SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1997 Commission File Number 1-10521
CITY NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310)888-6000
Indicate by check mark whether the registrant(1)has filed all reports
required to be filed by Section 13 or 15 (d)of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
------ -------
Number of shares of common stock outstanding at April 30,
1997: 46,090,258
CITY NATIONAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
ASSETS
March 31, December 31, March 31,
1997 1996 1996
--------- ------------ -----------
(Dollars in thousands)
Cash and due from banks. . . . . . . . . . . . . . . . . . $ 268,911 $ 331,046 $ 302,901
Interest-bearing deposits in other banks . . . . . . . . . 1,160 10,978 30,701
Federal funds sold and securities purchased under
resale agreements. . . . . . . . . . . . . . . . . . . . 60,000 151,200 160,000
Investment securities (market values $212,117; $194,655
and $168,143 at March 31, 1997, December 31, 1996 and
March 31, 1996, respectively). . . . . . . . . . . . . . 214,820 195,229 169,998
Securities available for sale (cost $611,254; $619,580 and
$673,418 at March 31, 1997, December 31, 1996 and
March 31, 1996, respectively). . . . . . . . . . . . . . 602,631 615,863 666,367
Trading account securities . . . . . . . . . . . . . . . . 39,639 32,129 32,363
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,302,001 2,839,435 2,373,914
Less allowance for credit losses . . . . . . . . . . . . . 137,614 130,089 128,911
------------ ------------- --------------
Net loans 3,164,387 2,709,346 2,245,003
Leveraged leases 5,549 6,147 6,614
Premises and equipment, net 32,798 24,196 24,028
Customers' acceptance liability 1,988 2,339 1,754
Other real estate 18,958 15,116 12,562
Deferred tax asset 51,834 65,291 63,400
Goodwill and core deposit intangibles 63,207 10,083 11,918
Other assets 57,763 47,533 40,332
------------ ------------- -------------
Total assets $ 4,583,645 $ 4,216,496 $ 3,767,941
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES
Demand deposits $ 1,547,850 $ 1,642,558 $ 1,194,003
Interest checking deposits 375,186 386,211 307,806
Money market accounts 813,155 714,127 746,243
Savings deposits 174,072 136,691 133,238
Time deposits - under $100,000 240,054 146,076 131,481
Time deposits - $100,000 and over 489,680 360,860 358,103
------------ ----------- ------------
Total deposits 3,639,997 3,386,523 2,870,874
Federal funds purchased and securities sold
under repurchase agreements 130,131 194,549 288,996
Other short-term borrowings 262,339 148,642 160,843
Long-term debt 34,800 34,800 34,800
Other liabilities 49,115 48,896 53,896
Acceptances outstanding 1,988 2,339 1,754
------------ ----------- ------------
Total liabilities 4,118,370 3,815,749 3,411,163
------------ ----------- ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock authorized-5,000,000, none outstanding - - -
Common stock- par value- $1.00; authorized - 75,000,000
Issued- 46,694,668; 46,302,782 and 45,817,762 at
March 31, 1997, December 31, 1996 and March 31, 1996,
respectively 46,695 46,303 45,818
Additional paid-in capital 300,102 275,610 269,588
Unrealized gain (loss) on available for sale securities (4,973) (2,149) (4,054)
Retained earnings 126,163 113,266 74,370
Treasury shares, at cost - 135,475; 2,394,600 and 2,211,200 at March 31,
1997, December 31, 1996 and March 31, 1996, respectively (2,712) (32,283) (28,944)
--------------- ------------- ------------
Total shareholders' equity 465,275 400,747 356,778
--------------- ------------- -------------
Total liabilities and shareholders' equity $ 4,583,645 $ 4,216,496 $ 3,767,941
--------------- ------------- -------------
--------------- ------------- -------------
See accompanying Notes to the Unaudited Consolidated Financial Statements
-2-
City National Corporation
Consolidated Statement of Operations
(Unaudited)
For the quarter ended March 31,
1997 1996
-------- --------
(Dollars in thousands)
INTEREST INCOME:
Interest and fees on loans. . . . . . . . . . . . . . . . . . . . $70,011 $53,223
Interest on federal funds sold and securities purchased
under resale agreements . . . . . . . . . . . . . . . . . . . . 312 1,407
Interest on investment securities:
U.S. Treasury and federal agency securities . . . . . . . . . . 1,667 1,587
Municipal securities . . . . . . . . . . . . . . . . . . . . . . 1,107 320
Other securities . . . . . . . . . . . . . . . . . . . . . . . . 254 571
Interest on securities available for sale . . . . . . . . . . . . 9,517 10,743
Interest on trading account securities. . . . . . . . . . . . . . 439 470
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,307 68,321
-------- --------
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . . . . 16,494 13,433
Interest on federal funds purchased and securities sold
under repurchase agreements. . . . . . . . . . . . . . . . . . . 2,922 4,427
Interest on other short-term borrowings . . . . . . . . . . . . . 3,610 877
Interest on long-term debt. . . . . . . . . . . . . . . . . . . . 509 424
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,535 19,161
-------- --------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . 59,772 49,160
PROVISION FOR CREDIT LOSSES . . . . . . . . . . . . . . . . . . . - -
-------- --------
Net interest income after provision for credit losses . . . . . . 59,772 49,160
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . 3,304 2,646
Investment services income. . . . . . . . . . . . . . . . . . . . 3,051 2,469
Trust fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,016 1,721
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . . . 1,039 688
Gain (loss) on sales of securities. . . . . . . . . . . . . . . . (277) 742
All other income. . . . . . . . . . . . . . . . . . . . . . . . . 3,492 3,121
-------- --------
Total noninterest income . . . . . . . . . . . . . . . . . . . . 12,625 11,387
-------- --------
NONINTEREST EXPENSE:
Salaries and other employee benefits. . . . . . . . . . . . . . . 23,496 20,139
Net occupancy of premises . . . . . . . . . . . . . . . . . . . . 2,362 2,814
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . 2,152 2,183
Professional. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,582 3,139
FDIC insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 88 1
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . 1,556 1,154
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,357 1,278
Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,722 1,145
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581 480
Amortization of goodwill and core deposit intangibles . . . . . . 1,381 435
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . 4,270 3,219
Other real estate expense . . . . . . . . . . . . . . . . . . . . 378 174
-------- --------
Total noninterest expense. . . . . . . . . . . . . . . . . . . . 43,925 36,161
-------- --------
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . 28,472 24,386
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,469 8,534
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,003 $15,852
-------- --------
-------- --------
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $0.38 $0.35
-------- --------
-------- --------
Shares used to compute net income per share. . . . . . . . . . . . . 47,608 44,932
-------- --------
-------- --------
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,
------------------------
1997 1996
------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,003 $ 15,852
Adjustment to net income:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 1,357 1,278
Amortization of goodwill and core deposit intangibles . . . . 1,381 435
Net (increase) in trading securities. . . . . . . . . . . . . (7,510) (2,635)
Net decrease in deferred tax benefits. . . . . . . . . . . . . 13,457 1,020
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (12,811) (5,619)
-------- --------
Net cash provided (used) by operating activites. . . . . . . 13,877 10,331
-------- --------
INVESTING ACTIVITIES
Net decrease in short-term investments . . . . . . . . . . . . . 9,818 49,995
Purchase of securities available for sale. . . . . . . . . . . . (134,694) (324,294)
Sales and maturities of securities available for sale. . . . . . 198,346 510,243
Maturities of investment securities. . . . . . . . . . . . . . . 2,988 8,621
Purchase of investment securities. . . . . . . . . . . . . . . . (21,851) (72,147)
Purchase of residential mortgage loans . . . . . . . . . . . . . (74,681) (118,283)
Sale of residential mortgage loans . . . . . . . . . . . . . . . 47,513 -
Other loan originations net of principal collections . . . . . . (83,751) 85,457
Proceeds from sales of ORE . . . . . . . . . . . . . . . . . . . 5,411 -
Proceeds from sale of leveraged leases . . . . . . . . . . . . . - 1,824
Net cash provided by acquisitions. . . . . . . . . . . . . . . . 42,876 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,456) 16,619
-------- --------
Net cash provided (used) by investing activities. . . . . . . (16,481) 158,035
-------- --------
FINANCING ACTIVITIES
Net increase in federal funds purchased and
securities sold under repurchase agreements. . . . . . . . . . 80,582 30,643
Net decrease in deposits . . . . . . . . . . . . . . . . . . . . (197,705) (377,161)
Net increase in short term borrowings. . . . . . . . . . . . . . (31,303) (34,257)
Proceeds from long term debt . . . . . . . . . . . . . . . . . . - 9,800
Proceeds from issuance of stock. . . . . . . . . . . . . . . . . 5,312 2,820
Purchase of treasury shares. . . . . . . . . . . . . . . . . . . (1,072) (19,045)
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . (5,106) (4,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,439) (5,805)
-------- --------
Net cash used in financing activities . . . . . . . . . . . . (150,731) (397,005)
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (153,335) (228,639)
Cash and cash equivalents at beginning of year . . . . . . . . . 482,246 691,540
-------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 328,911 $ 462,901
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,878 $ 15,882
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2 1,750
Non cash investing activities:
Transfer from loans to ORE . . . . . . . . . . . . . . . . . 9,652 5,123
See accompanying Notes to the Unaudited Consolidated Financial Statements
-4-
CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
For the three months ended
March 31,
------------------------
1997 1996
--------- ---------
(Dollars in thousands)
Common Stock
Balance, beginning of period. . . . . . . . . . . . . . . . . $46,303 $45,554
Stock options exercised . . . . . . . . . . . . . . . . . . . 392 264
--------- ---------
Balance, end of period. . . . . . . . . . . . . . . . . . . . 46,695 45,818
--------- ---------
Additional paid-in capital
Balance, beginning of period. . . . . . . . . . . . . . . . . 275,610 266,829
Stock options exercised . . . . . . . . . . . . . . . . . . . 4,920 2,556
Tax benefit from stock options. . . . . . . . . . . . . . . . 1,385 203
Excess of market value of treasury shares issued for
acquisitions over historical cost. . . . . . . . . . . . . 18,187 -
--------- ---------
Balance, end of period . . . . . . . . . . . . . . . . . . . 300,102 269,588
--------- ---------
Treasury shares
Balance, beginning of period. . . . . . . . . . . . . . . . . (32,283) (9,899)
Purchase of shares. . . . . . . . . . . . . . . . . . . . . . (1,072) (19,045)
Issuance of shares for acquisitions . . . . . . . . . . . . . 30,643 -
--------- ---------
Balance, end of period. . . . . . . . . . . . . . . . . . . . (2,712) (28,944)
--------- ---------
Unrealized net gains (losses) on securities available for sale
Balance, beginning of period. . . . . . . . . . . . . . . . . (2,149) 1,955
Change during period. . . . . . . . . . . . . . . . . . . . . (2,824) (6,009)
--------- ---------
Balance, end of period. . . . . . . . . . . . . . . . . . . . (4,973) (4,054)
--------- ---------
Retained earnings
Balance, beginning of period. . . . . . . . . . . . . . . . . 113,266 62,518
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . 18,003 15,852
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (5,106) (4,000)
--------- ---------
Balance, end of period. . . . . . . . . . . . . . . . . . . . 126,163 74,370
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . $465,275 $356,778
--------- ---------
--------- ---------
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, 1996.
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. On January 17, 1997, the Company completed its acquisition of Ventura
County National Bancorp (VCNB) for $49.1 million by issuing 1,344,095
treasury shares with an aggregate market value of $28.1 million and
paying $21.0 million in cash. VCNB had shareholders' equity of $30.2
million at closing. This acquisition was accounted for under the
purchase method of accounting.
On January 24, 1997, the Company completed its acquistion of Riverside
National Bank (RNB) for $41.3 million. The Company issued 963,430
treasury shares with an aggreage market value of $20.7 million as well
as paying $20.6 million in cash. RNB had shareholders' equity of
$22.5 million at closing. This acquisition was accounted for under
the purchase method of accounting.
5. On March 17, 1997, the Company announced a program for repurchase of
up to 1.5 million shares of its common stock. Shares purchased under
the buyback program will be issued upon the exercise of stock options
and for other general purposes.
-6-
6. 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.
7. Certain prior year data have been reclassified to conform with current
year presentation.
-7-
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 $18.0 million, or $.38 per
share, in the first quarter of 1997, compared to a net income of $15.9 million,
or $.35 per share, in the first quarter of 1996. Most of the change between
first quarters resulted from an increase in net interest income of $10.6 million
offset in part by the higher level of expenses resulting from acquisitions.
Return on average assets for the first quarter of 1997 was 1.65% compared
with 1.73% for the first quarter of 1996. Return on average equity for the
first quarter of 1997 decreased to 16.25% from 17.38% in 1996 as a result of
the increase in average equity resulting from the issuance of 2.3 million shares
of treasury stock for the two acquisitions completed in January 1997.
Taxable equivalent net interest income was $61.8 million in the first
quarter of 1997, up 23.9% from the year-ago quarter. The increase resulted from
the 20.5% increase in average interest earning assets between quarters and
interest recoveries of $2.7 million in the first quarter of 1997 compared to $.7
million in the first quarter of 1996. The net interest spread increased from
4.62% to 4.68% and the net interest margin increased from 5.99% to 6.11% due to
the strong increase in loans, improved yields from securities, good growth in
core deposits and the recognition of a higher level of interest income from
problem loans. Management expects modest growth in quarterly net interest
income for the remainder of 1997 from first quarter 1997 levels. The foregoing
forward-looking statement assumes, among other things, that interest rate levels
will increase somewhat in 1997 and is based on anticipated growth in loans,
either of which may cause actual results to differ materially if the assumption
proves to have been
-8-
incorrect. See "Cautionary Statement for Purposes of the `Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995", below.
Average loans increased $773.8 million (32.9%) between first quarters to
$3,122.5 million at March 31, 1997. This increase reflected higher average
commercial and residential first mortgage loans outstanding, up $428.0
million (41.1%) and $242.8 million (36.8%), respectively. The increase in
commercial loans resulted from the Bank's internal loan generation, the
acquisitions of VCNB Bancorp (VCNB) and Riverside National Bank (RNB) in
January 1997 and purchases of corporate syndicated loans. The increase in
residential first mortgage loans resulted from both the Bank's internal loan
generation and bulk purchases of residential first mortgage loans. Average
construction loans increased $29.1 million (36.2%) from the first quarter of
1996. Average real estate mortgage loans increased $63.3 million (11.9%) due
primarily to the acquisitions of VCNB and RNB.
Total average investments and available for sale securities decreased by
$.2 million between first quarters due to strong loan demand, which has
absorbed any excess liquidity. Total average deposits increased $572.6
million (20.3%) between first quarters due primarily to the acquisitions of
VCNB and RNB as well as increased deposit levels generated by the Bank's
existing branches.
The provision for credit losses was zero for the quarters ended March 31,
1997 and 1996. Loans charged off in the first quarter of 1997 were $3.7 million,
compared to $5.5 million in the first quarter of 1996. Recoveries were $4.3
million in the first quarter of 1997, compared to $2.9 million in the first
quarter of 1996. The provision for credit losses is expected to remain at
reduced levels for the remainder of 1997. This forward-looking statement is
based on an assumption that general economic conditions in Southern California
will not deteriorate materially in 1997, 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 $11.9 million for the first quarter of 1997, up $1.9 million
(19.1%) from a year earlier Service charges on deposit accounts increased $.7
million (24.9%) for the quarter ended March 31, 1997
-9-
due primarily to the acquisitions of VCNB and RNB. Investment services income
increased $.6 million (23.6%) for the quarter ended March 31, 1997 due to new
customers and new investment products offered to customers. Management expects
modest growth in non-interest income from first quarter 1997 levels during the
remainder of 1997. 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 $43.5 million in
the first quarter of 1997, an increase of $7.6 million (21.0%) from the first
quarter of 1996. Salaries and other employee benefits increased $3.4 million
(16.7%) for the quarter ended March 31, 1997 from the first quarter of 1996 due
primarily to the additional personnel added as a result of the acquisition of
VCNB and RNB and the hiring of additional personnel to pursue other
opportunities.
The expense categories other than staff increased $4.2 million (26.5%)
for the quarter ended March 31, 1997 from the comparable period in 1996. The
increases in professional expenses resulted primarily from higher consulting
and legal fees. The increase in promotion expenses resulted from the
Company's increased advertising program. Other noninterest expense for the
first quarter of 1997 included charges totaling $1.8 million for the
unreserved portion of the cost of a buyout of the Company's then existing
data processing contract, the write-off of unamortized software and hardware
connected with that contract and conversion expense incurred to date to a new
data processing provider. In March 1997, the Company reached agreements with
its insurance carriers regarding a lender liability lawsuit which it settled
with a former bank customer in the fourth quarter of 1996. The insurance
reimbursements of $2.5 million have been credited to other noninterest
expense. The remaining other increases were primarily as a result of the
acquisitions of VCNB and RNB, including $1.7 million in acquisition related
costs incurred in the first quarter of 1997 to cover certain integration
expenses compared to $.7 million in acquisition related costs incurred in the
first quarter of 1996 related to the acquisition of First Los Angeles Bank.
Amortization of goodwill and core deposit intangibles increased to $1.4
million in the first quarter of 1997 from $.4 million in the first quarter of
1996. In April 1997, the Company signed a seven year contract with its new
data processing provider which is expected to substantially decrease its data
processing expense after completion of the conversion to the new data
processing provider. Noninterest expense levels for the second half of 1997
are expected to decrease from first quarter 1997 levels with the completion
of the integration of VCNB and
-10-
RNB into City National Bank and the completion of the conversion to the new data
processing provider. See "Cautionary Statement For Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform Act of 1995",
below.
The Company's effective tax rate increased to 36.8% in the first quarter of
1997 from 35.0% in the first quarter of 1996. The increase resulted from the
recognition of $.9 million in previously unrecognized deferred tax benefits in
the first quarter of 1996. The Company expects the effective tax rate for the
remainder of 1997 to remain near 1997 first quarter levels. See "Cautionary
Statement For Purposes of the `Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
-11-
NET INTEREST INCOME SUMMARY
The following table presents the components of net interest income for the
quarters ended March 31,
1997 and 1996.
March 31, 1997 March 31, 1996
--------------------------- ---------------------------
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 $ 1,468,793 $ 34,115 9.14% $ 1,040,799 $ 23,849 9.22%
Real estate - construction 109,243 3,089 11.47 80,187 2,335 11.71
Real estate - mortgage 593,469 14,577 9.96 530,149 13,160 9.98
Residential first mortgages 903,224 17,728 7.96 660,403 13,320 8.11
Installment loans 47,725 1,164 9.89 37,114 947 10.26
----------- ------------ ------- ------------ ----------- -------
Total loans 3,122,454 70,673 9.05 2,348,652 53,611 9.18
----------- ------------ ------- ------------ ----------- -------
Due from banks-interest bearing 7,730 96 5.04 26,821 392 5.88
State and municipal investment securities 98,714 1,724 7.08 27,412 498 7.31
Taxable investment securities 112,684 1,825 6.57 107,097 1,766 6.63
Securities available for sale 626,430 10,218 6.62 703,540 10,854 6.20
Federal funds sold and securities
purchased under resale agreements 25,081 312 5.04 100,909 1,407 5.61
Trading account securities 39,775 437 4.46 31,789 487 6.16
----------- ------------ ------- ------------ ----------- -------
Total earning assets 4,032,868 85,285 8.47 3,346,220 69,015 8.30
----------- ------------ ------- ------------ ----------- -------
Allowance for credit losses (136,644) (132,097)
Cash and due from banks 318,480 299,763
Other nonearning assets 210,385 161,385
----------- ------------
Total assets $ 4,425,089 $ 3,675,271
----------- ------------
----------- ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Noninterest - bearing deposits $ 1,409,595 - - $ 1,147,607 - -
Interest-bearing deposits:
Interest checking accounts 367,322 908 1.00 327,018 816 1.00
Money market accounts 776,539 5,755 3.01 731,477 5,356 2.94
Savings deposits 167,001 1,367 3.32 132,527 1,007 3.06
Time deposits - under $100,000 218,718 2,738 5.08 130,387 1,695 5.23
Time deposits - $100,000 and over 449,025 5,726 5.17 346,625 4,559 5.29
----------- ------------ ------- ----------- ----------- -------
Total interest - bearing deposits 1,978,605 16,494 3.38 1,668,034 13,433 3.24
----------- ------------ ------- ----------- ----------- -------
Total deposits 3,388,200 2,815,641
Federal funds purchased and securities
sold under repurchase agreements 233,214 2,922 5.08 337,965 4,427 5.27
Other borrowings 305,508 4,119 5.47 90,695 1,301 5.77
----------- ------------ ------- ----------- ----------- -------
Total interest - bearing liabilities 2,517,327 23,535 3.79 2,096,694 19,161 3.68
----------- ------------ ------- ----------- ----------- -------
Other liabilities 48,754 64,163
Shareholders' equity 449,413 366,807
----------- -----------
Total liabilities and shareholders'
equity $ 4,425,089 $ 3,675,271
----------- ------------
----------- ------------
Net interest spread 4.68 4.62
----- -----
----- -----
Fully taxable equivalent net interest income $ 61,750 $ 49,854
-------- ---------
-------- ---------
Net interest margin 6.11% 5.99%
----- -----
----- -----
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $42,723 and $50,562 for 1997 and
1996, respectively.
(3) Loan income includes loan fees of $1,762 and $1,744 for 1997 and 1996,
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 March 31, Quarter Ended March 31,
1997 vs 1996 1996 vs 1995
-------------------------------- ------------------------------
Increase Increase
Dollars in thousands - (decrease) Net (decrease) Net
Fully taxable equivalent basis due to (1): increase due to(1): increase
------------------ ----------------
Volume Rate (decrease) Volume Rate (decrease)
-------- ------- ---------- --------- ----- ----------
Interest earned on:
Interest-bearing deposits
in other banks $ (246) $ (50) $ (296) $ 367 $ 22 $ 389
Loans 17,357 (295) 17,062 16,958 (1,297) 15,661
Taxable investment securities 77 (18) 59 (7,915) 1,702 (6,213)
Non-taxable investment securities 1,242 (16) 1,226 33 19 52
Securities available for sale (1,297) 661 (636) 9,493 (381) 9,112
Trading account securities 103 (153) (50) 61 (76) (15)
Federal funds sold and
securities purchased
under resale agreements (964) (131) (1,095) 394 (188) 206
-------- -------- ---------- ------- ------- -------
Total interest-earning
assets 16,272 (2) 16,270 19,391 (199) 19,192
-------- -------- ---------- ------- ------- ----------
Interest paid on:
Interest checking 92 - 92 139 23 162
Money market deposits 287 112 399 761 515 1,276
Savings deposits 268 92 360 299 295 594
Other time deposits 2,370 (160) 2,210 3,572 611 4,183
Other borrowings 1,391 (78) 1,313 2,348 (259) 2,089
-------- -------- ---------- ------- -------- ----------
Total interest-bearing
liabilities 4,408 (34) 4,374 7,119 1,185 8,304
-------- -------- ---------- ------- ------- ----------
$ 11,864 $ 32 $ 11,896 $ 12,272 $ (1,384) $ 10,888
-------- -------- ---------- ------- ------- -------
-------- -------- ---------- ------- ------- -------
(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:
March 31, December 31, March 31,
1997 1996 1996
-------------- -------------- --------------
(Dollars in thousands)
C>
Commercial $1,561,797 $1,334,577 $1,018,913
Residential first mortgage 929,205 882,573 714,369
Real estate - construction 121,746 92,322 83,040
Real estate -mortgage 640,866 499,377 521,514
Installment 48,387 30,586 36,078
--------------- --------------- --------------
Total loans, gross 3,302,001 2,839,435 2,373,914
Less: Allowance for credit losses (137,614) (130,089) (128,911)
--------------- --------------- --------------
Total loans, net $3,164,387 $2,709,346 $2,245,003
--------------- --------------- --------------
--------------- --------------- --------------
Gross loans at March 31, 1997 amounted to $3,302.0 million, up $928.1
million (39.1%) from March 31, 1996. Approximately $350.0 million of the
increase was due to the acquisitions of VCNB and RNB. The $542.9 million
increase in commercial loans was due to the Bank's own loan originations, the
acquisitions of VCNB and RNB and the purchase of syndicated corporate loans.
The $214.8 million increase in residential first mortgage loans resulted from
the Bank's own originations, which were supplemented by purchases of
residential first mortgages originated by third parties. Construction loans
also increased significantly from March 31, 1996, up $38.7 million to $121.7
million at March 31, 1997 as the Company continued to expand its lending for
residential construction development. The Company expects that the Bank's
loan portfolio will continue to increase from first quarter 1997 levels due
primarily to its own internal loan generation activities. 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.
March 31, December 31, March 31,
1997 1996 1996
--------------- -------------- --------------
(Dollars in thousands)
Nonaccrual loans:
Real estate - mortgages $ 21,464 $ 25,661 $ 35,944
Commercial 19,211 15,882 16,706
Installment - - -
-------- -------- --------
Total 40,675 41,543 52,650
ORE 18,958 15,116 12,562
-------- -------- --------
Total nonaccrual loans
and ORE $ 59,633 $ 56,659 $ 65,212
-------- -------- --------
-------- -------- --------
Restructured loans, accrual status $ 5,744 $ 2,569 $ 4,960
-------- -------- --------
-------- -------- --------
Ratio of nonaccrual loans
to total loans 1.23% 1.46% 2.22
Ratio of nonperforming assets
to total assets 1.30 1.98 1.73
Ratio of allowance for credit
losses to nonaccrual loans 338.33 313.14 244.85
The table below summarizes the approximate changes in nonaccrual loans for the
quarters ended March 31, 1997 and March 31, 1996.
Quarter ended
March 31,
-----------------------
1997 1996
---------- ----------
(Dollars in millions)
Balance, beginning of period $ 41.5 $ 48.1
Additions from acquisitions 2.4 -
Loans placed on nonaccrual 9.1 18.2
Charge offs ( 2.9) ( 4.4)
Loans returned to accrual ( 0.7) ( 2.1)
Repayments (including interest
applied to principal) ( 6.0) ( 2.0)
Transfer to ORE ( 2.7) ( 5.1)
--------- ------
Balance, end of period $ 40.7 $ 52.7
--------- ------
--------- ------
At March 31, 1997, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $21.2 million of potential problem
loans about which the ability of the borrowers to comply with the present loan
repayment terms in the future is questionable.
-15-
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding and changes in the
allowance for credit losses for the periods presented:
-----------------------------
Quarter Ended
March 31, March 31,
1997 1996
--------- ---------
(Dollars in millions)
Average amount of loans outstanding $ 3,122.5 $ $2,348.7
--------- ---------
--------- ---------
Balance of allowance for credit losses,
beginning of period 130.1 $131.5
Loans charged off:
Commercial 1.4 5.5
Real estate loans - construction - -
Real estate loans - mortgage 2.3 -
Installment - -
--------- ---------
Total loans charged off 3.7 5.5
--------- ---------
Less recoveries of loans previously
charged off:
Commercial 4.2 2.9
Real estate loans - construction -
Real estate loans - mortgage 0.1 -
Installment -
--------- ---------
Total recoveries 4.3 2.9
--------- ---------
Net loans charged off (recovered) (0.6) 2.6
Provisions charged to operating expense - -
Additions: From acquisition of VCNB 4.6 -
From acquisition of RNB 2.3 -
--------- ---------
Balance, end of period $ 137.6 $ 128.9
--------- ---------
--------- ---------
Ratio of net charge-offs to
average loans * 0.44%
--------- ---------
--------- ---------
Ratio of allowance for credit losses
to total period end loans 4.17% 5.43%
--------- ---------
--------- ---------
* Not meaningful.
-16-
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
This Statement establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publically held common stock or
potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion
15. This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. Upon adoption of SFAS No. 128, the Company
anticipates that its basic EPS disclosures will be increased as compared to
the primary EPS disclosures presently required by APB Opinion 15. Diluted
EPS disclosures are not expected to differ materially from the fully-diluted
disclosures presently required by APB Opinion 15.
CAPITAL ADEQUACY REQUIREMENTS
As of March 31, 1997, the Company had a ratio of Tier 1 capital to
risk-weighted assets (Tier 1 risk-based capital ratio) of 12.18%, a ratio of
total capital to risk weighted assets (total risk-based capital ratio) of
13.46%, and a ratio of Tier 1 capital to average adjusted total assets (Tier 1
leverage ratio) of 9.48%, while the Bank had a Tier 1 risk-based capital ratio
of 10.85%, a total risk-based capital ratio of 12.13% and a Tier 1 leverage
ratio of 8.48%.
On March 17, 1997, the Company announced a program for repurchase of up to
1.5 million shares of its common stock. Through April 30, 1997, the Company had
repurchased 562,100
-17-
shares at a total cost of $12.3 million. Shares purchased under the buyback
program will be reissued upon the exercise of stock options and for other
general purposes.
On April 16, 1997, the Company declared a regular quarterly dividend of
$.11 per share, payable May 15, 1997 to shareholders of record as of May 5,
1997.
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 74.8% of total funding in the first quarter
of 1997, compared to 76.1% in the first quarter of 1996. This decrease has
required that the Company increase its use of more costly alternative funding
sources. Despite the decrease in percentage of funding derived from core
deposits, the Company has not faced any liquidity constraints.
The following table shows that the Company's cumulative one year interest
rate sensitivity gap decreased from ($235.5) million at March 31, 1996 to
($544.6) million at March 31, 1997. 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 $601.5 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 $275.0 million to eliminate its asset
sensitivity. At March 31, 1997 the unrealized loss on the Company's interest
rate swap contracts were $2.1 million. The Company's liability sensitive
position during a period of slowly rising interest rates is not expected to have
a significant negative impact on net interest income since rates paid on the
Company's large base of interest checking, savings and money market deposit
accounts historically have not increased proportionately with increases in
interest rates.
-18-
INTEREST RATE SENSITIVITY MANAGEMENT
At March 31, 1997 and 1996, the Company's distribution of rate-sensitive assets
and liabilities was as follows:
Maturing or repricing
---------------------------------------------------------------
After 3 After 1 year
In 3 months months but but within After
or less within 1 year 5 years 5 years Total
----------- ----------- ----------- ----------- -----------
March 31, 1997 (Dollars in millions)
Rate-sensitive assets:
Interest-bearing deposits in other banks . . . . . . . . . . $ 1.2 $ - $ - $ - $ 1.2
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,680.3 325.1 351.1 904.8 3,261.3
Investment securities. . . . . . . . . . . . . . . . . . . . 0.0 7.9 153.5 53.5 214.9
Securities available for sale. . . . . . . . . . . . . . . . 11.8 - 249.3 341.5 602.6
Trading account. . . . . . . . . . . . . . . . . . . . . . . 39.6 - - 39.6
Interest rate swap . . . . . . . . . . . . . . . . . . . . . (375.0) 100.0 275.0 0.0
Federal funds sold and securities
purchased with agreement to resell. . . . . . . . . . . 60.0 - - - 60.0
----------- ----------- ----------- ----------- ----------
Total rate-sensitive assets . . . . . . . . . . . . . . 1,417.9 433.0 1,028.9 1,299.8 4,179.6
----------- ----------- ----------- ----------- ----------
Rate-sensitive liabilities: (1)
Interest checking. . . . . . . . . . . . . . . . . . . . . . 375.2 - - - 375.2
Money market deposits. . . . . . . . . . . . . . . . . . . . 813.2 - - - 813.2
Savings deposits . . . . . . . . . . . . . . . . . . . . . . 174.1 - - - 174.1
Other time deposits. . . . . . . . . . . . . . . . . . . . . 292.0 313.8 119.6 4.3 729.7
Short-term borrowings. . . . . . . . . . . . . . . . . . . . 392.4 - - - 392.4
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 25.0 9.8 34.8
----------- ----------- ----------- ----------- ----------
Total rate-sensitive liabilities. . . . . . . . . . . . 2,071.9 323.6 119.6 4.3 2,519.4
----------- ----------- ----------- ----------- ----------
Interest rate sensitivity gap. . . . . . . . . . . . . . . . . . $ (654.0) $ 109.4 $ 909.3 $ 1,295.5 $ 1,660.2
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Cumulative interest rate sensitivity gap . . . . . . . . . . . . $ (654.0) $ (544.6) $ 364.7 $ 1,660.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities . . . . . . . . . . . . . . . . . . 68% 77% 115% 166% 166%
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Maturing or repricing
---------------------------------------------------------------
After 3 After 1 year
In 3 months months but but within After
or less within 1 year 5 years 5 years Total
----------- ----------- ----------- ----------- -----------
March 31, 1996 (Dollars in millions)
Rate-sensitive assets:
Interest-bearing deposits in other banks . . . . . . . . . . $ 30.7 $ - $ - $ - $ 30.7
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,295.2 371.7 184.8 469.6 2,321.3
Investment securities. . . . . . . . . . . . . . . . . . . . 13.8 6.3 84.7 65.3 170.1
Securities available for sale. . . . . . . . . . . . . . . . 46.2 15.5 353.5 251.1 666.3
Trading account. . . . . . . . . . . . . . . . . . . . . . . 32.4 - - - 32.4
Interest rate swap . . . . . . . . . . . . . . . . . . . . . (125.0) 125.0 0.0
Federal funds sold and securities. . . . . . . . . . . . . .
purchased with agreement to resell. . . . . . . . . . . 160.0 - - - 160.0
----------- ----------- ----------- ----------- ----------
Total rate-sensitive assets . . . . . . . . . . . . . . 1,453.3 393.5 748.0 786.0 3,380.8
----------- ----------- ----------- ----------- ----------
Rate-sensitive liabilities: (1)
Interest checking. . . . . . . . . . . . . . . . . . . . . . 307.8 - - - 307.8
Money market deposits. . . . . . . . . . . . . . . . . . . . 746.2 - - - 746.2
Savings deposits . . . . . . . . . . . . . . . . . . . . . . 133.2 - - - 133.2
Other time deposits. . . . . . . . . . . . . . . . . . . . . 282.2 163.1 43.6 0.7 489.6
Short-term borrowings. . . . . . . . . . . . . . . . . . . . 449.8 - - - 449.8
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . - - 34.8 34.8
----------- ----------- ----------- ----------- ----------
Total rate-sensitive liabilities. . . . . . . . . . . . 1,919.2 163.1 78.4 - 2,161.4
----------- ----------- ----------- ----------- ----------
Interest rate sensitivity gap. . . . . . . . . . . . . . . . . . $ (465.9) $ 230.4 $ 669.6 $ 786.0 $ 1,219.4
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Cumulative interest rate sensitivity gap . . . . . . . . . . . . $ (465.9) $ (235.5) $ 434.1 $ 1,220.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities . . . . . . . . . . . . . . . . . . . 76% 89% 120% 156% 156%
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
(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
increase in 1997, but if interest rates vary substantially from this
expectation, 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
repeal 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 borrowing 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 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
-20-
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.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Report dated February 26, 1997, reporting the adoption of a
stockholder rights plan for City National Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
--------------------------------------
(REGISTRANT)
DATE: May 14, 1997 /s/ Frank P. Pekny
--------------------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
-22-