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 June 30, 1996 Commission File Number 1-10521
CITY NATIONAL CORPORATION
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(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
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Number of shares of common stock outstanding at July 31, 1996: 43,761,454
CITY NATIONAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
ASSETS
June 30, December 31, June 30,
1996 1995 1995
---------- ------------ ----------
(Dollars in thousands)
Cash and due from banks........................................... $ 339,813 $ 339,737 $ 216,067
Interest-bearing deposits in other banks.......................... 30,709 80,696 688
Federal funds sold and securities purchased under
resale agreements............................................... 25,000 351,803 100,000
Investment securities (market values $191,294; $110,524
and $565,473 at June 30, 1996, December 31, 1995 and
June 30, 1995, respectively).................................... 193,669 110,006 573,401
Securities available for sale (cost $666,485; $862,276 and
$107,788 at June 30, 1996, December 31, 1995 and
June 30, 1995, respectively).................................... 655,818 865,401 108,032
Trading account securities........................................ 26,798 29,728 130,212
Loans............................................................. 2,547,725 2,346,611 1,699,826
Less allowance for credit losses.................................. 127,294 131,514 109,052
----------- ----------- -----------
Net loans....................................................... 2,420,431 2,215,097 1,590,774
Leveraged leases.................................................. 6,614 8,400 9,018
Premises and equipment, net....................................... 23,611 23,607 21,699
Customers' acceptance liability................................... 2,686 2,656 4,657
Other real estate................................................. 15,691 7,439 4,733
Deferred tax asset................................................ 65,040 64,420 28,060
Other assets...................................................... 52,004 58,561 31,134
----------- ----------- -----------
Total assets.................................................... $3,857,884 $4,157,551 $2,818,475
=========== =========== ===========
LIABILITIES
Demand deposits................................................... $1,204,233 $1,490,934 $ 914,364
Interest checking deposits........................................ 294,383 380,230 253,292
Money market accounts............................................. 730,703 759,707 567,852
Savings deposits.................................................. 134,638 130,704 79,452
Time deposits - under $100,000.................................... 125,549 142,731 75,486
Time deposits - $100,000 and over................................. 361,493 343,729 132,774
----------- ----------- -----------
Total deposits.................................................. 2,850,999 3,248,035 2,023,220
Federal funds purchased and securities sold
under repurchase agreements..................................... 279,543 258,353 312,068
Other short-term borrowings....................................... 275,000 195,100 72,756
Long-term debt.................................................... 34,800 25,000 25,000
Other liabilities................................................. 46,798 61,450 29,709
Acceptances outstanding........................................... 2,686 2,656 4,657
----------- ----------- -----------
Total liabilities............................................... 3,489,826 3,790,594 2,467,410
----------- ----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock authorized-5,000,000, none outstanding - - -
Common stock- par value- $1.00; authorized - 75,000,000
Issued-45,927,151; 45,553,724 and 45,375,260 at
June 30, 1996, December 31, 1995 and June 30, 1995,
respectively................................................... 45,927 45,554 45,375
Additional paid-in capital........................................ 270,758 266,829 264,939
Unrealized gain (loss) on available for sale securities........... (6,143) 1,955 152
Retained earnings................................................. 86,460 62,518 42,222
Treasury shares, at cost - 2,211,200; 762,500 and 144,300 at
June 30, 1996, December 31, 1995 and June 30, 1995,
respectively.................................................... (28,944) (9,899) (1,623)
----------- ----------- -----------
Total shareholders' equity...................................... 368,058 366,957 351,065
----------- ----------- -----------
Total liabilities and shareholders' equity...................... $3,857,884 $4,157,551 $2,818,475
=========== =========== ===========
See accompanying Notes to the Unaudited Consolidated Financial Statements
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City National Corporation
Consolidated Statement of Operations
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
------------------------ -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Dollars in thousands) (Dollars in thousands)
Interest income:
Interest and fees on loans .................................. $53,826 $41,257 $107,049 $78,959
Interest on federal funds sold and securities purchased
under resale agreements ................................... 758 1,676 2,165 2,877
Interest on investment securities:
U.S. Treasury and federal agency securities ............... 1,873 7,159 3,460 14,598
Municipal securities ...................................... 612 279 932 566
Other securities .......................................... 596 495 1,167 1,038
Interest on securities available for sale.................... 9,731 1,624 20,474 3,366
Interest on trading account securities....................... 373 528 843 984
--------- --------- --------- ---------
Total ..................................................... 67,769 53,018 136,090 102,388
--------- --------- --------- ---------
Interest expense:
Interest on deposits ........................................ 13,192 7,713 26,625 14,931
Interest on federal funds purchased and securities sold
under repurchase agreements ............................... 5,107 4,030 9,534 7,163
Interest on other short-term borrowings ..................... 895 595 1,772 1,101
Interest on long-term debt .................................. 511 228 935 228
--------- --------- --------- ---------
Total ..................................................... 19,705 12,566 38,866 23,423
--------- --------- --------- ---------
Net interest income ......................................... 48,064 40,452 97,224 78,965
Provision for credit losses ................................. - - - -
--------- --------- --------- ---------
Net interest income after provision for credit losses ....... 48,064 40,452 97,224 78,965
--------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts ......................... 2,757 1,902 5,403 3,741
Investment services income ................................. 2,783 2,069 5,252 4,053
Trust fees .................................................. 1,732 1,605 3,453 3,243
Gain on sale of leverage leases ............................. - - 688 -
Gain (loss) on sales of securities ......................... (450) 291 292 635
All other income ............................................ 3,133 2,944 6,254 5,705
--------- --------- --------- ---------
Total noninterest income................................... 9,955 8,811 21,342 17,377
--------- --------- --------- ---------
Noninterest expense:
Salaries and other employee benefits ........................ 18,172 16,466 38,311 33,059
Net occupancy of premises ................................... 2,143 1,980 4,957 3,974
Data processing ............................................. 2,190 1,742 4,373 3,514
Professional ................................................ 3,411 2,281 6,550 4,428
FDIC insurance .............................................. 1 1,232 2 2,465
Office supplies ............................................. 1,373 1,041 2,527 2,111
Depreciation ................................................ 1,305 1,005 2,583 2,007
Promotion ................................................... 1,679 1,175 2,824 2,303
Equipment ................................................... 633 501 1,113 918
Other operating ............................................. 3,142 2,791 6,796 5,060
Other real estate expense ................................... (215) 59 (41) 211
--------- --------- --------- ---------
Total noninterest expense.................................. 33,834 30,273 69,995 60,050
--------- --------- --------- ---------
Income before taxes............................................ 24,185 18,990 48,571 36,292
Income taxes ................................................. 8,169 7,429 16,703 14,114
--------- --------- --------- ---------
Net income .................................................... $16,016 $11,561 $31,868 $22,178
========= ========= ========= =========
Net income per share .......................................... $0.36 $0.25 $0.71 $0.48
========= ========= ========= =========
Shares used to compute net income per share ................... 44,765 45,804 44,848 45,822
========= ========= ========= =========
See accompanying Notes to the Unaudited Consolidated Financial Statements
-3-
City National Corporation
Consolidated Statement of Cash Flows
(Unaudited)
For the six months
ended June 30,
--------- ---------
1996 1995
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(Dollars in thousands)
Operating Activities
Net income ............................................................ $ 31,868 $ 22,178
Adjustment to net income:
Provision for credit losses.......................................... - -
Gain on sale of leveraged leases..................................... (688) -
Depreciation......................................................... 2,583 2,007
Net increase in trading securities................................... 2,930 (104,681)
Net decrease ( increase) in deferred tax benefits.................... (620) 190
Income tax refund ................................................... - 4,500
Other, net........................................................... (10,020) (2,952)
--------- ---------
Net cash provided (used) by operating activities................... 26,053 (78,758)
--------- ---------
Investing Activities
Net decrease (increase) in short-term investments...................... 49,987 (14)
Purchase of securities available for sale.............................. (370,776) (36,325)
Sales and maturities of securities available for sale.................. 563,212 24,578
Maturities of investment securities.................................... 16,897 89,614
Purchase of investment securities...................................... (104,118) (5,006)
Purchase of residential mortgage loans................................. (200,171) (100,588)
Other loan originations and principal collections, net................. (14,223) 36,077
Proceeds from sales of ORE and Disposition Program assets.............. 806 804
Proceeds from sale of leveraged leases................................. 1,824 -
Other, net............................................................. 20,705 12,392
--------- ---------
Net cash provided (used) by investing activities..................... (35,857) 21,532
--------- ---------
Financing Activities
Net increase in federal funds purchased and
securities sold under repurchase agreements.......................... 21,190 129,948
Net decrease in deposits............................................... (397,036) (394,542)
Net increase in short term borrowings................................. 79,900 22,756
Proceeds from long term debt........................................... 9,800 25,000
Proceeds from issuance of stock........................................ 3,788 1,316
Purchase of treasury shares............................................ (19,045) (1,623)
Cash dividends paid.................................................... (7,926) (5,437)
Other, net............................................................. (7,584) 194
--------- ---------
Net cash used in financing activities................................ (316,913) (222,388)
--------- ---------
Net decrease in cash and cash equivalents.............................. (326,717) (279,614)
Cash and cash equivalents at beginning of year......................... 691,540 595,681
--------- ---------
Cash and cash equivalents at end of year............................... $ 364,823 $ 316,067
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest .......................................................... $ 37,924 $ 23,063
Income taxes....................................................... 9,750 10,050
Non cash investing activities:
Transfer from loans to ORE........................................ 9,507 908
See accompanying Notes to the Unaudited Consolidated Financial Statements
- 4-
CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the six months ended
June 30,
------------------------
1996 1995
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(Dollars in thousands)
Common Stock
Balance, beginning of period .............................. $45,554 $45,193
Stock options exercised .................................... 373 182
-------- --------
Balance, end of period ..................................... 45,927 45,375
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Additional paid-in capital
Balance, beginning of period .............................. 266,829 263,609
Stock options exercised .................................... 3,415 1,134
Tax benefit from stock options ............................. 514 194
-------- --------
Balance, end of period ..................................... 270,758 264,937
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Treasury shares
Balance, beginning of period .............................. (9,899) -
Purchase of shares ........................................ (19,045) (1,623)
-------- --------
Balance, end of period ..................................... (28,944) (1,623)
-------- --------
Unrealized net gains (losses) on securities available for sale
Balance, beginning of period .............................. 1,955 (3,564)
Change during period ....................................... (8,098) 3,716
-------- --------
Balance, end of period ..................................... (6,143) 152
-------- --------
Retained earnings
Balance, beginning of period ............................. 62,518 25,483
Net income ................................................. 31,868 22,178
Dividends paid ............................................. (7,926) (5,437)
-------- --------
Balance, end of period ..................................... 86,460 42,224
-------- --------
Total shareholders' equity ...................................$368,058 $351,065
-------- --------
See accompanying Notes to the Unaudited Consolidated Financial Statements
-5-
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 holding 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 with current
year presentation.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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 Company and the Bank.
RESULTS OF OPERATIONS
The Company recorded consolidated net income of $16.0 million, or $.36 per
share, in the second quarter of 1996, compared to a net income of $11.6
million, or $.25 per share, in the second quarter of 1995. Most of the change
between second quarters resulted from an increase in net interest income in
the second quarter of 1996 of $7.6 million.
Net income for the first six months of 1996 totaled $31.9 million, or $.71
per share compared with $22.2 million, or $.48 per share in the 1995 period.
The six month increase resulted largely from an $18.3 million increase in net
interest income and $4.0 million increase in non-interest income, partially
offset by a $10.2 million increase in non-interest expense excluding ORE
expense.
Returns on average assets for both the second quarter and the first half
of 1996 was 1.73% compared with 1.70% and 1.65% for the second quarter and
first half of 1995. Returns on average equity for the second quarter and the
first half of 1996 were 17.90% and 17.64%, respectively, compared with 13.39%
and 13.12% in 1995.
Taxable equivalent net interest income was $49.4 million in the second
quarter of 1996, up 20.7% from the year-ago quarter. The increase resulted
from the 35.6% increase in average interest earning assets between quarters.
Due to a higher proportion of total funding in the second quarter of 1996 from
time deposits of $100,000 and over and wholesale money market sources, the net
interest spread decreased from 5.00% to 4.47% and the net interest margin
decreased from 6.39% to 5.83%. Management expects modest growth in quarterly
net interest income for the remainder of 1996 from first half 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 loans, either of which may cause actual results to differ materially
if the
-7-
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 $784.8 million (47.1%) between second quarters to
$2,452.1 million at June 30, 1996. The majority of this increase reflected
higher average residential first mortgage loans outstanding, up $469.9 million
(153.4%). This increase resulted from both the Bank's internal loan generation
as well as bulk purchases of residential first mortgage loans. Average
construction loans increased $37.0 million (77.9%) from the second 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 $220.6 million (26.5%) and $59.5 million (13.4%) due primarily
to the acquisition of First Los Angeles Bank (First LA) on December 31, 1995
and the purchase of corporate loans originated by third parties.
Total average investments and available for sale securities increased
$145.9 million (20.9%) between second quarters due mainly to the improved
liquidity resulting from the acquisition of First LA which had total loans at
December 31, 1995 of $337.5 million and total deposits of $795.5 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 FASB No. 115. Total average deposits increased $791.7
million (39.2%) between second quarters due primarily to the acquisition of
First LA as well as increased deposit levels from the Bank's non-First LA
customers.
For the first half of 1996, average loans increased $756.9 million
(46.1%). Total average investment and available for sale securities increased
$124.3 million (17.4%) from the comparable period of 1995. Total average
deposits for the six months ended June 30, 1996 increased $771.7 million
(37.8%) compared to the 1995 period. The changes in the six month average
balances resulted from the same factors that caused the changes between the
second quarter average balances.
The provision for credit losses was zero for the six months ended June 30,
1996 and 1995. Loans charged off in the second quarter of 1996 were $7.8
million, compared to $5.6 million in the second quarter of 1995. Recoveries
were $6.1 million in the second quarter of 1996, compared to $6.3 million in
the second quarter of 1995. The provision for credit losses is expected to
remain at reduced levels for the remainder of 1996. This forward-looking
statement
-8-
is based on an assumption that general economic conditions in Southern
California will not deteriorate materially in 1996, and if this assumption
proves to be 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 $10.4 million for the second quarter of 1996, up $1.9
million (22.1%) from a year earlier. For the six months ended June 30, 1996,
non-interest income excluding gains and losses on the sale of securities and
assets totaled $20.4 million, an increase of $3.6 million (21.6%) from last
year's total of $16.7 million. Service charges on deposit accounts increased
$.9 million (45.0%) and $1.7 million (44.4%), respectively, for the quarter
and six months ended June 30, 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 $.7 million (34.5%) and $1.2
million (29.6%) for the quarter and six months ended June 30, 1996 due to
higher fees and new investment products offered to customers. Management
expects modest growth in non-interest income from first half 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 $34.0 million in
the second quarter of 1996, an increase of $3.8 million (12.7%) from the
second quarter of 1995. Salaries and other employee benefits increased $1.7
million (10.4%) and $5.3 million (15.9%) for the quarter and six months ended
June 30, 1996, respectively, from comparable periods in 1995 due primarily to
the additional personnel added as a result of the acquisition of First LA and
the hiring of additional personnel to pursue other opportunities.
The expense categories other than staff increased $2.1 million (15.5%) and
$4.9 million (18.5%) for the quarter and six months ended June 30, 1996,
respectively, from the comparable periods in 1995. The increases in
professional expenses resulted primarily from higher consulting expenses. The
increases in promotion expenses resulted from the Company's increased
advertising program and the other increases were as a result of the
acquisition of First LA, including $.7 million in acquisition related costs
incurred in the first quarter of 1996 to cover certain integration expenses
related to the acquisition of First LA.
-9-
The Company's effective tax rate decreased to 33.8% in the second quarter
of 1996 from 39.1% in the second quarter of 1995. The decrease resulted from
the recognition of $.9 million in previously unrecognized deferred tax
benefits 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 1996 first half levels. See "Cautionary Statement For Purposes of the
'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995", below.
-10-
NET INTEREST INCOME SUMMARY
The following table presents the components of net interest income for the
quarters ended June 30, 1996 and 1995.
June 30, 1996 June 30, 1995
---------------------------------- ----------------------------------
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 $1,052,305 $23,582 9.01% $ 831,751 $21,799 10.10%
Real estate - construction 84,477 2,458 11.70 47,499 1,501 12.67
Real estate - mortgage 504,714 11,673 9.30 445,254 11,199 10.09
Residential first
mortgages 776,237 15,677 8.12 306,321 6,248 8.18
Installment loans 34,336 900 10.54 36,420 823 9.06
---------- ------- ----- ---------- ------- -----
Total loans 2,452,069 54,290 8.90 1,667,245 41,570 9.79
---------- ------- ----- ---------- ------- -----
Due from banks-interest
bearing 29,625 444 6.03 690 5 2.91
State and municipal
investment securities 53,614 953 7.15 24,428 435 7.14
Taxable investment
securities 128,695 2,025 6.33 577,239 7,649 5.31
Securities available for
sale 660,782 10,229 6.23 95,532 1,624 6.82
Federal funds sold and
securities purchased
under resale agreements 56,025 758 5.44 110,676 1,676 6.07
Trading account securities 31,053 453 5.87 39,888 566 5.69
---------- ------- ----- ---------- ------- -----
Total earning assets 3,411,863 69,152 8.15 2,515,698 53,525 8.40
---------- ------- ----- ---------- ------- -----
Reserve for credit losses (128,503) - - (109,795) - -
Cash and due from banks 279,912 - - 233,576 - -
Other nonearning assets 159,724 - - 94,870 - -
---------- ----------
Total assets $3,722,996 - - $2,734,349 - -
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest - bearing
deposits $1,160,406 - - 869,488 - -
Interest-bearing deposits:
Interest checking accounts 316,049 790 1.01 271,438 654 0.97
Money market accounts 710,069 5,252 2.97 599,055 4,231 2.83
Savings deposits 132,472 1,026 3.12 79,759 392 1.97
Time deposits - under
$100,000 136,827 1,760 5.17 75,749 886 4.69
Time deposits - $100,000
and over 356,260 4,364 4.93 124,920 1,550 4.98
---------- ------- ----- ---------- ------- -----
Total interest - bearing
deposits 1,651,677 13,192 3.21 1,150,921 7,713 2.69
---------- ------- ----- ---------- ------- -----
Total deposits 2,812,083 - - 2,020,409 - -
Federal funds purchased and
securities sold under
repurchase agree 400,807 5,107 5.12 277,886 4,030 5.82
Other borrowings 98,087 1,406 5.77 54,111 823 6.10
---------- ------- ----- ---------- ------- -----
Total interest - bearing
liabilities 2,150,571 19,705 3.69 1,482,918 12,566 3.40
---------- ------- ----- ---------- ------- -----
Other liabilities 52,092 - - 35,598 - -
Shareholders' equity 359,927 - - 346,345 - -
---------- ----------
Total liabilities and
shareholders' equity $3,722,996 - - $2,734,349 - -
========== ==========
Net interest spread - - 4.47% - - 5.00%
===== =====
Fully taxable equivalent net
interest income - $49,447 - - $40,959 -
======= =======
Net interest margin - - 5.83% - - 6.39%
===== =====
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $48,603 and $51,420 for 1996 and
1995, respectively.
(3) Loan income includes loan fees of $1,798 and $1,616 for 1996 and 1995,
respectively.
Net Interest Income Summary
The following table presents the components of net interest income for the six
months ended June 30, 1996 and 1995.
June 30, 1996 June 30, 1995
----------------------------------- ------------------------------------
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 $1,046,552 $ 47,431 9.11% $ 849,453 $ 42,278 9.90%
Real estate - construction 82,332 4,793 11.71 41,710 2,632 12.73
Real estate - mortgage 517,432 25,050 9.74 447,816 22,516 10.14
Residential first mortgages 718,318 28,780 8.06 268,855 10,377 7.78
Installment loans 35,725 1,847 10.40 35,679 1,717 9.70
---------- -------- ----- ---------- -------- ------
Total loans 2,400,359 107,901 9.04 1,643,513 79,520 9.66
---------- -------- ----- ---------- -------- ------
Due from banks-interest bearing 28,223 836 5.96 687 8 2.35
State and municipal investment
securities 40,513 1,452 7.21 25,072 882 7.09
Taxable investment securities 117,897 3,791 6.47 596,982 15,628 5.28
Securities available for sale 682,161 21,468 6.33 94,180 3,366 7.21
Federal funds sold and securities
purchased under resale agreements 78,467 2,165 5.55 92,626 2,877 6.26
Trading account securities 31,421 940 6.02 34,098 1,068 6.32
---------- -------- ----- ---------- -------- ------
Total earning assets 3,379,041 138,553 8.25 2,487,158 103,349 8.32
---------- ------- ----- ---------- ------- -----
Reserve for credit losses (130,300) (108,620)
Cash and due from banks 289,837 237,360
Other nonearning assets 160,558 95,400
---------- ----------
Total assets $3,699,136 $2,711,298
========== ==========
Liabilities and Shareholders' Equity
Noninterest - bearing deposits $1,154,006 - - $ 874,565 - -
Interest-bearing deposits:
Interest checking accounts 321,534 1,606 1.00 272,827 1,308 0.97
Money market accounts 720,773 10,608 2.96 612,984 8,311 2.73
Savings deposits 132,499 2,033 3.09 82,458 805 1.97
Time deposits - under $100,000 133,607 3,455 5.20 75,967 1,648 4.37
Time deposits - $100,000 and over 351,442 8,923 5.11 123,335 2,859 4.67
---------- -------- ----- ---------- -------- -----
Total interest - bearing deposits 1,659,855 26,625 3.23 1,167,571 14,931 2.58
---------- -------- ----- ---------- -------- -----
Total deposits 2,813,861 2,042,136
Federal funds purchased and
securities sold under repurchase
agreements 369,386 9,534 5.19 249,705 7,163 5.78
Other borrowings 94,392 2,707 5.77 44,561 1,329 6.01
---------- -------- ----- ---------- -------- -----
Total interest - bearing
liabilities 2,123,633 38,866 3.68 1,461,837 23,423 3.23
---------- -------- ----- ---------- -------- -----
Other liabilities 58,130 33,904
Shareholders' equity 363,367 340,992
---------- ----------
Total liabilities and
shareholders' equity $3,699,136 $2,711,298
========== ==========
Net interest spread 4.57% 5.09%
====== ======
Fully taxable equivalent net interest
income $ 99,687 $ 79,926
========== ========
Net interest margin 5.93% 6.38%
====== ======
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $49,583 and $56,461 for 1996 and
1995, respectively.
(3) Loan income includes loan fees of $3,542 and $3,358 for 1996 and 1995,
respectively.
-12-
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 June 30, Quarter Ended June 30,
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 $ 428 $ 11 $ 439 $ 1 $ 1 $ 2
Loans 17,714 (4,994) 12,720 3,863 5,939 9,802
Taxable investment securities (6,860) 1,236 (5,624) (1,565) 630 (935)
Non-taxable investment securities 517 1 518 145 (4) 141
Securities available for sale 8,758 (153) 8,605 (1,461) 568 (893)
Trading account securities (130) 17 (113) 251 80 331
Federal funds sold and
securities purchased
under resale agreements (758) (160) (918) (733) 704 (29)
------- ------- ------- ------- ------ ------
Total interest-earning
assets 19,669 (4,042) 15,627 501 7,918 8,419
------- ------- ------- ------- ------ ------
Interest paid on:
Interest checking 109 27 136 (40) 6 (34)
Money market deposits 805 216 1,021 (820) 989 169
Savings deposits 336 298 634 (89) 0 (89)
Other time deposits 3,622 66 3,688 (362) 798 436
Other borrowings 2,211 (551) 1,660 1,039 1,601 2,640
------- ------- ------- ------- ------ ------
Total interest-bearing
liabilities 7,083 56 7,139 (272) 3,394 3,122
------- ------- ------- ------- ------ ------
$12,586 $(4,098) $ 8,488 $ 773 $4,524 $5,297
======= ======= ======= ======= ====== ======
Six Months Ended June 30, Six Months Ended June 30,
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 $ 798 $ 30 $ 828 $ 1 $ (1) $ 0
Loans 34,591 (6,210) 28,381 4,604 13,527 18,131
Taxable investment securities (14,752) 2,915 (11,837) (3,371) 1,332 (2,039)
Non-taxable investment securities 555 15 570 405 (63) 342
Securities available for sale 18,562 (460) 18,102 (199) 918 719
Trading account securities (80) (48) (128) 257 346 603
Federal funds sold and
securities purchased
under resale agreements (409) (303) (712) (2,242) 1,766 (476)
-------- ------- -------- ------- ------- -------
Total interest-earning
assets 39,265 (4,061) 35,204 (545) 17,825 17,280
-------- ------- -------- ------- ------- -------
Interest paid on:
Interest checking 254 44 298 (88) 12 (76)
Money market deposits 1,554 743 2,297 (1,429) 1,749 320
Savings deposits 635 593 1,228 (174) 5 (169)
Other time deposits 7,242 629 7,871 (872) 1,331 459
Other borrowings 4,548 (799) 3,749 1,363 3,334 4,697
-------- ------- -------- ------- ------- -------
Total interest-bearing
liabilities 14,233 1,210 15,443 (1,200) 6,431 5,231
-------- ------- -------- ------- ------- -------
$ 25,032 $(5,271) $ 19,761 $ 655 $11,394 $12,049
======== ======= ======== ======= ======= =======
(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.
-13-
BALANCE SHEET ANALYSIS
Loan Portfolio
A comparative period-end loan table is presented below:
June 30, December 31, June 30,
1996 1995 1995
---------- ------------ ---------
(Dollars in thousands)
Commercial $1,104,420 $1,080,125 $ 827,434
Residential first mortgage 823,046 593,546 358,431
Real estate - construction 96,083 81,318 52,356
Real estate - mortgage 490,850 553,095 425,870
Installment 33,326 38,527 35,735
---------- ---------- ----------
Total loans, gross 2,547,725 2,346,611 1,699,826
Less: Allowance for credit losses (127,294) (131,514) (109,052)
---------- ---------- ----------
Total loans, net $2,420,431 $2,215,097 $1,590,774
========== ========== ==========
Gross loans at June 30, 1996 amounted to $2,547.7 million, up $847.9 million
(49.9%) from June 30, 1995. Approximately $200.0 million of the increase,
concentrated primarily in real estate mortgage loans, was due to the
acquisition of First LA. The $464.6 million increase in residential first
mortgage loans resulted from the purchase of residential first mortgages
originated by third parties and the Bank's own originations. Construction
loans also increased significantly from June 30, 1995, up $43.7 million to
$96.1 million at June 30, 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 second quarter
1996 levels due both to 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.
-14-
The following table presents information concerning nonaccrual loans, ORE,
and restructured loans.
June 30, December 31, June 30,
1996 1995 1995
------- -------- -------
(Dollars in thousands)
Nonaccrual loans:
Real estate - mortgages $ 38,254 $ 39,536 $ 29,210
Commercial 8,598 8,316 13,208
Installment - 272 -
-------- -------- --------
Total 46,852 48,124 42,418
ORE 15,691 7,439 4,733
-------- -------- --------
Total nonaccrual loans
and ORE $ 62,543 $ 55,563 $ 47,151
======== ======== ========
Restructured loans, accrual status $ 3,146 $ 5,483 $ 2,897
======== ======== ========
Additional potential problems loans $ 7,259 $ 19,100 $ 6,200
======== ======== ========
Ratio of nonaccrual loans
to total loans 1.84 % 2.05 % 2.50 %
Ratio of nonperforming assets
to total assets 1.62 1.34 1.67
Ratio of allowance for credit
losses to nonaccrual loans 271.69 273.28 257.09
The table below summarizes the approximate changes in nonaccrual loans for
the months ended June 30, 1996 and June 30, 1995.
Quarter ended Six months ended
June 30, June 30,
----------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
(Dollars in millions)
Balance, beginning of period $ 52.7 $ 59.9 $ 48.1 $ 58.8
Loans placed on nonaccrual 6.8 7.3 25.0 18.8
Charge offs (5.4) (4.4) (9.8) (5.6)
Loans returned to accrual (0.1) (3.7) (2.2) (4.2)
Repayments (including interest
applied to principal) (3.9) (16.5) (5.9) (25.2)
Transfer to ORE (3.2) (0.2) (8.3) (0.2)
------ ------ ------ ------
Balance, end of period $ 46.9 $ 42.4 $ 46.9 $ 42.4
====== ====== ====== ======
The following table summarizes average loans outstanding and changes in the
allowance for credit losses for the periods presented:
Quarter ended Six months ended
June 30, June 30,
------------------------ -------- ----------
1996 1995 1996 1995
--------- ------------ -------- ----------
(Dollars in millions)
Average amount of loans outstanding $2,452.1 $1,667.2 $2,400.4 $1,643.5
======== ======== ======== ========
Balance of allowance for credit
losses, beginning of period 128.9 108.4 131.5 105.3
Loans charged off:
Commercial 5.5 5.1 11.0 7.4
Real estate loans - construction - - - -
Real estate loans - mortgage 2.3 0.5 2.3 1.1
Installment - - - -
------- ------- ------- -------
Total loans charged off 7.8 5.6 13.3 8.5
------- ------- ------- -------
Less recoveries of loans previously
charged off:
Commercial 3.0 5.6 5.9 10.8
Real estate loans - construction - - - -
Real estate loans - mortgage 3.1 0.6 3.1 1.2
Installment - 0.1 - 0.3
------- ------- ------- -------
Total recoveries 6.1 6.3 9.0 12.3
------- ------- ------- -------
Net loans charged off (recovered) 1.7 (0.7) 4.3 (3.8)
Provisions charged to operating
expense - - - -
------- ------- ------- -------
Balance, end of period $ 127.2 $ 109.1 $ 127.2 $ 109.1
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.28% NM * 0.36% NM *
======== ======== ======== ========
Ratio of allowance for credit losses
to total period end loans 5.00% 6.42% 5.00% 6.42%
======== ======== ======== ========
* Not meaningful.
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 June 30, 1996, the balance
remaining in the consolidation reserve was $4.1 million. The Bank is
continuing to negotiate settlements of lease commitments and believes the
reserve balance at June 30, 1996 is adequate to cover these lease liabilities.
CAPITAL ADEQUACY REQUIREMENTS
As of June 30, 1996, the Company had a ratio of Tier 1 capital to risk-
weighted assets (Tier 1 risk-based capital ratio) of 14.01%, a ratio of total
capital to risk weighted assets (total risk-based capital ratio) of 15.31%,
and a ratio of Tier 1 capital to average adjusted total assets (Tier 1
leverage ratio) of 9.60%, while the Bank had a Tier 1 risk-based capital ratio
of 13.23%, a total risk-based capital ratio of 14.53% and a Tier 1 leverage
ratio of 9.04%.
At June 30, 1996, the Corporation had repurchased 2.2 million shares of
its stock for approximately $28.9 million, leaving 53,800 million 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 acquisitions, and to a lesser extent, additional share
repurchases. On July 24, 1996, the Board of Directors of the Company declared
a regular quarterly dividend of $.09 per share, payable August 15, 1996 to
shareholders of record as of August 5, 1996.
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 74.2% of total funding in the second
quarter of 1996, compared to 80.6% in the second 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.
-17-
The following table shows that the Company's cumulative one year interest
rate sensitivity gap decreased from $392.1 million at June 30, 1995 to
($473.2) million at June 30, 1996. This change resulted from the Company's
effort to lower its exposure to decreases in net interest income due to a
rapid decline in interest rates. The Company has increased its portfolio of
loans that reprices after one year by $578.0 million during the last twelve
months. In addition, the Company has entered into interest rate swap contracts
with maturities in excess of one year totaling $150.0 million to eliminate its
asset sensitivity. At June 30, 1996 the unrealized loss on the Company's
interest rate swap contracts were $1.5 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.
-18-
Interest Rate Sensitivity Management
At June 30, 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
-------- -------------- ------------ -------- -----
June 30, 1996 (Dollars in millions)
Rate-sensitive assets:
Interest-bearing deposits in other banks....... $ 30.7 $ - $ - $ - $ 30.7
Loans.......................................... 1,352.0 341.7 200.7 606.5 2,500.9
Investment securities.......................... 5.2 1.0 101.7 85.8 193.7
Securities available for sale.................. 37.0 25.1 356.2 237.5 655.8
Trading account................................ 26.8 - - - 26.8
Interest rate swap............................. (250.0) 100.0 150.0 - 0.0
Federal funds sold and securities
purchased with agreement to resell.......... 25.0 - - - 25.0
-------- ------- ------ -------- --------
Total rate-sensitive assets................. 1,226.7 467.8 808.6 929.8 3,432.9
-------- ------- ------ -------- --------
Rate-sensitive liabilities: (1)
Interest checking.............................. 294.4 - - - 294.4
Money market deposits.......................... 730.7 - - - 730.7
Savings deposits............................... 134.6 - - - 134.6
Other time deposits............................ 247.0 206.5 32.8 0.7 487.0
Short-term borrowings.......................... 554.5 - - - 554.5
Long-term debt................................. - - 34.8 - 34.8
-------- ------- ------ -------- --------
Total rate-sensitive liabilities............ 1,961.2 206.5 67.6 0.7 2,236.0
-------- ------- ------ -------- --------
Interest rate sensitivity gap..................... $ (734.5) $ 261.3 $741.0 $ 929.1 $1,196.9
======== ======= ====== ======== ========
Cumulative interest rate sensitivity gap.......... $ (734.5) $(473.2) $267.8 $1,196.9
======== ======= ====== ========
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities...................... 63% 78% 112% 154% 154%
======== ======= ====== ======== ========
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
-------- ------------- ------------ ------- -----
June 30, 1995 (Dollars in millions)
Rate-sensitive assets:
Interest-bearing deposits in other banks....... $ 30.7 $ - $ - $ - $ 0.7
Loans.......................................... 1,320.2 109.8 147.2 82.0 1,659.2
Investment securities.......................... 62.7 101.8 197.5 211.4 573.4
Securities available for sale.................. 28.0 - 32.7 47.3 108.0
Trading account................................ 130.2 - - - 130.2
Federal funds sold and securities
purchased with agreement to resell.......... 100.0 - - - 100.0
-------- ------ ------ --------- --------
Total rate-sensitive assets................. 1,641.8 211.6 377.4 340.7 2,571.5
-------- ------ ------ --------- --------
Rate-sensitive liabilities: (1)
Interest checking.............................. 253.3 - - - 253.3
Money market deposits.......................... 567.9 - - - 567.9
Savings deposits............................... 79.5 - - - 79.5
Other time deposits............................ 83.3 92.5 32.5 - 208.3
Short-term borrowings.......................... 359.8 25.0 - - 384.8
Long-term debt................................. - - 25.0 - 25.0
-------- ------ ------ -------- -------
Total rate-sensitive liabilities............ 1,343.8 117.5 57.5 - 1,518.8
-------- ------ ------ -------- --------
Interest rate sensitivity gap..................... $ 298.0 $ 94.1 $319.9 $ 340.7 $ 1,052.7
======== ====== ====== ======== =========
Cumulative interest rate sensitivity gap.......... $ 298.0 $392.1 $712.0 $1,052.7
======== ====== ====== ========
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities....................... 122% 127% 147% 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.
-19-
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 statement 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 regulations, 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
competitive change, such as the merger
-20-
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 likelihood 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
businesses 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.
-21-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On April 16, 1996, the Registrant held its annual meeting of stockholders.
The stockholders elected the 11 directors listed in the Registrant's proxy
statement and approved amendments to the Registrant's Certificate of
Incorporation (a) providing for a classified Board of Directors, with
staggered terms, consisting of a maximum of 14 and a minimum of 5 directors
(Article NINTH), and (b) relating to the indemnification of directors and
officers by the Registrant (Article SEVENTH). The following table sets forth
the number of votes cast for or withheld with respect to each director. Under
applicable Delaware law, votes withheld have the same effect as votes cast
against a nominee, and for this reason the ballot did not offer a separate
opportunity to vote against a nominees. Additionally, the table sets forth the
number of votes cast for or against the amendments, as well as the number of
abstentions and, with respect to the amendment to Article NINTH only, broker
non-votes.
Name For Withheld
---- --- --------
George H. Benter, Jr. 38,959,743 1,878,239
Richard L. Bloch 37,652,557 3,185,425
Mirion P. Bowers, M.D. 39,838,430 999,552
Stuart D. Buchalter 38,906,226 1,931,756
Bram Goldsmith 38,926,160 1,911,822
Russell Goldsmith 28,963,334 1,874,648
Burton S. Horwitch 39,840,744 997,238
Charles E. Rickershauser, Jr. 39,841,155 996,827
Edward Sanders 38,934,882 1,903,100
Andrea L. Van De Kamp 39,864,209 973,773
Kenneth Ziffren 38,967,060 1,870,922
Broker
Matter For Against Abstain Non-votes
------ --- ------- ------- ---------
Amendments to Certificate
of Incorporation:
Article NINTH 22,565,126 13,146,887 139,162 4,986,807
Article SEVENTH 38,761,107 1,845,840 231,035 n/a
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-22-
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: August 9, 1996 /s/ Frank P. Pekny
---------------- -----------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
-23-