SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1997 Commission File Number 1-10521
CITY NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-2568550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Number of shares of common stock outstanding at July 31, 1997: 46,128,283
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31, JUNE 30,
1997 1996 1996
---------- --------- ----------
(DOLLARS IN THOUSANDS)
Cash and due from banks .. . . . . . . . . . . . . . . . . . . . $ 295,281 $ 331,046 $ 339,813
Interest-bearing deposits in other banks . . . . . . . . . . . . 444 10,978 30,709
Federal funds sold and securities purchased under
resale agreements . . . . . . . . . . . . . . . . . . . . . . - 151,200 25,000
Investment securities (market values $232,773; $194,655
and $191,294 at June 30, 1997, December 31, 1996 and
June 30, 1996, respectively) . . . . . . . . . . . . . . . . . 233,506 195,229 193,669
Securities available for sale (cost $594,601; $619,580 and
$666,485 at June 30, 1997, December 31, 1996 and
June 30, 1996, respectively) . . . . . . . . . . . . . . . . 592,935 615,863 655,818
Trading account securities . . . . . . . . . . . . . . . . . . 47,259 32,129 26,798
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,446,452 2,839,435 2,547,725
Less allowance for credit losses . . . . . . . . . . . . . . . 132,885 130,089 127,294
------------ ------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . 3,313,567 2,709,346 2,420,431
Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . 5,549 6,147 6,614
Premises and equipment, net . . . . . . . . . . . . . . . . . 36,719 24,196 23,611
Customers' acceptance liability . . . . . . . . . . . . . . . 4,810 2,339 2,686
Other real estate . . . . . . . . . . . . . . . . . . . . . . 10,238 15,116 15,691
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 51,463 65,291 65,040
Goodwill and core deposit intangibles . . . . . . . . . . . . 62,341 10,083 10,514
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 56,332 47,533 41,490
------------ ------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 4,710,444 $ 4,216,496 $ 3,857,884
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . $ 1,589,349 $ 1,642,558 $ 1,204,233
Interest checking deposits . . . . . . . . . . . . . . . . . . 356,995 386,211 294,383
Money market accounts . . . . . . . . . . . . . . . . . . . . 777,986 714,127 730,703
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . 173,988 136,691 134,638
Time deposits - under $100,000 . . . . . . . . . . . . . . . . 228,576 146,076 136,175
Time deposits - $100,000 and over . . . . . . . . . . . . . . 530,176 360,860 350,867
------------ ------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . 3,657,070 3,386,523 2,850,999
Federal funds purchased and securities sold
under repurchase agreements . . . . . . . . . . . . . . . . . 248,384 194,549 279,543
Other short-term borrowings . . . . . . . . . . . . . . . . . 267,931 148,642 275,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 9,800 34,800 34,800
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 50,234 48,896 46,798
Acceptances outstanding . . . . . . . . . . . . . . . . . . . 4,810 2,339 2,686
------------ ------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 4,238,229 3,815,749 3,489,826
------------ ------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock authorized-5,000,000, none outstanding . . . . - - -
Common stock- par value- $100; authorized - 75,000,000
Issued-46,700,891; 46,302,782 and 45,927,151 at
June 30, 1997, December 31, 1996 and June 30, 1996,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 46,700 46,303 45,927
Additional paid-in capital . . . . . . . . . . . . . . . . . 299,749 275,610 270,758
Unrealized loss on available for sale securities . . . . . . (958) (2,149) (6,143)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 140,654 113,266 86,460
Treasury shares, at cost - 628,249; 2,394,600 and 2,211,200
at June 30, 1997, December 31, 1996 and June 30, 1996,
respectively . . . . . . . . . . . . . . . . . . . . . . . . (13,930) (32,283) (28,944)
------------ ------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . 472,215 400,747 368,058
------------ ------------ ------------
Total liabilities and shareholders' equity . . . . . . . . . . $ 4,710,444 $ 4,216,496 $ 3,857,884
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
1997 1996 1997 1996
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(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
INTEREST INCOME:
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . $75,017 $53,826 $145,028 $107,049
Interest on federal funds sold and securities purchased
under resale agreements . . . . . . . . . . . . . . . . . . . . . 271 758 583 2,165
Interest on investment securities:
U.S. Treasury and federal agency securities .. . . . . . . . . . . 1,739 1,873 3,406 3,460
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . 1,194 612 2,301 932
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . 153 596 407 1,167
Interest on securities available for sale. . . . . . . . . . . . . 9,609 9,731 19,126 20,474
Interest on trading account securities . . . . . . . . . . . . . . 713 373 1,152 843
------- ------- ------- -------
Total .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,696 67,769 172,003 136,090
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . 18,032 13,192 34,526 26,625
Interest on federal funds purchased and securities sold
under repurchase agreements .. . . . . . . . . . . . . . . . . . . 3,486 5,107 6,408 9,534
Interest on other short-term borrowings .. . . . . . . . . . . . . 3,223 895 6,833 1,772
Interest on long-term debt . . . . . . . . . . . . . . . . . . . . 1,163 511 1,672 935
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Total .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,904 19,705 49,439 38,866
------- ------- ------- -------
NET INTEREST INCOME .. . . . . . . . . . . . . . . . . . . . . . . 62,792 48,064 122,564 97,224
PROVISION FOR CREDIT LOSSES . . . . . . . . . . . . . . . . . . . - - - -
------- ------- ------- -------
Net interest income after provision for credit losses . . . . . . 62,792 48,064 122,564 97,224
------- ------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . 3,325 2,757 6,629 5,403
Investment services income .. . . . . . . . . . . . . . . . . . . 3,093 2,783 6,144 5,252
Trust fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,154 1,732 4,170 3,453
International services income . . . . . . . . . . . . . . . . . . 1,841 1,219 3,367 2,202
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . .- - - 1,039 688
Gain (loss) on sales of securities . . . . . . . . . . . . . . . (262) (450) (539) 292
All other income . . . . . . . . . . . . . . . . . . . . . . . . . 3,263 1,914 5,229 4,052
------- ------- ------- -------
Total noninterest income.. . . . . . . . . . . . . . . . . . . . . 13,414 9,955 26,039 21,342
------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and other employee benefits . . . . . . . . . . . . . . . 24,617 18,172 48,113 38,311
Net occupancy of premises .. . . . . . . . . . . . . . . . . . . . 2,735 2,143 5,097 4,957
Data processing .. . . . . . . . . . . . . . . . . . . . . . . . . 2,654 2,190 4,806 4,373
Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,246 3,411 8,828 6,550
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 117 1 205 2
Office supplies .. . . . . . . . . . . . . . . . . . . . . . . . . 1,576 1,373 3,132 2,527
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,379 1,305 2,736 2,583
Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,679 3,722 2,824
Equipment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 614 633 1,195 1,113
Amortization of goodwill and core deposit intangibles .. . . . . . 1,820 435 3,201 870
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . 3,967 2,707 8,237 5,926
Other real estate income . . . . . . . . . . . . . . . . . . . . . (411) (215) (33) (41)
------- ------- ------- -------
Total noninterest expense. . . . . . . . . . . . . . . . . . . . . 45,314 33,834 89,239 69,995
------- ------- ------- -------
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . 30,892 24,185 59,364 48,571
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334 8,169 21,803 16,703
------- ------- ------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,558 $16,016 $37,561 $31,868
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . $0.41 $0.36 $0.79 $0.71
------- ------- ------- -------
------- ------- ------- -------
Shares used to compute net income per share . . . . . . . . . . . . 47,748 44,765 47,678 44,848
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
1997 1996
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(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,561 $ 31,868
Adjustment to net income:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,736 2,583
Amortization of goodwill and core deposit intangibles. . . . . . . 3,201 870
Net (increase) in trading securities. . . . . . . . . . . . . . . (15,130) 2,930
Net decrease in deferred tax benefits. . . . . . . . . . . . . . . 13,828 (620)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (709) (11,578)
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Net cash provided (used) by operating activites. . . . . . . . . . 41,487 26,053
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INVESTING ACTIVITIES
Net decrease in short-term investments . . . . . . . . . . . . . . . 10,534 49,987
Purchase of securities available for sale. . . . . . . . . . . . . . (228,297) (370,776)
Sales and maturities of securities available for sale. . . . . . . . 308,516 563,212
Maturities of investment securities. . . . . . . . . . . . . . . . . 4,382 16,897
Purchase of investment securities. . . . . . . . . . . . . . . . . . (41,996) (104,118)
Purchase of residential mortgage loans.. . . . . . . . . . . . . . . (74,681) (200,171)
Sale of residential mortgage loans . . . . . . . . . . . . . . . . . 47,513 -
Other loan originations net of principal collections . . . . . . . . (236,105) (14,223)
Proceeds from sales of ORE.. . . . . . . . . . . . . . . . . . . . . 13,547 806
Proceeds from sale of leveraged leases.. . . . . . . . . . . . . . . - 1,824
Net cash provided by acquisitions. . . . . . . . . . . . . . . . . . 42,876 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,712 20,705
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Net cash from investing activities.. . . . . . . . . . . . . . . . (151,999) (35,857)
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FINANCING ACTIVITIES
Net increase in federal funds purchased and
securities sold under repurchase agreements . . . . . . . . . . . . 12,636 21,190
Net decrease in deposits . . . . . . . . . . . . . . . . . . . . . . (180,632) (397,036)
Net increase in short term borrowings. . . . . . . . . . . . . . . . 119,289 79,900
Proceeds from (repayment) of long term debt. . . . . . . . . . . . . (15,200) 9,800
Proceeds from issuance of stock. . . . . . . . . . . . . . . . . . . 6,949 3,788
Purchase of treasury shares. . . . . . . . . . . . . . . . . . . . . (14,720) (19,045)
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . (10,173) (7,926)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,398 (7,584)
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Net cash used in financing activities. . . . . . . . . . . . . . . (76,453) (316,913)
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Net decrease in cash and cash equivalents. . . . . . . . . . . . . . (186,965) (326,717)
Cash and cash equivalents at beginning of year . . . . . . . . . . . 482,246 691,540
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Cash and cash equivalents at end of year.. . . . . . . . . . . . . . $ 295,281 $ 364,823
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,656 $ 37,924
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,202 9,750
Non cash investing activities:
Transfer from loans to ORE . . . . . . . . . . . . . . . . . . . . 10,296 9,507
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
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(DOLLARS IN THOUSANDS)
Common Stock
Balance, beginning of period . . . . . . . . . . . . . . . . . . . $ 46,303 $45,554
Stock options exercised . . . . . . . . . . . . . . . . . . . . . 397 373
-------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 46,700 45,927
-------- --------
Additional paid-in capital
Balance, beginning of period . . . . . . . . . . . . . . . . . . . 275,610 266,829
Stock options exercised . . . . . . . . . . . . . . . . . . . . . 4,122 3,415
Tax benefit from stock options . . . . . . . . . . . . . . . . . . 1,830 514
Excess of market value of treasury shares issued
for acquisitions over historical cost . . . . . . . . . . . . . . 18,187 -
-------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 299,749 270,758
-------- --------
Treasury shares
Balance, beginning of period .. . . . . . . . . . . . . . . . . . (32,283) (9,899)
Purchase of shares .. . . . . . . . . . . . . . . . . . . . . . . (14,720) (19,045)
Issuance of shares for acquisitions .. . . . . . . . . . . . . . . 30,643 -
Issuance of shares for stock options . . . . . . . . . . . . . . . 2,430 -
-------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . (13,930) (28,944)
-------- --------
Unrealized net gains (losses) on securities available for sale
Balance, beginning of period .. . . . . . . . . . . . . . . . . . (2,149) 1,955
Change during period . . . . . . . . . . . . . . . . . . . . . . . 1,191 (8,098)
-------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . (958) (6,143)
-------- --------
Retained earnings
Balance, beginning of period . . . . . . . . . . . . . . . . . . . 113,266 62,518
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,561 31,868
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (10,173) (7,926)
-------- --------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . 140,654 86,460
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . $472,215 $368,058
-------- --------
-------- --------
See accompanying Notes to the Unaudited Consolidated Financial Statements
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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 acquisition of
Riverside National Bank (RNB) for $41.3 million. The Company issued
963,430 treasury shares with an aggregate 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.
4. 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.
5. 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.
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6. Certain prior year data have been reclassified to conform with current
year presentation.
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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 $19.6 million, or $.41 per
share, in the second quarter of 1997, compared to a net income of $16.0 million,
or $.36 per share, in the second quarter of 1996. Most of the change between
second quarters resulted from an increase in net interest income of $14.7
million and an increase in noninterest income of $3.5 million offset in part by
a $11.5 million increase in noninterest expenses due to the acquisitions of
Ventura County National Bancorp (VCNB) and Riverside National Bank (RNB) in
January 1997 and the strong growth in business.
Net income for the first six months of 1997 totaled $37.6 million, or $.79
per share compared with $31.9 million, or $.71 per share in the 1996 period.
The six month increase resulted largely from a $25.3 million increase in net
interest income and a $4.7 million increase in non-interest income, partially
offset by a $19.2 million increase in non-interest expense.
Returns on average assets for the second quarter and first half of 1997
were 1.67% and 1.66%, respectively, compared with 1.73% for both the second
quarter and first half of 1996. Returns on average equity for the second
quarter and first half of 1997 decreased to 16.87% and 16.56%, respectively,
from 17.90% and 17.64% in 1996 as a result of the increase in average equity
caused by the issuance of 2.3 million shares of treasury stock for the two
acquisitions completed in January 1997, and retained earnings for the last
twelve months.
Taxable equivalent net interest income was $65.2 million in the second
quarter of 1997, up 31.8% from the year-ago quarter. The increase resulted from
a 36.4% increase in average loans between quarters as well as a 28.0% increase
in non-interest bearing deposits. The net interest spread increased from 4.47%
to 4.72% and the net interest margin increased from 5.83% to 6.15% due to the
strong increase in loans, improved yields from securities and good growth
-8-
in core deposits. Management expects modest growth in quarterly net interest
income for the remainder of 1997 from first half 1997 levels. The foregoing
forward-looking statement assumes, among other things, that short term
interest rate levels will increase somewhat in 1997 and is based on
anticipated growth in loans. Actual results may differ materially if either
of those assumptions proves to be incorrect. See "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
Average loans increased $893.4 million (36.4%) between second quarters to
$3,345.5 million for the quarter ended June 30, 1997. This increase reflected
higher average commercial and residential first mortgage loans outstanding,
up $535.7 million (50.9%) and $168.7 million (21.7%), respectively. The
increase in commercial loans resulted from the Bank's internal loan
generation, the acquisitions of VCNB and RNB in January 1997 and purchases of
syndicated corporate 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 $41.3
million (48.8%) from the second quarter of 1996, and average real estate
mortgage loans increased $135.8 million (26.9%), due primarily to the
acquisitions of VCNB and RNB.
Total average investments and available for sale securities decreased by
$7.1 million between second quarters due to strong loan demand. Total
average deposits increased $776.3 million (27.6%) between second quarters due
primarily to the acquisitions of VCNB and RNB as well as increased deposit
levels generated by the Bank's existing branches.
For the first half of 1997, average loans increased $834.2 million
(34.8%), and total average investment and available for sale securities
decreased $3.6 million (.4%). Total deposits for the six months ended June
30, 1997 increased $675.0 million (24.0%) compared to the 1996 period. The
changes in the six month average balances resulted from the same factors that
caused the changes between the second quarter average balances.
The provision for credit losses was zero for the six months ended June
30, 1997 and 1996. Loans charged off in the second quarter of 1997 were $7.9
million, compared to $7.8 million in the second quarter of 1996. Recoveries
were $3.2 million in the second quarter of 1997, compared to $6.1 million in
the second 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
-9-
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 $13.7 million for the second quarter of 1997, up $3.3
million (31.4%) from a year earlier. For the six months ended June 30, 1997,
non-interest income excluding gains and losses on the sale of securities and
assets totaled $25.5 million, an increase of $5.2 million (25.4%) from last
year's total of $20.4 million. Service charges on deposit accounts increased $.6
million (20.6%) and $1.2 million (22.7%), respectively, for the quarter and six
months ended June 30, 1997 due primarily to the acquisitions of VCNB and RNB.
Investment services income increased $.3 million (11.1%) and $.9 million (17.0%)
for the quarter and six months ended June 30, 1997 due to new customers and new
investment products offered to customers. Trust fees increased $.4 million
(24.4%) and $.7 million (20.8%) for the quarter and six months ended June 30,
1997 due to higher amounts of new business. International fees increased $.6
million (51.0%) and $1.2 million (52.9%) for the quarter and six months ended
June 30, 1997 due to business generated by the addition of several additional
foreign exchange traders in mid-1996 and the Bank's increased marketing efforts.
Included in all other income in the second quarter of 1997 was a $.9 settlement
of a lawsuit with a borrower. Management expects modest growth in non-interest
income from first half 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 $45.7 million in
the second quarter of 1997, an increase of $11.7 million (34.3%) from the second
quarter of 1996. For the first half of 1997, excluding net ORE results,
non-interest expense totaled $89.3 million, an increase of $19.2 million (27.5%)
from the first half of 1996. Salaries and other employee benefits increased
$6.4 million (35.5%) and $9.8 million (25.6%) for the quarter and six months
ended June 30, 1997 from the comparable period in 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 internally grow the business.
-10-
The expense categories other than staff increased $5.2 million (32.9%) and
$9.4 million (29.7%) for the quarter and six months ended June 30, 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 expanded advertising program. Other
noninterest expense for the first half of 1997 included charges totaling $1.8
million and $.4 million during the first and second quarters, respectively, 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 expenses incurred to date to convert
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 resulted from the acquisitions of VCNB
and RNB. Amortization of goodwill and core deposit intangibles increased to $1.8
and $3.2 million for the second quarter and first six months of 1997 from $.4
million and $.9 million in the applicable periods in 1996. In April 1997, the
Company signed a seven year contract with its new data processing provider which
is expected to reduce its data processing expense after completion of the
conversion. Noninterest expense levels for the second half of 1997 are expected
to decrease from first half 1997 levels with the completion of the integration
of VCNB and 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 36.7% in the second quarter
of 1997 from 33.8% in the second quarter of 1996. The increase resulted from
the recognition of $.9 million in previously unrecognized deferred tax benefits
in the second quarter of 1996. The Company expects the effective tax rate for
the remainder of 1997 to remain near 1997 first half 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 June 30, 1997 and 1996.
DOLLARS IN THOUSANDS
JUNE 30, 1997 JUNE 30, 1996
------------------------------ -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE (1) RATE BALANCE EXPENSE (1) RATE
---------- -------- ------- -------- ----------- -------
ASSETS (2)
Earning assets
Loans: (3)
Commercial loans $1,588,036 $ 36,583 9.24% $1,052,305 $ 23,582 9.01%
Real estate - construction 125,739 3,593 11.46 84,477 2,458 11.70
Real estate - mortgage 640,506 15,898 9.96 504,714 11,673 9.30
Residential first mortgages 944,954 18,379 7.80 776,237 15,677 8.12
Installment loans 46,250 1,321 11.46 34,336 900 10.54
---------- -------- ----- ---------- -------- -----
Total loans 3,345,485 75,774 9.08 2,452,069 54,290 8.90
---------- -------- ----- ---------- -------- -----
Due from banks-interest bearing 411 2 1.95 29,625 444 6.03
State and municipal investment securities 106,101 1,860 7.03 53,614 953 7.15
Taxable investment securities 116,352 1,890 6.52 128,695 2,025 6.33
Securities available for sale 613,588 10,480 6.85 660,782 10,229 6.23
Federal funds sold and securities
purchased under resale agreements 19,073 271 5.70 56,025 758 5.44
Trading account securities 48,678 801 6.60 31,053 453 5.87
---------- -------- ----- ---------- -------- -----
Total earning assets 4,249,688 91,078 8.60 3,411,863 69,152 8.15
---------- -------- ----- ---------- -------- -----
Allowance for credit losses (136,139) (128,503)
Cash and due from banks 346,521 279,912
Other nonearning assets 225,633 159,724
---------- ----------
Total assets $4,685,703 $3,722,996
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest - bearing deposits $1,485,023 - - $1,160,406 - -
Interest-bearing deposits:
Interest checking accounts 383,216 969 1.01 316,049 790 1.01
Money market accounts 800,412 6,034 3.02 710,069 5,252 2.97
Savings deposits 174,019 1,415 3.26 132,472 1,026 3.12
Time deposits - under $100,000 237,541 3,025 5.11 136,827 1,760 5.17
Time deposits - $100,000 and over 508,182 6,589 5.20 356,260 4,364 4.93
---------- -------- ----- ---------- -------- -----
Total interest - bearing deposits 2,103,370 18,032 3.44 1,651,677 13,192 3.21
---------- -------- ----- ---------- -------- -----
Total deposits 3,588,393 2,812,083
Federal funds purchased and securities
sold under repurchase agreements 260,892 3,486 5.36 400,807 5,107 5.12
Other borrowings 315,993 4,386 5.57 98,087 1,406 5.77
---------- -------- ----- ---------- -------- -----
Total interest - bearing liabilities 2,680,255 25,904 3.88 2,150,571 19,705 3.69
---------- -------- ----- ---------- -------- -----
Other liabilities 55,279 52,092
Shareholders' equity 465,146 359,927
---------- ----------
Total liabilities and shareholders'
equity $4,685,703 $3,722,996
---------- ----------
---------- ----------
Net interest spread 4.72% 4.47%
----- -----
----- -----
Fully taxable equivalent net interest income $ 65,174 $49,447
-------- --------
-------- --------
Net interest margin 6.15% 5.83%
----- -----
----- -----
- ----------
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $43,820 and $48,603 for 1997 and
1996, respectively.
(3) Loan income includes loan fees of $2,214 and $1,798 for 1997 and 1996,
respectively.
-12-
NET INTEREST INCOME SUMMARY
The following table presents the components of net interest income for the
six months ended June 30, 1997 and 1996.
DOLLARS IN THOUSANDS
JUNE 30, 1997 JUNE 30, 1996
------------------------------ -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE (1) RATE BALANCE EXPENSE (1) RATE
---------- -------- ------- -------- ----------- -------
ASSETS (2)
Earning assets
Loans: (3)
Commercial loans $1,528,747 $ 70,698 9.24% $1,046,552 $ 47,431 9.11%
Real estate - construction 117,537 6,682 11.46 82,332 4,793 11.71
Real estate - mortgage 617,117 30,475 9.96 517,432 25,050 9.74
Residential first mortgages 924,204 36,107 7.88 718,318 28,780 8.06
Installment loans 46,984 2,485 10.67 35,725 1,847 10.40
---------- -------- ----- ---------- -------- -----
Total loans 3,234,589 146,447 9.09 2,400,359 107,901 9.04
---------- -------- ----- ---------- -------- -----
Due from banks-interest bearing 4,051 98 4.88 28,223 836 5.96
State and municipal investment securities 102,428 3,584 7.06 40,513 1,452 7.21
Taxable investment securities 114,527 3,715 6.54 117,897 3,791 6.47
Securities available for sale 619,973 20,698 6.73 682,161 21,468 6.33
Federal funds sold and securities
purchased under resale agreements 22,060 583 5.33 78,467 2,165 5.55
Trading account securities 44,251 1,237 5.64 31,421 940 6.02
---------- -------- ----- ---------- -------- -----
Total earning assets 4,141,879 176,362 8.55 3,379,041 138,553 8.25
---------- -------- ----- ---------- -------- -----
Allowance for credit losses (136,390) (130,300)
Cash and due from banks 332,578 289,837
Other nonearning assets 218,052 160,558
---------- ----------
Total assets $4,556,119 $3,699,136
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest - bearing deposits $1,447,517 - - $1,154,006 - -
Interest-bearing deposits:
Interest checking accounts 375,312 1,877 1.01 321,534 1,606 1.00
Money market accounts 788,541 11,789 3.01 720,773 10,608 2.96
Savings deposits 170,530 2,782 3.29 132,499 2,033 3.09
Time deposits - under $100,000 228,182 5,763 5.09 133,607 3,455 5.20
Time deposits - $100,000 and over 478,767 12,315 5.19 351,442 8,923 5.11
---------- -------- ----- ---------- -------- -----
Total interest - bearing deposits 2,041,332 34,526 3.41 1,659,855 26,625 3.23
---------- -------- ----- ---------- -------- -----
Total deposits 3,488,849 2,813,861
Federal funds purchased and securities
sold under repurchase agreements 247,129 6,408 5.23 369,386 9,534 5.19
Other borrowings 310,780 8,505 5.52 94,392 2,707 5.77
---------- -------- ----- ---------- -------- -----
Total interest - bearing liabilities 2,599,241 49,439 3.84 2,123,633 38,866 3.68
---------- -------- ----- ---------- -------- -----
Other liabilities 52,039 58,130
Shareholders' equity 457,322 363,367
---------- ----------
Total liabilities and shareholders'
equity $4,556,119 $3,699,136
---------- ----------
---------- ----------
Net interest spread 4.71% 4.57%
----- -----
----- -----
Fully taxable equivalent net interest income $126,923 $ 99,687
-------- ----------
-------- ----------
Net interest margin 6.15% 5.93%
----- -----
----- -----
- -------------
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $43,272 and $49,583 for 1997 and
1996, respectively.
(3) Loan income includes loan fees of $3,976 and $3,542 for 1997 and 1996,
respectively.
-13-
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.
DOLLARS IN THOUSANDS
QUARTER ENDED JUNE 30, QUARTER ENDED JUNE 30,
1997 VS 1996 1996 VS 1995
------------------------------ -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1): NET DUE TO (1): NET
-------------------- INCREASE -------------------- INCREASE
FULLY TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- -------- ---------- ---------- -------- ----------
Interest earned on:
Interest-bearing deposits
in other banks $ (262) $ (180) $ (442) $ 428 $ 11 $ 439
Loans 20,357 1,127 21,484 17,714 (4,994) 12,720
Taxable investment securities (196) 61 (135) (6,860) 1,236 (5,624)
Non-taxable investment securities 923 (16) 907 517 1 518
Securities available for sale (748) 999 251 8,758 (153) 8,605
Trading account securities 286 62 348 (130) 17 (113)
Federal funds sold and
securities purchased
under resale agreements (522) 35 (487) (758) (160) (918)
-------- ------- --------- --------- -------- --------
Total interest-earning assets 19,838 2,088 21,926 19,669 (4,042) 15,627
-------- ------- --------- --------- -------- --------
Interest paid on:
Interest checking 179 0 179 109 27 136
Money market deposits 691 91 782 805 216 1,021
Savings deposits 340 49 389 336 298 634
Other time deposits 3,273 217 3,490 3,622 66 3,688
Other borrowings 1,073 286 1,359 2,211 (551) 1,660
-------- ------- --------- --------- -------- --------
Total interest-bearing liabilities 5,556 643 6,199 7,083 56 7,139
-------- ------- --------- --------- -------- --------
$ 14,282 $ 1,445 $ 15,727 $ 12,586 $ (4,098) $ 8,488
-------- ------- --------- --------- -------- --------
-------- ------- --------- --------- -------- --------
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 VS 1996 1996 VS 1995
------------------------------ -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO (1): NET DUE TO (1): NET
DOLLARS IN THOUSANDS - -------------------- INCREASE -------------------- INCREASE
FULLY TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- -------- ---------- ---------- -------- ----------
Interest earned on:
Interest-bearing deposits
in other banks $ (608) $ (130) $ (738) $ 798 $ 30 $ 828
Loans 37,469 1,077 38,546 34,591 (6,210) 28,381
Taxable investment securities (115) 39 (76) (14,752) 2,915 (11,837)
Non-taxable investment securities 2,163 (31) 2,132 555 15 570
Securities available for sale (2,055) 1,285 (770) 18,562 (460) 18,102
Trading account securities 360 (63) 297 (80) (48) (128)
Federal funds sold and
securities purchased
under resale agreements (1,499) (83) (1,582) (409) (303) (712)
-------- ------- --------- --------- -------- --------
Total interest-earning
assets 35,715 2,094 37,809 39,265 (4,061) 35,204
-------- ------- --------- --------- -------- --------
Interest paid on:
Interest checking 256 15 271 254 44 298
Money market deposits 1,001 180 1,181 1,554 743 2,297
Savings deposits 611 138 749 635 593 1,228
Other time deposits 5,628 72 5,700 7,242 629 7,871
Other borrowings 2,486 186 2,672 4,548 (799) 3,749
-------- ------- --------- --------- -------- --------
Total interest-bearing
liabilities 9,982 591 10,573 14,233 1,210 15,443
-------- ------- --------- --------- -------- --------
$ 25,733 $ 1,503 $ 27,236 $ 25,032 $ (5,271) $ 19,761
-------- ------- --------- --------- -------- --------
-------- ------- --------- --------- -------- --------
- -----------
(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.
-14-
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
(dollars in thousands)
June 30, December 31, June 30,
1997 1996 1996
---------- ---------- ----------
Commercial $1,660,474 $1,334,577 $1,104,420
Residential first mortgage 951,616 882,573 823,046
Real estate- construction 125,799 92,322 96,083
Real estate-mortgage 660,877 499,377 490,850
Installment 47,686 30,586 33,326
---------- ---------- ----------
Total loans, gross 3,446,452 2,839,435 2,547,725
Less: Allowance for credit loss (132,885) (130,089) (127,294)
---------- ---------- ----------
Total Loans, net $3,313,567 $2,709,346 $2,420,431
---------- ---------- ----------
---------- ---------- ----------
Gross loans at June 30, 1997 amounted to $3,446.5 million, up $898.7
million (35.3%) from June 30, 1996. Approximately $300.0 million of the
increase was due to the acquisitions of VCNB and RNB. The $556.1 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 $128.6 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 June 30, 1996, up $29.7 million to $125.8
million at June 30, 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 second 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.
-15-
The following table presents information concerning nonaccrual loans, ORE,
and restructured loans.
June 30, December 31, June 30,
1997 1996 1996
---------- ---------- ----------
(Dollars in thousands)
Nonaccrual loans:
Real estate - mortgages $ 22,498 $ 25,661 $ 38,254
Commercial 18,284 15,882 8,598
Installment - - -
--------- --------- ---------
Total 40,782 41,543 46,852
ORE 10,238 15,116 15,691
--------- --------- ---------
Total nonaccrual loans and ORE $ 51,020 $ 56,659 $ 62,543
--------- --------- ---------
--------- --------- ---------
Restructured loans, accrual status $ 5,617 $ 2,569 $ 3,146
--------- --------- ---------
--------- --------- ---------
Ratio of nonaccrual loans
to total loans 1.18% 1.46% 1.84%
Ratio of nonperforming assets
to total assets 1.08 1.34 1.62
Ratio of allowance for credit
losses to nonaccrual loans 325.84 313.14 271.69
The table below summarizes the approximate changes in nonaccrual loans for
the quarters and six months ended June 30, 1997 and June 30, 1996.
Quarter ended Six months ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(Dollars in millions)
Balance, beginning of period $ 40.7 $ 52.7 $ 41.5 $ 48.1
Additions from acquisitions - - 2.4 -
Loans placed on nonaccrual 11.4 6.8 20.5 25.0
Charge offs (5.8) (5.4) (8.8) (9.8)
Loans returned to accrual status (2.5) (0.1) (3.1) (2.2)
Repayments (including interest
applied to principal) (3.0) (3.9) (9.1) (5.9)
Transfer to ORE - (3.2) (2.6) (8.3)
------- ------- ------- -------
Balance, end of period $ 40.8 $ 46.9 $ 40.8 $ 46.9
------- ------- ------- -------
------- ------- ------- -------
At June 30, 1997, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $10.8 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.
-16-
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 Six months ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(Dollars in millions)
Average amount of loans
outstanding $3,345.5 $2,452.1 $3,234.6 $2,400.4
-------- -------- -------- --------
-------- -------- -------- --------
Balance of allowance for
credit losses, beginning
of period 137.6 $128.9 $ 130.1 $131.5
Loans charged off:
Commercial 6.8 5.5 8.2 11.0
Real estate loans -
construction - - - -
Real estate loans - mortgage 1.1 2.3 3.5 2.3
Installment - - - -
-------- -------- -------- --------
Total loans charged off 7.9 7.8 11.7 13.3
-------- -------- -------- --------
Less recoveries of loans
previously charged off
Commercial 2.1 3.0 6.3 5.9
Real estate loans -
construction - - - -
Real estate loans -
mortgage 1.1 3.1 1.2 3.1
Installment - - - -
-------- -------- -------- --------
Total recoveries 3.2 6.1 7.5 9.0
-------- -------- -------- --------
Net loans charged off 4.7 1.7 4.2 4.3
Provisions charged to
operating expense - - - -
Additions: From acquisition
of VCNB - - 4.6 -
From acquisition
of RNB - - 2.4 -
-------- -------- -------- --------
Balance, end of period $ 132.9 $ 127.2 132.9 127.2
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of net charge-offs to
average loans 0.56% 0.28% 0.26% 0.36%
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of allowance for
credit losses to total
period end loans 3.86% 5.00% 3.86% 5.00%
-------- -------- -------- --------
-------- -------- -------- --------
-17-
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (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 publicly 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. The Company
does not expect its diluted EPS disclosures will differ materially from the
fully-diluted disclosures presently required by APB Opinion 15.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS No. 129 consolidates existing
reporting standards for disclosing information about an entity's capital
structure. SFAS No. 129 must be adopted for financial statements for periods
ending after December 15, 1997. The impact on the Company of adopting SFAS
No. 129 is not expected to be material as, the Company's existing disclosures
are generally in compliance with the disclosure requirements in SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for
-18-
fiscal years beginning after December 15, 1997. The impact on the Company
of adopting SFAS No. 130 is not expected to be material to the Company's
existing disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting selected information about operating segments in
annual financial statements and requires reporting interim reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
The Company is currently assessing the potential impact of SFAS No. 131.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require expanded disclosure of accounting
policies for derivative financial instruments in the footnotes to the
financial statements, and quantitative and qualitative information about
market risk inherent in market risk sensitive instruments. The required
quantitative and qualitative information should be disclosed outside the
financial statements and related notes thereto. The enhanced accounting
policy disclosure requirements are effective for the quarterly period ended
June 30, 1997. As the Company believes that the derivative financial
instrument disclosures contained within the notes to the financial statements
of its 1996 Form 10-K substantially conform with the accounting policy
requirements of these rule amendments, no further interim period disclosure
has been provided. The rule amendments that require expanded disclosure of
quantitative and qualitative information about market risk are effective with
the 1997 Form 10-K.
CAPITAL ADEQUACY REQUIREMENTS
As of June 30, 1997, the Company had a ratio of Tier 1 capital to
risk-weighted assets (Tier 1 risk-based capital ratio) of 11.82%, a ratio of
total capital to risk weighted assets (total risk-based capital ratio) of
13.10%, and a ratio of Tier 1 capital to average adjusted total assets (Tier
1 leverage ratio) of 9.00%, while the Bank had a Tier 1 risk-based capital
ratio of 10.20%, a total risk-based capital ratio of 11.48% and a Tier 1
leverage ratio of 7.72%.
-19-
On March 17, 1997, the Company announced a program for repurchase of up
to 1.5 million shares of its common stock. Through June 30, 1997, the
Company had repurchased 663,500 shares at a total cost of $14.7 million.
Shares purchased under the buyback program will be reissued upon the exercise
of stock options and for other general purposes. At June 30, 1997, 628,249
shares were held in treasury with a total cost of $13.9 million.
On July 23, 1997, the Company declared a regular quarterly dividend of
$.11 per share, payable August 14, 1997 to shareholders of record as of
August 4, 1997.
LIQUIDITY
The Company continues to manage its liquidity through a 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 73.9% of total funding in the second
quarter of 1997, compared to 74.2% in the second quarter of 1996. This
decrease has required the Company to 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 ($473.2) million at June 30, 1996 to
($612.4) million at June 30, 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 reprice after one year by $533.5 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 $250.0 million to
reduce its asset sensitivity. At June 30, 1997 the unrealized loss on the
Company's interest rate swap contracts were $.7 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.
-20-
INTEREST RATE SENSITIVITY MANAGEMENT
At June 30, 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
----------- ------------- ------------ ------- ---------
(DOLLARS IN MILLIONS)
JUNE 30, 1997
Rate-sensitive assets:
Interest-bearing deposits in other banks. . . $ 0.4 $ - $ - $ - $ 0.4
Loans . . . . . . . . . . . . . . . . . . . . 1,715.6 349.4 384.1 956.6 3,405.7
Investment securities . . . . . . . . . . . . 8.6 5.3 155.8 63.8 233.5
Securities available for sale . . . . . . . . 12.5 1.0 259.4 320.0 592.9
Trading account . . . . . . . . . . . . . . . 47.3 - - 47.3
Interest rate swap. . . . . . . . . . . . . . (400.0) 150.0 250.0 0.0
Federal funds sold and securities
purchased with agreement to resell. . . . . - - - - 0.0
-------- -------- --------- --------- --------
Total rate-sensitive assets. . . . . . . 1,384.4 505.7 1,049.3 1,340.4 4,279.8
-------- -------- --------- --------- --------
Rate-sensitive liabilities: (1)
Interest checking . . . . . . . . . . . . . . 357.0 - - - 357.0
Money market deposits . . . . . . . . . . . . 778.0 - - - 778.0
Savings deposits. . . . . . . . . . . . . . . 174.0 - - - 174.0
Other time deposits . . . . . . . . . . . . . 335.6 331.8 87.2 4.1 758.7
Short-term borrowings . . . . . . . . . . . . 516.3 - - - 516.3
Long-term debt. . . . . . . . . . . . . . . . - 9.8 9.8
-------- -------- --------- --------- --------
Total rate-sensitive liabilities . . . . 2,160.9 341.6 87.2 4.1 2,593.8
-------- -------- --------- --------- --------
Interest rate sensitivity gap . . . . . . . . . . $ (776.5) $ 164.1 $ 962.1 $ 1,336.3 $1,686.0
======== ======== ========= ========= ========
Cumulative interest rate sensitivity gap. . . . . $ (776.5) $ (612.4) $ 349.7 $ 1,686.0
======== ======== ========= =========
Cumulative ratio of rate-sensitive assets
to rate-sensitive liabilities . . . . . . . . . 64% 76% 114% 165% 165%
======== ======== ========= ========= ========
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
----------- ------------- ------------ ------- ---------
(DOLLARS IN MILLIONS)
JUNE 30, 1996
Rate-sensitive assets:
Interest-bearing deposits in other banks . . $ 30.7 $ - $ - $ - $ 30.7
Loans. . . . . . . . . . . . . . . . . . . . 1,352.0 341.7 200.7 606.5 2,500.9
Investment securities. . . . . . . . . . . . 5.2 1.0 101.7 85.8 193.7
Securities available for sale. . . . . . . . 37.0 25.1 356.2 237.5 655.8
Trading account. . . . . . . . . . . . . . . 26.8 - - - 26.8
Interest rate swap . . . . . . . . . . . . . (250.0) 100.0 150.0 0.0
Federal funds sold and securities
purchased with agreement to resell . . . . 25.0 - - - 25.0
-------- -------- --------- --------- --------
Total rate-sensitive assets . . . . . . 1,226.7 467.8 808.6 929.8 3,432.9
-------- -------- --------- --------- --------
Rate-sensitive liabilities: (1)
Interest checking. . . . . . . . . . . . . . 294.4 - - - 294.4
Money market deposits. . . . . . . . . . . . 730.7 - - - 730.7
Savings deposits . . . . . . . . . . . . . . 134.6 - - - 134.6
Other time deposits. . . . . . . . . . . . . 247.0 206.5 32.8 0.7 487.0
Short-term borrowings. . . . . . . . . . . . 554.5 - - - 554.5
Long-term debt.. . . . . . . . . . . . . . . - - 34.8 - 34.8
-------- -------- --------- --------- --------
Total rate-sensitive liabilities. . . . 1,961.2 206.5 67.6 - 2,236.0
-------- -------- --------- --------- --------
Interest rate sensitivity gap. . . . . . . . . . $ (734.5) $ 261.3 $ 741.0 $ 929.8 $1,196.9
======== ======== ========= ========= ========
Cumulative interest rate sensitivity gap . . . . $ (734.5) $ (473.2) $ 267.8 $ 1,197.6
======== ======== ========= =========
Cumulative ratio of rate-sensitive assets
to rate-sensitive liabilities. . . . . . . . . 63% 78% 112% 154% 154%
======== ======== ========= ========= ========
- -----------
(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.
-21-
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 short term interest rate
levels will increase in 1997, but if interest rates vary substantially from
this expectation, the Company's results could 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
-22-
accordance with the terms of their loans. The Bank has adopted
underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk
by assessing the likelihood of nonperformance, tracking loan performance
and diversifying the Bank's credit portfolio, but such policies and
procedures may not prevent unexpected losses that could adversely affect
the Company's results.
- -- Other risks. From time to time, the Company details other risks to its
businesses and/or its financial results in its filings with the Securities
and Exchange Commission.
While management believes that its assumptions regarding these and other factors
on which forward-looking statements are based are reasonable, such assumptions
are necessarily speculative in nature, and actual outcomes can be expected to
differ to some degree. Consequently, there can be no assurance that the results
described in such forward-looking statements will, in fact, be achieved.
-23-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On April 16, 1997, the Registrant held its annual meeting of
stockholders. The stockholders elected the three Class I directors listed in
the Registrant's proxy statement and approved an amendment to the
Registrant's 1995 Omnibus Plan revising the method by which stock options are
awarded to the Registrant's non-employee directors. The following table sets
forth the number of votes cast for, or withheld with respect to, each
director nominated for election. Under applicable Delaware law, votes
withheld have the same effect as votes cast against a nominee, and for this
reason the ballot did not offer a separate opportunity to vote against a
nominee. Additionally, the table sets forth the number of votes cast for or
against the 1995 Omnibus Plan amendment, as well as the number of
abstentions. Broker non-votes were treated as not present at the meeting and
had no effect.
NAME FOR WITHHELD
---- --- --------
George H. Benter, Jr. 42,474,276 365,184
Stuart D. Buchalter 42,459,213 380,247
Andrea L. Van De Kamp 42,492,253 347,207
MATTER FOR WITHHELD ABSTENTION
------ --- -------- ----------
Amendment to 1995 30,218,947 11,097,347 734,804
Omnibus Plan
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-24-
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
(REGISTRANT)
DATE: August 12, 1997 /s/ Frank P. Pekny
------------------- ---------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
-25-