UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to_________________
Commission File Number 1-10521
CITY NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
City National Center
400 North Roxbury Drive, Beverly Hills, California 90210
- --------------------------------------------------------------------------------
(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 28, 2000: 47,494,933
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2000 1999 1999
------------- ------------- -------------
ASSETS
Cash and due from banks ............................................... $ 381,763 $ 233,178 $ 287,911
Federal funds sold .................................................... 285,000 57,000 210,000
Securities available-for-sale (cost $1,188,488; $1,149,013 and
$1,074,666 at March 31, 2000, December 31, 1999 and March 31, 1999,
respectively ...................................................... 1,142,412 1,102,092 1,078,633
Trading account securities ............................................ 54,119 27,714 29,403
Loans ................................................................. 6,164,016 5,490,669 4,518,276
Less allowance for credit losses ...................................... 140,450 134,077 138,710
------------- ------------- -------------
Net loans ......................................................... 6,023,566 5,356,592 4,379,566
Premises and equipment, net ........................................... 63,094 62,446 57,164
Customers' acceptance liability ....................................... 13,286 6,784 1,943
Deferred tax asset .................................................... 68,777 75,841 46,925
Goodwill and core deposit intangibles ................................. 192,782 127,255 71,864
Bank owned life insurance ............................................. 50,830 49,981 43,084
Affordable housing investments ........................................ 47,810 47,934 13,301
Other assets .......................................................... 100,066 66,802 64,525
------------- ------------- -------------
Total assets ...................................................... $ 8,423,505 $ 7,213,619 $ 6,284,319
============= ============= =============
LIABILITIES
Demand deposits ....................................................... $ 2,705,431 $ 2,448,916 $ 2,101,752
Interest checking deposits ............................................ 541,976 472,996 385,719
Money market deposits ................................................. 1,436,409 1,103,907 945,123
Savings deposits ...................................................... 238,283 221,002 190,207
Time deposits-under $100,000 .......................................... 294,731 253,894 180,223
Time deposits-$100,000 and over ....................................... 1,160,630 1,168,694 800,706
------------- ------------- -------------
Total deposits .................................................... 6,377,460 5,669,409 4,603,730
Federal funds purchased and securities sold under repurchase
agreements ........................................................ 231,404 95,487 152,583
Other short-term borrowings ........................................... 829,549 496,724 507,326
Subordinated debt ..................................................... 123,500 123,453 123,311
Long-term debt ........................................................ 130,000 180,000 280,000
Other liabilities ..................................................... 70,854 70,116 56,401
Acceptances outstanding ............................................... 13,286 6,784 1,943
------------- ------------- -------------
Total liabilities ................................................. 7,776,053 6,641,973 5,725,294
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock authorized - 5,000,000 : none outstanding ............. - - -
Common Stock-par value-$1.00; authorized - 75,000,000; Issued -
47,535,224; 46,885,182; and 46,885,182 shares at March 31, 2000,
December 31, 1999 and March 31, 1999, respectively ................ 47,535 46,885 46,885
Additional paid-in capital ............................................ 284,512 276,464 281,911
Accumulated other comprehensive income (loss) ......................... (26,704) (27,193) 2,286
Retained earnings ..................................................... 344,302 321,210 261,646
Treasury shares, at cost - 81,473; 1,428,439 and 1,056,189
shares at March 31, 2000, December 31, 1999 and March 31, 1999,
respectively ...................................................... (2,193) (45,720) (33,703)
------------- ------------- -------------
Total shareholders' equity ........................................ 647,452 571,646 559,025
------------- ------------- -------------
Total liabilities and shareholders' equity ........................ $ 8,423,505 $ 7,213,619 $ 6,284,319
============= ============= =============
See accompanying Notes to the Unaudited Consolidated Financial Statements.
2
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
----------- -----------
INTEREST INCOME
Loans ........................................................................... $ 121,964 $ 94,799
Federal funds sold and securities purchased under resale agreements ............. 788 505
Securities available-for-sale ................................................... 18,346 15,686
Trading account ................................................................. 969 502
----------- -----------
Total interest income ....................................................... 142,067 111,492
----------- -----------
INTEREST EXPENSE
Deposits ........................................................................ 30,749 19,741
Federal funds purchased and securities sold under repurchase agreements ......... 4,036 3,013
Other short-term borrowings ..................................................... 10,889 5,842
Subordinated debt ............................................................... 1,888 2,040
Other long-term debt ............................................................ 2,258 3,176
----------- -----------
Total interest expense ...................................................... 49,820 33,812
----------- -----------
Net interest income ............................................................. 92,247 77,680
PROVISION FOR CREDIT LOSSES ........................................................ - -
----------- -----------
Net interest income after provision for credit losses ........................... 92,247 77,680
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts ............................................. 5,557 4,075
Investment services ............................................................. 5,897 4,320
Trust fees ...................................................................... 5,060 4,391
International services .......................................................... 3,308 1,991
Bank owned life insurance ....................................................... 621 539
Gain on sale of assets .......................................................... 5 58
Gain on sale of securities ...................................................... 223 1,253
Other ........................................................................... 3,572 2,518
----------- -----------
Total noninterest income .................................................... 24,243 19,145
----------- -----------
NONINTEREST EXPENSE
Salaries and other employee benefits ............................................ 38,851 32,513
Professional .................................................................... 5,385 4,785
Net occupancy of premises ....................................................... 4,805 3,486
Information services ............................................................ 3,587 2,521
Marketing and advertising ....................................................... 2,703 2,564
Depreciation .................................................................... 3,040 2,444
Office services ................................................................. 2,066 1,836
Equipment ....................................................................... 465 651
Amortization of goodwill and core deposit intangibles ........................... 3,489 2,060
Acquisition integration ......................................................... 1,309 -
Other operating ................................................................. 3,438 3,006
Other real estate (income) ...................................................... (53) 35
----------- -----------
Total noninterest expense ................................................... 69,085 55,901
----------- -----------
Income before income taxes ...................................................... 47,405 40,924
Income taxes .................................................................... 16,397 14,923
----------- -----------
NET INCOME ...................................................................... 31,008 26,001
----------- -----------
Other comprehensive income
Unrealized gains (loss) on securities available-for-sale .................... 870 (17,885)
Less: reclassification adjustment for gains (losses) included in
noninterest income .......................................................... (27) (524)
Income taxes (benefits) ..................................................... 354 (7,794)
----------- -----------
Other comprehensive income (loss) ............................................... 489 (10,615)
----------- -----------
Comprehensive income ............................................................ $ 31,497 $ 15,386
=========== ===========
Net income per share, basic .................................................... $ 0.68 $ 0.57
=========== ===========
Net income per share, diluted .................................................. $ 0.66 $ 0.55
=========== ===========
Shares used to compute income per share, basic .................................. 45,903 45,990
=========== ===========
Shares used to compute income per share, diluted ................................ 46,896 47,336
=========== ===========
Dividends per share ............................................................. $ 0.175 $ 0.165
=========== ===========
See accompanying Notes to the Unaudited Consolidated Financial Statements.
3
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(DOLLARS IN THOUSANDS) 2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................................... $ 31,008 $ 26,001
Adjustments to net income:
Gain on sales of ORE ....................................................... (50) (23)
Depreciation ............................................................... 3,040 2,444
Amortization of goodwill and core deposit intangibles ...................... 3,489 2,060
Net (increase) decrease in trading securities .............................. (26,405) 5,612
Deferred income tax (benefit) .............................................. 6,710 (693)
Gain on sale of securities ................................................. (223) (1,253)
Net increase in other assets ............................................... (30,321) (8,356)
Other, net ................................................................. 17,653 14,072
----------- -----------
Net cash provided by operating activites ............................... 4,901 39,864
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities .......................................................... (62,427) (124,288)
Sales of securities available-for-sale .......................................... 124,842 8,050
Maturities of securities ........................................................ 19,424 31,552
Purchase of residential mortgage loans .......................................... (25,280) -
(Loan originations) principal collections, net .................................. (165,660) 11,053
Proceeds from sales of ORE ...................................................... 975 176
Purchase of premises and equipment .............................................. (3,043) (4,273)
Net cash from acquisitions ...................................................... 78,715 -
Other, net ...................................................................... 13 173
----------- -----------
Net cash used by investing activities ...................................... (32,441) (77,557)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in federal funds purchased and securities sold
under repurchase agreements ................................................ 135,917 276,272
Net increase (decrease) in deposits ............................................. 6,358 (283,672)
Net increase (decrease) in short-term borrowings, net of transfers from
long-term debt ............................................................. 257,810 (224,675)
Proceeds from issuance of other long-term debt .................................. 50,000 95,000
Repayment of long-term debt ..................................................... (25,000) -
Proceeds from exercise of stock options ......................................... 1,032 3,302
Stock repurchases ............................................................... (14,203) (14,477)
Cash dividends paid ............................................................. (7,916) (7,630)
Other, net ...................................................................... 127 641
----------- -----------
Net cash provided (used) by financing activities ........................... 404,125 (155,239)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............................ 376,585 (192,932)
Cash and cash equivalents at beginning of year .................................. 290,178 690,843
----------- -----------
Cash and cash equivalents at end of period ...................................... $ 666,763 $ 497,911
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................... $ 55,687 $ 35,338
Income taxes ........................................................... 621 2,000
Non-cash investing activities:
Transfer from long-term debt to short-term borrowing ................... 75,000 65,000
See accompanying Notes to the Unaudited Consolidated Financial Statements.
4
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
------------- -------------
Common Stock
Balance, beginning of period ........................................... $ 46,885 $ 46,885
Stock issued for acquisitions .......................................... 650 -
Stock options exercised ................................................ - -
------------- -------------
Balance, end of period ................................................. 47,535 46,885
------------- -------------
Additional paid-in capital
Balance, beginning of period ........................................... 276,464 287,363
Tax benefit from stock options ......................................... 127 641
Excess of cost of treasury shares reissued
over stock option exercise amounts ................................ (1,317) (6,093)
Excess of market value of shares issued
for acquisitions over historical cost ............................. 9,149 -
Other .................................................................. 89 -
------------- -------------
Balance, end of period ................................................. 284,512 281,911
------------- -------------
Accumulated other comprehensive income
Balance, beginning of period ........................................... (27,193) 12,901
Other comprehensive (loss) income net of income taxes/benefits ......... 489 (10,615)
------------- -------------
Balance, end of period ................................................. (26,704) 2,286
------------- -------------
Retained earnings
Balance, beginning of period ........................................... 321,210 243,275
Net income ............................................................. 31,008 26,001
Dividends paid ......................................................... (7,916) (7,630)
------------- -------------
Balance, end of period ................................................. 344,302 261,646
------------- -------------
Treasury shares
Balance, beginning of period ........................................... (45,720) (28,621)
Purchase of shares ..................................................... (14,203) (14,477)
Issuance of shares for acquisitions .................................... 55,381 -
Issuance of shares for stock options ................................... 2,349 9,395
------------- -------------
Balance, end of period ................................................. (2,193) (33,703)
------------- -------------
Total shareholders' equity ................................................... $ 647,452 $ 559,025
============= =============
See accompanying Notes to the Unaudited Consolidated Financial Statements.
5
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. City National Corporation (the "Corporation") is the holding company for
City National Bank (the "Bank"). In light of the fact that the Bank
comprises substantially all of the business of the Corporation, references
to the "Company" means the Corporation and the Bank together.
2. The results of operations reflect the interim adjustments, all of which are
of a normal recurring nature and which, in the opinion of management, are
necessary for a fair presentation of the results for such interim periods.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Corporation's Annual Report on Form 10-K for the year ended December
31, 1999.
3. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. This Statement was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No.133" (SFAS 137), which extended the
effective date to fiscal years beginning after June 15, 2000. The Company
uses interest rate swaps to manage interest rate exposure, which are
accounted for as hedging activities. Management does not believe that the
implementation will have a significant impact on the Corporation's
financial position, net income or net comprehensive income.
4. Trading account securities are stated at market value. Investments not
classified as trading securities are classified as securities
available-for-sale and recorded at fair value. Unrealized holding gains or
losses for securities available-for-sale, net of taxes are excluded from
net income and are reported as comprehensive income included as a separate
component of shareholders' equity.
5. Certain prior periods' data have been reclassified to conform to current
period presentation.
6. On February 29, 2000, the Company acquired The Pacific Bank, N.A. ("Pacific
Bank"). In that transaction, Pacific Bank merged into the Bank and the
Corporation paid consideration equal to $145.2 million (including the
consideration for stock options), 47.0% of which was paid in the
Corporation's common stock and 53.0% of which was paid in cash. The
transaction was accounted for as a purchase. Pacific Bank had total assets,
loans, and deposits of $782.0 million, $488.0 million, and $702.0 million,
respectively, at the date of acquisition. The acquisition of Pacific Bank
resulted in the recording of goodwill and intangibles of approximately
$69.1 million. Included in goodwill as purchase price adjustments were $3.9
million of accrued severance and change of control costs of which $1.9
million remain unpaid, $1.3 million of paid transaction-related expenses
and $2.5 million of exit costs of which $2.0 million remain unpaid as of
March 31, 2000. Results reflect the operations of Pacific Bank from
February 29, 2000, the date of acquisition.
7. Reserves established as part of the goodwill for the August 27, 1999
acquisition of American Pacific State Bank ("APSB") of $0.5 million for
severance accruals and $0.2 million for exit costs remain as of March 31,
2000. Reserves established as part of the goodwill for the December 31,
1998 acquisition of North American Trust Company of $0.4 million for excess
space continue to be amortized over the remaining 5.67 years of a lease.
8. Under the Corporation's current stock buyback program of one million common
shares announced on July 29, 1999, 731,100 shares, including 450,300 shares
in the first quarter of 2000, were repurchased for a cost of $23.5 million.
Shares purchased under the buyback program have been and will continue to
be reissued for acquisitions, upon the exercise of stock options, and for
other general corporate purposes. Treasury shares at March 31, 2000 totaled
81,473 shares, reflecting the use of 1,715,127 treasury shares for the
acquisition of Pacific Bank.
6
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)
Percentage Change
At or for the three Months Ended March 31, 2000 From
-------------------------------------------------
March 31, December 31, March 31, December 31, March 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1999 1999 1999
------------ ------------- ------------ ------------- -----------
For The Quarter
Net income $ 31,008 $ 27,917 $ 26,001 11% 19%
Net income per common share, basic 0.68 0.61 0.57 11 19
Net income per common share, diluted 0.66 0.60 0.55 10 20
Dividends, per common share 0.175 0.165 0.165 6 6
At Quarter End
Assets $8,423,505 $7,213,619 $6,284,319 17 34
Deposits 6,377,460 5,669,409 4,603,730 12 39
Loans 6,164,016 5,490,669 4,518,276 12 36
Securities 1,196,531 1,129,806 1,108,036 6 8
Shareholders' equity 647,452 571,646 559,025 13 16
Book value per share 13.64 12.58 12.20 8 12
Average Balances
Assets $7,661,611 $7,132,771 $6,100,799 7 26
Deposits 5,676,364 5,508,263 4,368,935 3 30
Loans 5,740,343 5,300,284 4,510,941 8 27
Securities 1,208,883 1,155,776 1,091,773 5 11
Shareholders' equity 598,166 570,932 564,294 5 6
Selected Ratios
Return on average assets 1.63% 1.55% 1.73% 5 (6)
Return on average shareholders' equity 20.85 19.40 18.69 7 12
Tier 1 leverage 6.46 6.73 8.06 (4) (20)
Tier 1 risk-based capital 7.21 7.88 9.76 (9) (26)
Total risk-based capital 10.32 11.21 13.54 (8) (24)
Dividend payout ratio, per share 25.53 26.69 29.34 (4) (13)
Net interest margin 5.47 5.46 5.60 - (2)
Efficiency ratio 57.82 58.81 56.27 (2) 3
Asset Quality Ratios
Nonaccrual loans to total loans 0.52% 0.46% 0.51% 13 2
Nonaccrual loans and ORE
to total loans and ORE 0.53 0.49 0.57 8 (7)
Allowance for credit losses
to total loans 2.28 2.44 3.07 (7) (26)
Allowance for credit losses
to nonaccrual loans 434.43 530.20 596.24 (18) (27)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See "Cautionary Statement for Purposes of the `Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995", below for "forward
looking" statements included in this report.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income for the first quarter of 2000 was $31.0
million, or $0.66 per diluted common share, compared with $26.0 million, or
$0.55 per diluted common share, and $27.9 million, or $0.60 per diluted common
share, for the first and fourth quarters of 1999, respectively. The increase in
net income reflects the growth in the Company's loans and deposits, an increase
in noninterest income and an increase in noninterest expense due, in part, to
the acquisitions of APSB in August 1999 and Pacific Bank in February 2000 and a
decrease in the effective tax rate.
For the first quarter of 2000, the return on average assets was 1.63%,
and the return on average shareholders' equity was 20.85%, compared with 1.73%
and 18.69%, respectively, in the first quarter of 1999 and with 1.55% and
19.40%, respectively, in the fourth quarter of 1999.
Income before the amortization of goodwill and core deposit intangibles
(net of applicable taxes) from acquisitions ("cash" income) for the quarter
ended March 31, 2000 was $33.9 million, or $0.72 per diluted common share,
compared with $27.6 million, or $0.58 per diluted common share, and $30.4
million, or $0.65 per diluted common share, for the corresponding periods ended
March 31, 1999 and December 31, 1999, respectively. On the same basis, the
return on average assets was 1.81% and the return on average shareholders'
equity was 28.31%, compared with 1.85% and 22.19%, respectively, for the first
quarter of 1999 and compared with 1.72% and 26.71%, respectively, for the fourth
quarter of 1999. "Cash" income is presented because it measures the
Corporation's ability to support growth, pay dividends and repurchase stock. The
Corporation's "cash" income per share and other ratios are not necessarily
comparable to similarly titled measures reported by other companies.
NET INTEREST INCOME
Net interest income is the difference between interest income (which
includes yield-related loan fees) and interest expense. Net interest income on a
taxable-equivalent basis expressed as a percentage of average total earning
assets is referred to as the net interest margin, which represents the average
net effective yield on earning assets.
Net interest income on a fully taxable-equivalent basis increased 19.0%
to $95.3 million in the first quarter of 2000 compared with $80.1 million in the
year-ago quarter, and increased 6.1% from $89.9 million in the fourth quarter of
1999. The year-over-year increase was primarily due to a $1.4 billion, or 24.2%,
increase in average interest-earning assets, primarily loans. The year-over-year
quarterly increase in net interest income was offset by a lower net interest
margin of 5.47% for the quarter ended March 31, 2000 compared with 5.60% for the
year-earlier period. The net interest margin was 5.46% for the fourth quarter of
1999. The lower net interest margin compared with the year-ago quarter was
primarily attributable to a higher cost of funds to finance the expanding loan
portfolio and lower interest recovered on nonaccrual and charged-off loans.
Interest recovered on nonaccrual and charged-off loans was $1.0 million in the
first quarter of 2000 compared with $3.4 million for the same period a year ago.
See "-- Liquidity Management."
8
The following table presents the components of net interest income on a
fully taxable-equivalent basis for the three months ended March 31, 2000 and
1999. To compare the tax exempt asset yields to taxable yields, amounts are
adjusted to pre-tax equivalents based on the marginal corporate federal tax rate
of 35%.
NET INTEREST INCOME SUMMARY
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------------------------------- ----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (2) RATE BALANCE EXPENSE (2) RATE
--------------------------------------- ----------------------------------------
ASSETS
Interest-earning assets
Loans
Commercial $2,950,902 $64,989 8.86% $2,433,188 $52,809 8.80%
Residential first mortgages 1,207,907 21,775 7.25 1,036,771 18,713 7.32
Real estate construction 377,433 9,345 9.96 245,509 5,961 9.85
Real estate commercial mortgages 1,141,315 25,865 9.11 747,037 17,563 9.53
Installment 62,786 1,463 9.37 48,436 1,130 9.46
----------- -------- ----------- --------
Total loans (1) 5,740,343 123,437 8.65 4,510,941 96,176 8.65
Securities available-for-sale 1,132,575 19,924 7.08 1,040,180 16,834 6.56
Federal funds sold and securities
purchased under resale agreements 57,194 788 5.54 36,863 505 5.56
Trading account securities 76,308 999 5.27 51,593 426 3.35
----------- -------- ----------- --------
Total interest-earning assets 7,006,420 145,148 8.33 5,639,577 113,941 8.19
-------- --------
Allowance for credit losses (137,491) (138,484)
Cash and due from banks 320,135 296,318
Other nonearning assets 472,547 303,388
---------- ----------
Total assets $7,661,611 $6,100,799
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest checking accounts $ 466,139 546 0.47 $ 401,821 599 0.60
Money market accounts 1,178,765 9,261 3.16 939,328 6,735 2.91
Savings deposits 224,989 2,238 4.00 183,204 1,976 4.37
Time deposits - under $100,000 267,561 3,431 5.16 185,774 2,181 4.76
Time deposits - $100,000 and over 1,154,605 15,273 5.32 724,557 8,250 4.62
----------- -------- ----------- --------
Total interest - bearing deposits 3,292,059 30,749 3.76 2,434,684 19,741 3.29
Federal funds purchased and securities
sold under repurchase agreements 290,781 4,036 5.58 267,809 3,013 4.56
Other borrowings 1,006,636 15,035 6.01 833,268 11,058 5.38
----------- -------- ----------- --------
Total interest - bearing liabilities 4,589,476 49,820 4.37 3,535,761 33,812 3.88
-------- --------
Noninterest - bearing deposits 2,384,305 1,934,251
Other liabilities 89,664 66,493
Shareholders' equity 598,166 564,294
---------- ----------
Total liabilities and
shareholders' equity $7,661,611 $6,100,799
========== ==========
Net interest spread 3.96% 4.31%
===== ====
Fully taxable-equivalent net interest income $95,328 $80,129
======= =======
Net interest margin 5.47% 5.60%
===== ====
(1) Includes average nonaccrual loans of $28,178 and $24,082 for 2000 and
1999, respectively.
(2) Loan income includes loan fees of $3,910 and $4,591 for 2000 and 1999,
respectively.
9
Average loans rose 27.3% during the first quarter of 2000 to $5.7
billion compared with the first quarter of 1999. Compared with the year-ago
quarter, commercial loan average balances rose 21.3% from $2.4 billion to $3.0
billion. Average loan growth was driven primarily by increases in commercial
loans and real estate commercial mortgages. Real estate commercial mortgage
averages rose 52.8% from $0.7 billion to $1.1 billion. Growth in all other loan
categories also contributed to the increase in average loans over the prior-year
quarter. Average loans increased 8.3% from the 1999 fourth quarter;
approximately 3.0% of the loan growth since December 31, 1999 is attributable to
loans acquired with the acquisition of Pacific Bank. Approximately half of the
loans acquired with Pacific Bank were commercial loans and approximately 40%
were real estate commercial mortgages.
Average securities increased $117.1 million, or 10.7%, to $1.2 billion
for the quarter ended March 31, 2000 compared with the first quarter of 1999 and
increased 5.0% from the fourth quarter of 1999.
Average deposits increased $1.3 billion, or 30.0%, to $5.7 billion for
the quarter ended March 31, 2000 compared with the first quarter of 1999 and
increased 3.1% from the fourth quarter of 1999.
Net interest income is impacted by the volume and rate of
interest-earning assets and interest-bearing liabilities. The following table
shows changes in net interest income between the first quarter of 2000 and the
first quarter of 1999 as well as between the first quarter of 1999 and the first
quarter of 1998.
CHANGES IN NET INTEREST INCOME
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2000 VS 1999 1999 VS 1998
--------------------------------------- -------------------------------------
INCREASE (DECREASE) NET INCREASE (DECREASE)
DUE TO INCREASE DUE TO NET
-------------------- ------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ---- ---------- ------ ---- ----------
Interest earned on:
Loans $27,261 $ - $27,261 $10,889 $(5,874) $5,015
Securities available-for-sale 1,639 1,451 3,090 3,699 (731) 2,968
Trading account securities 262 311 573 104 (351) (247)
Federal funds sold and
securities purchased
under resale agreements 285 (2) 283 (34) 29 (5)
-------- ------ -------- ------- ------- ------
Total interest-earning assets 29,447 1,760 31,207 14,658 (6,927) 7,731
-------- ------ -------- ------- ------- ------
Interest paid on:
Interest checking deposits 87 (140) (53) 39 (48) (9)
Money market deposits 1,893 633 2,526 762 (191) 571
Savings deposits 436 (174) 262 61 63 124
Other time deposits 6,657 1,616 8,273 (363) (1,414) (1,777)
Other borrowings 2,803 2,197 5,000 5,313 (1,034) 4,279
Total interest-bearing -------- ------ -------- ------- ------- ------
liabilities 11,876 4,132 16,008 5,812 (2,624) 3,188
-------- ------ -------- ------- ------- ------
$17,571 $(2,372) $15,199 $8,846 $(4,303) $4,543
======== ====== ======== ======= ======= ======
10
PROVISION FOR CREDIT LOSSES
The Corporation recorded no credit loss provisions for the first quarter
of 2000, as credit quality remained strong. There were also no credit loss
provisions in the year-earlier period. Net charge offs for the first quarter of
2000 were $3.6 million compared with net recoveries of $3.4 million in the
year-earlier period and net charge offs of $4.9 million for the fourth quarter
of 1999. See "--Allowance for Credit Losses."
NONINTEREST INCOME
Noninterest income continued its strong growth, totaling $24.2 million
for the first quarter 2000, a 26.6% increase over the $19.1 million reported in
the first quarter of 1999. These results reflect a 4.4% increase over the $23.2
million for the fourth quarter of 1999. Noninterest income was 20.8% of total
revenues in the first quarter of 2000 compared with 19.8% for the year-earlier
period and 21.1% for the fourth quarter of 1999.
All categories of recurring noninterest income increased over the
prior-year period. Investment services and trust fees rose as a result of strong
internally generated new business, and the growing customer base within City
National Investments (CNI), a division of the Bank. CNI had assets under
administration and management of $14.9 billion as of March 31, 2000 compared
with $13.3 billion at March 31, 1999 and $14.1 billion at December 31, 1999.
International services income rose as a result of increased foreign exchange
fees. Growth in noninterest income also reflects the acquisition of Pacific
Bank. Gains on the sale of assets and securities amounted to $0.2 million for
the quarter compared with $1.3 million in the prior-year quarter. The increase
during the first quarter of 2000 was primarily attributable to the acquisition
of Pacific Bank.
NONINTEREST EXPENSE
Noninterest expense was $69.1 million for the first quarter of 2000
compared with $55.9 million in the first quarter and $66.7 million in the fourth
quarter of 1999. The year-over-year increase is primarily the result of
additional offices and employees, including those resulting from the
acquisitions of APSB and Pacific Bank. Salaries and other employee benefits
increased by $6.3 million, or 19.5%, compared with the first quarter of 1999; it
increased by $3.9 million, or 11.3%, compared with the fourth quarter of 1999.
All other expenses increased $6.8 million, or 29.3%, from the first quarter of
1999 and decreased $1.5 million, or 5.1%, from the fourth quarter of 1999. First
quarter noninterest expense included $1.3 million relating to the integration of
Pacific Bank and included system conversion charges, the cost of new client
checks and facility consolidation expenses.
During 1999, the Company completed the process of preparing for the
Year 2000 date change. To date, the Company has successfully managed the
transition. Although considered unlikely, unanticipated problems in the
Company's business process, including problems associated with non-compliant
third parties and disruptions to the economy in general, could still occur
despite efforts to date to remediate systems problems and develop contingency
plans. Management will continue to monitor all business processes, including
interaction with the Company's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
INCOME TAXES
The effective tax rate in the first quarter of 2000 declined to 34.6%
compared with 36.5% in the first quarter and 35.7% in the fourth quarter of
1999. The decline is due primarily to the impact of the formation of a regulated
investment company subsidiary that provides flexibility to raise additional
capital in a tax efficient manner. There can be no assurance as to the timing or
ability of the Company to raise capital through this subsidiary. The effective
tax rate is expected to remain at this lower rate for the balance of the year.
11
BALANCE SHEET ANALYSIS
Total assets were $8.4 billion at March 31, 2000 compared with $6.3
billion at March 31, 1999 and $7.2 billion at December 31, 1999. Increased loan
balances due to internally generated loan growth as well as the acquisitions of
APSB and Pacific Bank contributed to this growth in assets.
SECURITIES
Comparative period-end security portfolio balances are presented below:
SECURITIES AVAILABLE-FOR-SALE
MARCH 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------------------- -------------------------- -------------------------
FAIR FAIR FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- ---------- ----------
U.S. Gov. and federal agency $ 298,832 $ 293,147 $ 291,407 $ 286,546 $ 294,087 $ 297,396
Mortgage-backed 380,219 363,128 368,948 351,251 387,273 384,530
State and Municipal 164,562 160,651 155,736 152,244 143,874 144,938
Other debt securities 166,692 151,460 166,772 150,913 142,802 142,346
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities 1,010,305 968,386 982,863 940,954 968,036 969,210
Marketable equity securities 178,183 174,026 166,150 161,138 106,630 109,423
---------- ---------- ---------- ---------- ---------- ----------
Total securities $1,188,488 $1,142,412 $1,149,013 $1,102,092 $1,074,666 $1,078,633
========== ========== ========== ========== ========== ==========
At March 31, 2000, securities available-for-sale totaled $1.1 billion
remaining relatively stable compared with holdings at March 31, 1999 and
December 31, 1999. Unrealized net losses decreased $0.8 million. The unrealized
gain or loss on securities available-for-sale is reported on an after-tax basis
as a valuation allowance that is a component of other comprehensive income
(loss).
The following table provides the expected remaining maturities and
yields (taxable-equivalent basis) of debt securities within the securities
portfolio as of March 31, 2000. To compare the tax-exempt assets yields to
taxable yields, amounts are adjusted to pre-tax equivalents based on the
marginal corporate federal tax rate of 35%.
DEBT SECURITIES AVAILABLE-FOR-SALE
ONE YEAR OVER 1 YEAR OVER 5 YEARS
OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL
-------------- --------------- --------------- -------------- ---------------
(%) (%) (%) (%) (%)
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
U.S. Gov. and federal agency $ 3,489 5.71 $200,955 6.35 $88,703 6.46 $ - - $ 293,147 6.37
Mortgage-backed 2,768 6.29 - - 22,791 5.99 337,569 6.59 363,128 6.56
State and Municipal 16,069 6.67 47,587 6.89 95,674 6.66 1,321 7.55 160,651 6.74
Other debt securities 51 7.00 - - 84,489 7.50 66,920 7.99 151,460 7.71
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total debt securities $22,377 6.48 $248,542 6.45 $291,657 6.78 $405,810 6.82 $ 968,386 6.72
======= ======== ======== ======== ========
Amortized cost $22,395 $252,443 $308,301 $427,166 $1,010,305
======= ======== ======== ======== ========
Dividend income included in interest income on securities in the
Consolidated Statement of Income and Comprehensive Income in the first quarter
of 2000 and 1999 were $2.3 million and $1.3 million, respectively.
12
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
LOANS
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2000 1999 1999
---------- ------------ -----------
Commercial $3,141,456 $2,870,438 $2,427,843
Residential first mortgage 1,224,343 1,173,334 1,032,383
Real estate construction 421,639 344,870 246,760
Real estate commercial mortgages 1,307,961 1,042,123 763,772
Installment 68,617 59,904 47,518
---------- ---------- ----------
Total loans 6,164,016 5,490,669 4,518,276
Less: Allowance for credit losses 140,450 134,077 138,710
---------- ---------- ----------
Total loans, net $6,023,566 $5,356,592 $4,379,566
========== ========== ==========
Total loans at March 31, 2000 were $6.2 billion compared with $4.5
billion at March 31, 1999 and $5.5 billion at December 31, 1999. During the
quarter, total loans increased $673.3 million, or 12.3%, from December 31, 1999.
Loans from the acquisition of Pacific Bank added $497.7 million of the increase
with other growth driven primarily by loans originated as part of a client
relationship; purchased residential first mortgages rose $21.1 million, or
10.0%, and non-relationship, syndicated loans rose $3.2 million, or less than
1.0%. Non-relationship syndicated loans continue to account for less than 10.0%
of the loan portfolio. On a year-over-year basis, in addition to the acquisition
of Pacific Bank and growth in loans originated as part of client relationships,
the acquisition of APSB also contributed to loan growth.
The following table presents information concerning nonaccrual loans,
ORE, and restructured loans.
NONACCRUAL LOANS, ORE AND RESTRUCTURED LOANS
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2000 1999 1999
------- ------------ ---------
Nonaccrual loans:
Real estate $ 8,791 $10,380 $16,959
Commercial 22,899 13,368 5,430
Installment 640 1,540 875
------- ------- -------
Total 32,330 25,288 23,264
ORE 429 1,413 2,390
------- ------- -------
Total nonaccrual loans and ORE $32,759 $26,701 $25,654
======= ======= =======
Loans past due 90 days or more on accrual status,
including credits in the process of being paid or
renewed and not anticipated to move to nonaccrual status $28,358 $ 4,033 $16,704
======= ======= =======
Restructured loans, accruing $ 2,647 $ 2,707 $ 1,881
======= ======= =======
Total non accrual loans as a
percentage of total loans 0.52 % 0.46 % 0.51 %
Total non accrual loans and ORE as a
percentage of total loans and ORE 0.53 0.49 0.57
Allowance for credit losses to total loans 2.28 2.44 3.07
Allowance for credit losses to nonaccrual loans 434.43 530.20 596.24
13
The table below summarizes the approximate changes in nonaccrual loans
for the three months ended March 31, 2000 and March 31, 1999.
CHANGES IN NONACCRUAL LOANS
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------- ---------
Balance, beginning of period $25,288 $23,138
Additions from acquisitions 4,428 -
Loans placed on nonaccrual 6,683 3,951
Charge offs (1,204) (384)
Loans returned to accrual status - (107)
Repayments (including interest
applied to principal) (2,865) (3,334)
Transfer to ORE - -
------- -------
Balance, end of period $32,330 $23,264
======= =======
At March 31, 2000, in addition to loans disclosed above as nonaccrual
or restructured, management had also identified $9.4 million of problem loans
about which the ability of the borrowers to comply with the present loan
repayment terms in the future is questionable. Problem loans were $4.4 million
at March 31, 1999 and $8.8 million at December 31, 1999.
Loans past due 90 days or more on accrual status fluctuate based on the
status of credits in the process of being paid and, in many cases, renewed. At
April 30, 2000, loans past due 90 days or more on accrual status were $15.9
million, down from $28.4 million at March 31, 2000.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses at March 31, 2000 totaled $140.5
million, or 2.28% of outstanding loans, which included an allowance of $9.9
million related to the acquisition of Pacific Bank. This compares with an
allowance of $138.7 million, or 3.07% of outstanding loans at March 31, 1999,
and an allowance of $134.1 million, or 2.44% of outstanding loans at December
31, 1999. The allowance for credit losses as a percentage of nonaccrual loans
was 434.4% at March 31, 2000 compared with 596.2% at March 31, 1999 and 530.2%
at December 31, 1999. Total non-performing assets (nonaccrual loans and ORE)
were $32.8 million, or 0.53%, of total loans and ORE at March 31, 2000 compared
with $25.7 million, or 0.57%, at March 31, 1999 and $26.7 million or 0.49%, at
December 31, 1999.
The allowance for credit losses is maintained at a level which
management deems appropriate based on a thorough analysis of numerous factors,
many of which are reflected in this report. The level of the allowance for
credit losses can be expected to fluctuate through the remainder of 2000 and may
require a minimal provision for credit losses. However, credit quality will be
influenced by underlying trends in the economic cycle, particularly in
California, and other factors which are beyond management's control.
Consequently, no assurances can be given that the Company will not sustain
credit losses, in any particular period, that are sizable in relation to the
allowance for credit losses. Additionally, subsequent evaluation of the loan
portfolio, in light of factors then prevailing, by the Company and its
regulators may indicate a requirement for increases in the allowance for credit
losses through charges to the provision for credit losses. Based on known
information available to it at the date of this report, management believes that
the Company's allowance for credit losses was adequate for foreseeable losses at
March 31, 2000.
14
CHANGES IN ALLOWANCE FOR CREDIT LOSSES
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------- ----------
Average amount of loans outstanding $5,740,343 $4,510,941
========== ==========
Balance of allowance for credit losses,
beginning of period $ 134,077 $ 135,339
Loans charged off:
Commercial 4,899 1,044
Real estate 660 54
---------- ----------
Total loans charged off 5,559 1,098
---------- ----------
Less recoveries of loans previously
charged off:
Commercial 1,732 4,398
Real estate 273 71
---------- ----------
Total recoveries 2,005 4,469
---------- ----------
Net loans (charged off) recovered (3,554) 3,371
Additions to allowance charged to operating expense - -
Additions to allowance from acquisitions 9,927 -
---------- ----------
Balance, end of period $ 140,450 $ 138,710
========== ==========
Ratio of net charge-offs
to average loans 0.06% N/M
========== ==========
Ratio of allowance for credit losses to total period end loans 2.28% 3.07%
========== ==========
OTHER ASSETS
Other assets included the following:
OTHER ASSETS
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2000 1999 1999
-------- ------- -------
Accrued interest receivable ........................................ $ 50,383 $42,206 $39,999
Claim in receivership .............................................. 17,200 - -
Income tax refund .................................................. 8,153 4,188 -
Other .............................................................. 24,330 20,408 24,526
-------- ------- -------
Total other assets ............................................. $100,066 $66,802 $64,525
======== ======= =======
The claim in receivership arose from the acquisition of Pacific Bank
DEPOSITS
Deposits totaled $6.4 billion at March 31, 2000 compared with $4.6
billion at March 31, 1999 and $5.7 billion at December 31, 1999. Deposit
growth during the quarter reflects the deposits assumed in the acquisition of
Pacific Bank, which added $699.0 million to deposits at March 31, 2000.
Deposits typically decline the first quarter of the year due to seasonal run
up in balances at year-end. Core deposits which continued to provide
substantial benefits to the Bank's cost of funds rose 16.0% during the
quarter, providing a significant contribution to the total
15
increase from December 31, 1999. The year-over-year increase resulted from
the Company's increased marketing efforts, the nature of the Company's
relationship business which allows customers to maintain balances as
compensation for banking services, as well as from the acquisitions of APSB
and Pacific Bank.
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for well
capitalized institutions and the capital ratios for the Corporation and the
Bank at March 31, 2000, December 31, 1999 and March 31, 1999.
Regulatory
Well Capitalized March 31, December 31, March 31,
Standards 2000 1999 1999
----------------- ----------- ------------- ------------
City National Corporation
Tier 1 leverage 4.00 % 6.46 % 6.73 % 8.06 %
Tier 1 risk-based capital 6.00 7.21 7.88 9.76
Total risk-based capital 10.00 10.32 11.21 13.54
City National Bank
Tier 1 leverage 4.00 % 6.26 % 6.30 % 7.78 %
Tier 1 risk-based capital 6.00 6.98 7.40 9.40
Total risk-based capital 10.00 10.10 10.75 13.18
The reduction in capital ratios was due primarily to the acquisitions
of APSB and Pacific Bank and the Corporation's stock repurchase program but
remain above the well capitalized standards.
On April 26, 2000, the Corporation declared a regular quarterly cash
dividend on common stock at a rate of $0.175 per share to shareholders of
record on May 10, 2000 payable on May 22, 2000.
LIQUIDITY MANAGEMENT
The Company continues to manage its liquidity through the
combination of core deposits, federal funds purchased, repurchase agreements,
collateralized borrowing lines at the Federal Reserve Bank and the Federal
Home Loan Bank of San Francisco and a portfolio of securities
available-for-sale. Liquidity is also provided by maturing securities and
loans.
Average core deposits and shareholders' equity comprised 66.8% of
total funding in the first quarter of 2000, compared with 69.0% in the first
quarter of 1999. 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 and shareholders' equity,
the Company has not faced any liquidity constraints.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The principal objective of asset/liability management is to maximize
net interest income subject to margin volatility and liquidity constraints.
Margin volatility results when the rate reset (or repricing) characteristics
of assets are materially different from those of the Company's liabilities.
Liquidity risk results from the mismatching of asset and liability cash
flows. Management chooses asset/liability strategies that promote stable
earnings and reliable funding. Interest rate risk and funding positions are
kept within limits established by the Board of Directors to ensure that risk
taking is not excessive and that liquidity is properly managed.
16
A quantitative and qualitative discussion about market risk is
included on pages A-15 to A-18 of the Corporation's Form 10-K for the year
ended December 31, 1999. During the quarter, the Company became slightly more
asset sensitive, but at all times remained within the limits set by the Board
of Directors.
As of March 31, 2000, the Company has $775.0 million of notional
principal in receive fixed-pay LIBOR interest rate swaps, of which $420.0
million have maturities greater than one year. The Company's interest-rate
risk-management instruments had a fair value of $(12.0) million and $(10.0)
million at March 31, 2000 and December 31, 1999, respectively, with no
exposure to credit risk at March 31, 2000 or at December 31, 1999. The credit
exposure represents the cost to replace, on a present value basis and at
current market rates, the net positive value of all contracts for each
counterparty that were outstanding at the end of the period. The Company's
swap agreements require the deposit of collateral to mitigate the amount of
credit risk if certain market value exposure thresholds are exceeded. As of
March 31, 2000, the Company had deposited $6.0 million par value in
securities with counterparties.
With the acquisition of Pacific Bank, the Company also acquired a
$25.0 million interest rate floor transaction. In a floor transaction, the
holder receives payment when an interest rate index falls below a
predetermined level. Pacific Bank purchased a floor to reduce its asset
sensitivity. This transaction is tied to three-month LIBOR, and matures in
September 2000. The market value of this transaction on March 31, 2000 was
essentially zero.
At March 31, 2000, the Company's outstanding foreign exchange
contracts for both those purchased as well as sold totaled $145.4 million.
The Company enters into foreign exchange contracts with its customers and
counterparty banks solely for the purpose of offsetting or hedging
transaction and economic exposures arising out of commercial transactions.
The Company's policies prohibit outright speculation by the Company and its
employees. The Company actively manages its foreign exchange exposures within
prescribed risk limits and controls. All foreign exchange contracts
outstanding at March 31, 2000 had remaining maturities of six months or less.
17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We have made forward-looking statements in this document that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of our management, and on information currently available to
our management. Forward-looking statements include the information concerning
our possible or assumed future results of operations, and statements preceded
by, followed by or that include the words "will," believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
Our management believes these forward-looking statements are
reasonable; however, you should not place undue reliance on the
forward-looking statements, which are based on current expectations. Actual
results may differ materially from those currently expected or anticipated.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Many of the factors described below that will
determine these results and values are beyond our ability to control or
predict. For those statements, we claim the protection of the safe harbor
contained in the Private Securities Litigation Reform Act of 1995.
AN ECONOMIC SLOWDOWN IN CALIFORNIA COULD HURT OUR BUSINESS. Prior to
the merger with Pacific Bank, we have focused our business in Los Angeles,
Orange, Ventura, San Diego, San Bernardino and Riverside counties of Southern
California. After the merger, our operations include San Francisco and San
Mateo counties. An economic slowdown in California could have the following
consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Demand for our products and services may decline; and
- Collateral for loans made by us, especially real estate, may
decline in value, in turn reducing customers' borrowing power,
and reducing the value of assets and collateral associated with
our existing loans.
CHANGES IN INTEREST RATES AFFECT OUR PROFITABILITY. Changes in
prevailing rates may hurt our business. We derive our income mainly from the
difference or "spread" between the interest earned on loans, securities and
other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. In general, the wider the spread, the
more we earn. When market rates of interest change, the interest we receive
on our assets and the interest we pay on our liabilities will fluctuate. This
can cause decreases in our spread and can affect our income. In addition,
interest rates affect how much money we can lend. For example, when interest
rate rise, loan originations tend to decrease. We expect interest rates to
rise in 2000.
SIGNIFICANT CHANGES IN BANKING LAWS OR REGULATIONS COULD MATERIALLY
AFFECT OUR BUSINESS. The banking industry is subject to extensive federal and
state regulations, and significant new laws or changes in, or repeals of,
existing laws may cause results to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects our credit conditions, primarily through open
market operations in U.S. government securities, the discount rate for member
bank borrowing and bank reserve requirements. A material change in these
conditions would have an impact on results.
WE FACE STRONG COMPETITION FROM FINANCIAL SERVICE COMPANIES AND
OTHER COMPANIES THAT OFFER BANKING SERVICES WHICH CAN HURT OUR BUSINESS.
Increased competition in our market may result in reduced loans and deposits.
Ultimately, we may not be able to compete successfully against current and
future competitors. Many competitors offer the banking services that we offer
in our service area. These competitors include national, regional, and
community banks. We also face competition from many other types of financial
institutions, including, without limitation, savings and loans, finance
companies, brokerage firms, insurance companies, credit unions, mortgage
banks, and other financial intermediaries. Recently passed legislation will
make it easier for other types of financial institutions to compete with us.
OUR RESULTS WOULD BE ADVERSELY AFFECTED IF WE SUFFERED HIGHER THAN
EXPECTED LOSSES ON OUR LOANS. We assume risk from the possibility that losses
will be sustained because borrowers, guarantors, and related parties may fail
to
18
perform in accordance with the terms of their loans. We have adopted
underwriting and credit policies, including establishing and reviewing the
allowance for credit losses that we believe are appropriate to minimize this
risk. We assess the likelihood of nonperformance, track loan performance, and
diversify our credit portfolio. Those policies and procedures may not prevent
unexpected losses that could adversely affect our results.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On January 25, 2000, the Corporation filed a report on Form
8-K under item 5 regarding the financial results for the
quarter and year ended December 31, 1999. Included in the
report was a press release dated January 13, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: May 15, 2000 /s/ FRANK P. PEKNY
------------------------------- -------------------------
FRANK P. PEKNY
Executive Vice President and
Chief Financial Officer/Treasurer
(Authorized Officer and Principal
Financial Officer)
20