Other assets included the following:

Other Assets

Dollars in thousands			March 31, 2002		December 31, 2001		March 31, 2001
	Accrued interest receivable		$	48,407	$	44,432	$	54,534
	Claim in receivership and other assets			22,320		22,242		21,655
	Interest rate swap mark-to-market			13,393		21,254		18,178
	Loans held-for-sale			12,980		23,558		22,756
	Other			40,374		28,577		32,638
		Total other assets	$	137,474	$	140,063	$	149,761

        The claim in receivership and other assets was acquired in the acquisition of Pacific Bank. The claim in receivership, which is approximately half of the balance, is expected to be realized in first half of 2002.

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        See—"Net Interest Income" for a discussion of interest rate swaps which result in the swap mark-to-market asset of $13.4 million.

Deposits

        Deposits totaled $8.7 billion at March 31, 2002, compared with $6.9 billion at March 31, 2001, and $8.1 billion at December 31, 2001. 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. The acquisition of Civic contributed $469.7 million to deposits at March 31, 2002.

        Demand deposits accounted for 43 percent of total deposits at March 31, 2002. Core deposits which continued to provide substantial benefits to the Bank's cost of funds were 85 percent of total deposits at March 31, 2002. See "—Net Interest Income."

        Management expects average deposit growth in 2002, compared with 2001, 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 March 31, 2002, December 31, 2001 and March 31, 2001.

		Regulatory Well Capitalized Standards		March 31, 2002		December 31, 2001		March 31, 2001
City National Corporation
	Tier 1 leverage	4.00	%	7.31	%	7.26	%	6.71	%
	Tier 1 risk-based capital	6.00		9.05		9.32		8.33
	Total risk-based capital	10.00		13.55		14.08		11.35
City National Bank
	Tier 1 leverage	4.00		7.01		6.59		6.31
	Tier 1 risk-based capital	6.00		8.66		8.48		7.85
	Total risk-based capital	10.00		13.18		13.28		10.88

        March 31, 2002 capital ratios for the Corporation have been slightly adjusted downward from originally published ratios due to Civic acquisition allocation adjustments.

        On April 25, 2002, the Corporation declared a regular quarterly cash dividend on common stock at a rate of $0.195 per share to shareholders of record on May 8, 2002, payable on May 20, 2002.

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 73 percent of total funding in the first quarter of 2002, compared with 66 percent in the first quarter of 2001. This increase allowed the Company to decrease its use of more costly alternative funding sources. See "—Net Interest Income."

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CRITICAL ACCOUNTING POLICIES

        The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

        Certain accounting policies involved significant judgements and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.

        The Company believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of its consolidated financial statements:

•

Accounting for the allowance for credit losses. See—Balance Sheet Analysis—Allowance for Credit Losses.



•

Accounting for derivatives and hedging activities. See—Results of Operations—Net Interest Income and Quantitative and Qualitative Disclosures About Market Risk—Asset/Liability Management.

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-18 of the Corporation's Form 10-K for the year ended December 31, 2001. During the first quarter of 2002, the Company maintained a sight asset sensitive interest rate position, and at all times remained within the limits set by the Board of Directors.

        As of March 31, 2002, the Company had $866.4 million of notional principal in receive fixed-pay LIBOR interest rate swaps, of which $426.4 million have maturities greater than one year. The Company's interest-rate risk-management instruments had a fair value and credit exposure risk of $9.5 million and $20.6 million at March 31, 2002 and December 31, 2001, respectively taking into consideration legal right of offset. 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 March 31, 2002, the Company had received securities with a total market value of $16.7 million to reduce counterparty exposure.

        At March 31, 2002, the Company's outstanding foreign exchange contracts for both those purchased as well as sold totaled $163.9 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 March 31, 2002 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.

        Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur of the date the statements are made or to update earnings guidance including the factors that influence earnings.

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) economic uncertainty created by the most recent terrorist attacks on the United States and unrest in other parts of the world, (2) 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, (3) the 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 lowered interest rates eleven times 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.

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        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 financial results could be adversely affected by unanticipated changes in regulatory, judicial, or legislative tax treatment of business transactions.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Reports on Form 8-K


On January 17, 2002, the Corporation filed a report on Form 8-K under item 5 regarding the financial results for the quarter and twelve months ended December 31, 2001. Included in the report was a press releases dated January 16, 2002.

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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: May 15, 2002	By:	/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 1—FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES