SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996 Commission File Number 1-10521
CITY NATIONAL CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------------ ----------
Number of shares of common stock outstanding at April 30, 1996: 43,616,022
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
March 31, December 31, March 31,
1996 1995 1995
---------- ------------ ---------
(Dollars in thousands)
Cash and due from banks ............................................. $ 302,901 $ 339,737 $ 240,609
Interest-bearing deposits in other banks ............................ 30,701 80,696 686
Federal funds sold and securities purchased under
resale agreements ................................................. 160,000 351,803 135,000
Investment securities (market values $168,143, $110,524
and $609,684 at March 31, 1996, December 31, 1995 and
March 31, 1995, respectively) ..................................... 169,998 110,006 628,872
Securities available for sale (cost $673,418, $862,276 and
$104,512 at March 31, 1996, December 31, 1995 and
March 31, 1995, respectively) .................................... 666,367 865,401 101,238
Trading account securities .......................................... 32,363 29,728 26,716
Loans................................................................ 2,373,914 2,346,611 1,625,569
Less allowance for credit losses .................................... 128,911 131,514 108,358
---------- ---------- ----------
Net loans ......................................................... 2,245,003 2,215,097 1,517,211
Leveraged leases .................................................... 6,614 8,400 9,204
Premises and equipment, net ......................................... 24,028 23,607 20,677
Customers' acceptance liability ..................................... 1,754 2,656 2,706
Other real estate ................................................... 12,562 7,439 5,042
Deferred tax asset .................................................. 63,400 64,420 29,925
Other assets ........................................................ 52,250 58,561 30,171
---------- ---------- ----------
Total assets ...................................................... $3,767,941 $4,157,551 $2,748,057
========== ========== ==========
LIABILITIES
Demand deposits ..................................................... $1,194,003 $1,490,934 $ 910,903
Interest checking deposits .......................................... 307,806 380,230 264,033
Money market accounts ............................................... 746,243 759,707 614,603
Savings deposits .................................................... 133,238 130,704 84,258
Time deposits - under $100,000 ...................................... 131,481 142,731 74,295
Time deposits - $100,000 and over ................................... 358,103 343,729 124,251
---------- ---------- ----------
Total deposits .................................................... 2,870,874 3,248,035 2,072,343
Federal funds purchased and securities sold
under repurchase agreements ....................................... 288,996 258,353 278,581
Other short-term borrowings ......................................... 160,843 195,100 17,706
Long-term debt ...................................................... 34,800 25,000 -
Other liabilities ................................................... 53,896 61,450 34,914
Acceptances outstanding ............................................. 1,754 2,656 2,706
---------- ---------- ----------
Total liabilities ................................................. 3,411,163 3,790,594 2,406,250
---------- ---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock authorized-5,000,000, none outstanding - - -
Common stock- par value- $1.00; authorized - 75,000,000
Issued-45,817,762, 45,553,724 and 45,342,370 at
March 31, 1996, December 31, 1995 and March 31,
1995, respectively ................................................ 45,818 45,554 45,342
Additional paid-in capital ......................................... 269,588 266,829 264,675
Unrealized gain (loss) on available for sale securities.............. (4,054) 1,955 (2,048)
Retained earnings ................................................... 74,370 62,518 33,838
Treasury shares, at cost -2,211,200 and 762,500 at March 31, 1996
and December 31, 1995, respectively ............................... (28,944) (9,899) -
---------- ---------- ----------
Total shareholders' equity ........................................ 356,778 366,957 341,807
---------- ---------- ----------
Total liabilities and shareholders' equity ........................ $3,767,941 $4,157,551 $2,748,057
========== ========== ==========
See accompanying Notes to the Unaudited Consolidated Financial Statements
-2-
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the quarter ended March 31,
-------------------------------
1996 1995
----------- -----------
(Dollars in thousands)
INTEREST INCOME:
Interest and fees on loans ............................... $53,223 $37,702
Interest on federal funds sold and securities purchased
under resale agreements ................................ 1,407 1,201
Interest on investment securities:
U.S. Treasury and federal agency securities ............ 1,587 7,439
Municipal securities ................................... 320 287
Other securities ....................................... 571 543
Interest on securities available for sale................. 10,743 1,742
Interest on trading account securities.................... 470 456
--------- ---------
Total .................................................. 68,321 49,370
--------- ---------
INTEREST EXPENSE:
Interest on deposits ..................................... 13,433 7,218
Interest on federal funds purchased and securities sold
under repurchase agreements ............................ 4,427 3,133
Interest on other short-term borrowings .................. 877 506
Interest on long-term debt ............................... 424 -
--------- ---------
Total .................................................. 19,161 10,857
--------- ---------
NET INTEREST INCOME ...................................... 49,160 38,513
PROVISION FOR CREDIT LOSSES .............................. - -
--------- ---------
Net interest income after provision for credit losses .... 49,160 38,513
--------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts ...................... 2,646 1,839
Investment services income .............................. 2,469 1,984
Trust fees ............................................... 1,721 1,638
Gain on sale of leverage leases .......................... 688 -
Gain on sales of securities ............................. 742 344
All other income ......................................... 3,121 2,761
--------- ---------
Total noninterest income................................ 11,387 8,566
--------- ---------
NONINTEREST EXPENSE:
Salaries and other employee benefits ..................... 20,139 16,593
Net occupancy of premises ................................ 2,814 1,994
Data processing .......................................... 2,183 1,772
Professional ............................................. 3,139 1,737
FDIC insurance ........................................... 1 1,233
Office supplies .......................................... 1,154 1,070
Depreciation ............................................. 1,278 1,002
Promotion ................................................ 1,145 1,128
Equipment ................................................ 480 417
Other operating .......................................... 3,654 2,679
Other real estate expense ................................ 174 152
--------- ---------
Total noninterest expense............................... 36,161 29,777
--------- ---------
Income before taxes......................................... 24,386 17,302
Income taxes ............................................... 8,534 6,685
--------- ---------
NET INCOME ................................................. $15,852 $10,617
========= =========
NET INCOME PER SHARE ....................................... $0.35 $0.23
========= =========
Shares used to compute net income per share ................ 44,932 45,843
========= =========
See accompanying Notes to the Unaudited Consolidated Financial Statements
-3-
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the three months
ended March 31,
---------- ----------
1996 1995
---------- ----------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income .................................................. $ 15,852 $ 10,617
Adjustment to net income:
Provision for credit losses................................ - -
Gain on sale of leveraged leases........................... (688) -
Depreciation............................................... 1,278 1,002
Net increase in trading securities......................... (2,635) (1,185)
Net decrease (increase) in deferred tax benefits........... 1,020 (1,675)
Income tax refund ......................................... - 4,500
Other, net................................................. (4,496) 6,766
--------- ---------
Net cash provided by operating activites................. 10,331 20,025
--------- ---------
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments............ 49,995 (12)
Purchase of securities available for sale.................... (324,294) (10,552)
Sales and maturities of securities available for sale........ 510,243 2,224
Maturities of investment securities.......................... 8,621 29,588
Purchase of investment securities............................ (72,147) -
Purchase of residential mortgage loans....................... (118,283) (43,210)
Other loan originations and principal collections, net....... 85,457 58,594
Proceeds from sale of leveraged leases....................... 1,824 -
Other, net................................................... 16,619 4,054
--------- ---------
Net cash provided by investing activities.................. 158,035 40,686
--------- ---------
FINANCING ACTIVITIES
Net increase in federal funds purchased and
securities sold under repurchase agreements................ 30,643 96,461
Net decrease in deposits..................................... (377,161) (345,419)
Net decrease in short term borrowings....................... (34,257) (32,294)
Proceeds from long term debt................................. 9,800 -
Proceeds from issuance of stock.............................. 2,820 1,216
Purchase of treasury shares.................................. (19,045) -
Cash dividends paid.......................................... (4,000) (2,262)
Other, net................................................... (5,805) 1,515
--------- ---------
Net cash used in financing activities...................... (397,005) (280,783)
--------- ---------
Net decrease in cash and cash equivalents.................... (228,639) (220,072)
Cash and cash equivalents at beginning of year............... 691,540 595,681
--------- ---------
Cash and cash equivalents at end of year..................... $ 462,901 $ 375,609
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest ................................................ $ 15,882 $ 10,709
Income taxes............................................. 1,750 (4,500)
Non cash investing activities:
Transfer from loans to ORE .............................. 5,123 316
See accompanying Notes to the Unaudited Consolidated Financial Statements
-4-
CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
For the three months ended
March 31,
---------------------------
1996 1995
-------- --------
(Dollars in thousands)
Common Stock
Balance, beginning of period............................. $ 45,554 $ 45,193
Stock options exercised.................................. 264 149
-------- --------
Balance, end of period................................... 45,818 45,342
-------- --------
Surplus
Balance, beginning of period............................. 266,829 263,609
Stock options exercised.................................. 2,556 921
Tax benefit from stock options........................... 203 145
-------- --------
Balance, end of period................................... 269,588 264,675
-------- --------
Treasury shares
Balance, beginning of period............................. (9,899) -
Purchase of shares....................................... (19,045) -
-------- --------
Balance, end of period................................... (28,944) -
-------- --------
Unrealized net gains (losses) on securities available for sale
Balance, beginning of period............................. 1,955 (3,564)
Change during period..................................... (6,009) 1,516
-------- --------
Balance, end of period................................... (4,054) (2,048)
-------- --------
Retained earnings
Balance, beginning of period............................. 62,518 25,483
Net income............................................... 15,852 10,617
Dividends paid........................................... (4,000) (2,262)
-------- --------
Balance, end of period................................... 74,370 33,838
-------- --------
Total shareholders' equity................................. $ 356,778 $ 341,807
======== ========
See accompanying Notes to the Unaudited Consolidated Financial Statements
-5-
NOTES TO THE FINANCIAL STATEMENTS OF THE REGISTRANT
1. The results of operations reflect the interim adjustments, all of which are
of a normal recurring nature and which, in the opinion of management, are
necessary for a fair presentation of the results for such interim periods.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
2. 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 securities available for sale and recorded at fair value. Unrealized
gains or losses for securities available for sale are excluded from earnings
and reported as a net amount after taxes, in a separate component of
shareholders' equity, until realized.
3. For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold and securities purchased
under resale agreements, and do not include items with original maturities
of over 90 days.
4. Certain prior year data have been reclassified to conform to current year
presentation.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
OVERVIEW
City National Corporation (the Corporation) is the holding company for City
National Bank (the Bank). Because the Bank constitutes substantially all of
the business of the Company, references to the Company in this Item 2 reflect
the consolidated activities of the Corporation and the Bank.
RESULTS OF OPERATIONS
The Company recorded consolidated net income of $15.9 million, or $.35 per
share, in the first quarter of 1996, compared to a net income of $10.6
million, or $.23 per share, in the first quarter of 1995. The change between
first quarters resulted from an increase in net interest income and
noninterest income of $10.6 million and $2.8 million, respectively, partially
offset by an increase in noninterest expense of $6.4 million. Returns on
average assets and on average equity for the first quarter of 1996 were 1.73%
and 17.38%, respectively, compared with 1.60% and 12.83% in the first quarter
of 1995.
Taxable equivalent net interest income was $49.9 million in the first
quarter of 1996, up 27.9% from the year-ago quarter. The increase resulted
from the 36.1% increase in average interest earning assets between quarters.
Due to a higher proportion of total funding in the first quarter of 1996 from
time deposits of $100,000 and over and wholesale money market sources, the net
interest spread decreased from 5.10% to 4.62% and the net interest margin
decreased from 6.36% to 5.99%. Management expects modest growth in quarterly
net interest income for the remainder of 1996 from first quarter 1996 levels.
The foregoing forward-looking statement assumes, among other things, that
interest rate levels will remain relatively constant and is based on the
anticipated growth in earning assets, either of which may cause actual
results to differ materially if the assumption proves to have been incorrect.
See "Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995," below.
Average loans increased $729.1 million (45.0%) between first quarters to
$2,348.7 million at March 31, 1996. The majority of this increase reflected
higher average residential first mortgage loans outstanding, up $429.4
million (185.9%). This increase resulted from both the Bank's internal loan
generation and bulk purchases of residential mortgage loans. Average
construction loans increased $44.3 million (123.6%) from the first quarter of
1995, primarily as a result of the Bank's increased efforts in generating
new construction loan commitments. Average commercial and real estate mortgage
loans increased $173.5 million (20.0%) and $79.7 million (17.7%) due primarily
to the acquisition of First Los Angeles Bank (First LA) on
-7-
December 31, 1995. Total average investment and available for sale securities
increased $102.6 million (13.9%) between first quarters due mainly to the
improved liquidity resulting from the acquisition of First LA, which had total
loans at December 31, 1995 of $338 million and total deposits of $796
million. In December 1995, the Company reclassified securities with a book
value of $402.3 million and a market value of $401.2 million from the
investment securities classification to available for sale as permitted by the
Guide to the Implementation of SFAS No. 115. Total average deposits increased
$751.5 million (36.4%) between first quarters due primarily to the acquisition
of First LA as well as increased deposit levels from the Bank's non-First LA
customers.
The provision for credit losses was zero for the quarters ended March 31,
1996 and 1995, respectively. Loans charged off in the first quarter of 1996
were $5.5 million, compared to $2.9 million in the first quarter of 1995.
Recoveries were $2.9 million in the first quarter of 1996, compared to $6.0
million in the first quarter of 1995. The provision for credit losses is
expected to remain at reduced levels in 1996. This forward-looking statement
is based on an assumption that general economic conditions in Southern
California will not deteriorate materially in 1996, and if this assumption
proves to have been inaccurate, an increased provision for credit losses may
be required. See "Cautionary Statement For Purposes of the 'Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995," below .
Non-interest income, excluding gains and losses on the sale of securities
and assets, totaled $10.0 million for the first quarter of 1996, up $1.7
million (21.1%) from a year earlier. Service charges on deposit accounts
increased $.8 million (43.9%) for the quarter ended March 31, 1996 due
primarily to the acquisition of First LA and higher levels of service charges
resulting from the lower earnings on deposit balances as a result of lower
interest rates compared to the prior year. Investment services income
increased $.5 million due to higher fees and new investment products offered
to customers. Other income in 1996 included a pre-tax gain of $.7 million from
the sale of a leveraged lease and securities gains of $.7 million while other
income in 1995 included $.3 million in gains from the sale of securities.
Management expects modest growth in non-interest income from first quarter
1996 levels during the remaining quarters of 1996. See "Cautionary Statement
For Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995," below.
Excluding net ORE results, non-interest expense totaled $36.0 million in
the first quarter of 1996, an increase of $6.4 million (21.5%) from the first
quarter of 1995. Salaries and other employee benefits increased $3.5 million
(21.4%) for the first quarter of 1996 from the first quarter of 1995 due to
the additional personnel added as a result of the acquisition of First LA.
-8-
Noninterest expense levels for the remaining quarters of 1996 are expected to
decrease from first quarter 1996 levels with the completion of the integration
of First LA into City National Bank. See "Cautionary Statement For Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act
of 1995," below.
Net ORE results was $.2 million for both the first quarter of 1996 and of
1995.
The Company's effective tax rate decreased to 35.0%in the first quarter of
1996 from 38.6% in the first quarter of 1995. The decrease resulted from the
recognition of $1.0 million in previously unrecorded California deferred taxes
and a higher level of municipal leases, municipal bonds and preferred stock
holdings in the securities portfolio as compared with the prior year. The
Company expects the effective tax rate for the remainder of 1996 to remain
near first quarter 1996 levels. See "Cautionary Statement For Purposes of the
'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995," below.
-9-
NET INTEREST INCOME SUMMARY
The following table presents the components of net interest income for the
quarters ended March 31, 1996 and 1995.
3-31-96 3-31-95
------------------------------------ -----------------------------------
Interest Average Interest Average
Average income/ interest Average income/ interest
Dollars in thousands- Balance expense (1) rate Balance expense (1) rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS (2)
Earning assets
Loans: (3)
Commercial loans $1,040,799 $23,849 9.22 % $867,346 $20,479 9.58 %
Real estate - construction 80,187 2,335 11.71 35,856 1,131 12.79
Real estate - mortgage 530,149 13,160 9.98 450,409 11,317 10.19
Residential first mortgages 660,403 13,320 8.11 230,973 4,129 7.25
Installment loans 37,114 947 10.26 34,929 894 10.38
---------- ------- ----- --------- ------- -----
Total loans 2,348,652 53,611 9.18 1,619,513 37,950 9.40
---------- ------- ----- --------- ------- -----
Due from banks-interest bearing 26,821 392 5.88 683 3 1.78
State and municipal investment securities 27,412 498 7.31 25,723 446 7.03
Taxable investment securities 107,097 1,766 6.63 616,944 7,979 5.25
Securities available for sale 703,540 10,854 6.20 92,813 1,742 7.61
Federal funds sold and securities
purchased under resale agreements 100,909 1,407 5.61 74,376 1,201 6.55
Trading account securities 31,789 487 6.16 28,243 502 7.21
---------- ------- ----- --------- ------ -----
Total earning assets 3,346,220 69,015 8.30 2,458,295 49,823 8.15
---------- -------- ----- --------- ------ -----
Allowance for credit losses (132,097) (107,432)
Cash and due from banks 299,763 241,182
Other nonearning assets 161,385 95,930
---------- ----------
Total assets $3,675,271 $2,687,975
========== ==========
LIABILITIES AND SHAREHOLDERS'S EQUITY
Noninterest - bearing deposits $1,147,607 - - $ 879,699 - -
Interest-bearing deposits:
Interest checking accounts 327,018 816 1.00 274,232 654 0.97
Money market accounts 731,477 5,356 2.94 627,067 4,080 2.64
Savings deposits 132,527 1,007 3.06 85,188 413 1.97
Time deposits - under $100,000 130,387 1,695 5.23 76,188 762 4.06
Time deposits - $100,000 and over 346,625 4,559 5.29 121,732 1,309 4.36
---------- -------- ----- ---------- ------ -----
Total interest - bearing deposits 1,668,034 13,433 3.24 1,184,407 7,218 2.47
---------- -------- ----- ---------- ------ -----
Total deposits 2,815,641 2,064,106
Federal funds purchased and securities
sold under repurchase agreements 337,965 4,427 5.27 221,544 3,133 5.74
Other borrowings 90,695 1,301 5.77 34,570 506 5.94
---------- -------- ----- ---------- ------ -----
Total interest - bearing liabilities 2,096,694 19,161 3.68 1,440,521 10,857 3.05
---------- -------- ----- ---------- ------ -----
Other liabilities 64,163 32,173
Shareholders' equity 366,807 335,582
---------- ----------
Total liabilities and shareholders'
equity $3,675,271 $2,687,975
========== ==========
Net interest spread 4.62 5.10
==== ====
Fully taxable equivalent net interest income $49,854 $38,966
======= =======
and margin 5.99 % 6.36 %
==== ====
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $50,562 and $61,503 for 1996 and
1995, respectively.
(3) Loan income includes loan fees of $1,744 and $1,742 for 1996 and 1995,
respectively.
-10-
The following tables set forth, for the periods indicated, the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Average balances in all categories in each reported period were used
in the volume computations. Average yields and rates in each reported period
were used in rate computations.
Quarter Ended March 31, Quarter Ended March 31,
1996 vs 1995 1995 vs 1994
----------------------------------- -----------------------------------
Increase Increase
Dollars in thousands - (decrease) (decrease)
Fully taxable equivalent basis due to (1): Net due to (1): Net
---------------------- increase ---------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
--------- -------- ---------- ---------- --------- ----------
Interest earned on:
Interest-bearing deposits
in other banks $ 367 $ 22 $ 389 $ 0 $ (2) $ (2)
Loans 16,958 (1,297) 15,661 921 7,408 8,329
Taxable investment securities (7,915) 1,702 (6,213) (1,807) 702 (1,105)
Non-taxable investment securities 33 19 52 263 (63) 200
Securities available for sale 9,493 (381) 9,112 1,401 211 1,612
Trading account securities 61 (76) (15) 19 253 272
Federal funds sold and
securities purchased
under resale agreements 394 (188) 206 (1,482) 1,035 (447)
-------- ------- -------- -------- -------- --------
Total interest-earning
assets 19,391 (199) 19,192 (685) 9,544 8,859
-------- ------- -------- -------- -------- --------
Interest paid on:
Interest checking 139 23 162 (42) 0 (42)
Money market deposits 761 515 1,276 (622) 772 150
Savings deposits 299 295 594 (85) 5 (80)
Other time deposits 3,572 611 4,183 (504) 527 23
Other borrowings 2,348 (259) 2,089 372 1,685 2,057
-------- ------- -------- -------- -------- --------
Total interest-bearing
liabilities 7,119 1,185 8,304 (881) 2,989 2,108
-------- ------- -------- -------- -------- --------
$ 12,272 $(1,384) $ 10,888 $ 196 $ 6,555 $ 6,751
======== ======= ======== ======== ======== ========
(1) The change in interest due to both rate and volume has been allocated to
change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
-11-
BALANCE SHEET ANALYSIS
Loan Portfolio
A comparative period-end loan table is presented below:
March 31, Dec. 31, March 31,
1996 1995 1995
------------ ------------ -----------
(Dollars in thousands)
Commercial $1,018,913 $1,080,124 $ 826,642
Residential first mortgage 714,369 593,547 260,502
Real estate - construction 83,040 81,318 44,030
Real estate - mortgage 521,514 553,095 459,308
Installment 36,078 38,527 35,087
---------- ---------- ----------
Total loans, gross 2,373,914 2,346,611 1,625,569
Less: Allowance for credit losses (128,911) (131,514) (108,358)
---------- ---------- ----------
Total loans, net $2,245,003 $2,215,097 $1,517,211
========== ========== ==========
Gross loans at March 31, 1996 amounted to $2,373.9 million, up $748.3
million (46.0%) from March 31, 1995. Approximately $280.0 million of the
increase, concentrated primarily in real estate mortgage loans, was due to the
acquisition of First LA. The $453.9 million increase in residential first
mortgage loans resulted from the purchase of residential mortgages originated
by third parties and the Bank's own originations. Construction loans also
increased significantly from March 31, 1995, up 88.6% to $83.0 million at
March 31, 1996 as the Company continued to expand its lending for single
family residential construction development. The Company expects that the
Bank's loan portfolio will continue to increase from first quarter 1996 levels
due to both its own internal generation as well as purchases of loans
originated by third parties. See "Cautionary Statement For Purposes of the
'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995," below.
-12-
The following table presents information concerning nonaccrual loans, ORE and
restructured loans.
March 31, Dec. 31, March 31,
1996 1995 1995
-------- ------- --------
(Dollars in thousands)
Nonaccrual
Real estate - mortgage $35,944 $39,536 $30,961
Commercial 16,706 8,316 28,958
Installment - 272 -
------- ------- -------
Total 52,650 48,124 59,919
ORE 12,562 7,439 5,042
------- ------- -------
Total nonaccrual loans
and ORE $65,212 $55,563 $64,961
======= ======= =======
Restructured loans;
accrual status $ 4,960 $ 5,483 $ 2,004
======= ======= =======
Ratio of nonaccrual loans
to total loans 2.22% 2.05% 3.69%
Ratio of nonperforming
assets to total assets 1.73 1.34 2.36
Ratio of allowance for
credit losses to nonaccrual
loans 244.85 273.28 180.84
The table below summarizes the approximate changes in nonaccrual loans
for the quarters ended March 31, 1996 and March 31, 1995.
Quarter ended
--------------------
Mar. 31, Mar. 31,
1996 1995
--------- ---------
(Dollars in millions)
Balance, beginning of period $48.1 $58.8
Loans placed on nonaccrual 18.2 11.5
Charge offs (4.4) (1.2)
Loans returned to accrual (2.1) (.5)
Repayments (including interest
applied to principal) (2.0) (8.7)
Transfer to ORE (5.1) -
----- -----
Balance, end of period $52.7 $59.9
===== =====
At March 31, 1996, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $6.0 million of potential problem
loans about which the ability of the borrowers to comply with the present loan
repayment terms in the future is questionable.
-13-
The following table summarizes average loans outstanding and changes in
the allowance for credit losses for the periods presented:
Quarter ended
-----------------------
March 31, March 31,
1996 1995
---------- ----------
(Dollars in millions)
Average amount of loans outstanding $2,348.7 $1,619.5
======== ========
Balance of allowance for credit losses,
beginning of period $ 131.5 $ 105.3
-------- --------
Loans charged off:
Commercial 5.5 2.3
Real estate loans - construction - -
Real estate loans - mortgage - .6
Installment - -
-------- --------
Total loans charged off 5.5 2.9
-------- --------
Less recoveries of loans previously
charged off:
Commercial 2.9 5.2
Real estate loans - construction - -
Real estate loans - mortgage - .6
Installment - .2
-------- --------
Total recoveries 2.9 6.0
-------- --------
Net loans charged off(recovered) 2.6 (3.1)
Provisions charged to operating expense - -
-------- --------
Balance, end of period $ 128.9 $ 108.4
======== ========
Ratio of net charge-offs to
average loans .44% NM
======== ========
Ratio of allowance for credit losses
to total period end loans 5.43% 6.67%
======== ========
-14-
CONSOLIDATION CHARGE RESERVE
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. At March 31, 1996, the balance
remaining in the consolidation reserve was $4.2 million. The Bank is
continuing to negotiate settlements of lease commitments and believes the
reserve balance at March 31, 1996 is adequate to cover these lease liabilities
and the remaining expenses expected to be incurred as part of the
consolidation program.
Capital
As of March 31, 1996, the Company had a ratio of Tier 1 capital to risk-
weighted assets (Tier 1 risk-based capital ratio) of 13.88%, a ratio of total
capital to risk weighted assets (total risk-based capital ratio) of 15.19%,
and a ratio of Tier 1 capital to average adjusted total assets (Tier 1
leverage ratio) of 9.31%, while the Bank had a Tier 1 risk-based capital ratio
of 12.78%, a total risk-based capital ratio of 14.09% and a Tier 1 leverage
ratio of 8.54%.
At March 31, 1996, the Corporation had repurchased 2.2 million shares of
its stock for approximately $28.9 million, leaving 53,800 shares remaining to
be purchased in the 5% share repurchase program announced on May 3, 1995. The
Company continues to evaluate alternatives in managing its capital, including
additional share repurchases and acquisitions. On April 24, 1996, the Board
of Directors of the Company declared a regular quarterly cash dividend of $.09
per share, payable May 16, 1996 to shareholders of record as of May 6, 1996.
OTHER DEVELOPMENTS
The Company completed the integration of First LA into the Bank in March,
1996. First LA's Beverly Hills and Downtown offices and City National's
Newport Beach office were consolidated with other Bank offices in the
immediate vicinity on February 26, 1996 and the conversion of First LA's
customers to the data processing system used by City National Bank was also
completed on that date. On April 22, 1996, the Bank announced plans to
consolidate First LA's 1999 Avenue of the Stars branch into its 1950 Avenue
of the Stars location effective May 17, 1996.
-15-
LIQUIDITY
The Company continues to manage its liquidity through the combination of
core deposits, federal funds purchased, repurchase agreements, collateralized
borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of
San Francisco, and a portfolio of securities available for sale. Liquidity is
also provided by maturing investment securities and loans.
Average core deposits comprised 76.1% of total funding in the first
quarter of 1996, compared to 83.7% in the first quarter of 1995. This
decrease has required that the Company increase its use of more costly
alternative funding sources. Despite the decrease in percentage of funding
derived from core deposits, the Company has not faced any liquidity
constraints.
The following table shows that the Company's cumulative interest rate
sensitivity gap on a one year measurement basis decreased from $270.9 million
at March 31, 1995 to ($235.5) million at March 31, 1996. This change resulted
from the Company's efforts to minimize its exposure to large decreases in net
interest income due to a rapid decline in interest rates. The Company has
increased its portfolio of loans that reprice after one year by $383.7 million
during the last twelve months. In addition, the Company has entered into
interest rate swaps totaling $125.0 million to reduce its asset sensitivity.
At March 31, 1996, the unrealized loss on these swaps was approximately $1.1
million. The Company's liability sensitive position during a period of slowly
rising interest rates is not expected to have a significant negative impact on
net interest income since rates paid on the Company's large base of interest
checking, savings and money market deposit accounts historically have not
increased proportionately with increases in interest rates.
-16-
INTEREST RATE SENSITIVITY MANAGEMENT
At March 31, 1996 and 1995, the Company's distribution of rate-sensitive
assets and liabilities was as follows:
Maturing or repricing in
---------------------------------------------------------
After 3 After 1 year
3 months months but but within After
or less within 1 year 5 years 5 years Total
-------- ------------- -------- -------- --------
(Dollars in millions)
MARCH 31, 1996
Rate-sensitive assets:
Interest-bearing deposits in other banks ........................ $ 30.7 $ - $ - $ - $ 30.7
Loans ........................................................... 1,295.2 371.7 184.8 469.6 2,321.3
Investment securities ........................................... 13.8 6.3 84.7 65.3 170.1
Securities available for sale ................................... 46.2 15.5 353.5 251.1 666.3
Trading account.................................................. 32.4 - - - 32.4
Interest rate swap .............................................. (125.0) 125.0 0.0
Federal funds sold and securities
purchased with agreement to resell .......................... 160.0 - - - 160.0
-------- -------- -------- -------- --------
Total rate-sensitive assets ................................. 1,453.3 393.5 748.0 786.0 3,380.8
-------- -------- -------- -------- --------
Rate-sensitive liabilities: (1)
Interest checking .............................................. 307.8 - - - 307.8
Money market deposits .......................................... 746.2 - - - 746.2
Savings deposits ............................................... 133.2 - - - 133.2
Other time deposits ............................................ 282.2 163.1 43.6 0.7 489.6
Short-term borrowings .......................................... 449.8 - - - 449.8
Long-term debt ................................................. - - 34.8 - 34.8
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ............................ 1,919.2 163.1 78.4 0.7 2,161.4
-------- -------- -------- -------- --------
Interest rate sensitivity gap ..................................... $ (465.9) $ 230.4 $ 669.6 $ 785.3 $ 1,219.4
======== ======== ======== ======== ========
Cumulative interest rate sensitivity gap .......................... $ (465.9) $ (235.5) $ 434.1 $ 1,219.4
======== ======== ======== ========
Cumulative ratio of rate-sensitive assets to rate-sensitive
liabilities ................................................... 76% 89% 120% 156% 156%
======== ======== ======== ======== ========
Maturing or repricing in
----------------------------------------------------
After 3 After 1 year
3 months months but but within After
or less within 1 year 5 years 5 years Total
-------- ------------- -------- -------- --------
(Dollars in millions)
MARCH 31, 1995
Rate-sensitive assets:
Interest-bearing deposits in other banks ....................... $ 0.7 $ - $ - $ - $ 0.7
Loans .......................................................... 914.9 378.5 163.2 107.5 1,564.1
Investment securities .......................................... 94.6 144.7 160.4 229.2 628.9
Securities available for sale................................... - - 65.8 35.4 101.2
Trading account................................................. 26.7 - - - 26.7
Federal funds sold and securities
purchased with agreement to resell .......................... 135.0 - - - 135.0
-------- -------- -------- -------- --------
Total rate-sensitive assets ................................. 1,171.9 523.2 389.4 372.1 2,456.6
-------- -------- -------- -------- --------
Rate-sensitive liabilities: (1)
Interest checking .............................................. 264.0 - - - 264.0
Money market deposits .......................................... 614.6 - - - 614.6
Savings deposits ............................................... 84.2 - - - 84.2
Other time deposits ............................................ 94.4 70.7 33.5 - 198.6
Short-term borrowings .......................................... 296.3 - - - 296.3
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ............................ 1,353.5 70.7 33.5 - 1,457.7
-------- -------- -------- -------- --------
Interest rate sensitivity gap ..................................... $ (181.6) $ 452.5 $ 355.9 $ 372.1 $ 998.9
======== ======== ======== ======== ========
Cumulative interest rate sensitivity gap .......................... $ (181.6) $ 270.9 $ 626.8 $ 998.9
======== ======== ======== ========
Cumulative ratio of rate-sensitive assets to rate-sensitive
liabilities .................................................... 87% 119% 143% 169% 169%
======== ======== ======== ======== ========
(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.
-17-
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company.
- -- Economic conditions. The Company's results are strongly influenced by general
economic conditions in its market area, Southern California, and a
deterioration in these conditions could have a material adverse impact
on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in economic conditions in
the real estate and entertainment industries may affect the Company's
performance.
- -- Interest rates. Management anticipates that interest rate levels will remain
generally constant in 1996, but if interest rates vary substantially
from present levels, this may cause the Company's results to differ
materially.
- -- Government regulation and monetary policy. All forward-looking statements
presume a continuation of the existing regulatory environment and U.S.
government monetary policies. The banking industry is subject to
extensive federal and state regulation, and significant new laws or
changes in, or repeals of, existing laws may cause results to differ
materially. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects
credit conditions for the Bank, primarily through open market
operations in U.S. government securities, the discount rate for member
bank borrowings and bank reserve requirements, and a material change in
these conditions would be likely to have an impact on results.
- -- Competition. The Bank competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries.
Results may differ if circumstances affecting the nature or level of
competition change, such as the merger of competing financial
institutions or the acquisition of California institutions by out-of-
state companies.
- -- Credit quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their
loans. The Bank has adopted underwriting and credit monitoring
procedures and credit policies, including the establishment and review
of the allowance for credit losses, that management believes are
appropriate to minimize this risk by assessing the likehood of
nonperformance, tracking loan performance and diversifying the Bank's
credit portfolio, but such policies and procedures may not prevent
unexpected losses that could adversely affect the Company's results.
- -- Other risks. From time to time the Company details other risks to its
business and/or its financial results in its filings with the
Securities and Exchange Commission.
While management believes that its assumptions regarding these and
other factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance that
the results described in such forward-looking statements will, in fact, be
achieved.
-18-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Report dated January 11, 1996, reporting the closing of the Bank's
acquisition of First LA on December 31, 1995.
Report on Form 8-K/A dated March 15, 1996, containing the following
financial statements:
1. Audited consolidated financial statements of First LA, including
consolidated balance sheets as of December 31, 1993 and 1994,
and consolidated statements of operations, changes in
stockholder's equity and cash flows for the twelve months ended
December 31, 1993 and 1994.
2. Unaudited consolidated balance sheets of First LA as of October
31, 1994 and 1995, and consolidated statements of operations and
cash flows for the ten months ended October 31, 1994 and 1995.
3. Unaudited pro forma combined statement of operations of the
Company and First LA for the year ended December 31, 1995.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: May 14, 1996 /s/ Frank P. Pekny
------------- ----------------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
-20-