EXHIBIT 13
PAGES 16 THROUGH 59 AND PAGE 63 OF
ANNUAL REPORT TO SECURITY HOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1994.
SELECTED FINANCIAL INFORMATION
As of or for the Year Ended December 31,
Dollars in thousands, except per share data 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Interest income $ 181,825 $ 169,792 $ 233,049 $ 360,834 $ 425,538
Interest expense 38,414 41,996 84,433 180,319 228,935
------------------------------------------------------------------
Net interest income 143,411 127,796 148,616 180,515 196,603
Provision for credit losses 6,000 30,000 114,500 118,000 43,000
Noninterest income (other than gains
and losses on securities transactions) 36,180 45,810 45,365 43,332 38,524
Gains (losses) on securities transactions (3,383) -- 1,629 -- 45
Noninterest expense (other than ORE and
consolidation charge) 122,831 129,226 152,887 148,302 134,577
Consolidation charge -- 12,000 -- -- --
ORE expense (income) (5,297) 25,674 20,825 2,548 --
------------------------------------------------------------------
Income (loss) from continuing operations
before taxes 52,674 (23,294) (92,602) (45,003) 57,595
Income taxes (benefit) 15,511 (9,260) (32,450) (22,387) 18,800
------------------------------------------------------------------
Income (loss) from continuing operations 37,163 (14,034) (60,152) (22,616) 38,795
Income from discontinued operations -- 7,128 804 1,396 5,202
------------------------------------------------------------------
Net income (loss) $ 37,163 $ (6,906) $ (59,348) $ (21,220) $ 43,997
================================================================================================================================
PER SHARE DATA
Income (loss) per share from
continuing operations $ .81 $ (.35) $ (1.87) $ (.70) $ 1.19
Net income (loss) per share .81 (.17) (1.84) (.66) 1.35
Cash dividends declared .05 -- -- .32 .64
Book value per share 7.32 6.62 7.07 8.91 9.89
Shares used to compute income (loss) per share 45,626 39,580 32,240 32,214 32,501
BALANCE SHEET DATA - AT PERIOD END
Assets $3,012,775 $3,100,626 $3,514,102 $4,571,262 $4,962,826
Loans 1,638,406 1,620,556 2,075,202 2,615,201 3,057,735
Investment and available for sale securities 749,435 904,481 443,922 731,196 622,318
Interest-earning assets 2,711,012 2,830,451 3,013,188 3,993,881 4,554,412
Deposits 2,417,762 2,526,767 2,911,276 3,664,219 4,102,098
Shareholders' equity 330,721 298,074 227,944 287,064 317,688
BALANCE SHEET DATA - AVERAGE BALANCES
Assets $2,831,471 $2,944,461 $3,918,949 $4,605,075 $4,602,373
Loans 1,530,582 1,737,401 2,315,285 2,852,311 2,875,154
Investment and available for sale securities 854,823 517,059 548,734 665,071 597,677
Interest-earning assets 2,586,826 2,597,902 3,462,548 4,164,090 4,103,452
Deposits 2,241,175 2,380,106 3,133,109 3,706,621 3,726,727
Shareholders' equity 313,196 260,649 259,629 318,776 312,348
ASSET QUALITY
Nonaccrual loans $ 53,289 $ 71,056 $ 160,299 $ 152,555 $ 68,408
ORE 7,924 5,559 94,065 64,510 2,130
------------------------------------------------------------------
Total nonaccrual loans and ORE $ 61,213 $ 76,615 $ 254,364 $ 217,065 $ 70,538
================================================================================================================================
Assets held for accelerated disposition $ -- $ 17,450 $ -- $ -- $ --
================================================================================================================================
16 CITY NATIONAL CORPORATION
As of or for the Year Ended December 31,
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average assets 1.31% (.23)% (1.51)% (.46)% .96%
Return on average shareholders' equity 11.87 (2.65) (22.84) (6.65) 14.09
Net interest spread 4.62 4.19 3.61 3.33 3.59
Net interest margin 5.59 4.97 4.41 4.48 4.95
Average shareholders' equity to
average assets 11.06 8.85 6.62 6.92 6.79
ASSET QUALITY RATIOS
Nonaccrual loans to total loans 3.25% 4.38% 7.72% 5.83% 2.24%
Nonaccrual loans and ORE to total loans
and ORE 3.72 4.71 11.73 8.10 2.31
Allowance for credit losses to total loans 6.43 6.82 6.56 4.81 1.97
Allowance for credit losses to
nonaccrual loans 197.68 155.51 84.90 82.44 87.83
Net charge offs to average loans .73 3.12 4.50 1.83 .68
--------------------------------------------------------------------------------------------------------------------------------
Return on Assets Return on Shareholders' Equity
(in percent) (in percent)
(Omitted graph illustrates (Omitted graph illustrates
return on average assets return on average shareholders'
from above table for equity from above table for
years 1990 to 1994) years 1990 to 1994)
CITY NATIONAL CORPORATION 17
OVERVIEW
City National Corporation (the "Corporation") is the holding company for City
National Bank (the "Bank"). Because the Bank comprises substantially all of the
business of the Corporation, references to the "Company" in this Annual Report
reflect the consolidated activities of the Corporation and the Bank.
Consolidated net income was $37.2 million, or $.81 per share in 1994,
compared with a loss of $6.9 million or $.17 per share in 1993, which was net
of a gain of $7.1 million from the sale of the Company's data processing
business. The $44.1 million improvement between years was primarily the
result of a $15.6 million increase in net interest income, a $24.0 million
decrease in the provision for credit losses, a $31.0 million improvement in
net ORE expense and a $18.4 million decrease in all other noninterest
expense, $12.0 million of which is related to the consolidation charge
recorded in 1993. These results were also impacted by higher gains on sales
of assets in 1993.
The Company's 1994 return on average assets was 1.31% and the return on
average shareholders' equity was 11.87%, compared with a negative .23% and a
negative 2.65%, respectively, in 1993.
Average assets declined from $2,944.5 million in 1993 to $2,831.5 million in
1994, a decrease of $113.0 million or 3.8%, largely due to decreases in
average loans and federal funds sold. Total average loans decreased $206.8
million or 11.9% between 1993 and 1994 due to weak loan demand and the Bank's
continuing efforts to achieve a more diversified risk profile in its loan
portfolio. Average investment and available for sale securities increased
$337.8 million or 65.3% in 1994 as the Company invested its excess liquidity
in securities. Average core deposits (checking, savings and money market
accounts and time certificates of deposit of less than $100,000) declined
from $2,176.9 million in 1993 to $2,095.7 million in 1994, a decrease of
$81.2 million or 3.7%. Average time deposits of $100,000 or more decreased by
$57.7 million or 28.4% between 1993 and 1994.
Nonaccrual loans declined to $53.3 million at December 31, 1994, or 3.25% of
total loans, compared with $71.1 million, or 4.38% a year earlier. The
allowance for credit losses at December 31, 1994 was $105.3 million, or 6.43%
of loans outstanding at year end, compared with 6.82% a year earlier. Net
charge offs totaled $11.2 million in 1994, or .73% of average loans, down
significantly from $54.1 million or 3.12% of average loans in 1993. ORE
totaled $7.9 million at year end, compared with $5.6 million a year earlier.
In March 1993, the Bank adopted an accelerated asset disposition program
("the Disposition Program") to aggressively dispose of ORE and certain
problem loans with an aggregate book value before the Disposition Program of
$119.5 million. In November 1993, the Bank sold most of the assets in the
Disposition Program to WHC - THREE Investors, L.P., a limited partnership.
The transaction resulted in a pretax gain of $12.8 million in the fourth
quarter of 1993. The Bank completed the transaction in early 1994 and
recorded an additional gain of $4.2 million.
In November 1993, the Bank announced a consolidation plan to improve
efficiency and operational productivity in its branch network. To cover the
costs associated with this action, the Bank recorded a consolidation charge
of $12.0 million in the fourth quarter of 1993. This consolidation was
completed in April, 1994 and has resulted in a decrease in noninterest
expense of approximately $8.0 million per year, before the effect of
inflation and other factors.
Management anticipates a slow economic recovery in Southern California in
1995 and therefore, expects that economic conditions will continue to affect
the Bank's ability to increase its commercial loan portfolio. Based on its
review of the loan portfolio, management anticipates that net charge offs and
provisions for credit losses for 1995 should remain low, unless there is
significant unexpected deterioration in economic conditions.
On January 21, 1994, the Office of the Comptroller of the Currency ("OCC")
terminated a formal agreement between the OCC and the Bank which had been in
effect since November 18, 1992. The
18 CITY NATIONAL CORPORATION
Company satisfied the major requirement of the formal agreement in June 1993
when the Corporation contributed $65 million to the Bank as Tier 1 capital, out
of net proceeds of $76.5 million from a common stock rights offering conducted
by the Corporation. In February, 1994, the Federal Reserve Bank of San Francisco
notified the Corporation of the termination of a Memorandum of Understanding
entered into in February 1993.
The Corporation paid its first dividend of $.05 per share of common stock in
the fourth quarter of 1994 since suspending payment of dividends in August,
1991. A dividend of $.05 per share for the first quarter of 1995 was paid on
February 16, 1995.
OPERATIONS SUMMARY
Increase Increase
(Decrease) (Decrease)
Dollars in thousands, -------------- ---------------
except per share amounts 1994 Amount % 1993 Amount % 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------
Interest income/(1)/ $182,960 $11,826 7 $171,134 $(66,149) (28) $237,283 $367,043 $432,074
Interest expense 38,414 (3,582) (9) 41,996 (42,437) (50) 84,433 180,319 228,935
-----------------------------------------------------------------------------------------
Net interest income 144,546 15,408 12 129,138 (23,712) (16) 152,850 186,724 203,139
Provision for credit losses 6,000 (24,000) (80) 30,000 (84,500) (74) 114,500 118,000 43,000
Noninterest income 36,180 (9,630) (21) 45,810 445 1 45,365 43,332 38,524
Gains (losses) on
securities transactions (3,383) (3,383) NM -- (1,629) (100) 1,629 -- 45
Noninterest expense:
Staff expense 64,396 (5,387) (8) 69,783 (13,780) (16) 83,563 83,211 78,629
Other expense 58,435 (1,008) (2) 59,443 (9,881) (14) 69,324 65,091 55,948
Consolidation charge -- (12,000) (100) 12,000 12,000 NM -- -- --
ORE expense (income) (5,297) (30,971) (121) 25,674 4,849 23 20,825 2,548 --
-----------------------------------------------------------------------------------------
Total 117,534 (49,366) (30) 166,900 (6,812) (4) 173,712 150,850 134,577
-----------------------------------------------------------------------------------------
Income (loss) before
income taxes 53,809 75,761 345 (21,952) 66,416 75 (88,368) (38,794) 64,131
Income taxes (benefit) 15,511 (24,771) (268) (9,260) (23,190) (71) (32,450) (22,387) 18,800
Less adjustments/(1)/ 1,135 207 15 1,342 2,892 68 4,234 6,209 6,536
-----------------------------------------------------------------------------------------
Income (loss) from
continuing operations 37,163 51,197 365 (14,034) 46,118 77 (60,152) (22,616) 38,795
Income from discontinued
operations -- (7,128) (100) 7,128 6,324 787 804 1,396 5,202
-----------------------------------------------------------------------------------------
Net income (loss) $ 37,163 $44,069 638 $ (6,906) $ 52,442 88 $(59,348) $(21,220) $ 43,997
==============================================================================================================================
Net income (loss)
per share $ .81 $ .98 576 $ (.17) $ 1.67 91 $ (1.84) $ (.66) $ 1.35
==============================================================================================================================
/(1)/ Includes amounts to convert nontaxable income to a fully taxable
equivalent basis.
CITY NATIONAL CORPORATION 19
RATIOS TO AVERAGE ASSETS
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------
Net interest income/(1)/ 5.10% 4.39% 3.90% 4.05% 4.41%
Noninterest income 1.16 1.56 1.20 .94 .84
Less provision for
credit losses .21 1.02 2.92 2.56 .93
Less noninterest expense:
Staff expense 2.27 2.37 2.13 1.81 1.71
Other expense 2.07 2.02 1.77 1.41 1.22
Consolidation charge -- .41 -- -- --
ORE expense (income) (.19) .87 .53 .06 --
------------------------------------------------------------
Total 4.15 5.67 4.43 3.28 2.93
------------------------------------------------------------
Income (loss) before income taxes/(1)/ 1.90 (.74) (2.25) (.85) 1.39
------------------------------------------------------------
Income (loss) from continuing operations 1.31 (.47) (1.53) (.49) .84
Income from discontinued operations -- .24 .02 .03 .12
------------------------------------------------------------
Net income (loss) 1.31% (.23)% (1.51)% (.46)% .96%
========================================================================================================
/(1)/ Fully taxable equivalent basis.
NET INTEREST INCOME
1994 Compared With 1993
Taxable equivalent net interest income totaled $144.5 million in 1994, up
$15.4 million, or 11.9%, from 1993. The increase from 1993 to 1994 was due in
part to the favorable impact of higher interest rates during 1994 on the
Company's asset-sensitive balance sheet. The net interest margin increased
from 4.97% in 1993 to 5.59% in 1994.
Average loans declined from $1,737.4 million in 1993 to $1,530.6 million in
1994, a decrease of $206.8 million or 11.9%. The majority of this decrease
reflects lower average commercial loans outstanding, down $140.3 million or
14.0%. This decline resulted from weak loan demand because of the struggling
Southern California economy and the Bank's efforts to achieve a more
diversified risk profile in its loan portfolio. Average construction loans
decreased $52.8 million or 74.6%, primarily because of the transfer of
certain construction loans to the real estate mortgage category after
completion of construction, and because the Bank had curtailed new
construction loan commitments beginning in 1990. Average real estate mortgage
loans decreased $67.0 million or 11.0% due to pay offs and charge offs of
commercial real estate loans, net of amounts transferred from the
construction portfolio. Average residential first mortgages increased to
$68.8 million in 1994 from $3.1 million in 1993, primarily as a result of
purchases beginning in April of 1994 of residential mortgages originated by
third parties, which supplemented mortgages originated by the Bank beginning
in late 1993. Average loan balances are expected to increase moderately in
1995, especially for residential first mortgage loans.
Average taxable securities increased $337.5 million or 67.6% between 1993 and
1994 as a result of investing the Company's excess liquidity in government
and agency securities. Average federal funds sold and securities purchased
under resale agreements decreased $133.6 million or 43.5% between 1993 and
1994. The Bank's improved financial condition allowed management to reduce
the level of liquidity previously being maintained.
Average noninterest-bearing deposits were $914.6 million in 1993 compared
with $907.2 million in 1994, while average interest-bearing core deposits
declined from $1,262.3 million in 1993 to $1,188.5 million in 1994, a
decrease of $73.8 million or 5.8%. Average time deposits of $100,000 or more
decreased $57.7 million or 28.4% between 1993 and 1994. The Bank's deposit
levels were impacted by higher yields available on alternative investments
and by the closure of six offices early in 1994, although the latter did not
have a significant effect on the Bank's overall deposit levels. Due to the
higher yields available
20 CITY NATIONAL CORPORATION
from alternative investments, management expects continued declines in core
deposits, especially in money market accounts. Average federal funds
purchased and securities sold under repurchase agreements declined $50.0
million or 18.8% between 1993 and 1994 as the Bank reduced its funding from
these higher cost sources.
1993 COMPARED WITH 1992
Fully taxable equivalent net interest income decreased $23.7 million, or
15.5% from 1992 to 1993. The decline in the volume of interest-earning
assets accounted for a decrease of $29.8 million. This was offset by an
increase of $6.1 million due to an increase in the net interest margin to
4.97% in 1993 from 4.41% in 1992.
Average loans declined from $2,315.3 million in 1992 to $1,737.4 million in
1993, a decrease of $577.9 million or 25.0% due to decreases of $313.1
million or 23.8% in commercial loans, $148.7 million or 67.7% in construction
loans and $105.4 million or 14.8% in real estate mortgage loans. These
decreases resulted from reduced loan demand due to the recession, the Bank's
efforts to achieve a more diversified risk profile in its loan portfolio,
gross charge offs during 1992 and 1993 of $202.7 million and the sale of
$73.7 million of Equity Line of Credit (ELC) loans in April 1993.
Taxable securities increased $37.6 million or 8.1% between 1992 and 1993.
Average federal funds sold and securities purchased under resale agreements
decreased $246.5 million or 44.5% between 1992 and 1993.
Average noninterest-bearing deposits decreased $115.1 million or 11.2% between
1992 and 1993. Average interest-bearing core deposits decreased $325.3 million
or 20.5% while average time deposits of $100,000 and over decreased $312.6
million or 60.6%. Due to the decline in the Bank's assets in 1993 compared with
1992 the Bank was able, in 1993, to reduce its dependence on time deposits of
$100,000 and over.
CHANGE IN NET INTEREST INCOME
1994 vs 1993 1993 vs 1992
--------------------------------------- ----------------------------------------
Increase Increase
(decrease) (decrease)
due to: Net due to: Net
Dollars in thousands-fully -------------------------- increase -------------------------- increase
taxable equivalent basis Volume /(1)/ Rate /(1)/ (decrease) Volume /(1)/ Rate /(1)/ (decrease)
----------------------------------------------------------------------------------------------------------------------------------
Interest earned on:
Interest-bearing deposits in other banks $ (7) $ (7) $ (14) $ (58) $ 21 $ (37)
Loans (16,663) 15,491 (1,172) (43,943) (695) (44,638)
Taxable securities 17,193 (1,794) 15,399 2,390 (6,485) (4,095)
State and municipal securities 21 (325) (304) (6,416) (327) (6,743)
Trading account securities (329) 339 10 (250) (151) (401)
Federal funds sold and securities purchased
under resale agreements (4,893) 2,800 (2,093) (7,808) (2,427) (10,235)
----------------------------------------------------------------------------------
Total interest-earning assets (4,678) 16,504 11,826 (56,085) (10,064) (66,149)
----------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest checking 25 (646) (621) (756) (2,040) (2,796)
Money market deposits (1,062) (584) (1,646) (6,892) (6,636) (13,528)
Savings deposits (169) (217) (386) (99) (781) (880)
Other time deposits (2,691) 393 (2,298) (11,980) (4,532) (16,512)
Short-term borrowings (1,458) 2,827 1,369 (6,571) (2,150) (8,721)
----------------------------------------------------------------------------------
Total interest-bearing liabilities (5,355) 1,773 (3,582) (26,298) (16,139) (42,437)
==================================================================================================================================
$ 677 $14,731 $15,408 $(29,787) $ 6,075 $(23,712)
==================================================================================================================================
/(1)/ The change in interest due to both rate and volume has been
allocated to the change due to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
CITY NATIONAL CORPORATION 21
NET INTEREST INCOME SUMMARY
1994 1993
--------------------------------- ----------------------------------
Interest Average Interest Average
Average income/ interest Average income/ interest
Dollars in thousands balance expense/(1)/ rate balance expense/(1)/ rate
----------------------------------------------------------------------------------------------------------------
ASSETS
Earnings assets(2)
Loans:
Commercial loans $ 861,630 $ 74,893 8.69% $1,001,965 $ 75,155 7.50%
Real estate - construction 17,947 1,853 10.32 70,783 5,023 7.10
Real estate - mortgage 542,351 45,474 8.38 609,304 46,294 7.60
Residential first mortgage 68,768 4,541 6.60 3,089 186 6.02
Installment loans 39,886 3,959 9.93 52,260 5,234 10.02
------------------------------------------------------------------------
Total loans (3) 1,530,582 130,720 8.54 1,737,401 131,892 7.59
------------------------------------------------------------------------
Interest bearing deposits
in other banks 655 17 2.60 835 30 3.59
State and municipal securities 17,799 1,320 7.42 17,575 1,624 9.24
Taxable securities 837,024 42,371 5.06 499,484 26,973 5.40
Federal funds sold and
securities purchased under
resale agreements 173,451 7,264 4.19 307,078 9,357 3.05
Trading account securities 27,315 1,268 4.64 35,529 1,258 3.54
------------------------------------------------------------------------
Total earnngs assets 2,586,826 182,960 7.07 2,597,902 171,134 6.59
------------------------------------------------------------------------
Allowance for credit losses (113,100) (129,873)
Cash and due from banks 249,768 272,610
Other nonearning assets 107,977 203,822
------------------------------------------------------------------------
Total assets $2,831,471 $2,944,461
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 907,234 - - $ 914,642 - -
Interest-bearing deposits:
Interest checking accounts 285,983 2,758 0.96 283,871 3,379 1.19
Money market accounts 719,203 16,212 2.25 767,121 17,858 2.33
Savings deposits 95,097 1,869 1.97 103,161 2,255 2.19
Time deposits - under $100,000 88,195 3,226 3.66 108,135 4,063 3.76
Time deposits - $100,000 and over 145,463 4,958 3.41 203,176 6,419 3.16
------------------------------------------------------------------------
Total interest-bearing deposits 1,333,941 29,023 2.18 1,465,464 33,974 2.32
------------------------------------------------------------------------
Total deposits 2,241,175 2,380,106
Federal funds purchased and
securities sold under
repurchase agreements 215,130 8,552 3.98 265,082 7,499 2.83
Other short-term borrowings 20,348 839 4.12 16,147 523 3.24
------------------------------------------------------------------------
Total interest-bearing liabilities 1,569,419 38,414 2.45 1,746,693 41,996 2.40
------------------------------------------------------------------------
Other liabilities 41,622 22,477
Shareholders' equity 313,196 260,649
------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,831,471 $2,944,461
================================================================================================================
Net interest spread 4.62 4.19
Fully taxable equivalent net interest
income and margin $144,546 5.59% $129,138 4.97%
================================================================================================================
/(1)/ Fully taxable equivalent basis.
/(2)/ Includes average nonaccrual loans of $61,749, $106,119, $159,420,
$136,096, and $31,726 for 1994, 1993, 1992, 1991 and 1990, respectively.
/(3)/ Loan income includes loan fees of $6,835, $5,304, $5,427, $7,287, and
$9,487 for 1994, 1993, 1992, 1991 and 1990, respectively.
22 CITY NATIONAL CORPORATION
1992 1991 1990
---------------------------------- ---------------------------------- ----------------------------------
Interest Average Interest Average Interest Average
Average income/ interest Average income/ interest Average income/ interest
balance expense/(1)/ rate balance expense/(1)/ rate balance expense/(1)/ rate
---------------------------------------------------------------------------------------------------------------
$1,315,112 $ 96,437 7.34% $1,618,442 $152,848 9.44% $1,623,120 $178,691 10.98%
219,456 15,761 7.18 396,934 39,255 9.89 425,722 53,094 12.47
714,753 57,497 8.04 761,675 74,884 9.83 746,851 85,926 11.51
-- -- -- -- -- -- -- -- --
65,964 6,836 10.36 75,260 8,675 11.53 79,461 9,514 11.97
---------------------------------------------------------------------------------------------------------------
2,315,285 176,531 7.62 2,852,311 275,662 9.66 2,875,154 327,225 11.37
---------------------------------------------------------------------------------------------------------------
2,637 67 2.54 3,534 297 8.40 12,176 1,009 8.29
86,863 8,365 9.63 127,540 12,448 9.76 127,993 12,415 9.70
461,871 31,068 6.73 537,531 41,410 7.70 469,684 40,000 8.52
553,540 19,592 3.54 578,622 33,450 5.78 556,487 46,468 8.35
42,352 1,660 3.92 64,552 3,776 5.85 61,958 4,957 8.00
---------------------------------------------------------------------------------------------------------------
3,462,548 237,283 6.85 4,164,090 367,043 8.81 4,103,452 432,074 10.53
---------------------------------------------------------------------------------------------------------------
(141,537) (74,240) (38,320)
368,297 374,353 416,587
229,641 140,872 120,654
---------------------------------------------------------------------------------------------------------------
$3,918,949 $4,605,075 $4,602,373
===============================================================================================================
$1,029,758 -- -- $ 961,072 -- -- $ 943,038 -- --
328,555 6,175 1.88 301,338 11,018 3.66 285,729 10,791 3.78
1,023,280 31,386 3.07 986,438 48,394 4.91 917,080 53,035 5.78
106,608 3,135 2.94 86,606 3,810 4.40 87,459 3,811 4.36
129,105 6,106 4.73 150,544 8,981 5.97 139,727 11,242 8.05
515,803 20,888 4.05 1,220,623 78,698 6.45 1,353,694 110,171 8.14
---------------------------------------------------------------------------------------------------------------
2,103,351 67,690 3.22 2,745,549 150,901 5.50 2,783,689 189,050 6.79
---------------------------------------------------------------------------------------------------------------
3,133,109 3,706,621 3,726,727
488,520 16,220 3.32 531,590 28,550 5.37 499,178 38,628 7.74
14,279 523 3.66 14,561 868 5.96 14,265 1,257 8.81
---------------------------------------------------------------------------------------------------------------
2,606,150 84,433 3.24 3,291,700 180,319 5.48 3,297,132 228,935 6.94
---------------------------------------------------------------------------------------------------------------
23,412 33,527 49,855
259,629 318,776 312,348
---------------------------------------------------------------------------------------------------------------
$3,918,949 $4,605,075 $4,602,373
===============================================================================================================
3.61 3.33 3.59
$152,850 4.41% $186,724 4.48% $203,139 4.95%
===============================================================================================================
CITY NATIONAL CORPORATION 23
Net Interest Margin
(in percent)
(Omitted graph illustrates fully taxable equivalent net interest margin from
table on preceding two pages for years 1990 to 1994)
PROVISION FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgment of the adequacy of the allowance for credit losses and is determined
through periodic analysis of the loan portfolio. This analysis includes a
detailed review of the classification and categorization of problem and
potential problem loans and loans to be charged off; an assessment of the
overall quality and collectibility of the portfolio; and consideration of the
loan loss experience, trends in problem loans and concentrations of credit risk,
as well as current and expected future economic conditions (particularly in
Southern California). The Bank has an internal risk analysis and review staff
that reports to the Audit and Examining Committee of the Board of Directors
which continuously reviews loan quality. Such reviews also assist management in
establishing the level of the allowance for credit losses.
For 1994, the provision for credit losses totaled $6.0 million, down from
$30.0 million in 1993 and $114.5 million in 1992. In 1994, net charge offs
totaled $11.2 million, or .73% of related average credits, down from $54.1
million, or 3.12% in 1993. Because of the improvement in the overall credit
quality of the loan portfolio, including the decreased level of charge offs,
the continued reduction of problem loans, the higher proportion of
residential first trust deed mortgages in the loan portfolio, the higher
level of recoveries and the stabilization of economic conditions in Southern
California, the provision for credit losses declined from 1993 to 1994. It is
expected to remain at reduced levels in 1995, compared with those of the
recent past, provided a deterioration of economic conditions does not occur.
NONINTEREST INCOME
Noninterest income in 1994 totaled $32.8 million, down $13.0 million from
1993 which was down $1.2 million from 1992. A breakdown of noninterest income
by category is reflected on page 25.
Service charges on deposit accounts decreased $2.3 million, or 19.8%,
compared with a 9.4% increase in 1993. Service charges on deposit accounts
were lower in 1994 because customers paid for services with higher earnings
on deposit balances which resulted from increased interest rates. Service
charges on deposit accounts increased from 1992 to 1993 as the Bank more
aggressively collected account analysis deficiencies from deposit customers.
Investment services income, which includes fees, commissions and markups on
securities transactions with customers, and fees on money market mutual
funds, increased $.9 million, or 14.3% in 1994, compared with a 1.6% decrease
the preceding year. The increase from 1993 to 1994 was due to higher fees and
new investment products offered to customers. Trust fees decreased $.6
million or 8.1% from 1993 to 1994 after being relatively unchanged between
1992 and 1993. All other income categories, which include foreign exchange,
letter of credit fees, escrow and proof of deposit fees, in addition to other
miscellaneous income, decreased during the last three years due to lower
volumes.
24 CITY NATIONAL CORPORATION
The Bank sold its merchant card business to NOVA Information Systems as of
January 1, 1993, for a pretax gain of $1.9 million. The Bank's sale of $73.7
million in ELC loans in April 1993 generated a pretax gain of $4.5 million.
Securities losses in 1994 totaled $3.4 million compared with none in 1993.
The Company sold lower yielding government and agency securities and invested
the proceeds in higher yielding assets. In December 1992, in conjunction with
tax planning strategies, the Bank sold $32.4 million of municipal securities
for a gain of $1.6 million.
ANALYSIS OF CHANGES IN NONINTEREST INCOME
Increase Increase
(Decrease) (Decrease)
--------------- ---------------
Dollars in millions 1994 Amount % 1993 Amount % 1992
-----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 9.3 $ (2.3) (19.8) $11.6 $ 1.0 9.4 $10.6
Trust fees 6.8 (.6) (8.1) 7.4 (.1) (1.3) 7.5
Investment services income 7.2 .9 14.3 6.3 (.1) (1.6) 6.4
Credit card merchant fees -- -- -- -- (4.5) (100.0) 4.5
Gain on sale of selected ELC loans -- (4.5) (100.0) 4.5 4.5 NM --
Gain on sale of assets 1.5 (.4) (21.1) 1.9 1.9 NM --
Gain (loss) on sale of securities (3.4) (3.4) NM -- (1.6) (100.0) 1.6
All other income 11.4 (2.7) (19.1) 14.1 (2.3) (14.0) 16.4
--------------------------------------------------------------------
Total $32.8 $(13.0) (28.4) $45.8 $(1.2) (2.6) $47.0
===================================================================================================================================
NONINTEREST EXPENSE
Noninterest expense totaled $117.5 million in 1994, down $49.4 million or
29.6% from 1993 which compares with a decrease of 3.9% from 1992 to 1993.
Included in 1993 expense were the consolidation charge of $12.0 million and
$36.5 million from adoption of the Disposition Program.
Staff expense decreased 7.7% in 1994 compared with a 16.5% decrease in 1993
due principally to continued staff decreases. The effect of reduced staff
levels in 1994 was partially offset by profit sharing contribution expense of
$3.3 million and higher incentive compensation in 1994. On a full-time
equivalent basis, staff levels have declined from approximately 2,000 at
December 31, 1991 to 1,350 at December 31, 1993 to 1,225 at year-end 1994.
Staff levels are expected to remain stable in 1995.
Excluding ORE and the consolidation charge, the remaining expense categories
decreased $1.0 million, or 1.7%, between 1993 and 1994 due to the branch
consolidation program and continued cost control measures. Included in 1994
were higher promotion and professional expenses as the Company worked on
expanding the business and developing new products and services. These
expenses decreased $9.9 million, or 14.3% between 1992 and 1993. The decrease
between 1992 and 1993 resulted from a $2.4 million decrease in severance and
litigation expenses, writedowns of $2.3 million in 1992 resulting from
updated valuations of in-substance foreclosures of non-real estate assets and
a $2.8 million decrease in merchant credit card processing expense due to the
sale of the business.
In November 1993, the Company announced a consolidation plan to improve
efficiency and operational productivity in its branch network. To cover the
costs associated with this action, the Company recorded a consolidation
charge of $12.0 million in the fourth quarter of 1993 comprised of $7.5
million for disposition of lease commitments, $1.5 million for disposition of
fixed assets, and $3.0 million for severance costs and other expenses
directly related to the consolidation. Completion of this consolidation has
CITY NATIONAL CORPORATION 25
resulted in a decrease in noninterest expense of approximately $8.0 million per
year, principally in staff expense and net occupancy expense. At December 31,
1994, the balance remaining in the consolidation allowance was $7.6 million. The
Bank is continuing to negotiate settlements of lease commitments for several of
the closed branches and believes this allowance balance is adequate to cover
these lease liabilities and the remaining expenses expected to be incurred.
ORE resulted in net income of $5.3 million in 1994 compared with expense of
$25.7 million in 1993 and $20.8 million in 1992. The 1994 amount reflects
gains on the final sale of Disposition Program assets of $4.2 million and
lower costs associated with fewer ORE properties. The 1993 ORE expense
includes the $36.5 million charge to establish the Disposition Program and a
gain of $12.8 million in the fourth quarter of 1993 upon the sale of loans
contained in the Disposition Program.
ANALYSIS OF CHANGES IN NONINTEREST EXPENSE
Increase Increase
(Decrease) (Decrease)
--------------- ----------------
Dollars in millions 1994 Amount % 1993 Amount % 1992
--------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 64.4 $ (5.4) (7.7) $ 69.8 $(13.8) (16.5) $ 83.6
----------------------------------------------------------------------
All other:
Net occupancy of premises 10.3 (1.5) (12.7) 11.8 .3 2.6 11.5
Data processing 7.2 (.6) (7.7) 7.8 (.2) (2.5) 8.0
Professional 8.3 1.0 13.7 7.3 (1.1) (13.1) 8.4
FDIC insurance 5.8 (1.4) (19.4) 7.2 (.3) (4.0) 7.5
Office supplies 4.6 (.4) (8.0) 5.0 (1.0) (16.7) 6.0
Promotion 3.0 1.1 57.9 1.9 (1.1) (36.7) 3.0
Depreciation 4.1 (.4) (8.9) 4.5 (.2) (4.3) 4.7
Equipment 2.6 .6 30.0 2.0 (.3) (13.0) 2.3
Other operating 12.5 .6 5.0 11.9 (6.0) (33.5) 17.9
----------------------------------------------------------------------
58.4 (1.0) (1.7) 59.4 (9.9) (14.3) 69.3
----------------------------------------------------------------------
Consolidation charge -- (12.0) (100.0) 12.0 12.0 NM --
ORE expense (income) (5.3) (31.0) (120.6) 25.7 4.9 23.6 20.8
----------------------------------------------------------------------
Total $117.5 $(49.4) (29.6) $166.9 $ (6.8) (3.9) $173.7
================================================================================================================================
INCOME TAXES
The 1994 effective tax rate was 29.4%, compared with a benefit rate of 39.8%
in 1993 and 35.0% in 1992. The effective rates differed from the applicable
statutory federal tax rate due to various factors including state taxes, tax
exempt income and higher income tax rates in carry back years.
The lower effective tax rate for 1994 resulted from utilization of the
Company's California net operating loss carry forwards and the reversal of
$3.9 million of valuation allowances. The recognition of $3.9 million of
additional California deferred tax assets resulted from the Company's
continued improved profitability and was based on the net deductible
temporary differences that are expected to be realized within a twelve month
carry forward period, which is the period over which management believes it
is prudent to make projections for such purposes. At December 31, 1994 the
Company had recorded $28.3 million of deferred tax assets for which it is
more likely than not to realize benefits in future tax returns.
The effective tax rate for 1995 is expected to increase but is still expected
to remain below the combined statutory federal and California tax rates due
to the impact of municipal securities and leases, tax credits from
investments in low income housing and any additional reversals of the
remaining valuation allowance for California deferred tax assets.
26 CITY NATIONAL CORPORATION
SOURCES AND USES OF FUNDS
The discussion in this section focuses on changes between December average
balances in 1994 and 1993 as depicted on the following table. Management
believes that a comparison of December averages gives a clearer picture of
changes in the balance sheet during the year than a comparison of annual
averages, which may conceal trends during the year, or year-end balances,
which may be distorted by significant end-of-year fluctuations.
The Company manages its balance sheet to meet the needs of its business
strategy, which it adapts to the changing economic environment, and business
and competitive conditions in its financial services market. Understanding
changes in the balance sheet requires an examination of changes in the size
and composition of the Company's earning assets and sources of funds.
Based on December averages, assets decreased 6.7% in 1994, compared with a
8.0% decrease in 1993. Gross loans increased at a 1.4% rate in 1994, compared
with a 23.3% decrease in 1993. Commercial loans decreased 4.2% and 23.2% in
1994 and 1993, respectively, reflecting reduced loan demand because of the
weak Southern California economy and the Bank's efforts to achieve a more
diversified risk profile in its loan portfolio. Real estate loans increased
10.8% in 1994, primarily because of purchases of residential first mortgage
loans during 1994, compared with a 23.3% decrease from 1992 to 1993
reflecting transfers to ORE, pay downs and charge offs.
Securities, which includes both investment and available for sale securities,
decreased 4.6% in 1994, compared with a 77.0% increase in 1993. The decrease
in 1994 resulted from the Company's decision to invest excess liquidity in
residential first mortgages instead of securities. The 1993 increase in
securities resulted from the general lack of loan demand and also from the
investment of the proceeds of the common stock rights offering.
The Company's primary sources for funding earning assets are core deposits,
certificates of deposit and short-term purchased funds. Core deposits
decreased 6.9% in 1994 compared with a decrease of 6.4% in 1993. During 1994,
certificates of deposit of $100,000 and over were down 24.6% from 1993,
compared with a reduction of 41.2% from 1992. Due to the decrease in total
assets, the Company has reduced its funding from these more expensive funds.
Federal funds purchased and securities sold under repurchase agreements
decreased 10.5% in 1994 and 29.0% in 1993 as the Company reduced its
arbitrage activities.
CITY NATIONAL CORPORATION 27
SOURCES AND USES OF FUNDS TRENDS
Increase Increase
December (Decrease) December (Decrease) December
1994 --------------- 1993 --------------- 1992
Dollars in millions Average Amount % Average Amount % Average
----------------------------------------------------------------------------------------------------------------------------
USES OF FUNDS
Earning Assets:
Interest bearing deposits
in other banks $ .7 $ .1 17 $ .6 $ (17.1) (97) $ 17.7
Investment and available for
sale securities 750.3 (36.3) (5) 786.6 342.3 77 444.3
Trading account securities 27.5 (25.2) (48) 52.7 17.6 50 35.1
Federal funds sold and
securities purchased under
resale agreements 208.7 (122.8) (37) 331.5 59.1 22 272.4
Loans:
Commercial loans 864.9 (38.1) (4) 903.0 (273.2) (23) 1,176.2
Real estate loans 714.1 69.8 11 644.3 (195.9) (23) 840.2
Installment loans 36.7 (8.9) (20) 45.6 (15.9) (26) 61.5
------------------------------------------------------------------------------
Total loans 1,615.7 22.8 1 1,592.9 (485.0) (23) 2,077.9
Less allowance for credit losses 114.2 (3.5) (3) 117.7 (23.8) (17) 141.5
------------------------------------------------------------------------------
Net loans 1,501.5 26.3 2 1,475.2 (461.2) (24) 1,936.4
------------------------------------------------------------------------------
Total earning assets/(1)/ 2,602.9 (161.4) (6) 2,764.3 (83.1) (3) 2,847.4
Cash and due from banks 270.8 (.5) -- 271.3 (110.1) (29) 381.4
Other nonearning assets 101.8 (47.1) (32) 148.9 (99.0) (40) 247.9
------------------------------------------------------------------------------
Total assets $2,861.3 $(205.5) (7) $3,066.8 $(268.4) (8) $3,335.2
============================================================================================================================
SOURCES OF FUNDS
Core deposits:
Demand deposits $ 990.5 $ (9.9) (1) $1,000.4 $ (82.2) (8) $1,082.6
Interest checking deposits 297.9 (4.3) (1) 302.2 .1 -- 302.1
Money market accounts 679.1 (108.7) (14) 787.8 (68.2) (8) 856.0
Savings deposits 89.0 (15.6) (15) 104.6 9.3 10 95.3
Time deposits -- under $100,000 79.4 (19.8) (20) 99.2 (16.8) (14) 116.0
------------------------------------------------------------------------------
Total core deposits 2,135.9 (158.3) (7) 2,294.2 (157.8) (6) 2,452.0
Short-term purchased funds:
Time deposits -- $100,000 and over 129.7 (42.3) (25) 172.0 (120.3) (41) 292.3
Federal funds purchased and
securities sold under repurchase
agreements 207.1 (24.2) (10) 231.3 (94.5) (29) 325.8
Mortgages payable -- (26.3) (100) 26.3 26.3 NM --
Other short-term funds borrowed 25.6 14.9 139 10.7 (3.9) (27) 14.6
------------------------------------------------------------------------------
Total short-term purchased funds 362.4 (77.9) (18) 440.3 (192.4) (30) 632.7
Other liabilities 35.1 .3 1 34.8 11.5 49 23.3
Shareholders' equity 327.9 30.4 10 297.5 70.3 31 227.2
------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,861.3 $(205.5) (7) $3,066.8 $(268.4) (8) $3,335.2
============================================================================================================================
/(1)/ Before deduction of allowance for credit losses.
28 CITY NATIONAL CORPORATION
CAPITAL
At December 31, 1994, the Company's and the Bank's Tier 1 capital, which is
comprised of common shareholders' equity and certain regulatory adjustments,
amounted to $334.3 million and $316.5 million, respectively. At December 31,
1993, the Company's and the Bank's Tier 1 capital amounted to $298.1 million
and $279.8 million, respectively.
The following table presents the capital ratios for the Company and the Bank
at December 31, 1994, 1993 and 1992.
As of December 31,
------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------
CITY NATIONAL CORPORATION
Tier 1 leverage 11.87% 9.95% 6.49%
Tier 1 risk-based capital 17.50 15.75 9.17
Total risk-based capital 18.81 17.06 10.47
CITY NATIONAL BANK
Tier 1 leverage 11.31% 9.38% 6.32%
Tier 1 risk-based capital 16.69 14.78 8.90
Total risk-based capital 17.99 16.09 10.20
-----------------------------------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
(in percent)
[omitted graph illustrates following plot points]
Total Risk-Based Tier 1 Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
---------------- ----------------- ---------
1990 10.09% 8.80% 6.75%
1991 10.49% 9.21% 6.46%
1992 10.47% 9.17% 6.49%
1993 17.06% 15.75% 9.95%
1994 18.81% 17.50% 11.87%
The Corporation resumed paying dividends on common stock with a cash dividend
of $.05 per share in the fourth quarter of 1994 after suspending payment of
dividends in August, 1991. A dividend of $.05 per share for the first quarter
of 1995 was paid by the Corporation on February 16, 1995 to shareholders of
record on February 6, 1995. The level of dividends will be subject to
periodic review as the Corporation moves toward its objective of paying annual
dividends of approximately one-third of prior year's earnings.
LIQUIDITY MANAGEMENT
Liquidity refers to the Company's ability to maintain a cash flow adequate to
fund operations and meet obligations and other commitments on a timely and
cost effective basis.
In recent years, core deposits have provided the Company with a sizable
source of relatively stable and low-cost funds. The Company's average core
deposits and shareholders' equity funded 85% and 83% of average total assets
in 1994 and 1993, respectively.
Liquidity is also provided by assets such as federal funds sold, securities
purchased under resale agreements and trading account securities which may be
immediately converted to cash at minimal cost. The aggregate of these assets
averaged $236.2 million during December 1994, down $148.0 million, or 38.5%
from the
CITY NATIONAL CORPORATION 29
prior year. This decrease resulted from the Company's decision to
maintain a substantially lower level of liquidity in light of the
stabilization in deposits. In addition, at December 31, 1994 and 1993 the
Company had $90.4 million and $2.0 million, respectively of securities
classified as available for sale, which provide an additional source of
liquidity.
Liquidity may also be provided by maturing investment securities including
amortizing payments received on mortgage-backed securities. At December 31,
1994, investment securities maturing within one year amounted to $132.5
million, or 20.1% of the portfolio. See page 32 for a table on maturity
distribution of investment securities at December 31, 1994. Because
prepayments on amortizing mortgage-backed securities can fluctuate based on
the prepayments on the underlying mortgage loans, the maturities shown on the
table reflect the final contractual payment date of those securities.
Consequently, the timing of cash flows from those securities will be realized
earlier than depicted. In addition, the unpledged portion of investment
securities at December 31, 1994 totaled $500.1 million and would be available
as collateral for borrowing. Maturing loans also provide liquidity, and
$804.2 million of the Bank's loans are scheduled to mature in 1995. The
amount of loans with remaining maturities of over one year have increased
from $601.4 million at December 31, 1993 to $834.2 million at December 31,
1994 due to the increased amount of residential first mortgages. See page 34
for a table on maturity distribution of loans at December 31, 1994.
ASSET/LIABILITY MANAGEMENT
The principal objectives of asset/liability management are to maximize net
interest margin subject to margin volatility and liquidity constraints. Margin
volatility results when the rate reset (or repricing) characteristics of assets
are materially different from those of the Company's liabilities. Liquidity risk
results from the mismatching of asset and liability cash flows. Management
chooses asset/liability strategies that promote stable earnings and reliable
funding. Interest rate risk and funding positions are kept within limits
established by the Company's Board of Directors to ensure that risk-taking is
not excessive and that liquidity is properly managed.
The Company has established three measurement vehicles to quantify and manage
exposure to interest rate risk: net interest income simulation modeling, gap
analysis, and present value of equity analysis. Net interest income
simulations are used to identify the direction and severity of interest rate
risk exposure across a twelve month forecast horizon. Gap analysis provides
insight into structural mismatches of assets and liability repricing
characteristics. Present value of equity calculations are used to estimate
the theoretical sensitivity of shareholder equity to changes in interest
rates.
The table on page 31 compares the Company's interest rate gap position as of
December 31, 1994 and 1993. Generally, an asset sensitive gap indicates that
net interest margin will improve during a period of rising interest rates.
The gap report shows that the Company's cumulative asset sensitive position
increased from $1,076.9 million at December 31, 1993 to $1,159.7 million at
December 31, 1994. This increase resulted from the decline in rate-sensitive
liabilities and the increased proportion of funding from noninterest-bearing
deposits. The Company's increased asset sensitive position in this period of
rising interest rates had a significant positive effect on net interest
income. Since interest rate changes do not affect all categories of assets
and liabilities equally or simultaneously, a cumulative gap analysis alone
cannot be used to evaluate the Company's interest rate sensitivity position.
To supplement traditional gap analysis, the Company uses simulation modeling
to estimate the potential effects of changing interest rates. This process
allows the Company to fully explore the complex relationships within the gap
over time and various interest rate environments.
30 CITY NATIONAL CORPORATION
Maturing or repricing in
-------------------------------------------------------------------
After 3 After 1 year
3 months months but but within After
Dollars in millions or less within 1 year 5 years 5 years Total
-------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
Rate-sensitive assets:
Interest-bearing deposits in other banks $ .7 $ -- $ -- $ -- $ .7
Loans 1,216.2 166.1 152.7 50.1 1,585.1
Taxable investment securities 95.2 122.9 185.4 229.9 633.4
Nontaxable investment securities 1.1 8.5 14.7 1.3 25.6
Securities available for sale -- -- 62.0 28.4 90.4
Trading account securities 25.5 -- -- -- 25.5
Federal funds sold and securities purchased
under resale agreements 297.0 -- -- -- 297.0
------------------------------------------------------------------
Total rate-sensitive assets 1,635.7 297.5 414.8 309.7 2,657.7
------------------------------------------------------------------
Rate-sensitive liabilities:/(1)/
Interest checking deposits 305.6 -- -- -- 305.6
Money market accounts 669.9 -- -- -- 669.9
Savings deposits 88.0 -- -- -- 88.0
Time deposits 99.0 67.6 35.8 202.4
Federal funds purchased and securities sold
under repurchase agreements 182.1 -- -- -- 182.1
Other short-term borrowings 50.0 -- -- -- 50.0
------------------------------------------------------------------
Total rate-sensitive liabilities 1,394.6 67.6 35.8 -- 1,498.0
------------------------------------------------------------------
Interest rate sensitivity gap $ 241.1 $229.9 $379.0 $ 309.7 $1,159.7
=========================================================================================================================
Cumulative interest rate sensitivity gap $ 241.1 $471.0 $850.0 $1,159.7
=========================================================================================================================
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities 117% 132% 157% 177% 177%
=========================================================================================================================
Maturing or repricing in
------------------------------------------------------------------
After 3 After 1 year
3 months months but but within After
Dollars in millions or less within 1 year 5 years 5 years Total
-------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
Rate-sensitive assets:
Interest-bearing deposits in other banks $ .6 $ -- $ -- $ -- $ 0.6
Loans 1,308.4 82.8 140.4 17.9 1,549.5
Taxable investment securities 259.8 123.4 328.7 184.1 896.0
Nontaxable investment securities 1.1 2.5 2.8 .1 6.5
Securities available for sale -- -- -- 2.0 2.0
Trading account securities 39.8 -- -- -- 39.8
Federal funds sold and securities
purchased under resale agreements 265.0 -- -- -- 265.0
---------------------------------------------------------------------
Total rate-sensitive assets 1,874.7 208.7 471.9 204.1 2,759.4
---------------------------------------------------------------------
Rate-sensitive liabilities:/(1)/
Interest checking deposits 324.0 -- -- -- 324.0
Money market accounts 742.4 -- -- -- 742.4
Savings deposits 107.2 -- -- 107.2
Time deposits 153.1 73.6 37.0 1.4 265.1
Federal funds purchased and securities
sold under repurchase agreements 202.5 -- -- -- 202.5
Other short-term borrowings 15.0 -- -- -- 15.0
Mortgages payable 26.3 -- -- -- 26.3
---------------------------------------------------------------------
Total rate-sensitive liabilities 1,570.5 73.6 37.0 1.4 1,682.5
---------------------------------------------------------------------
Interest rate sensitivity gap $ 304.2 $135.1 $434.9 $ 202.7 $1,076.9
==========================================================================================================================
Cumulative interest rate sensitivity gap $ 304.2 $439.3 $874.2 $1,076.9
==========================================================================================================================
Cumulative ratio of rate-sensitive assets
to rate-sensitive liabilities 119% 127% 152% 164% 164%
==========================================================================================================================
/(1)/ Customer deposits which are subject to immediate withdrawal are presented
as repricing within 3 months or less. The distribution of other time
deposits is based on scheduled maturities.
CITY NATIONAL CORPORATION 31
SECURITIES
The Company classifies its securities as investment, available for sale or
trading. Securities which the Company has the ability and intent to hold
until maturity are classified as investment securities. Securities held to
facilitate customer trading orders are classified as trading securities. All
other securities are classified as available for sale securities.
INVESTMENT SECURITIES
Investment securities at year end were down $243.5 million, or 27.0% from 1993.
U.S. government and federal agency securities decreased $368.2 million, or
52.4%, due to the high level of short term securities held at December 31, 1993.
Mortgage-backed securities increased $108.7 million or 70.4%. State and
municipal securities totaled $25.6 million at December 31, 1994 compared with
$6.5 million at December 31, 1993. Other securities decreased $3.2 million, or
8.2%. The average expected maturity of total investment securities decreased
slightly to 3.2 years at December 31, 1994 compared with 3.5 years at the end of
1993. Sales of investment securities resulted in gains of $1.6 million in 1992,
none in 1993 and an insignificant amount in 1994.
The carrying amounts of investment securities at the dates indicated are
summarized as follows:
December 31,
-------------------------------
Dollars in thousands 1994 1993
---------------------------------------------------------------------------------------------------------------------------------
U.S. Government and federal agency securities $334,373 $702,529
Mortgage-backed securities 263,161 154,444
State and municipal securities 25,633 6,475
Other securities 35,846 39,033
-------------------------------
Total $659,013 $902,481
=================================================================================================================================
The following table shows the maturities of
investment securities at December 31, 1994.
One year Over 1 year Over 5 years Over
Total or less thru 5 years thru 10 years 10 years
------------------ ------------------ ------------------ ------------------ ------------------
Dollars in thousands Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/
-------------------------------------------------------------------------------------------------------------------------------
U.S. Government and
federal agency
securities $334,373 4.61% $120,811 4.31% $200,034 4.76% $ -- --% $ 13,528 4.96%
Mortgage-backed
securities 263,161 5.82 -- -- 9,591 7.68 57,434 5.21 196,136 5.90
State and municipal
securities 25,633 7.14 9,631 7.16 14,697 6.94 555 8.99 750 9.20
Other securities/(2)/ 35,846 5.97 2,061 4.67 4,104 5.28 1,500 6.83 28,181 6.12
--------------------------------------------------------------------------------------------------
Total $659,013 5.26% $132,503 4.52% $228,426 5.03% $59,489 5.28% $238,595 5.88%
=============================================================================================================================
Fair value $625,425 $130,448 $214,720 $57,249 $223,008
=============================================================================================================================
/(1)/ Fully taxable equivalent.
/(2)/ Equity securities are reported in the "Over 10 years" category.
32 CITY NATIONAL CORPORATION
AVAILABLE FOR SALE SECURITIES
The carrying amounts of available for sale securities
at the dates indicated are summarized as follows:
December 31,
------------------
Dollars in thousands 1994 1993
-------------------------------------------------------------------------------
U.S. Government and federal agency securities $33,649 $ --
Mortgage-backed securities 48,131 --
Other securities 8,642 2,000
--------------------
Total $90,422 $2,000
===============================================================================
The following table shows the maturities of
available for sale securities at December 31, 1994.
One year Over 1 year Over 5 years Over
Total or less thru 5 years thru 10 years 10 years
------------- ------------- ---------------- ---------------- -------------
Dollars in thousands Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Government and
federal agency
securities $33,649 6.23% $ -- --% $33,649 6.23% $ -- --% $ -- --%
Mortgage-backed
securities 48,131 6.76 -- -- -- -- -- -- 48,131 6.76
Other securities/(2)/ 8,642 7.80 -- -- -- -- -- -- 8,642 7.80
-------------------------------------------------------------------------------------------------
Total $90,422 6.63% $ -- --% $33,649 6.23% $ -- --% $56,773 6.88%
==============================================================================================================================
Amortized cost $96,124 $ -- $34,797 $ -- $61,327
==============================================================================================================================
/(1)/ Fully taxable equivalent.
/(2)/ Equity securities are reported in the "Over 10 years" category.
At December 31, 1994, securities available for sale totaled $90.4 million.
This included $33.6 million of government and agency securities, $48.1
million of mortgage-backed securities and $5.9 million of preferred stock. At
December 31, 1993 securities available for sale consisted of $2.0 million of
7.5% convertible preferred stock, which was converted into common stock in
January 1994. Sales of available for sale securities resulted in losses of
$3.4 million in 1994, and none in 1993 and 1992.
At December 31, 1994, 1993 and 1992, the Company did not have investments in
securities issued by any one non-federal issuer which exceeded 10% of its
shareholders' equity.
LOAN PORTFOLIO
LOANS BY TYPE
The amount of loans outstanding at the indicated year ends are shown in the
following table according to type of loans. The Company's lending activities
are predominately in Southern California. The Bank has no agricultural or
foreign loans.
December 31,
------------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------------
Commercial/(1)/ $ 904,103 $ 939,719 $1,177,948 $1,485,766 $1,746,152
Real estate loans -- construction 31,201 11,699 105,467 322,121 450,271
Real estate loans -- mortgage 453,832 617,067 731,234 735,606 784,051
Residential first mortgage 212,595 6,586 -- -- --
Installment loans 36,675 45,485 60,553 71,708 77,261
------------------------------------------------------------------
Total loans $1,638,406 $1,620,556 $2,075,202 $2,615,201 $3,057,735
===================================================================================================================================
/(1)/ Commercial included unsecured loans to real estate developers and
customers involved in real estate investments and commercial
loans where real estate partially secures the borrowing.
CITY NATIONAL CORPORATION 33
Loans by Type
[The pie percentages are:
Commercial 55.2%
Real Estate Mortgage 27.7%
Installment 2.2%
Real Estate Construction 1.9%
Residential First Mortgage 13.0%]
[PIE CHART]
Gross loans at December 31, 1994 were $1,638.4 million, up 1.1% or $17.9 million
from the previous year end. Commercial loans continue to represent the major
portion of the Bank's lending activity, constituting 55.2% and 58.0% at 1994 and
1993 year ends, respectively. Real estate construction loans increased $19.5
million, or 166.7%, between year ends as the Company resumed construction
lending on a limited basis in 1994. Real estate mortgage loans decreased $163.2
million, or 26.5%, primarily due to payoffs, normal amortization and charge
offs. Residential first mortgage loans increased to 13.0% of total loans as a
result of loan purchases and the creation of a residential loan origination
division.
At December 31, 1994, 76.5% of commercial loans, 83.6% of real estate loans,
including residential first mortgages, and 12.3% of installment loans
outstanding were floating interest rate loans. Floating rate loans comprised
78.1% of the total loan portfolio at December 31, 1994 and 82.1% at December
31, 1993. Total loans at December 31, 1994 were comprised of 49.1% due in one
year or less, 35.1% due in 1-5 years and 15.8% due after 5 years.
LOAN MATURITIES
December 31, 1994
--------------------------------------------------------------------------------------------
Real estate- Real estate- Residential
Dollars in thousands Commercial construction mortgage first mortgage Installment Total
-----------------------------------------------------------------------------------------------------------------------------------
Aggregate maturities of
loan balances due:
In one year or less
Interest rates -- floating $498,051 $26,325 $101,183 $ -- $ 4,133 $ 629,692
Interest rates -- fixed 134,438 -- 30,247 -- 9,871 174,556
After one year but within five years
Interest rates -- floating 182,155 4,876 253,882 193 379 441,485
Interest rates -- fixed 59,423 -- 58,309 2,319 13,124 133,175
After five years
Interest rates -- floating 11,097 -- 6,622 190,441 -- 208,160
Interest rates -- fixed 18,939 -- 3,589 19,642 9,168 51,338
------------------------------------------------------------------------------------------
Total loans $904,103 $31,201 $453,832 $212,595 $36,675 $1,638,406
===================================================================================================================================
The loan maturities shown in the table above are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Bank and
the borrower. Because the Bank is unable to estimate the extent to which its
borrowers will renew their loans the table is based on contractual
maturities.
34 CITY NATIONAL CORPORATION
CREDIT RISK MANAGEMENT
The Company assesses and manages credit risk on an ongoing basis through
diversification guidelines, lending limits, credit review and approval
policies and internal monitoring. As part of the control process, an
independent credit review function regularly examines the Company's loan
portfolio. In addition to this internal credit process, the Company's loan
portfolio is subject to examination by external regulators. Credit quality
will be influenced by underlying trends in the economic and business cycles.
The Company seeks to manage and control its risk through diversification of
the portfolio by type of loan, industry concentration and type of borrower.
REAL ESTATE LENDING, EXCLUDING RESIDENTIAL FIRST MORTGAGE
The Company engages in real estate lending in the form of construction loans
and permanent loans secured by deeds of trust. At year-end 1994, real estate
loans excluding residential first mortgages totaled $485.0 million, or 29.6%
of total loans, compared with 38.8% and 40.3% at year-end 1993 and 1992. Real
estate loans have decreased 24.9% from 1992 to 1993 and 22.9% from 1993 to
1994. The decrease in real estate mortgage loans between 1993 and 1994 was
primarily due to payoffs, normal principal repayments and charge offs.
Included in the "Other" category is a loan of $41.7 million that resulted
from the financing of the sale of the assets in the Disposition Program.
Management does not believe that this loan, which is performing as agreed,
poses risks significantly different from the Bank's existing real estate
mortgage loan portfolio. In addition to real estate loans outstanding, the
Company had open but unused commitments, excluding those under equity lines
of credit, to lend against real estate at December 31, 1994, of $24.2
million.
Nonaccrual real estate loans totaled $32.3 million, or 6.7% of related loans
outstanding, at December 31, 1994, down from $48.0 million, or 7.6% of
related loans outstanding at December 31, 1993 and from $96.3 million, or
11.5%, at December 31, 1992. The decrease in nonaccrual real estate loans at
December 31, 1994 compared with the two prior year ends is due in large part
to the decrease in the amount of loans placed on nonaccrual status during
1993 and 1994.
REAL ESTATE CONSTRUCTION LOANS BY TYPE
December 31,
----------------------------
Dollars in thousands 1994 1993
---------------------------------------------------------------------------------------------------------------------------------
Condo/apartment $ 2,110 $ --
Shopping centers 8,974 --
1-4 family (includes land) 9,062 594
Office building 5,262 7,282
Industrial 1,421 --
Other 4,372 3,823
---------------------------
Total $31,201 $11,699
=================================================================================================================================
REAL ESTATE MORTGAGE LOANS BY TYPE
December 31,
----------------------------
Dollars in thousands 1994 1993
---------------------------------------------------------------------------------------------------------------------------------
Equity lines of credit $ 22,475 $ 47,279
Industrial 96,329 123,594
Office building 87,113 110,183
Shopping centers 63,971 68,236
Other 1-4 family 10,603 30,761
Condo/apartment 31,840 54,040
Land, nonresidential 8,149 32,885
Other 133,352 150,089
----------------------------
Total $453,832 $617,067
=================================================================================================================================
CITY NATIONAL CORPORATION 35
Real estate net credit losses in 1994 totaled $25.4 million, or 4.5% of related
average outstandings. Real estate net credit losses in 1993 totaled $25.5
million, or 3.8% of related average outstandings and $20.4 million or 2.2% in
1992.
RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning nonaccrual loans, ORE, loans
which are contractually past due 90 days or more as to interest or principal
payments and still accruing, and restructured loans:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31,
----------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Real estate construction $ -- $ -- $ 21,219 $ 51,455 $ --
Real estate mortgage 32,336 48,016 75,128 30,522 22,639
Commercial 20,953 23,040 63,592 69,799 45,451
Installment -- -- 360 779 318
----------------------------------------------------------------
Total 53,289 71,056 160,299 152,555 68,408
ORE 7,924 5,559 94,065 64,510 2,130
----------------------------------------------------------------
Total nonaccrual loans and ORE $61,213 $76,615 $254,364 $217,065 $70,538
========================================================================================================================
Total nonaccrual loans as a percentage of total loans 3.25% 4.38% 7.72% 5.83% 2.24%
Total nonaccrual loans and ORE as a percentage of
total loans and ORE 3.72 4.71 11.73 8.10 2.31
Allowance for credit losses to nonaccrual loans 197.68 155.51 84.90 82.44 87.83
Assets held for accelerated disposition $ -- $17,450 $ -- $ -- $ --
In-substance foreclosures -- intangible assets 2,314 4,740 7,362 8,734 --
=========================================================================================================================
Loans past due 90 days or more on accrual status:
Real estate $ 2,830 $17,412 $ 25,458 $ 42,956 $17,079
Commercial 1,068 11,382 1,464 26,492 16,798
Installment 404 155 36 3,587 491
----------------------------------------------------------------
Total $ 4,302 $28,949 $ 26,958 $ 73,035 $34,368
========================================================================================================================
Restructured loans:
On accrual status $ 2,061 $ 958 $ 1,144 $ -- $ --
On nonaccrual status 7,043 -- -- -- 8,210
----------------------------------------------------------------
Total $ 9,104 $ 958 $ 1,144 $ -- $ 8,210
========================================================================================================================
The table below summarizes the changes in nonaccrual loans for the years ended
December 31, 1994 and 1993.
CHANGES IN NONACCRUAL LOANS
Year ended December 31,
----------------------------
Dollars in thousands 1994 1993
------------------------------------------------------------------------------------------------------------------
Balance, beginning of the year $ 71,056 $160,299
Loans placed on nonaccrual 71,576 105,695
Charge offs (30,039) (66,834)
Loans returned to accrual status (13,364) (43,052)
Repayments (including interest applied to principal) (44,352) (56,462)
Transfers to ORE (1,588) (13,892)
Transfers to assets held for accelerated disposition, net -- (14,698)
----------------------------
Balance, end of year $ 53,289 $ 71,056
==================================================================================================================
36 CITY NATIONAL CORPORATION
The additional interest income that would have been recorded from nonaccrual
loans, if the loans had not been on nonaccrual status was $4.2 million, $8.5
million and $12.6 million for the years ended December 31, 1994, 1993 and
1992, respectively. Interest payments received on nonaccrual loans are
applied to principal unless there is no doubt as to ultimate full repayment
of principal, in which case, the interest payment is recognized as interest
income. Interest income includes $3.5 million, $3.9 million and $3.2 million
for the years ended December 31, 1994, 1993, and 1992, respectively, from
collection of interest related to nonaccrual loans. Interest income not
recognized on nonaccrual loans reduced the net interest margin by 16, 33, and
36 basis points for the years ended December 31, 1994, 1993, and 1992,
respectively.
It is the Bank's policy that a loan will be placed on nonaccrual status if
either principal or interest payments are past due in excess of 90 days
unless the loan is both well secured and in process of collection, or if full
collection of interest or principal becomes uncertain, regardless of the time
period involved.
At December 31, 1994, in addition to loans disclosed above as past due,
nonaccrual or restructured, management also identified $16.0 million of loans
about which it had serious doubts as to the ability of the borrowers to comply
with the present loan payment terms in the future. This amount was determined
based on analysis of information known to management about the borrowers'
financial condition and current and expected economic conditions. Unfunded loan
commitments pertaining to these potential problem loans total $4.5 million. If
economic conditions change, adversely or otherwise, or if additional facts on
borrowers' financial condition come to light, then the amount of such potential
problem loans may change, possibly significantly. Estimated potential losses
from these potential problem loans have been provided for in determining the
allowance for credit losses.
At December 31, 1994, the allowance for credit losses was $105.3 million or
6.43% of period-end loans compared with 6.82% at December 31, 1993. The
allowance at December 31, 1994 was equal to 197.7% of total nonaccrual loans
up from 155.5% at December 31, 1993.
The following table summarizes average loans outstanding during the year and
changes in the allowance for credit losses for the five-year period 1990 to
1994.
Year ended December 31,
----------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------------
Average amount of loans outstanding $1,530,582 $1,737,401 $2,315,285 $2,852,311 $2,875,154
-----------------------------------------------------------------------------------------------------------------------------------
Balance of allowance for credit losses,
beginning of year $ 110,499 $ 136,095 $ 125,766 $ 60,083 $ 36,615
----------------------------------------------------------------
Loans charged off:
Commercial loans 20,503 56,012 97,751 47,600 21,707
Real estate loans -- construction -- 3,183 11,321 6,219 1,000
Real estate loans -- mortgage 26,354 23,149 9,209 3,212 --
Installment loans 128 621 1,460 779 668
----------------------------------------------------------------
Total loans charged off 46,985 82,965 119,741 57,810 23,375
----------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial loans 34,163 27,842 15,243 5,242 3,727
Real estate loans -- construction 161 20 167 20 --
Real estate loans -- mortgage 758 767 6 98 --
Installment loans 747 215 154 133 116
----------------------------------------------------------------
Total recoveries 35,829 28,844 15,570 5,493 3,843
----------------------------------------------------------------
Net loans charged off 11,156 54,121 104,171 52,317 19,532
Additions to allowance charged to
operating expense 6,000 30,000 114,500 118,000 43,000
Other/ (1) / -- (1,475) -- -- --
----------------------------------------------------------------
Balance, end of period $ 105,343 $ 110,499 $ 136,095 $ 125,766 $ 60,083
===================================================================================================================================
Ratio of net charge offs to average loans .73% 3.12% 4.50% 1.83% .68%
===================================================================================================================================
/(1)/ Allowance for credit losses allocated to $73.7 million of Equity Lines of
Credit sold in April, 1993.
CITY NATIONAL CORPORATION 37
The following table reflects management's allocation of the allowance for credit
losses by loan category and the ratio of loans in each category to total loans
at December 31 for each of the last five years.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSES
Allowance amount Percent of loans to total loans
----------------------------------------------------------- ---------------------------------
Dollars in thousands 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------- ---------------------------------
Commmercial $ 55,179 $ 53,110 $ 72,029 $77,780 $45,933 55% 58% 57% 57% 57%
Real estate --
construction 2,341 1,410 10,500 24,926 8,000 2 1 5 12 15
Real estate -- mortgage 43,745 55,020 52,323 21,560 4,700 28 38 35 28 26
Residential first mortgage 3,200 100 -- -- -- 13 -- -- -- --
Installment 878 859 1,243 1,500 1,450 2 3 3 3 2
---------------------------------------------------------- ---------------------------------
Total $105,343 $110,499 $136,095 $125,766 $60,083 100% 100% 100% 100% 100%
================================================================================================= =================================
The allowance allocated to the loan categories shown above is based on previous
loan loss experience, management's evaluation of the current loan portfolio, and
anticipated economic conditions. While the allowance is allocated to specific
loans and to portfolio segments, the allowance is general in nature and is
available for the portfolio in its entirety.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114 "Accounting by Creditors for Impairment of a Loan," which was amended in
October, 1994 by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." A loan is considered impaired when
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Once a loan is
determined to be impaired, SFAS No. 114 requires that the impairment be measured
based on the present value of the expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, the
impairment may be measured by using the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
If the measurement of the impaired loan is less than the recorded amount of
the loan, an impairment will be recognized by creating a valuation allowance
with a corresponding charge to the provision for credit losses or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to the provision for credit losses.
The Company adopted SFAS No. 114 and SFAS No.118 prospectively, on January 1,
1995. The adoption is not expected to have a material impact on the Company's
results of operations or shareholders' equity.
OTHER REAL ESTATE
The Company's ORE totaled $7.9 million at year end 1994 compared with $5.6
million a year ago and $94.1 million at December 31, 1992. The decrease in
ORE in 1993 was due to the transfer of $91.1 million of ORE to the
Disposition Program described below. The Company's policy is to record these
properties at fair value, net of selling expenses, at the time they are
transferred into ORE thereby tying future gains or losses from sale or
potential additional writedowns to underlying changes in the market.
38 CITY NATIONAL CORPORATION
ASSETS HELD FOR ACCELERATED DISPOSITION
In March 1993, the Bank adopted the Disposition Program to aggressively
dispose of ORE and certain problem loans with an aggregate book value before
the Disposition Program of $119.5 million. The Bank signed a definitive
agreement to sell, as of November 1, 1993, all six asset pools in the
Disposition Program to WHC-THREE Investors, L.P., a limited partnership. The
sales of the loans contained in the Disposition Program for $48.3 million
closed concurrently with the signing of the definitive agreement and a gain
of $12.8 million was recognized at that time, net of disposition expenses and
allowances. The sale of certain of the Disposition Program ORE closed in
the first half of 1994 and a gain of $4.2 million was recognized.
The Bank provided 75% financing for the sale of the Disposition Program
properties at terms comparable to other real estate loans in its portfolio.
The terms of the notes require annual pay downs and payment of the remaining
principal in five years in addition to payments when individual real estate
assets securing the loans are sold or refinanced. The unpaid balance on the
notes, all of which were performing, was $41.7 million and $56.0 million, at
December 31, 1994 and 1993, respectively.
DEPOSITS
The maturity distribution of time deposits of $100,000 or more at December
31, 1994 is as follows:
Public time Certificates
Dollars in thousands deposits of deposit Total
---------------------------------------------------------------------------------------------------------------------------
Under 3 months $1,100 $ 71,958 $73,058
3 to 6 months 120 20,914 21,034
6 to 12 months -- 15,398 15,398
Over 12 months -- 15,280 15,280
---------------------------------------------
Total $1,220 $123,550 $124,770
===========================================================================================================================
At December 31, 1994 and 1993 the aggregate amount of deposits by foreign
depositors in domestic offices totaled approximately $22 million and $27
million, respectively, the majority of which was interest bearing. The bank had
no brokered deposits at December 31, 1994 or 1993.
SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings and weighted average
rates.
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
Balances at Average Average Balances at Average Average Balances at Average Average
Dollars in thousands year-end balance rate year-end balance rate year-end balance rate
-----------------------------------------------------------------------------------------------------------------------------------
Federal funds
purchased and securities
sold under repurchase
agreements $182,120 $215,130 3.98% $202,459 $265,082 2.83% $339,149 $488,520 3.32%
Other short-term
borrowings 50,000 20,348 4.12 15,000 14,000 3.17 15,000 14,279 3.66
-----------------------------------------------------------------------------------------------------------------------------------
The maximum amount of federal funds purchased and securities sold with
agreements to repurchase at any month end was $269.4 million, $423.0 million
and $622.3 million in 1994, 1993 and 1992, respectively.
The maximum amount of other short-term borrowings at any month end was $50
million during the year ended December 31, 1994, and $15 million during the
years ended December 31, 1993 and 1992.
City National Corporation 39
1994 QUARTERLY OPERATING RESULTS
Quarter ended
----------------------------------------------
Dollars in thousands March 31 June 30 September 30 December 31 Total
---------------------------------------------------------------------------------------------------------------------
Interest income
From loans $29,499 $31,656 $32,988 $35,986 $130,129
From investments 11,239 13,212 14,053 13,192 51,696
--------------------------------------------------------
40,738 44,868 47,041 49,178 181,825
Interest expense (8,749) (9,443) (9,893) (10,329) (38,414)
--------------------------------------------------------
Net interest income 31,989 35,425 37,148 38,849 143,411
Provision for credit losses (3,000) (3,000) -- -- (6,000)
--------------------------------------------------------
Net interest income after
provision for credit losses 28,989 32,425 37,148 38,849 137,411
Noninterest income 10,321 8,874 8,785 8,200 36,180
Loss on sale of securities -- -- (647) (2,736) (3,383)
Noninterest expense (30,634) (29,401) (29,917) (32,879) (122,831)
ORE (expense) income 4,526 774 203 (206) 5,297
--------------------------------------------------------
Income before taxes 13,202 12,672 15,572 11,228 52,674
Income taxes (4,542) (4,443) (5,160) (1,366) (15,511)
--------------------------------------------------------
Net income $ 8,660 $ 8,229 $10,412 $ 9,862 $ 37,163
=====================================================================================================================
Net income per share $ .19 $ .18 $ .23 $ .21 $ .81
=====================================================================================================================
1993 QUARTERLY OPERATING RESULTS
Quarter ended
----------------------------------------------
Dollars in thousands March 31 June 30 September 30 December 31 Total
---------------------------------------------------------------------------------------------------------------------
Interest income
From loans $ 36,118 $32,489 $30,528 $32,015 $131,150
From investments 8,451 8,211 10,072 11,908 38,642
--------------------------------------------------------
44,569 40,700 40,600 43,923 169,792
Interest expense (12,122) (10,320) (9,965) (9,589) (41,996)
--------------------------------------------------------
Net interest income 32,447 30,380 30,635 34,334 127,796
Provision for credit losses (11,500) (7,500) (5,500) (5,500) (30,000)
--------------------------------------------------------
Net interest income
after provision for credit losses 20,947 22,880 25,135 28,834 97,796
Noninterest income 11,679 14,559 10,307 9,265 45,810
Noninterest expense (32,427) (32,206) (32,450) (32,143) (129,226)
Consolidation charge -- -- -- (12,000) (12,000)
ORE (expense) income (40,336) 72 2,020 12,570 (25,674)
--------------------------------------------------------
Income (loss) before taxes
from continuing operations (40,137) 5,305 5,012 6,526 (23,294)
Income (taxes) benefit 14,283 (1,543) (1,537) (1,943) 9,260
--------------------------------------------------------
Income (loss) from continuing operations (25,854) 3,762 3,475 4,583 (14,034)
Income from discontinued operations -- 7,128 -- -- 7,128
--------------------------------------------------------
Net income (loss) $(25,854) $10,890 $ 3,475 $ 4,583 $ (6,906)
=====================================================================================================================
Income (loss) per share from continuing operation $ (.80) $ .11 $ .08 $ .10 $ (.35)
=====================================================================================================================
Net income (loss) per share $ (.80) $ .30 $ .08 $ .10 $ (.17)
=====================================================================================================================
40 CITY NATIONAL CORPORATION
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions, and that the financial statements
reasonably present the Company's financial position and results of operations
in conformity with generally accepted accounting principles. Management also
has included in the Company's financial statements amounts that are based on
estimates and judgements that it believes are reasonable under the
circumstances.
The independent auditors audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and
provide an objective, independent review of the fairness of reported
operating results and financial position.
The Board of Directors of the Corporation has an Audit Committee comprised
solely of three non-management Directors. The Committee meets periodically with
financial management, the internal auditors and the independent auditors to
review accounting, internal control, auditing and financial reporting matters.
/s/ BRAM GOLDSMITH
Bram Goldsmith
Chairman of the Board and Chief Executive Officer
/s/ FRANK P. PEKNY
Frank P. Pekny
Executive Vice President and Chief Financial Officer
January 17, 1995
INDEPENDENT AUDITORS' REPORT
[KPMG PEAT MARWICK LLP LOGO]
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CITY NATIONAL CORPORATION:
We have audited the accompanying consolidated balance sheet of City
National Corporation and subsidiaries as of December 31, 1994 and 1993 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of City National Corporation and subsidiaries
as of December 31, 1992 and for the year then ended were audited by other
auditors whose report dated January 13, 1993 expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurances about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of City
National Corporation and subsidiaries as of December 31, 1994 and 1993 and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 17, 1995
CITY NATIONAL CORPORATION 41
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------
Dollars in thousands 1994 1993
-----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 298,715 $ 234,504
Interest-bearing deposits in other banks 674 649
Federal funds sold and securities purchased under resale agreements 296,966 265,000
Investment securities (market value $625,425 in 1994 and $902,738 in 1993) 659,013 902,481
Securities available for sale (cost $96,124 in 1994 and $2,000 in 1993) 90,422 2,000
Trading account securities 25,531 39,765
Loans 1,638,406 1,620,556
Less allowance for credit losses 105,343 110,499
-----------------------
Net loans 1,533,063 1,510,057
Leveraged leases 9,856 13,852
Premises and equipment, net 19,231 20,359
Customers' acceptance liability 5,104 5,150
Other real estate 7,924 5,559
Deferred tax asset 28,250 18,050
Assets held for accelerated disposition -- 17,450
Other assets 38,026 65,750
-----------------------
Total assets $3,012,775 $3,100,626
=====================================================================================================
LIABILITIES
Demand deposits $1,151,709 $1,088,026
Interest checking deposits 305,659 324,034
Money market deposits 669,940 742,381
Savings deposits 88,027 107,221
Time deposits-under $100,000 77,657 96,672
Time deposits-$100,000 and over 124,770 168,433
-----------------------
Total deposits 2,417,762 2,526,767
-----------------------
Federal funds purchased and securities
sold under repurchase agreements 182,120 202,459
Other short-term borrowings 50,000 15,000
Mortgages payable -- 26,319
Other liabilities 27,068 26,857
Acceptances outstanding 5,104 5,150
-----------------------
Total liabilities 2,682,054 2,802,552
-----------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock authorized - 5,000,000, none outstanding -- --
Common Stock-par value - $1.00; authorized - 75,000,000
Outstanding - 45,192,678 and 45,027,417
shares in 1994 and 1993, respectively 45,193 45,027
Surplus 263,611 262,471
Unrealized loss on available for sale securities (3,564) --
Retained earnings (deficit) 25,481 (9,424)
-----------------------
Total shareholders' equity 330,721 298,074
-----------------------
Total liabilities and shareholders' equity $3,012,775 $3,100,626
=====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
42 CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31,
-------------------------------
In thousands, except per share amounts 1994 1993 1992
----------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $130,129 $131,150 $175,182
Interest on federal funds sold and securities purchased
under resale agreements 7,264 9,357 19,592
Interest on investment securities:
U. S. Treasury and federal agency securities 32,521 26,190 30,127
Municipal securities 848 122 5,488
Other securities 1,566 813 1,008
Interest on securities available for sale 8,301 1,001 74
Interest on trading account 1,196 1,159 1,578
------------------------------
Total 181,825 169,792 233,049
------------------------------
INTEREST EXPENSE
Interest on deposits 29,023 33,974 67,690
Interest on federal funds purchased and securities sold
under repurchase agreements 8,552 7,499 16,220
Interest on other short-term borrowings 839 523 523
------------------------------
Total 38,414 41,996 84,433
------------------------------
Net interest income 143,411 127,796 148,616
Provision for credit losses 6,000 30,000 114,500
------------------------------
Net interest income after provision for credit losses 137,411 97,796 34,116
------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 9,294 11,570 10,618
Trust fees 6,762 7,390 7,480
Investment services income 7,168 6,288 6,439
Credit card merchant fees -- -- 4,537
Gain on sale of selected ELC loans -- 4,460 --
Gain on sale of assets 1,494 1,941 --
Gain (loss) on sale of securities (3,383) -- 1,629
All other income 11,462 14,161 16,291
------------------------------
Total 32,797 45,810 46,994
------------------------------
NONINTEREST EXPENSE
Salaries and other employee benefits 64,396 69,783 83,563
Net occupancy of premises 10,286 11,828 11,546
Data processing 7,202 7,757 8,007
Professional 8,264 7,348 8,437
FDIC insurance 5,774 7,202 7,504
Office supplies 4,658 4,994 5,951
Promotion 2,962 1,900 3,012
Depreciation 4,145 4,516 4,725
Equipment 2,653 1,996 2,283
Other operating 12,491 11,902 17,859
Consolidation charge -- 12,000 --
ORE expense (income) (5,297) 25,674 20,825
------------------------------
Total 117,534 166,900 173,712
------------------------------
Income (loss) from continuing operations before taxes 52,674 (23,294) (92,602)
Income taxes (benefit) 15,511 (9,260) (32,450)
------------------------------
Income (loss) from continuing operations 37,163 (14,034) (60,152)
Income from discontinued operations -- 7,128 804
------------------------------
Net income (loss) $ 37,163 $ (6,906) $(59,348)
=========================================================================================
Income (loss) per share from continuing operations $ .81 $ (.35) $ (1.87)
=========================================================================================
Net income (loss) per share $ .81 $ (.17) $ (1.84)
=========================================================================================
Shares used to compute income (loss) per share 45,626 39,580 32,240
=========================================================================================
Dividends per share $ .05 $ -- $ --
=========================================================================================
See accompanying Notes to Consolidated Financial Statements.
CITY NATIONAL CORPORATION 43
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31,
--------------------------------------------------------
Dollars in thousands 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 37,163 $ (6,906) $ (59,348)
Adjustment to net income (loss):
Provision for credit losses 6,000 30,000 114,500
Writedowns on ORE 1,535 40,283 18,388
Gain on sales of ORE and Disposition Program (5,597) (15,568) (365)
Depreciation 4,145 4,516 4,725
Net (increase) decrease in trading securities 14,234 (29,507) 102,029
Net (increase) decrease in deferred tax benefits (10,200) 19,070 (3,972)
Increase in accrued liabilities, net 165 11,879 2,734
Other, net 35,745 (5,287) (17,170)
--------------------------------------------------------
Net cash provided by operating activites 83,190 48,480 161,521
--------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (25) 14,307 15,044
Purchase of securities available for sale (249,087) -- --
Sales and maturities of securities available for sale 151,961 18,928 34,615
Maturities of investment securities 532,297 230,357 522,641
Purchase of investment securities (313,786) (711,798) (271,608)
Purchase of residential mortgage loans (187,623) -- --
Loan originations and principal collections, net 118,765 354,191 363,017
Proceeds from sales of ORE and Disposition Program assets 20,543 41,639 16,402
Proceeds from sale of leveraged leases 5,141 -- --
Proceeds from sales of loans -- 76,684 --
Other, net 33,661 9,450 11,647
--------------------------------------------------------
Net cash provided by investing activities 111,847 33,758 691,758
--------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in federal funds purchased
and securities sold under repurchase agreements (20,339) (136,690) (240,177)
Net decrease in deposits (109,005) (384,509) (752,943)
Net increase in short-term borrowings 35,000 -- --
Proceeds from issuance of common stock 1,147 76,989 190
Cash dividends paid (2,258) -- --
Other, net (3,405) 1,659 (2,153)
--------------------------------------------------------
Net cash used in financing activities (98,860) (442,551) (995,083)
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 96,177 (360,313) (141,804)
Cash and cash equivalents at beginning of year 499,504 859,817 1,001,621
--------------------------------------------------------
Cash and cash equivalents at end of year $ 595,681 $ 499,504 $ 859,817
=================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 38,406 $ 42,771 $ 88,700
Income taxes 4,444 (30,018) (6,909)
Noncash investing activities:
Transfer from loans to foreclosed assets 4,023 28,590 72,813
Transfers from (to) investment securities
to/from securities available for sale -- (8,201) 30,277
Loan to facilitate sale of disposition program assets -- 55,955 --
Noncash financing activities:
Proceeds from mortgages payable (26,319) 26,319 --
=================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
44 CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
loss on
securities Retained Total
Shares Common available earnings shareholders'
Dollars in thousands outstanding stock Surplus for sale (deficit) equity
----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1991 32,214,230 $ 32,214 $ 198,020 $ -- $ 56,830 $ 287,064
Net loss -- -- -- -- (59,348) (59,348)
Stock options exercised 25,484 26 164 -- -- 190
Tax benefit from stock options -- -- 38 -- -- 38
------------------------------------------------------------------------------
Balances, December 31, 1992 32,239,714 32,240 198,222 -- (2,518) 227,944
Net loss -- -- -- -- (6,906) (6,906)
Stock options exercised 70,892 71 417 -- -- 488
Proceeds from rights offering 12,716,811 12,716 63,785 -- -- 76,501
Tax benefit from stock options -- -- 47 -- -- 47
------------------------------------------------------------------------------
Balances, December 31, 1993 45,027,417 45,027 262,471 -- (9,424) 298,074
Net income -- -- -- -- 37,163 37,163
Stock options exercised 165,261 166 981 -- -- 1,147
Tax benefit from stock options -- -- 159 -- -- 159
Cash dividends -- -- -- -- (2,258) (2,258)
Unrealized loss on securities
available for sale -- -- -- (3,564) -- (3,564)
------------------------------------------------------------------------------
Balances, December 31, 1994 45,192,678 $ 45,193 $ 263,611 $ (3,564) $ 25,481 $ 330,721
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CITY NATIONAL CORPORATION 45
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of City National Corporation (the
Corporation) and of City National Bank (the Bank) and its subsidiaries
conform to generally accepted accounting principles and to prevailing
practices within the banking industry.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
the Corporation, the Bank (100% owned), and its wholly owned subsidiaries
after elimination of all material intercompany transactions. The Company also
has, through its subsidiaries, a 32% interest in a real estate partnership.
The Company's equity in the net income and capital of this partnership are
included in the consolidated financial statements. Certain prior years' data
have been reclassified to conform to current year presentation.
SECURITIES
Securities held for investment are classified as investment securities.
Because the Company has the ability and management has the intent to hold
investment securities until maturity, investment securities are stated at
cost adjusted for amortization of premiums and accretion of discounts.
Trading account securities are stated at market value. Investments not
classified as trading securities nor as investment securities are classified
as available for sale securities and recorded at fair value. Unrealized
gains or losses on available for sale securities are excluded from
earnings and reported as a net amount, after taxes, in a separate component of
shareholders' equity, until realized. Investment services income consists of
fees, commissions and mark ups on securities transactions with customers and
money market mutual fund fees. Premiums or discounts on investment and available
for sale securities are amortized or accreted into income on a level yield
basis. Realized gains or losses on sales of investment or available for sale
securities are recorded using the specific identification method.
LOANS
Loans are generally carried at amounts advanced less principal payments
collected and unamortized non-refundable fees. Interest income is accrued as
earned. Non refundable fees are amortized into income on a level yield method
or straight line method if not materially different. Loans held for sale are
recorded at the lower of cost or market value.
Loans are placed on nonaccrual status when a loan becomes 90 days past due as
to interest or principal unless the loan is both well secured and in process
of collection. Loans are also placed on nonaccrual status when the full
collection of interest or principal becomes uncertain. When a loan is placed
on nonaccrual status, the accrued and unpaid interest receivable is reversed.
Thereafter, interest collected on the loan is accounted for on the cash or
cost recovery method until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when all delinquent
principal and interest is brought current in accordance with the terms of the
loan agreement and certain performance criteria have been met.
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgement of the adequacy of the allowance for credit losses and is determined
through periodic analytical reviews of the loan portfolio, problem loans and
consideration of such other factors as the Bank's loan loss experience, trends
in problem loans, and concentrations of credit risk, and current and expected
future economic conditions, as well as the results of the Company's ongoing
examination process and that of its regulators.
LEVERAGED LEASES
Income from leveraged leases is recognized over the terms of the leases based
upon the unrecovered equity investment.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed generally on a straight-
46 CITY NATIONAL CORPORATION
line basis over the estimated useful life of each type of asset. Gains and
losses on dispositions are reflected in current operations. Maintenance and
repairs are charged to operating expenses.
OTHER REAL ESTATE (ORE)
Other real estate is comprised of real estate acquired in satisfaction of
loans and in-substance foreclosures. In-substance foreclosures are properties
in which a borrower with little or no equity in the collateral effectively
abandons control of the property or has no economic interest to continue
involvement in the property. The borrower's ability to rebuild equity, based
on current financial conditions, is considered doubtful. Property acquired by
foreclosure or deed in lieu of foreclosure and properties classified as in-
substance foreclosures are transferred to ORE and are recorded at fair value,
less estimated costs to sell, at the date of transfer of the property
constructively or actually received. The fair value of the ORE property is based
upon a current appraisal. Losses that result from the ongoing periodic valuation
of these properties are charged against ORE expense in the period in which they
are identified. Expenses for holding costs are charged to operations as
incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of existing differences between financial reporting and tax
reporting basis of assets and liabilities, as well as for operating losses
and tax credit carry forwards, using enacted tax laws and rates. Deferred tax
assets will be reduced through a valuation allowance whenever it becomes more
likely than not that all, or some portion, will not be realized. Deferred income
taxes (benefit) represents the net change in the deferred tax asset or liability
balance during the year. This amount, together with income taxes currently
payable or refundable in the current year, represents the total income taxes
(benefit) for the year.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed on the basis of the average number of
common shares outstanding during each period plus the common stock
equivalents which would arise from exercise of common stock options in per-
iods when there is a dilutive effect.
OTHER
The Company and its subsidiaries are on the accrual basis of accounting for
income and expenses. In accordance with the usual practice of banks, assets
and liabilities of individual trust, agency and fiduciary funds have not
been included in the accounts.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are purchased and sold for one day periods.
DISCONTINUED OPERATIONS
In December 1992, the Bank entered into an agreement with Systematics, Inc.
to sell its data processing business, City National Information Services
(CNIS). Accordingly, all income and expenses related to CNIS have been
removed from continuing operations and are now included in the Consolidated
Statement of Operations under the caption "Net Income from discontinued
operations." Except where noted, footnote disclosures relate solely to
continuing operations.
DERIVATIVES
Gains or losses on derivative financial instruments identified as hedges of
assets or liabilities are included in the carrying value of the associated
asset or liability. Gains or losses on the hedges of firm commitments or
anticipated transactions are deferred and recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs.
CITY NATIONAL CORPORATION 47
NOTE 2. INVESTMENT SECURITIES
The following is a summary of the amortized cost and estimated fair value for
the major categories of investment securities:
Gross Gross
December 31, Carrying unrealized unrealized Fair
Dollars in thousands value gains losses value
----------------------------------------------------------------------------------------------
1994
U.S. Government and federal agency securities $334,373 $ -- $15,392 $318,981
Mortgage-backed securities 263,161 -- 17,554 245,607
State and municipal securities 25,633 15 500 25,148
Other securities 35,846 -- 157 35,689
---------------------------------------------
Total $659,013 $ 15 $33,603 $625,425
==============================================================================================
1993
U.S. Government and federal agency securities $702,529 $2,651 $ 1,722 $703,458
Mortgage-backed securities 154,444 -- 1,085 153,359
State and municipal securities 6,475 182 -- 6,657
Other securities 39,033 236 5 39,264
---------------------------------------------
Total $ 902,481 $3,069 $ 2,812 $902,738
==============================================================================================
Sales of investment securities resulted in gains of $1.6 million in 1992, none
in 1993 and an insignificant amount in 1994.
The carrying values and estimated fair values of investment securities at
December 31, 1994, by contractual maturity, are shown below:
One year Over 1 year Over 5 years Over
Total or less thru 5 years thru 10 years 10 years
----------------- ---------------- ---------------- ----------------- -----------------
Dollars in thousands Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/
---------------------------------------------------------------------------------------------------------------------
U.S. Government
and federal agency
securities $334,373 4.61% $120,811 4.31% $200,034 4.76% $ -- --% $ 13,528 4.96%
Mortgage-backed
securities 263,161 5.82 -- -- 9,591 7.68 57,434 5.21 196,136 5.90
State and municipal
securities 25,633 7.14 9,631 7.16 14,697 6.94 555 8.99 750 9.20
Other securities/(2)/ 35,846 5.97 2,061 4.67 4,104 5.28 1,500 6.83 28,181 6.12
------------------------------------------------------------------------------------------
Total $659,013 5.26% $132,503 4.52% $228,426 5.03% $59,489 5.28% $238,595 5.88%
===================================================================================================================
Fair value $625,425 $130,448 $214,720 $57,249 $223,008
===================================================================================================================
/(1)/Fully taxable equivalent.
/(2)/Equity securities are reported in the "Over 10 years" category.
Securities totaling $162.1 million at December 31, 1994 were pledged to
secure trust funds, public deposits and for other purposes required or
permitted by law.
48 CITY NATIONAL CORPORATION
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following is a summary of amortized cost and estimated fair value for the
major categories of securities available for sale:
Gross Gross
December 31, Amortized unrealized unrealized Fair
Dollars in thousands Cost gains losses value
----------------------------------------------------------------------------------------------------------------------------------
1994
U.S. Government and federal agency securities $34,798 $ -- $1,149 $33,649
Mortgage-backed securities 52,927 -- 4,796 48,131
Other securities 8,399 829 586 8,642
------------------------------------------------------
Total $96,124 $ 829 $6,531 $90,422
==================================================================================================================================
1993
Other securities $ 2,000 $ -- $ -- $ 2,000
------------------------------------------------------
Total $ 2,000 $ -- $ -- $ 2,000
==================================================================================================================================
Sales of available for sale securities resulted in losses of $3.4 million in
1994, and none in 1993 and 1992.
The estimated fair value and amortized cost of securities available for sale
at December 31, 1994, by contractual maturity, are shown below:
One year Over 1 year Over 5 years Over
Total or less thru 5 years thru 10 years 10 years
------------------- ------------------ ------------------ ------------------ ------------------
Dollars in thousands Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/ Amount Yield/(1)/
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Government
and federal agency
securities $33,649 6.23% $ -- --% $33,649 6.23% $ -- --% $ -- --%
Mortgage-backed
securities 48,131 6.76 -- -- -- -- -- -- 48,131 6.76
Other securities/(2)/ 8,642 7.80 -- -- -- -- -- -- 8,642 7.80
----------------------------------------------------------------------------------------------------------
Total $90,422 6.63% $ -- --% 33,649 6.23% $ -- --% $56,773 6.88%
==================================================================================================================================
Amortized cost $96,124 $ -- $34,797 $ -- $61,327
==================================================================================================================================
/(1)/ Fully taxable equivalent.
/(2)/ Equity securities are reported in the "Over 10 years"
category.
NOTE 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES
The following is a summary of the major categories of loans:
December 31,
---------------------------------------
Dollars in thousands 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 904,103 $ 939,719
Real estate construction loans 31,201 11,699
Real estate mortgage loans 453,832 617,067
Residential first mortgage loans 212,595 6,586
Installment loans 36,675 45,485
---------------------------------------
Total loans (net of unearned income and fees of $5,455 and $4,031) $1,638,406 $1,620,556
==================================================================================================================================
CITY NATIONAL CORPORATION 49
In the normal course of business, the Bank has loans to officers and Directors
as well as loans to companies and individuals affiliated with or guaranteed by
officers and Directors of the Company and the Bank. These loans were made in the
ordinary course of business at rates and terms no more favorable than those
offered to other customers with a similar credit standing. The aggregate dollar
amounts of these loans were $16.7 million and $17.5 million at December 31, 1994
and 1993, respectively. During 1994 there were no advances and repayments
totaled $0.8 million. Interest income recognized on these loans amounted to $1.5
million, $2.3 million and $3.5 million during 1994, 1993 and 1992, respectively.
At December 31, 1994, none of these loans were on nonaccrual status. Based on
analysis of information presently known to management about the loans to
officers and Directors and their affiliates, management believes all such
borrowers have the ability to comply with the present loan repayment terms.
Loans past due 90 days or more and still accruing interest totaled $4.3 million,
$28.9 million and $27.0 million at December 31, 1994, 1993 and 1992,
respectively. Restructured loans totaled $9.1 million, $1.0 million, and $1.1
million at December 31, 1994, 1993 and 1992, respectively. At December 31, 1994
$7.0 million of the restructured loans were on nonaccrual status.
The following is a summary of activity in the allowance for credit losses:
Dollars in thousands 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $110,499 $136,095 $125,766
Provision charged to expense 6,000 30,000 114,500
Adjustments/(1)/ -- (1,475) --
Charge offs (46,985) (82,965) (119,741)
Recoveries 35,829 28,844 15,570
-------------------------------------------
Net credit losses (11,156) (54,121) (104,171)
-------------------------------------------
Balance, December 31 $105,343 $110,499 $136,095
==================================================================================================================================
/(1)/ Allowance for credit losses allocated to $73.7 million of equity line of
credit loans sold in April, 1993.
The following is a summary of nonaccrual loans and related interest foregone:
December 31,
-------------------------------------------
Dollars in thousands 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $53,289 $71,056 $160,299
-------------------------------------------
Contractual interest due $ 7,682 $12,356 $ 15,841
Interest recognized 3,489 3,871 3,208
-------------------------------------------
Net interest foregone $ 4,193 $ 8,485 $ 12,633
==================================================================================================================================
The following is a summary of foregone interest on loans on nonaccrual status at
December 31. This summary does not include interest foregone on loans on
nonaccrual status that were either charged off prior to year end or transferred
to ORE prior to year end.
December 31,
-------------------------------------------
Dollars in thousands 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Contractual interest due $6,206 $7,975 $16,944
Interest recognized 1,136 2,632 9,536
------------------------------------------
Net interest foregone $5,070 $5,343 $ 7,408
==================================================================================================================================
50 CITY NATIONAL CORPORATION
NOTE 5. ASSETS HELD FOR ACCELERATED DISPOSITION
In March, 1993, the Bank adopted an accelerated asset dispostion program
("the Disposition Program") to aggressively dispose of ORE and certain
problem loans with an aggregate book value before the Disposition Program of
$119.5 million.
The Bank signed, a definitive agreement, as of November 1, 1993 to sell all
six asset pools in the Disposition Program to WHC-THREE Investors, L.P.,
("WHC-THREE"), a limited partnership. The sale of the loans closed
concurrently with the signing of the definitive agreement and a gain of $12.8
million was recognized at that time net of disposition expenses and
allowances. This gain is included in other real estate expense in the
Consolidated Statement of Operations. The sale of the Disposition Program ORE
closed in the first half of 1994 at which time a pretax gain of $4.2 million
was recognized. From November 17, 1993 until closing, WHC-THREE provided
interim mortgages totaling $26.3 million which were cancelled in exchange for
title to the ORE properties at the closing of the sale of these properties.
These interim mortgages are included in mortgages payable in the consolidated
balance sheet.
The Bank provided $56.0 million in financing for this sale at terms
comparable to other real estate loans in its portfolio. The terms of the
notes require annual pay downs and payment of the remaining principal in five
years in addition to payments when individual real estate assets securing the
loans are sold or refinanced. At December 31, 1994 and 1993 the outstanding
balance on this loan, was $41.7 million and $56.0 million, respectively.
NOTE 6. NET INVESTMENT IN LEVERAGED LEASES
The following is a summary of the net investment in leveraged leases:
Dollars in thousands 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
Net rental receivables $ 8,300 $ 9,100
Estimated residual values (ranging from 5% to 20% of original asset cost) 3,500 6,660
Deferred expenses 17 175
Less: deferred income (1,961) (2,083)
------------------------
Investment in leveraged leases 9,856 13,852
Less: deferred taxes arising from leveraged leases (7,662) (7,799)
------------------------
Net investment in leveraged leases $ 2,194 $ 6,053
==================================================================================================================================
The Bank is the lessor of transportation and other equipment under leveraged
lease agreements expiring in various years extending to the year 2006. The
equity investment represents between 27% and 38% of the purchase price; the
remaining amount was furnished by third-party financing in the form of
nonrecourse long-term debt and is secured by the property. For federal income
tax purposes, the Bank, as an equity participant, is entitled to allowable
investment tax credits, deductions for depreciation of asset cost, and related
debt service costs, based on its share of the investment.
On January 14, 1994, the Bank sold its interest in two leveraged leases and
realized a gain of $1.3 million.
CITY NATIONAL CORPORATION 51
NOTE 7. PREMISES AND EQUIPMENT
The following is a summary of data for the major categories of premises and
equipment:
Accumulated
depreciation and Carrying
Dollars in thousands Cost amortization value
----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
Premises, including land of $2,490 $32,414 $19,895 $12,519
Furniture, fixtures and equipment 28,758 22,046 6,712
-------------------------------------------------
Total $61,172 $41,941 $19,231
==================================================================================================================================
DECEMBER 31, 1993
Premises, including land of $2,490 $34,313 $20,715 $13,598
Furniture, fixtures and equipment 31,730 24,969 6,761
-------------------------------------------------
Total $66,043 $45,684 $20,359
==================================================================================================================================
Depreciation and amortization expense was $4.1 million in 1994, $4.5 million in
1993 and $4.7 million in 1992. Net rental payments on operating leases included
in net occupancy of premises in the Consolidated Statement of Operations were
$7.6 million in 1994, $8.9 million in 1993, and $8.4 million in 1992.
The future net minimum rental commitments were as follows at December 31, 1994:
Dollars in thousands Net minimum rental commitments
----------------------------------------------------------------------------------------------------------------------------------
1995 $ 5,661
1996 4,987
1997 4,088
1998 3,278
1999 2,584
2000 - 2004 5,383
2005 - 2009 911
After 2009 1,313
-------
Total $28,205
==================================================================================================================================
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions and escalation clauses. The Bank paid
$.9 million, $.9 million and $.5 million during 1994, 1993 and 1992,
respectively, for rent and operating expense pass throughs to a real estate
partnership in which the Bank owns a 32% interest, and Mr. Bram Goldsmith,
Chairman and Chief Executive Officer, indirectly owns a 14% interest.
NOTE 8. CONSOLIDATION CHARGE
In November 1993, the Bank announced a consolidation plan to improve efficiency
and operational productivity in its branch network. By the second quarter of
1994 six branches were closed and the number of lending locations reduced. To
cover the costs associated with this action, the Bank recorded a consolidation
charge of $12.0 million in the fourth quarter of 1993, comprised of $7.5 million
for disposition of lease commitments, $1.5 million for disposition of fixed
assets and $3.0 million for severance costs and other expenses directly related
to the consolidation. At December 31, 1994, the balance in the allowance for
branch consolidation totaled $7.6 million and is included in "Other liabilities"
in the Consolidated Balance Sheet. The remaining balance of the allowance
consists primarily of the present value of amounts estimated by management
required to settle lease obligations through early termination or payment of
monthly lease obligations for the duration of the lease contract.
52 CITY NATIONAL CORPORATION
NOTE 9. INCOME TAXES
Income taxes (benefit) on income from continuing operations is composed of
the following amounts:
Dollars in thousands Current Deferred Total
----------------------------------------------------------------------------------------------------------------------------------
1994
Federal $ 22,761 $ (4,200) $ 18,561
State 800 (3,850) (3,050)
-------------------------------------------
Total $ 23,561 $ (8,050) $ 15,511
==================================================================================================================================
1993
Federal $(25,250) $ 15,990 $ (9,260)
State -- -- --
-------------------------------------------
Total $(25,250) $ 15,990 $ (9,260)
==================================================================================================================================
1992
Federal $(28,478) $ (3,972) $(32,450)
State -- -- --
-------------------------------------------
Total $(28,478) $ (3,972) $(32,450)
==================================================================================================================================
Additionally, the Company recorded tax expense of $3.7 million and $0.4 million
in 1993 and 1992, respectively on income from discontinued operations. Deferred
tax benefits in the amount of $2.2 million in 1994 and none in 1993 and 1992
relating to unrealized losses on available for sale securities and stock option
compensation were credited to shareholders' equity.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993 are presented below:
Dollars in thousands 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $32,439 $29,925
Accrued expenses 4,128 5,340
State income taxes 11,910 15,020
Unrealized losses on available for sale securities 1,995 --
ORE writedowns -- 898
Other 180 485
-----------------------------
Total gross deferred tax assets 50,652 51,668
Valuation allowance (10,737) (18,426)
-----------------------------
39,915 33,242
Deferred tax liabilities:
Leveraged leases 7,662 7,799
Installment sales 3,231 6,437
Depreciation 74 221
Loan fees 523 320
Other 175 415
-----------------------------
Total gross deferred tax liabilities 11,665 15,192
-----------------------------
Net deferred tax assets $28,250 $18,050
==================================================================================================================================
CITY NATIONAL CORPORATION 53
The following is a listing of the elements of deferred tax benefits for 1992:
Dollars in thousands 1992
----------------------------------------------------------------------------------------------------------------------------------
Lower credit loss deduction for tax return purposes $(4,413)
Higher income from leveraged leases for tax return purposes (880)
Higher state tax deduction for tax return purposes 1,263
Lower depreciation for tax return purposes (106)
Lower loss from ORE for tax return purposes (1,306)
Higher income from investments for tax return purposes (2,136)
Unrealized net operating losses 4,754
All other -- net (1,148)
-------
Total $(3,972)
==================================================================================================================================
Income taxes (benefit) resulted in effective tax rates that differ from the
statutory federal income tax rate for the following reasons:
% of pretax income (loss)
-------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
Statutory rate (benefit) 35.0% (35.0)% (34.0)%
Net state income tax (benefit) (4.1) -- --
Tax exempt income (1.5) (3.5) (2.7)
Realized net operating loss carry back -- (1.1) --
All other -- net -- (.2) 1.7
-------------------------------------
Effective tax provision (benefit) 29.4% (39.8)% (35.0)%
==================================================================================================================================
SFAS No. 109 requires that the tax benefit of deductible temporary differences
and net operating loss carry forwards be recorded as an asset to the extent that
management assesses the utilization of such temporary differences and
carryforwards to be "more likely than not." In accordance with SFAS No. 109, the
realization of tax benefits of deductible temporary differences and carry
forwards depends on whether the Company has sufficient taxable income within the
carryback and carryforward period permitted by the tax law to allow for
utilization of the deductible amounts.
As of January 1, 1994, the Company had an $18.4 million valuation allowance
principally related to net California deductible temporary differences of $116.9
million and net operating loss carryforwards of $31.0 million. California law
does not permit carrybacks and requires a 50% reduction of tax losses that are
carried forward to future years. In the fourth quarter of 1994, due to the
Company's continued and improved profitability, the Company reduced the
valuation allowance by $3.9 million that related to the net deductible temporary
differences that are expected to be realized within a twelve month carry forward
period, which is the period over which management believes is prudent to make
projections for such purposes. The additional reduction in the valuation
allowance was a result of changes in the components of the net deferred tax
asset during 1994 including $3.6 million due to the Company's utilization
against current income of its California net operating loss carry forward. As a
result the valuation allowance for deferred tax assets at December 31, 1994 was
reduced to $10.7 million.
At December 31, 1994 and 1993, the Company had income tax refunds receivable of
$5.7 million and $24.5 million, respectively. These amounts are included in
other assets in the Consoilidated Balance Sheet.
NOTE 10. RETIREMENT PLAN
The Company has a profit sharing retirement plan with an IRS Section 401(k)
feature covering all employees with at least one year of continuous service.
Contributions are made on an annual basis into a trust fund and are allocated
to the participants based on their salaries and length of service. The
contribution requirement is based on a percentage of annual operating income
before security gains or losses. In 1994 the
54 CITY NATIONAL CORPORATION
Company contribution was $3.3 million. Due to the Company's losses, no
contributions were made for 1993 or 1992.
Employees may contribute up to 10% of their pretax salary, but not more than the
maximum allowed under IRS regulations. The Bank matches 10% of the first four
percent of covered compensation contributed using participants' forfeitures and
additional Bank contributions if necessary. For 1994, 1993, and 1992 the Bank's
matching contribution expense was $140,000, $122,000 and $123,000, respectively.
The Company does not provide for any post-retirement employee benefits beyond
the profit sharing retirement plan.
NOTE 11. STOCK OPTION PLANS
Under the 1985 Stock Option Plan, 5,614,530 shares of the Corporation's common
stock were reserved for grant of stock options. The Corporation's 1983 Stock
Option Plan has expired but options granted thereunder remain outstanding. The
grants will be at prices at least equal to the market price of the Corporation's
stock on the effective date of the grant. In each succeeding year following the
date of grant, 25% of the options become exercisable. After ten years from
grant, all unexercised options will expire.
The Corporation on January 31, 1990, (in connection with a five year Employment
Agreement) granted to Mr. Bram Goldsmith, Chairman of the Board and Chief
Executive Officer, non-qualified stock options for 400,000 shares of the
Corporation's common stock at the market price at the date of the grant, of
$21.25, together with tax offset bonus rights. Such options are exercisable 25%
per year beginning at the end of the first year of such employment contract. In
November 1993, the stock option was adjusted to 436,080 shares at an exercise
price of $19.50 per share to reflect the effect of the Corporation's rights
offering in May, 1993. The tax offset bonus rights entitle Mr. Goldsmith to
receive an amount in cash equal to 11.1% of the excess of the fair market value
of each share on the date of exercise over the option price per share multiplied
by the number of shares exercised. These options have an expiration date of
January 30, 1995.
The following is a summary of the transactions under the stock option plans
described above:
1994 1993
-----------------------------------------------------
Number/(1)/ Number/(1)/
of shares Option price of shares Option price
--------------------------------------------------------------------------------------
Options outstanding, January 1 4,888 $5.05 - 23.75 3,936 $5.50 - 23.75
Granted 21 8.38 - 10.88 1,587 6.31 - 6.99
Exercised (165) 5.97 - 8.72 (71) 5.50 - 9.13
Cancelled (493) 6.31 - 23.75 (564) 6.88 - 23.75
--------------------------------------------------
Options outstanding, December 31 4,251 $5.05 - 23.75 4,888 $5.05 - 23.75
======================================================================================
/(1)/In thousands
At December 31, 1994, nonqualified and incentive stock options covering
1,241,581 and 1,934,434 shares, respectively, of the Company's common stock
were exercisable under the plans. At December 31, 1994, 1,189,663 shares were
available for future grants.
The Company also grants annually to each Director stock options with a value of
$3,000 at an exercise price of $1 per share. Such options fully vest six months
after grant. During 1994 and 1993, options to purchase 3,537 and 3,267 shares
respectively, were granted to Directors.
NOTE 12. AVAILABILITY OF FUNDS FROM SUBSIDIARIES;
RESTRICTIONS ON CASH BALANCES; CAPITAL
Historically, the majority of the funds for the payment of dividends by the
Corporation has been obtained from its subsidiary, City National Bank. Under
federal banking law, dividends declared by national banks in any calendar year
may not, without the approval of the OCC, exceed net profits (as defined), for
that year combined with its retained net profits for the preceding two calendar
years. The Bank paid no dividends in 1994 or 1993.
CITY NATIONAL CORPORATION 55
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances. Cash balances maintained to meet reserve requirements are not
available for use by the Bank or the Corporation. During 1994 and 1993, reserve
balances averaged approximately $58.2 million and $49.9 million, respectively.
The minimum Tier 1 and total capital ratios are 4.00% and 8.00% respectively.
The minimum leverage ratio capital requirement is from 3.00% to 5.00% depending
on an institution's composite rating by its primary regulator. The capital
ratios for the Company and the Bank were in excess of all these minimum capital
requirements as of December 31, 1994.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit, letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount reflected in the Consolidated Balance Sheet.
Exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit, letters of credit and
financial guarantees written, is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company had outstanding loan commitments aggregating $650.0 million and
$681.4 million at December 31, 1994 and 1993, respectively. In addition, the
Company had $78.6 million and $94.1 million outstanding in bankers acceptances
and letters of credit of which $49.4 million and $58.2 million relate to standby
letters of credit at December 31, 1994 and 1993, respectively. Substantially all
of the Company's loan commitments are on a variable rate basis and are comprised
of real estate and commercial loan commitments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis.
The Corporation and its subsidiaries are defendants in various pending lawsuits
claiming substantial amounts. Based upon present knowledge, management and in-
house counsel are of the opinion that the final outcome of such lawsuits will
not have a material adverse effect upon the financial position of the Company or
the future results of its operations.
NOTE 14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
SECURITIES AND TRADING ACCOUNT ASSETS
For securities held as investments or available for sale, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. For
trading account securities, fair values are based on quoted market prices or
dealer quotes.
LOANS
For certain homogeneous categories of loans, such as some residential mortgages,
and other consumer loans, fair value is estimated using dealer quotes, adjusted
for differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future
56 CITY NATIONAL CORPORATION
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. In
establishing the credit risk component of the fair value calculations for loans,
the Company concluded that the allowance for credit losses represented a
reasonable estimate of the credit risk component of the fair value of loans at
December 31, 1994 and 1993.
DEPOSITS
The fair value of demand and interest checking deposits, savings deposits, and
certain money market accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits with similar remaining
maturities.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate of fair
value.
MORTGAGES PAYABLE
The fair value of mortgages payable at December 31, 1993 approximated the
carrying value as the mortgages matured in early 1994.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. The fair
value of guarantees and letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1994 December 31, 1993
------------------------ ----------------------
Carrying Fair Carrying Fair
Dollars in thousands amount value amount value
---------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 299,389 $ 299,389 $ 235,153 $ 235,153
Federal funds sold and securities purchased
under resale agreements 296,966 296,966 265,000 265,000
Investment securities 659,013 625,425 902,481 902,738
Securities available for sale 90,422 90,422 2,000 2,000
Trading account assets 25,531 25,531 39,765 39,765
Loans, net of allowance for credit loss 1,533,063 1,517,630 1,510,057 1,511,398
Financial liabilities:
Deposits 2,417,762 2,416,253 2,526,767 2,528,895
Federal funds purchased and securities sold
under repurchase agreements 182,120 182,120 202,459 202,459
Other short-term borrowings 50,000 50,000 15,000 15,000
Mortgages payable -- -- 26,319 26,319
Commitments to extend credit (3,566) (3,566) (3,850) (3,850)
----------------------------------------------------------------------------------------------------
NOTE 15. DISCONTINUED OPERATIONS
On June 1, 1993, the Bank closed the sale of its data processing business, City
National Information Services (CNIS), to Systematics, Inc. for $12.0 million
and recognized a pretax gain of $10.8 million.
The Company has reclassified the prior years' operations of CNIS and presented
them as "Income from discontinued operations" on the Consolidated Statement of
Operations. Included in other assets at December 31, 1993 was a receivable of
$8.8 million for a portion of the purchase price which was paid on January 4,
1994.
CITY NATIONAL CORPORATION 57
Selected financial data for the discontinued operation is summarized below:
Dollars in thousands 1993 1992
-----------------------------------------------------
Revenues $ -- $36,547
Gain from sale of CNIS 10,800 --
Expenses -- 35,303
------------------
Net income before income taxes 10,800 1,244
Income taxes 3,672 440
------------------
Net income $ 7,128 $ 804
=====================================================
Billings to the Bank by Systematics (CNIS in 1992) amounted to $6.2 million,
$6.8 million and $7.0 million for 1994, 1993 and 1992, respectively and are
included in Data Processing expenses. Under the Bank's contract with
Systematics, the minimum annual purchases for data processing services were $5.7
million in 1994. This obligation will continue until December 31, 2000 and will
increase annually at 80% of the increase in the Consumer Price Index.
NOTE 16. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
December 31,
--------------------
Dollars in thousands 1994 1993
--------------------------------------------------------------------
Assets:
Cash $ 204 $ 57
Short-term investments 475 5,500
Investment securities 8,227 10,443
Securities available for sale 8,729 2,000
Other assets 434 373
Investment in Bank 312,776 279,785
--------------------
Total assets $330,845 $298,158
====================================================================
Liabilities:
Other liabilities $ 124 $ 84
Total shareholders' equity 330,721 298,074
-------------------
Total liabilities and shareholders' equity $330,845 $298,158
====================================================================
STATEMENT OF OPERATIONS
Year ended December 31,
--------------------------------
Dollars in thousands 1994 1993 1992
-----------------------------------------------------------------------------------------------
Income:
Dividends from Bank $ -- $ -- $ --
Interest and dividend income 854 634 238
--------------------------------
Total income 854 634 238
Expenses 361 269 255
--------------------------------
Income (loss) before tax (provision) benefit and equity in
undistributed income (loss) of Bank 493 365 (17)
Income taxes (benefit) 121 115 (40)
--------------------------------
Income before equity in undistributed income (loss)
of Bank 372 250 23
Equity in undistributed income (loss) of Bank 36,791 (7,156) (59,371)
--------------------------------
Net income (loss) $37,163 $(6,906) $(59,348)
================================================================================================
58 CITY NATIONAL CORPORATION
STATEMENT OF CASH FLOWS
Year ended December 31,
---------------------------------
Dollars in thousands 1994 1993 1992
---------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 37,163 $ (6,906) $(59,348)
Adjustments to net income (loss):
Equity in undistributed (income)
loss of Bank (36,791) 7,156 59,371
Other, net 185 11 (82)
---------------------------------
Net cash provided by (used in)
operating activities 557 261 (59)
---------------------------------
Investing Activities:
Capital contributed to Bank -- (65,000) --
Net decrease (increase) in short-term investments 5,025 (2,211) (2,379)
Sale (purchase) of investment securities -- (10,443) 2,200
Maturities of investment securities 2,000 -- --
Purchase of securities available for sale (6,711) -- --
Sales of securities available for sale 310 -- --
Other, net (112) 399 --
---------------------------------
Net cash provided by (used in) investing activities 512 (77,255) (179)
---------------------------------
Financing Activities:
Cash dividends paid (2,258) -- --
Sale of common stock (net of expenses) -- 76,501 --
Stock options exercised 1,147 488 190
Other, net 189 47 37
---------------------------------
Net cash provided by (used in) financing activities (922) 77,036 227
---------------------------------
Net increase (decrease) in cash and cash equivalents 147 42 (11)
Cash and cash equivalents at beginning of year 57 15 26
---------------------------------
Cash and cash equivalents at end of year $ 204 $ 57 $ 15
=============================================================================================
NOTE 17. DERIVATIVE FINANCIAL INSTRUMENTS
At December 31, 1994 and 1993 the Company had derivative instruments consisting
solely of foreign exchange spot and forward contracts of $50,000 and $365,000,
respectively, with insignificant financial exposure to the Company. The
contracts are entered into for the purpose of hedging foreign collection
services offered to customers and gains or losses are recognized when
collections are made.
All the contracts are exchange traded, had maturities of less than five months,
and were for Japanese Yen and Italian Lira.
CITY NATIONAL CORPORATION 59
MARKET DATA ON SHARES OF COMMON STOCK
Principal Market: NYSE
Stock Symbol: CYN
Market Price
Dividend ------------------------------
1994 Paid High Low Close
----------------------------------------------------------
Fourth quarter $.05 $11 5/8 $8 1/4 $10 5/8
Third quarter -- 12 1/8 9 7/8 11
Second quarter -- 11 3/4 8 10
First quarter -- 9 1/4 7 1/8 8 3/8
1993
----------------------------------------------------------
Fourth quarter -- 8 3/8 7 1/8 7 1/2
Third quarter -- 8 3/4 6 5/8 8
Second quarter -- 10 1/2 6 5/8 7 1/4
First quarter -- 11 1/8 6 5/8 10 1/2
----------------------------------------------------------
Market prices based on the sales prices during quarter as reported in The Wall
Street Journal.
The number of shareholders of record as of December 31, 1994 was 2,454.
FORM 10-K
For shareholders and others interested in information beyond that shown in this
report, the Company's Annual Report on Form 10-K for 1994, required to be filed
with the Securities and Exchange Commission, may be obtained without charge by
writing to:
Heng Chen, Senior Vice President
Finance Division, City National Bank
400 North Roxbury Dr.
Beverly Hills, CA 90210
CITY NATIONAL CORPORATION 63