1
EXHIBIT 13
Pages 7 through 53 of Annual Report to Security Holders
for the year ended December 31, 1993
2
EXHIBIT 13
FINANCIAL REVIEW
SELECTED FINANCIAL INFORMATION
AS OF OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
STATEMENT OF OPERATIONS DATA
Interest income.............................. $ 169,792 $ 233,049 $ 360,834 $ 425,538 $ 408,711
Interest expense............................. 41,996 84,433 180,319 228,935 220,342
Provision for credit losses.................. 30,000 114,500 118,000 43,000 15,146
Noninterest income........................... 45,810 45,365 43,332 38,524 39,327
Gains and losses on securities
transactions............................... -- 1,629 -- 45 65
Noninterest expense (other than ORE and
consolidation charge)...................... 129,226 152,887 148,302 134,577 124,351
Consolidation charge......................... 12,000 -- -- -- --
ORE expense.................................. 25,674 20,825 2,548 -- 65
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before taxes............................... (23,294) (92,602) (45,003) 57,595 88,199
Income taxes (benefit)....................... (9,260) (32,450) (22,387) 18,800 32,130
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations..... (14,034) (60,152) (22,616) 38,795 56,069
Income from discontinued operations.......... 7,128 804 1,396 5,202 4,149
---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (6,906) $ (59,348) $ (21,220) $ 43,997 $ 60,218
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
Income (loss) per share from continuing
operations................................. $ (.35) $ (1.87) $ (.70) $ 1.19 $ 1.73
Net income (loss) per share.................. (.17) (1.84) (.66) 1.35 1.86
Cash dividends declared...................... -- -- .320 .640 .576
Book value per share......................... 6.62 7.07 8.91 9.89 9.12
Shares used to compute income (loss) per
share...................................... 39,580,069 32,239,714 32,214,230 32,500,543 32,425,828
BALANCE SHEET DATA -- AT PERIOD END
Assets....................................... $3,100,626 $3,514,102 $4,571,262 $4,962,826 $4,769,368
Loans........................................ 1,620,556 2,075,202 2,615,201 3,057,735 2,738,095
Investment securities........................ 902,481 413,645 731,196 622,318 555,003
Interest-earning assets...................... 2,830,451 3,013,188 3,993,881 4,554,412 4,232,117
Deposits..................................... 2,526,767 2,911,276 3,664,219 4,102,098 3,911,608
Shareholders' equity......................... 298,074 227,944 287,064 317,688 288,036
BALANCE SHEET DATA -- AVERAGE BALANCES
Assets....................................... $2,944,461 $3,918,949 $4,605,075 $4,602,373 $4,217,763
Loans........................................ 1,737,401 2,315,285 2,852,311 2,875,154 2,527,224
Investment securities........................ 501,644 547,493 665,071 597,677 513,523
Interest-earning assets...................... 2,597,902 3,462,548 4,164,090 4,103,452 3,744,695
Deposits..................................... 2,380,106 3,133,109 3,706,621 3,726,727 3,416,472
Shareholders' equity......................... 260,649 259,629 318,776 312,348 266,890
ASSET QUALITY
Nonaccrual loans............................. $ 71,056 $ 160,299 $ 152,555 $ 68,408 $ 15,810
ORE.......................................... 5,559 94,065 64,510 2,130 --
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and ORE............... $ 76,615 $ 254,364 $ 217,065 $ 70,538 $ 15,810
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Assets held for accelerated disposition...... $ 17,450 $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PERFORMANCE RATIOS
Return on average assets..................... (.23)% (1.51)% (.46)% .96% 1.43%
Return on average shareholders' equity....... (2.65) (22.84) (6.65) 14.09 22.56
Net interest spread.......................... 4.19 3.61 3.33 3.59 3.69
Net interest margin.......................... 4.97 4.41 4.48 4.95 5.22
Average shareholders' equity to average
assets..................................... 8.85 6.62 6.92 6.79 6.33
ASSET QUALITY RATIOS
Nonaccrual loans to total loans.............. 4.38% 7.72% 5.83% 2.24% .58%
Nonaccrual loans and ORE to total loans and
ORE........................................ 4.71 11.73 8.10 2.31 .58
Allowance for credit losses to total loans... 6.82 6.56 4.81 1.97 1.34
Allowance for credit losses to nonaccrual
loans...................................... 155.51 84.90 82.44 87.83 231.59
Net charge offs to average loans............. 3.12 4.50 1.83 .68 .28
7
3
OVERVIEW
City National Corporation (the "Corporation") is the holding company for
City National Bank (the "Bank"). Because the Bank comprises substantially all of
the business of the Corporation, references to the "Company" in this Annual
Report reflect the consolidated activities of the Corporation and the Bank.
The Company recorded a consolidated net loss of $6.9 million, or $.17 per
share, in 1993. The net loss was largely due to the provision for credit losses
of $30.0 million, Other Real Estate (ORE) expenses of $25.7 million and a
consolidation charge of $12.0 million. The Company's 1993 loss of $6.9 million
compares with a loss of $59.3 million, or $1.84 per share, in 1992. The smaller
loss in 1993 was primarily the result of an $84.5 million decrease in the
provision for credit losses, a $23.7 million decrease in noninterest expense
before the consolidation charge and ORE expense, and a $7.1 million aftertax
gain from the sale of the Bank's data processing division in 1993. These factors
were partially offset by a $20.8 million decrease in net interest income due to
lower interest-earning assets, a $4.8 million increase in ORE expense and the
$12.0 million consolidation charge.
The return on average assets was a negative .23% and the return on average
shareholders' equity was a negative 2.65% in 1993, compared with a negative
1.51% and a negative 22.84%, respectively, in 1992.
Average assets declined from $3,918.9 million in 1992 to $2,944.5 million
in 1993, a decrease of $974.4 million, or 24.9%, largely due to the decrease in
average loans and federal funds sold, and securities purchased under resale
agreements. Total average loans decreased $577.9 million or 25.0% between 1992
and 1993 due to decreased loan demand because of the recession, the Bank's
continuing efforts to achieve a more diversified risk profile in its loan
portfolio and the sale of $73.7 million of equity lines of credit (ELC) loans in
April 1993. Average core deposits (checking, savings and money market accounts,
and time certificates of deposit of less than $100,000) declined from $2,617.3
million in 1992 to $2,176.9 million in 1993, a decrease of $440.4 million, or
16.8%. Average time deposits of $100,000 or more decreased by $312.6 million, or
60.6%, between 1992 and 1993.
Nonaccrual loans totaled $71.1 million at December 31, 1993, or 4.38% of
related credits, down from $160.3 million, or 7.72%, a year earlier. ORE totaled
$5.6 million at year end, down from $94.1 million a year earlier, primarily due
to the sale of certain ORE as part of the accelerated asset disposition program
discussed below.
The allowance for credit losses at December 31, 1993 was $110.5 million, or
6.82% of loans outstanding at year end, up from 6.56% a year earlier. Net charge
offs totaled $54.1 million in 1993, or 3.12% of average loans, down from $104.2
million, or 4.50% of average loans, in 1992.
Total shareholders' equity averaged $260.6 million in 1993, up slightly
from $259.6 million in the prior year. In June 1993, the Corporation completed
an offering and sale of 12.7 million shares of common stock (the Offering) at a
price of $6.375 per share. The gross proceeds of the Offering were $81.1 million
before expenses of issuance of $4.6 million. Upon completion of the Offering,
the Corporation contributed $65 million in capital to the Bank to comply with
the $65 million capital-raising requirement in the Bank's agreement (the
Agreement) with the Office of the Comptroller of the Currency (OCC).
In March 1993, the Bank adopted an accelerated asset disposition program
(the Disposition Program) to aggressively dispose of ORE and certain problem
loans with an aggregate book value before the Disposition Program of $119.5
million. The Bank signed a definitive agreement, as of November 1, 1993, to sell
the remaining assets in the Disposition Program, which were reduced by sales and
pay downs of individual Disposition Program assets during the second and third
quarters, to WHC-THREE Investors, L.P., a limited partnership. The transaction,
which was 75% financed by the Bank, resulted in a pretax gain of $12.8 million
in the fourth quarter of 1993, and is expected to result in an additional pretax
gain of approximately $3.5 million in the first part of 1994, when the final
phase of the sale closes.
8
4
In November 1993, the Bank announced a consolidation plan to improve
efficiency and operational productivity in its branch network. The streamlining
will reduce the Bank's total number of branches from 22 to 16, while
designating four of the remaining locations as regional commercial lending
centers. In addition to providing a full array of regular banking services, the
centers will also house teams of lenders specializing in serving midsize
businesses, as well as the Bank's larger, more complex relationships. The Bank
anticipates completing the closures by early 1994. To cover the costs
associated with this action, the Bank recorded a consolidation charge of $12.0
million in the fourth quarter of 1993. Completion of ongoing branch
restructuring, including the closures announced in November 1993, is expected
to result in an expense savings of approximately $8.0 million per year, before
the effect of inflation and other factors. However, this will be partially
offset by decreased income resulting from reductions in loans and deposits
caused by the consolidation.
Ongoing weakness in the Southern California economy, particularly the value
of Southern California real estate, continued to affect the Company's financial
performance during 1993. This was manifested, among other ways, in the continued
lack of loan demand, resulting in the ongoing decline in the size of the loan
portfolio, and the continued high but declining level of nonaccrual loans and
problem assets.
Management does not anticipate a meaningful economic recovery in Southern
California in 1994 and therefore expects that economic conditions will continue
to adversely affect the Bank's loan portfolio and the Company's financial
performance. However, based on its review of the loan portfolio, management
anticipates that net charge offs and provisions for credit losses for 1994 will
decrease from the 1993 levels, unless there is significant additional
deterioration of economic conditions.
On January 21, 1994, the OCC lifted the Agreement that had been in effect
since November 18, 1992. The Agreement had required the Bank, among other
things, to raise $65 million of new Tier 1 capital (a category consisting
principally of common shareholders' equity) so as to maintain Tier 1 capital of
at least 10% of risk-weighted assets and at least 7% of adjusted average total
assets. This requirement was satisfied in June 1993 when the Corporation
contributed $65 million to the Bank as Tier 1 capital, out of the proceeds of
the Offering. In February 1994, the Federal Reserve Bank of San Francisco
notified the Corporation that the Memorandum of Understanding (MOU), which it
had entered into with the Corporation in February 1993, was also terminated.
The Corporation ceased paying a dividend in August 1991. Dividend payments
are expected to resume, based on achieved earnings, and when the Board of
Directors determines that such payments are consistent with the long-term
objectives of the Company.
On January 17, 1994 and during the days thereafter, Los Angeles was struck
by a series of strong earthquakes. The Bank is currently accumulating data on
the collateral securing its loans in the effected area. Based on the information
currently available, the Bank does not believe earthquake related losses,
including those related to its facilities, will be material to the Bank's
financial position.
9
5
OPERATIONS SUMMARY
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- ----------------
1993 AMOUNT % 1992 AMOUNT % 1991 1990 1989
-------- -------- --- -------- --------- ---- -------- -------- --------
DOLLARS IN THOUSANDS
Interest income(1)..................... $171,134 $(66,149) (28) $237,283 $(129,760) (35) $367,043 $432,074 $415,934
Interest expense....................... 41,996 (42,437) (50) 84,433 (95,886) (53) 180,319 228,935 220,342
-------- -------- --- -------- --------- ---- -------- -------- --------
Net interest income.................... 129,138 (23,712) (16) 152,850 (33,874) (18) 186,724 203,139 195,592
Less provision for credit losses....... 30,000 (84,500) (74) 114,500 (3,500) (3) 118,000 43,000 15,146
Noninterest income..................... 45,810 (1,184) (3) 46,994 3,662 8 43,332 38,569 39,392
Less noninterest expense:
Staff expense........................ 69,783 (13,780) (16) 83,563 352 -- 83,211 78,629 72,735
Other expense........................ 59,443 (9,881) (14) 69,324 4,233 7 65,091 55,948 51,616
Consolidation charge................. 12,000 12,000 100 -- -- -- -- -- --
ORE expense.......................... 25,674 4,849 23 20,825 18,277 717 2,548 -- 65
-------- -------- --- -------- --------- ---- -------- -------- --------
Total.......................... 166,900 (6,812) (4) 173,712 22,862 15 150,850 134,577 124,416
-------- -------- --- -------- --------- ---- -------- -------- --------
Income (loss) before income taxes...... (21,952) 66,416 75 (88,368) (49,574) (128) (38,794) 64,131 95,422
Income tax provision (benefit)......... (9,260) (23,190) (71) (32,450) 10,063 45 (22,387) 18,800 32,130
Less adjustments(1).................... 1,342 2,892 68 4,234 1,975 32 6,209 6,536 7,223
-------- -------- --- -------- --------- ---- -------- -------- --------
Income (loss) from continuing
operations........................... (14,034) 46,118 77 (60,152) (37,536) (166) (22,616) 38,795 56,069
Income from discontinued operations.... 7,128 6,324 787 804 (592) (42) 1,396 5,202 4,149
-------- -------- --- -------- --------- ---- -------- -------- --------
Net income (loss)...................... $ (6,906) $ 52,442 88 $(59,348) $ (38,128) (180) $(21,220) $ 43,997 $ 60,218
-------- -------- --- -------- --------- ---- -------- -------- --------
-------- -------- --- -------- --------- ---- -------- -------- --------
Earnings (loss) per share.............. $ (.17) $ 1.67 91 $ (1.84) $ (1.18) (179) $ (.66) $ 1.35 $ 1.86
-------- -------- --- -------- --------- ---- -------- -------- --------
-------- -------- --- -------- --------- ---- -------- -------- --------
- ---------------
(1) Includes amounts to convert nontaxable income to a fully taxable equivalent
basis.
RATIOS TO AVERAGE ASSETS
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Net interest income(1)....................................... 4.39% 3.90% 4.05% 4.41% 4.64%
Noninterest income........................................... 1.56 1.20 .94 .84 .93
Less provision for credit losses............................. 1.02 2.92 2.56 .93 .36
Less noninterest expense:
Staff expense.............................................. 2.37 2.13 1.81 1.71 1.72
Other expense.............................................. 2.02 1.77 1.41 1.22 1.23
Consolidation charge....................................... .41 -- -- -- --
ORE expense................................................ .87 .53 .06 -- --
---- ---- ---- ---- ----
Total.............................................. 5.67 4.43 3.28 2.93 2.95
---- ---- ---- ---- ----
Income (loss) before income taxes(1)......................... (.74) (2.25) (.85) 1.39 2.26
---- ---- ---- ---- ----
Income (loss) from continuing operations..................... (.47) (1.53) (.49) .84 1.33
Income from discontinued operations.......................... .24 .02 .03 .12 .10
---- ---- ---- ---- ----
Net income (loss)............................................ (.23) (1.51) (.46) .96 1.43
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ---------------
(1) Fully taxable equivalent basis.
10
6
NET INTEREST INCOME
1993 COMPARED WITH 1992
Taxable equivalent net interest income totaled $129.1 million in 1993, down
$23.7 million, or 15.5%, from 1992. The decrease from 1992 to 1993 was due to a
$864.6 million, or 25.0%, decrease in average interest-earning assets. Although
net interest income declined, the net interest margin improved from 4.41% in
1992 to 4.97% in 1993, because of the greater proportional decrease
in low-yielding interest-earning assets, primarily federal funds sold and
securities purchased under resale agreements, and decreases in time deposits of
$100,000 and over, which are among the most expensive categories of funds for
the Bank.
Average loans declined from $2,315.3 million in 1992 to $1,737.4 million in
1993, a decrease of $577.9 million, or 25.0%. The majority of this decrease
reflects lower average commercial loans outstanding, down $313.1 million, or
23.8%. This decline resulted from decreased loan demand because of the recession
in Southern California, the Bank's efforts to achieve a more diversified risk
profile in its loan portfolio and gross loan charge offs during 1992 and 1993 of
$202.7 million. Average construction loans decreased $148.7 million, or 67.7%,
primarily because of the transfer of certain construction loans to the real
estate mortgage category after completion of construction and because the Bank
curtailed new construction loan commitments beginning in late 1990. Average real
estate mortgage loans decreased $102.4 million, or 14.3%, partially due to the
sale of $73.7 million of ELC loans in April 1993.
The Bank is committed to its efforts to improve credit quality and reduce
its exposure to the commercial real estate sector, which will limit the growth,
if any, in the loan portfolio in 1994. Loan balances are also likely to be
negatively affected by the continued impact of the recession.
Average taxable securities increased $37.6 million, or 8.1%, between 1992
and 1993, as a result of investment of the Bank's excess liquidity in the second
half of 1993 in government and agency securities. Average nontaxable securities
decreased $69.3 million, or 79.8%, between 1992 and 1993, due to maturities and
the sale of $32.4 million of municipal securities in December 1992.
Average federal funds sold and securities purchased under resale agreements
decreased $246.5 million, or 44.5%, between 1992 and 1993. Average federal funds
purchased and securities sold under repurchase agreements declined $223.4
million, or 45.7%, between 1992 and 1993. The Bank has reduced its federal funds
arbitrage activity due to the low profit margin from this business and its
impact on the Bank's Tier 1 leverage ratio.
Average noninterest-bearing deposits declined from $1,029.8 million in 1992
to $914.6 million in 1993, a decrease of $115.2 million, or 11.2%, while average
interest-bearing core deposits declined from $1,587.5 million in 1992 to
$1,262.3 million in 1993, a decrease of $325.2 million, or 20.5%. Average time
deposits of $100,000 or more decreased $312.6 million, or 60.6%, between 1992
and 1993. The Bank's interest-and noninterest-bearing deposits decreased as a
result of the continued weak economy, the uncertainty caused by the Bank's
losses and the Agreement, and the low interest rates paid on interest-bearing
deposits compared with other available investment alternatives. Although some
additional loss of deposits is expected to result from the Bank's closure of six
offices in 1994, it is not anticipated to have a significant effect on the
Bank's overall deposit levels.
11
7
Net Interest Income Summary
The following table presents the components of net interest income for the
five years ended December 31, 1993.
1993 1992
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- -------- ---------- -------- --------
DOLLARS IN THOUSANDS -- FULLY TAXABLE EQUIVALENT BASIS(1)
ASSETS
Earning assets(2)
Loans:
Commercial loans......................... $1,001,965 $ 74,413 7.50% $1,315,112 $ 95,088 7.34%
Real estate -- construction.............. 70,783 5,023 7.10 219,456 15,761 7.18
Real estate -- mortgage.................. 612,393 46,480 7.59 714,753 57,497 8.04
Installment loans........................ 52,260 5,234 10.02 65,964 6,836 10.36
---------- -------- -------- ---------- -------- --------
Total loans(3)........................... 1,737,401 131,150 7.59 2,315,285 175,182 7.62
---------- -------- -------- ---------- -------- --------
Interest-bearing deposits in other banks... 835 30 3.59 2,637 67 2.54
State and municipal securities............. 17,575 1,123 9.24 86,863 5,562 9.63
Other securities........................... 499,484 26,973 5.40 461,871 31,068 6.73
Federal funds sold and securities purchased
under resale agreements.................. 307,078 9,357 3.05 553,540 19,592 3.54
Trading account securities................. 35,529 1,159 3.54 42,352 1,578 3.92
---------- -------- -------- ---------- -------- --------
Total interest-earning assets............ 2,597,902 169,792 6.59 3,462,548 233,049 6.85
---------- -------- -------- ---------- -------- --------
Allowance for credit losses................ (129,873) (141,537)
Cash and due from banks.................... 272,610 368,297
Other nonearning assets.................... 203,822 229,641
---------- -------- -------- ---------- -------- --------
Total assets............................. $2,944,461 $3,918,949
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits................. $ 914,642 -- -- $1,029,758 -- --
Interest-bearing deposits:
Interest checking accounts................. 283,871 3,379 1.19 328,555 6,175 1.88
Money market accounts...................... 767,121 17,858 2.33 1,023,280 31,386 3.07
Savings deposits........................... 103,161 2,255 2.19 106,608 3,135 2.94
Time deposits -- under $100,000............ 108,135 4,063 3.76 129,105 6,106 4.73
Time deposits -- $100,000 and over......... 203,176 6,419 3.16 515,803 20,888 4.05
---------- -------- -------- ---------- -------- --------
Total interest-bearing deposits.......... 1,465,464 33,974 2.32 2,103,351 67,690 3.22
---------- -------- -------- ---------- -------- --------
Total deposits........................... 2,380,106 3,133,109
Federal funds purchased and securities sold
under repurchase agreements.............. 265,082 7,499 2.83 488,520 16,220 3.32
Other borrowings........................... 16,147 523 3.24 14,279 523 3.66
---------- -------- -------- ---------- -------- --------
Total interest-bearing liabilities..... 1,746,693 41,996 2.40 2,606,150 84,433 3.24
---------- -------- -------- ---------- -------- --------
Other liabilities............................ 22,477 23,412
Shareholders' equity......................... 260,649 259,629
---------- -------- -------- ---------- -------- --------
Total liabilities and shareholders'
equity................................. $2,944,461 $3,918,949
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------
Net interest income/spread................... 127,796 4.19 148,616 3.61
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------
Fully taxable equivalent net interest
income..................................... $129,138 $152,850
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------
Net interest margin(4)....................... 4.97% 4.41%
- ---------------
(1) The average rate data in this table are presented on a taxable equivalent
basis based on adjusting interest income exempt from federal income taxes,
or income taxed at a rate less than the statutory tax rates, using the
federal income tax rates in effect during the years presented.
12
8
1991 1990 1989
- ----------------------------------- ----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$1,618,442 $150,814 9.44% $1,623,120 $176,305 10.98% $1,485,903 $172,485 11.78%
396,934 39,255 9.89 425,722 53,094 12.47 332,232 44,975 13.54
761,675 74,884 9.83 746,851 85,926 11.51 628,543 75,649 12.04
75,260 8,675 11.53 79,461 9,514 11.97 80,546 9,621 11.94
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
2,852,311 273,628 9.66 2,875,154 324,839 11.37 2,527,224 302,730 12.07
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
3,534 297 8.40 12,176 1,009 8.29 20,311 1,857 9.14
127,540 8,367 9.76 127,993 8,350 9.70 141,961 9,217 9.80
537,531 41,410 7.70 469,684 40,000 8.52 371,562 31,793 8.56
578,622 33,450 5.78 556,487 46,468 8.35 634,122 58,826 9.28
64,552 3,682 5.85 61,958 4,872 8.00 49,515 4,288 8.87
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
4,164,090 360,834 8.81 4,103,452 425,538 10.53 3,744,695 408,711 11.11
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(74,240) (38,320) (33,564)
374,353 416,587 387,827
140,872 120,654 118,805
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$4,605,075 $4,602,373 $4,217,763
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$ 961,072 -- -- $ 943,038 -- -- $ 926,093 -- --
301,338 11,018 3.66 285,729 10,791 3.78 270,782 10,283 3.80
986,438 48,394 4.91 917,080 53,035 5.78 867,358 50,899 5.87
86,606 3,810 4.40 87,459 3,811 4.36 95,532 4,210 4.41
150,544 8,981 5.97 139,727 11,242 8.05 105,040 8,106 7.72
1,220,623 78,698 6.45 1,353,694 110,171 8.14 1,151,667 104,602 9.08
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
2,745,549 150,901 5.50 2,783,689 189,050 6.79 2,490,379 178,100 7.15
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
3,706,621 3,726,727 3,416,472
531,590 28,550 5.37 499,178 38,628 7.74 463,518 40,729 8.79
14,561 868 5.96 14,265 1,257 8.81 14,106 1,513 10.73
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
3,291,700 180,319 5.48 3,297,132 228,935 6.94 2,968,003 220,342 7.42
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
33,527 49,855 56,777
318,776 312,348 266,890
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$4,605,075 $4,602,373 $4,217,763
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
180,515 3.33 196,603 3.59 188,369 3.69
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$186,724 $203,139 $195,592
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
4.48% 4.95% 5.22%
- ---------------
(2) Includes average nonaccrual loans of $106,119, $159,420, $136,096, $31,726
and $16,287 for 1993, 1992, 1991, 1990 and 1989, respectively.
(3) Loan income includes loan fees of $5,304, $5,427, $7,287, $9,487 and $7,578
for 1993, 1992, 1991, 1990 and 1989, respectively.
(4) Fully taxable net interest income divided by interest-earning assets.
13
9
1992 Compared With 1991
Fully taxable equivalent net interest income decreased $33.9 million, or
18.1%, from 1991 to 1992. The decline in volume of interest-earning assets
accounted for $23.1 million of the decrease. The balance of the decrease
resulted from the lower interest income earned on the Company's net
interest-earning assets due to the decline in interest rates from 1991 to 1992.
As a result, the net interest margin declined to 4.41% in 1992 from 4.48% in
1991.
Average loans declined from $2,852.3 million in 1991 to $2,315.3 million in
1992, a decrease of $537.0 million, or 18.8%, between 1991 and 1992 due to
decreases of $303.3 million, or 18.7%, in commercial loans, $177.5 million, or
44.7%, in construction loans and $46.9 million, or 6.2%, in real estate mortgage
loans. These decreases resulted from reduced loan demand caused by the recession
and because the Bank curtailed new construction commitments beginning in late
1990.
Average taxable and nontaxable securities decreased $75.7 million, or
14.1%, and $40.7 million, or 31.9%, respectively, between 1991 and 1992. Average
federal funds sold and securities purchased under resale agreements decreased
$25.1 million, or 4.3%, between 1991 and 1992.
Average noninterest-bearing deposits increased $68.7 million, or 7.1%.
Average interest-bearing core deposits increased $62.6 million, or 4.1%, while
average time deposits of $100,000 and over decreased $704.8 million, or 57.7%.
Due to the decline in the Bank's assets in 1992 compared with 1991 and because
of the increase in core deposits, the Bank was able to reduce its dependence on
time deposits of $100,000 and over.
Change in Net Interest Income
The following table sets forth a summary of the changes in interest earned
and paid resulting from changes in volume and rate. 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.
1993 VS. 1992 1992 VS. 1991
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO(2): DUE TO(2):
-------------------- NET -------------------- NET
VOLUME(1) RATE(1) DECREASE VOLUME(1) RATE(1) DECREASE
--------- -------- -------- --------- -------- --------
DOLLARS IN THOUSANDS -- FULLY TAXABLE EQUIVALENT BASIS
Interest earned on:
Interest-bearing deposits in other
banks........................... $ (58) $ 21 $ (37) $ (61) $ (169) $ (230)
Loans............................. (43,943) (695) (44,638) (46,725) (52,408) (99,133)
Taxable securities................ 2,390 (6,485) (4,095) (5,458) (4,884) (10,342)
Nontaxable securities............. (6,416) (327) (6,743) (3,917) (164) (4,081)
Trading account securities........ (250) (151) (401) (1,080) (1,036) (2,116)
Federal funds sold and securities
purchased under resale
agreements...................... (7,808) (2,427) (10,235) (1,394) (12,464) (13,858)
--------- -------- -------- --------- -------- --------
Total interest-earning
assets..................... (56,085) (10,064) (66,149) (58,635) (71,125) (129,760)
--------- -------- -------- --------- -------- --------
Interest paid on:
Interest checking................. (756) (2,040) (2,796) 922 (5,765) (4,843)
Money market deposits............. (6,892) (6,636) (13,528) 1,748 (18,756) (17,008)
Savings deposits.................. (99) (781) (880) 761 (1,436) (675)
Other time deposits............... (11,980) (4,532) (16,512) (36,778) (23,907) (60,685)
Short-term borrowings............. (6,571) (2,150) (8,721) (2,170) (10,505) (12,675)
--------- -------- -------- --------- -------- --------
Total interest-bearing
liabilities................ (26,298) (16,139) (42,437) (35,517) (60,369) (95,886)
--------- -------- -------- --------- -------- --------
$(29,787) $ 6,075 $(23,712) $(23,118) $(10,756) $(33,874)
========= ======== ======== ======== ======== ========
- ---------------
(1) The changes in interest due to both rate and volume have been allocated to
the change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) The changes in interest income in this table are presented on a fully
taxable equivalent basis. Interest income exempt from federal income taxes,
or income taxed at a rate less than the statutory tax rates, has been
adjusted to a fully taxable equivalent basis using the federal income tax
rates in effect during the years presented.
14
10
PROVISION FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgment of the adequacy of the allowance for credit losses and is determined
through periodic analysis of the loan portfolio. This analysis includes a
detailed review of the classification and categorization of problem and
potential problem loans and loans to be charged off; an assessment of the
overall quality and collectibility of the portfolio; and consideration of the
loan loss experience, trends in problem loans and concentrations of credit risk,
as well as current and expected future economic conditions (particularly in
Southern California). The Bank has an internal risk analysis and review staff
that reports to the Audit and Examining Committee of the Board of Directors and
continuously reviews loan quality. Such reviews also assist management in
establishing the level of the allowance for credit losses.
For 1993, the provision for credit losses totaled $30.0 million, down from
$114.5 million in 1992 and $118.0 million in 1991. During the second half of
1991, the Bank recorded large credit loss provisions as it became clear that the
impact of the recession and the softening of the local real estate market on the
Bank's loan portfolio would be more prolonged and severe than initially
expected.
In 1992, net charge offs totaled $104.2 million, or 4.50% of related
average credits, up from $52.3 million, or 1.83%, in 1991. Because of the
increased level of charge offs and the continued migration of loans to
nonaccrual or loss status due to the continuing difficult economic situation in
Southern California, including further declines in real estate values, the
provision for credit losses remained high in 1992, particularly in the first
half of the year.
In 1993, net charge offs totaled $54.1 million, or 3.12% of related average
credits, compared with $104.2 million, or 4.50% of related average credits, in
1992. Nonaccrual loans decreased from $160.3 million at December 31, 1992 to
$71.1 million at December 31, 1993, due in part to the decrease in the second
half of 1993 in the inflow of loans into nonaccrual status. As a result, the
provision for credit losses decreased to $30.0 million in 1993.
Based on management's review of the loan portfolio, net charge offs and
provisions for credit losses for 1994 are expected to decrease from 1993 levels,
even though no meaningful economic recovery is expected in Southern California.
However, no assurance can be given that the Bank will not, in any particular
period, sustain credit losses that are sizable in relation to the amount
provided, or that subsequent evaluations of the loan portfolio by management or
the regulators, in light of the factors then prevailing, including economic
conditions and further declines in property values, will not require significant
increases in the allowance for credit losses.
NONINTEREST INCOME
Noninterest income from continuing operations totaled $45.8 million, down
$1.2 million from 1992, which was up $3.7 million from 1991. A breakdown of
noninterest income by category is reflected on page 16.
Service charges on deposit accounts increased $1.0 million, or 9.4%,
compared with a 14.0% increase in 1992. Growth in both 1993 and 1992 was due to
higher amounts collected from deposit customers for account analysis deficits.
Customer trading account income in 1993 decreased $.1 million, or 1.6%,
compared with a 25.5% increase the preceding year. The decrease from 1992 to
1993 was due primarily to lower volumes and reduced spreads on trading account
transactions with customers, due to the decline in the level of interest rates.
The increase from 1991 to 1992 was due to increased volume. Trust fees remained
relatively unchanged during the last three years. All other income categories,
which include foreign exchange, letter of credit fees, escrow and proof of
deposit fees, in addition to other miscellaneous income, decreased during the
last three years due to lower volumes.
The Bank sold its merchant draft business to NOVA Information Systems as of
January 1, 1993, for a pretax gain of $1.9 million. Merchant credit card fees
were $4.5 million in 1992 and $4.1 million in 1991. The Bank's sale of $73.7
million in ELC loans, in April 1993, generated a pretax gain of $4.5 million.
15
11
In December 1992, in conjunction with tax planning strategies, the Bank
sold $32.4 million of municipal securities for a gain of $1.6 million. There
were no investment securities gains or losses in 1993 or 1991.
In December 1992, the Bank entered into an agreement to sell its data
processing business, City National Information Systems (CNIS), to Systematics,
Inc. for $12.0 million. A pretax gain of $10.8 million was recognized at
closing, June 1, 1993. All income and expense related to CNIS have been removed
from continuing operations and are now included in the Consolidated Statement of
Operations under the caption "Income from discontinued operations." Prior
periods have been restated to conform for reporting for a discontinued
operation.
Analysis of Changes in Noninterest Income
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- -------------
1993 AMOUNT % 1992 AMOUNT % 1991
----- ------ ----- ----- ------ ---- -----
DOLLARS IN MILLIONS
Service charges on deposit accounts................... $11.6 $ 1.0 9.4 $10.6 $ 1.3 14.0 $ 9.3
Trust fees............................................ 7.4 (.1) (1.3) 7.5 .4 5.6 7.1
Customer trading account income....................... 6.3 (.1) (1.6) 6.4 1.3 25.5 5.1
Credit card merchant fees............................. -- (4.5) NM 4.5 .4 9.8 4.1
Gain on sale of selected ELC loans.................... 4.5 4.5 NM -- -- NM --
Gain on sale of merchant draft business............... 1.9 1.9 NM -- -- NM --
Net gain on securities available for sale............. -- (1.6) NM 1.6 1.6 NM --
Other income.......................................... 14.1 (2.3) (14.0) 16.4 (1.3) (7.3) 17.7
----- ------ ----- ----- ------ ---- -----
Total............................................. $45.8 $(1.2) (2.6) $47.0 $ 3.7 8.5 $43.3
----- ------ ----- ----- ------ ---- -----
----- ------ ----- ----- ------ ---- -----
NONINTEREST EXPENSE
Noninterest expense totaled $166.9 million in 1993, down $6.8 million, or
3.9%, from 1992, which compares with an increase of 15.1% from 1991 to 1992.
This decrease was substantially the result of expense reduction measures
implemented by the Company.
Staff expense decreased 16.5% in 1993, compared with a .5% increase in
1992. On a full-time equivalent basis, staff levels have declined from
approximately 2,000 at December 31, 1991 to 1,350 at year-end 1993. The decrease
includes approximately 100 employees of the discontinued CNIS operation. Staff
levels are expected to continue to decline in 1994 but at a reduced rate due to
the closure of branches and continued cost reduction measures.
The expense categories other than staff, ORE and the consolidation charge,
decreased $9.9 million, or 14.3%, between 1992 and 1993. These expenses
increased $4.1 million, or 6.3%, between 1991 and 1992. The decrease between
1992 and 1993 resulted from the Bank's efforts to reduce expenses, writedowns of
$2.3 million in 1992 resulting from updated valuations of in-substance
foreclosures of non-real estate assets and a $2.8 million decrease in merchant
credit card processing expense due to the sale of the business. The increase
from 1991 to 1992 was due to higher severance and litigation expenses in 1992
and the $2.3 million writedown discussed above.
As a result of writedowns, including those resulting from the Disposition
Program, net costs of ORE totaled $25.7 million in 1993, up from $20.8 million
in 1992 and $2.5 million in 1991. Net ORE expense for 1993 included a $12.8
million gain recorded in the fourth quarter upon the sale of a portion of the
assets in the Disposition Program. Based on the Bank's current ORE portfolio and
workout strategies, management anticipates that ORE expense in 1994 will
decrease from 1993 levels.
Due to declines in total deposits, the increases in FDIC insurance
assessment rates, that became effective in July 1, 1992 and January 1, 1993 did
not result in an increase in FDIC insurance assessment expense.
16
12
In November 1993, the Bank announced a consolidation plan to improve
efficiency and operational productivity in its branch network. The streamlining
will reduce the Bank's total number of branches from 22 to 16, while designating
four of the remaining locations as regional commercial lending centers. The Bank
anticipates completing the closures by early 1994. To cover the costs associated
with this action, the Bank recorded a consolidation charge of $12.0 million in
the fourth quarter of 1993 comprised of $7.5 million for disposition of lease
commitments, $1.5 million for disposition of fixed assets, and $3.0 million for
severance costs and other expenses directly related to the consolidation.
Completion of ongoing branch restructuring, including the closures announced in
November 1993, is expected to result in an expense savings of approximately $8.0
million per year, before the effect of inflation and other factors. However,
this will be partially offset by decreased income resulting from reductions in
loans and deposits caused by the consolidation.
Analysis of Changes in Noninterest Expense
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- --------------
1993 AMOUNT % 1992 AMOUNT % 1991
------ ------ ----- ------ ------ ----- ------
DOLLARS IN MILLIONS
Staff expense................................. $ 69.8 $(13.8) (16.5) $ 83.6 $ .4 .5 $ 83.2
------ ------ ----- ------ ------ ----- ------
All other:
Net occupancy of premises................... 11.8 .3 2.6 11.5 .2 1.8 11.3
Data processing............................. 7.8 (.2) (2.5) 8.0 .1 1.3 7.9
Professional................................ 7.3 (1.1) (13.1) 8.4 .5 6.3 7.9
FDIC insurance.............................. 7.2 (.3) (4.0) 7.5 (.4) (5.1) 7.9
Office supplies............................. 5.0 (1.0) (16.7) 6.0 (.1) (1.6) 6.1
Depreciation................................ 4.5 (.2) (4.3) 4.7 (.2) (4.1) 4.9
Promotion................................... 1.9 (1.1) (36.7) 3.0 (.6) (16.7) 3.6
Equipment................................... 2.0 (.3) (13.0) 2.3 (.4) (14.8) 2.7
Other....................................... 11.9 (6.0) (33.5) 17.9 5.0 38.8 12.9
------ ------ ----- ------ ------ ----- ------
All other................................... 59.4 (9.9) (14.3) 69.3 4.1 6.3 65.2
------ ------ ----- ------ ------ ----- ------
Consolidation charge.......................... 12.0 12.0 100.0 -- -- -- --
ORE expense................................... 25.7 4.9 23.6 20.8 18.3 NM 2.5
------ ------ ----- ------ ------ ----- ------
Total................................ $166.9 $(6.8) (3.9) $173.7 $22.8 15.1 $150.9
------ ------ ----- ------ ------ ----- ------
------ ------ ----- ------ ------ ----- ------
INCOME TAXES
The 1993 effective tax benefit rate was 39.8%, up from 35.0% last year. The
effective rates differed from the applicable statutory federal tax rate due to
various factors, including state taxes, tax exempt income and higher income tax
rates in carry back years.
No California tax benefit was reflected for the book losses for 1991, 1992
or 1993. If the Company should experience additional California book losses in
future years, no California benefit can be recognized unless it is more likely
than not that the benefit of such losses can be realized.
The federal tax benefits of $9.3 million, $32.5 million and $22.4 million
for 1993, 1992 and 1991, respectively, were recorded based on the Company's
ability to carry back the loss on both a book income and tax return basis to
prior years, as well as the availability of reversing taxable temporary
differences and projected taxable income for 1994 to justify the realization of
reversing deductible temporary differences.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective January 1, 1993. The cumulative
effect of adopting this statement did not have a material impact on the
financial position or results of operations of the Company.
17
13
BALANCE SHEET ANALYSIS
SOURCES AND USES OF FUNDS
The discussion in this section focuses on changes between December average
balances in 1993 and 1992 as depicted on the following table. Management
believes that a comparison of December averages gives a clearer picture of
changes in the balance sheet during the year than a comparison of annual
averages, which may conceal trends during the year, or year-end balances, which
may be distorted by significant end-of-year fluctuations.
The Company manages its balance sheet to meet the needs of its business
strategy, which it adapts to the changing economic environment and business and
competitive conditions in the financial services market. Understanding changes
in the balance sheet requires an examination of changes in the size and
composition of the Company's earning assets and sources of funds.
Based on December averages, assets decreased 8.0% in 1993, compared with a
25.9% decrease in 1992.
Net loans decreased at a 23.8% rate in 1993, compared with a 22.9% decrease
in 1992. Commercial loans decreased 23.2% and 20.1% in 1993 and 1992,
respectively, reflecting reduced loan demand because of the recession and the
Bank's efforts to achieve a more diversified risk profile in its loan portfolio.
Real estate loans decreased 23.3% in 1993, and 21.1% in 1992, reflecting
transfers to ORE, pay downs, charge offs and because the Bank curtailed new real
estate loan commitments beginning in late 1990.
Securities increased 77.0% in 1993, compared with a 42.2% decrease in 1992.
The increase in 1993 resulted from the lack of loan demand and the investment of
the proceeds of the Offering, while the decrease in 1992 was caused by the
decline in deposits and the Company's need for liquidity.
The Company's primary sources for funding earning assets are core deposits,
certificates of deposits and short-term purchased funds. Core deposits decreased
6.4% in 1993, compared with a decrease of 11.0% in 1992. During 1993,
certificates of deposit of $100,000 and over were reduced by 41.2% from 1992,
compared with a reduction of 62.6% from 1991 to 1992. Due to the decrease in
loan volume, the Bank has reduced its funding from these more expensive funds.
Federal funds purchased and securities sold under repurchase agreements
decreased 29.0% in 1993 and 45.8% in 1992 as the Bank reduced its arbitrage
activities.
The Company expects stabilization of deposits to continue and does not
expect the branch consolidation program to result in significant declines in
deposit levels.
18
14
SOURCES AND USES OF FUNDS TRENDS
INCREASE INCREASE
DECEMBER (DECREASE) DECEMBER (DECREASE) DECEMBER
1993 ------------- 1992 ----------------- 1991
AVERAGE AMOUNT % AVERAGE AMOUNT % AVERAGE
--------- ------- --- -------- --------- ----- --------
DOLLARS IN MILLIONS
USES OF FUNDS
Earning Assets:
Interest-bearing deposits in other banks................... $ .6 $(17.1) (97) $ 17.7 $ 17.7 -- $ --
Securities................................................. 786.6 342.3 77 444.3 (324.8) (42) 769.1
Trading account securities................................. 52.7 17.6 50 35.1 (40.8) (54) 75.9
Federal funds sold and securities purchased under resale 331.5 59.1 22 272.4 (280.1) 51) 552.5
agreements...............................................
Loans:
Commercial loans......................................... 903.0 (273.2) (23) 1,176.2 (296.3) (20) 1,472.5
Real estate loans........................................ 644.3 (195.9) (23) 840.2 (224.3) (21) 1,064.5
Installment loans........................................ 45.6 (15.9) (26) 61.5 (10.4) (14) 71.9
--------- ------- --- -------- --------- ----- --------
Total loans.............................................. 1,592.9 (485.0) (23) 2,077.9 (531.0) (20) 2,608.9
Less allowance for credit losses........................... 117.7 (23.8) (17) 141.5 44.9 46 96.6
--------- ------- --- -------- --------- ----- --------
Net loans................................................ 1,475.2 (461.2) (24) 1,936.4 (575.9) (23) 2,512.3
--------- ------- --- -------- --------- ----- --------
Total earning assets(1).................................. 2,764.3 (83.1) (3) 2,847.4 (1,159.0) (29) 4,006.4
Cash and due from banks.................................... 271.3 (110.1) (29) 381.4 (29.7) (7) 411.1
Other nonearning assets.................................... 148.9 (99.0) (40) 247.9 67.7 38 180.2
--------- ------- --- -------- --------- ----- --------
Total assets............................................. $3,066.8 $(268.4) (8) $3,335.2 $(1,165.9) (26) $4,501.1
--------- ------- --- -------- --------- ----- --------
--------- ------- --- -------- --------- ----- --------
SOURCES OF FUNDS
Core deposits:
Demand deposits............................................ $1,000.4 $(82.2) (8) $1,082.6 $ (4.7) -- $1,087.3
Interest checking deposits................................. 302.2 .1 -- 302.1 (29.9) (9) 332.0
Money market accounts...................................... 787.8 (68.2) (8) 856.0 (233.9) (21) 1,089.9
Savings deposits........................................... 104.6 9.3 10 95.3 (.3) -- 95.6
Time deposits -- under $100,000............................ 99.2 (16.8) (14) 116.0 (35.2) (23) 151.2
--------- ------- --- -------- --------- ----- --------
Total core deposits...................................... 2,294.2 (157.8) (6) 2,452.0 (304.0) (11) 2,756.0
Short-term purchased funds:
Time deposits -- $100,000 and over......................... 172.0 (120.3) (41) 292.3 (489.7) (63) 782.0
Federal funds purchased and securities sold under 231.3 (94.5) (29) 325.8 (275.2) (46) 601.0
repurchase agreements....................................
Other short-term funds borrowed............................ 10.7 (3.9) (27) 14.6 .1 -- 14.5
Mortgages payable.......................................... 26.3 26.3 NM -- -- -- --
--------- ------- --- -------- --------- ----- --------
Total short-term purchased funds......................... 440.3 (192.4) (30) 632.7 (764.8) (55) 1,397.5
Other liabilities............................................ 34.8 11.5 49 23.3 (9.9) (30) 33.2
Shareholders' equity......................................... 297.5 70.3 31 227.2 (87.2) (28) 314.4
--------- ------- --- -------- --------- ----- --------
Total liabilities and shareholders' equity................. $3,066.8 $(268.4) (8) $3,335.2 $(1,165.9) (26) $4,501.1
--------- ------- --- -------- --------- ----- --------
--------- ------- --- -------- --------- ----- --------
- ------------------
(1) Before deduction of allowance for credit losses.
19
15
CAPITAL
At December 31, 1993, the Company's and the Bank's Tier 1 capital, which is
comprised of common shareholders' equity, amounted to $298.1 million and $279.8
million, respectively. At December 31, 1992, the Company's and the Bank's Tier 1
capital amounted to $227.9 million and $221.9 million, respectively. At December
31, 1993, the Company had a Tier 1 risk-based capital ratio of 15.75% and a Tier
1 leverage ratio of 9.95%.
On November 18, 1992, the Bank entered into the Agreement, which required
the Bank to generate a minimum of $65 million in Tier 1 capital by June 30,
1993, so as to maintain Tier 1 capital of at least 10% of risk-weighted assets,
and Tier 1 capital of at least 7% of adjusted total assets. In June 1993, the
Corporation, after completing the Offering, contributed $65 million to the Bank
as Tier 1 capital. At December 31, 1993, the Bank's Tier 1 capital was 14.78% of
risk-weighted assets and 9.38% of adjusted total assets, which exceeded the
capital levels required under the Agreement. Early in 1994, both the Agreement
and the MOU were lifted.
The following table presents the capital ratios for the Company and the
Bank at December 31, 1993, 1992 and 1991.
AS OF DECEMBER 31
-------------------------
1993 1992 1991
----- ----- -----
CITY NATIONAL CORPORATION (CONSOLIDATED)
Tier 1 leverage................................................... 9.95% 6.49% 6.46%
Tier 1 risk-based capital......................................... 15.75 9.17 9.21
Total risk-based capital.......................................... 17.06 10.47 10.49
CITY NATIONAL BANK
Tier 1 leverage................................................... 9.38% 6.32% 6.34%
Tier 1 risk-based capital......................................... 14.78 8.90 9.00
Total risk-based capital.......................................... 16.09 10.20 10.28
On December 23, 1992, the Federal Financial Institutions Examinations
Council issued a statement that federally supervised banks and thrift
institutions should follow the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," for regulatory reporting
purposes, and recommended that the federal banking and thrift regulatory
agencies amend their capital standards to limit deferred tax assets that could
be used to meet capital requirements. On March 29, 1993, the OCC issued a
temporary guideline, pending adoption of a final rule, that would limit the
amount of deferred tax assets that could be included in a bank's regulatory
capital to the lesser of the amount expected to be realized within one year,
based on the bank's projections of future taxable income, or 10% of Tier 1
capital. However, there generally would be no limit on deferred tax assets that
could be realized from taxes paid in prior carry-back years and from future
reversals of existing taxable temporary differences. Based on the Company's
ability to carry back and recover taxes paid in prior years, and the expected
level of reversing taxable temporary differences as well as projected income for
1994 but not beyond, management believes that the recorded deferred tax asset
balance of $18.1 million is fully includable in regulatory capital at December
31, 1993.
The Corporation ceased paying dividends in the third quarter of 1991. It is
expected that dividend payments will resume, based on achieved earnings, and
when the Board of Directors determines that they are consistent with the
long-term objectives of the Company.
20
16
LIQUIDITY
A fundamental aspect of the asset/liability management strategy of a
financial institution is adequate liquidity -- the ability to meet the
requirements of customers for loans and deposit withdrawals in the most timely
and economical manner.
For most financial institutions, the most manageable sources of liquidity
are comprised of liabilities, especially core deposits. Average core deposits
increased to 83.9% of total funding in December 1993 compared with 79.5% in
December 1992. Although the Bank experienced a substantial decline in core
deposits in the first half of 1993, particularly during the first two months,
deposit levels stabilized thereafter, and average core deposits in December 1993
were 6.4% below those in December 1992.
Liquidity is also provided by assets such as federal funds sold, securities
purchased under resale agreements and trading account securities that may be
immediately converted to cash at minimal cost. The aggregate of these assets
averaged $384.2 million in December 1993, up $76.7 million, or 24.9%, from the
prior year.
Liquidity may also be provided by maturing investment securities. At
December 31, 1993, investment securities maturing within one year amounted to
$386.9 million, or 42.9% of the investment portfolio. See page 24 for a table on
maturity distribution of investment securities at December 31, 1993. Maturing
loans also provide liquidity, and $1,019.2 million of the Bank's loans are
scheduled to mature in 1994. See page 26 for a table on maturity distribution of
loans at December 31, 1993.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest sensitivity is related to liquidity because both are affected by
the interrelationships of maturing assets and liabilities. Interest rate
sensitivity management, however, is concerned with the timing and magnitude of
repricing assets compared with liabilities. It is the objective of interest rate
sensitivity management to control the risks associated with interest rate
movement.
The interest rate sensitivity gap is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A gap is considered positive when the amount of
interest rate-sensitive assets exceeds the amount of interest rate-sensitive
liabilities. A gap is considered negative when the amount of interest
rate-sensitive liabilities exceeds interest rate-sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive gap
would tend to affect net interest income adversely.
The following table shows that the Company's positive interest rate
sensitivity gap increased from $847.1 million at December 31, 1992 to $1,076.9
million at December 31, 1993. The Company's increased positive interest rate
sensitivity gap resulted from the decline in certificates of deposit and the
increased proportion of funding from noninterest-bearing deposits. The Company's
increased asset sensitive position in this period of low interest rates had a
negative effect on net interest income in 1993. While the interest rate
sensitivity gap is a useful measure and contributes toward effective asset and
liability management, it is difficult to predict the net interest margin solely
on that measure.
21
17
At December 31, 1993 and 1992, the Company's distribution of rate-sensitive
assets and rate-sensitive liabilities was as follows:
MATURING OR REPRICING IN
-------------------------------------------------------------
AFTER 3 AFTER 1 YEAR
3 MONTHS MONTHS BUT BUT WITHIN AFTER
OR LESS WITHIN 1 YEAR 5 YEARS 5 YEARS TOTAL
-------- ------------- ------------ -------- --------
DOLLARS IN MILLIONS
DECEMBER 31, 1993
Rate-sensitive assets:
Interest-bearing deposits in other banks............... $ .6 $ -- $ -- $ -- $ .6
Loans.................................................. 1,308.4 82.8 140.4 17.9 1,549.5
Taxable investment securities.......................... 259.8 123.4 328.7 184.1 896.0
Securities available for sale.......................... -- -- -- 2.0 2.0
Nontaxable investment securities....................... 1.1 2.5 2.8 .1 6.5
Trading account securities............................. 39.8 -- -- -- 39.8
Federal funds sold and securities purchased under
resale agreements.................................... 265.0 -- -- -- 265.0
-------- ------------- ------------ -------- --------
Total rate-sensitive assets........................ 1,874.7 208.7 471.9 204.1 2,759.4
-------- ------------- ------------ -------- --------
Rate-sensitive liabilities:(1)
Interest checking deposits............................. 324.0 -- -- -- 324.0
Money market accounts.................................. 742.4 -- -- -- 742.4
Savings deposits....................................... 107.2 -- -- -- 107.2
Time deposits.......................................... 153.1 73.6 37.0 1.4 265.1
Federal funds purchased and securities sold under
repurchase agreements................................ 202.5 -- -- -- 202.5
Other short-term borrowings............................ 15.0 -- -- -- 15.0
Mortgages payable...................................... 26.3 -- -- -- 26.3
-------- ------------- ------------ -------- --------
Total rate-sensitive liabilities................... 1,570.5 73.6 37.0 1.4 1,682.5
-------- ------------- ------------ -------- --------
Interest rate sensitivity gap............................ $ 304.2 $ 135.1 $434.9 $ 202.7 $1,076.9
-------- ------------- ------------ -------- --------
-------- ------------- ------------ -------- --------
Cumulative interest rate sensitivity gap................. $ 304.2 $ 439.3 $874.2 $1,076.9
-------- ------------- ------------ -------- --------
-------- ------------- ------------ -------- --------
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities............................. 119% 127% 152% 164% 164%
-------- ------------- ------------ -------- --------
-------- ------------- ------------ -------- --------
22
18
MATURING OR REPRICING IN
------------------------------------------------------------
AFTER 3 AFTER 1 YEAR
3 MONTHS MONTHS BUT BUT WITHIN AFTER
OR LESS WITHIN 1 YEAR 5 YEARS 5 YEARS TOTAL
-------- ------------- ------------ ------- --------
DOLLARS IN MILLIONS
DECEMBER 31, 1992
Rate-sensitive assets:
Interest-bearing deposits in other banks................. $ 15.0 $ -- $ -- $ -- $ 15.0
Loans.................................................... 1,680.3 78.8 130.3 25.5 1,914.9
Taxable investment securities............................ 62.7 140.7 177.2 33.0 413.6
Securities available for sale............................ 2.7 17.1 9.8 .7 30.3
Trading account securities............................... 10.2 -- -- -- 10.2
Federal funds sold and securities purchased under resale
agreements............................................. 468.9 -- -- -- 468.9
-------- ------------- ------------ ------- --------
Total rate-sensitive assets....................... 2,239.8 236.6 317.3 59.2 2,852.9
-------- ------------- ------------ ------- --------
Rate-sensitive liabilities:(1)
Interest checking deposits............................... 349.8 -- -- -- 349.8
Money market accounts.................................... 825.8 -- -- -- 825.8
Savings deposits......................................... 95.7 -- -- -- 95.7
Time deposits............................................ 247.4 91.7 41.3 -- 380.4
Federal funds purchased and securities sold under
repurchase agreements.................................. 339.1 -- -- -- 339.1
Other short-term borrowings.............................. 15.0 -- -- -- 15.0
-------- ------------- ------------ ------- --------
Total rate-sensitive liabilities.................. 1,872.8 91.7 41.3 -- 2,005.8
-------- ------------- ------------ ------- --------
Interest rate sensitivity gap.............................. $ 367.0 $ 144.9 $276.0 $ 59.2 $ 847.1
-------- ------------- ------------ ------- --------
-------- ------------- ------------ ------- --------
Cumulative interest rate sensitivity gap................... $ 367.0 $ 511.9 $787.9 $ 847.1
-------- ------------- ------------ ------- --------
-------- ------------- ------------ ------- --------
Cumulative ratio of rate-sensitive assets to rate-sensitive
liabilities.............................................. 120% 126% 139% 142% 142%
-------- ------------- ------------ ------- --------
-------- ------------- ------------ ------- --------
- ---------------
(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.
23
19
SECURITIES
The carrying amounts of investment securities at the dates indicated are
summarized as follows:
DECEMBER 31,
---------------------
CATEGORY OF INVESTMENT 1993 1992
------------------------------------------------------- -------- --------
DOLLARS IN THOUSANDS
U.S. government and federal agency obligations......... $880,180 $403,973
State and political subdivisions....................... 6,475 --
Other securities....................................... 15,826 9,672
-------- --------
Total........................................ $902,481 $413,645
-------- --------
-------- --------
The following table shows the maturities of investment securities at
December 31, 1993.
OVER 1 YEAR OVER 5 YEARS
ONE YEAR OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL
CATEGORY OF ------------------- ------------------- ------------------ ------------------- -------------------
INVESTMENT AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ------------- -------- -------- -------- -------- ------- -------- -------- -------- -------- --------
DOLLARS IN THOUSANDS
U.S.
government
and federal
agency
obligations...$380,042 4.13% $322,449 4.51% $ 9,989 4.37% $167,700 5.74% $880,180 4.58%
State and
political
subdivisions... 3,624 8.69 2,751 9.10 100 9.72 6,475 8.88
Other
securities... 3,207 4.72 6,287 5.08 500 7.00 5,832 5.88 15,826 5.36
-------- --- -------- --- ------- --- -------- --- -------- ---
Total.... $386,873 4.18% $331,487 4.56% $10,589 4.54% $173,532 5.75% $902,481 4.63%
-------- --- -------- --- ------- --- -------- --- -------- ---
-------- --- -------- --- ------- --- -------- --- -------- ---
- ---------------
(1) Fully taxable equivalent.
Investment securities at year end were up $488.8 million, or 118.2%, from
1992. U.S. government and federal agency obligations increased $476.2 million,
or 117.9%, due to the investment of the Company's excess liquidity in the second
half of 1993 in these securities. State and municipal securities totaled $6.5
million at December 31, 1993 compared with $30.3 million at December 31, 1992,
when these securities were categorized as securities available for sale. Due to
the Company's improved liquidity and profitability, the remaining balance of
state and municipal securities was transferred back to the investment portfolio
during the third quarter of 1993. Other securities increased $6.2 million, or
63.6%, due primarily to purchases of bonds during 1993.
The average maturity of total investment securities was 3.5 years at
December 31, 1993 compared to 2.8 years at the end of 1992. The increase in the
average maturity of the portfolio was largely due to purchases of
mortgage-backed agency securities during the year.
At December 31, 1993, 1992 and 1991, the Company did not have investments
in securities issued by any one nonfederal issuer that exceeded 10% of its
shareholders' equity.
24
20
At December 31, 1993, securities available for sale consisted of $2.0
million of 7.5% convertible preferred stock. At December 31, 1992 securities
available for sale consisted of state and municipal obligations with a carrying
value of $20.4 million in the one year or less maturity category, $9.8 million
in the over one through five years maturity category, and $.1 million in the
over five years through ten years category. The weighted average yields on these
securities, computed on a fully taxable equivalent basis, were 9.94% in the one
year or less maturity category, 8.79% in the over one through five years
maturity category, and 9.72% in the over five through ten years maturity
category.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of December 31, 1993. The impact on
shareholders' equity or the results of operations was not material.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated year ends are shown in
the following table according to the type of loan. The Company's lending
activities are predominantly in Southern California. The Bank has no
agricultural or foreign loans.
Loans by Type
DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
DOLLARS IN THOUSANDS
Commercial(1)........................ $ 939,719 $1,177,948 $1,485,766 $1,746,152 $1,573,419
Real estate loans -- construction.... 11,699 105,467 322,121 450,271 396,897
Real estate loans -- mortgage(2)..... 623,653 731,234 735,606 784,051 688,817
Installment loans.................... 45,485 60,553 71,708 77,261 78,962
---------- ---------- ---------- ---------- ----------
Total loans, gross......... $1,620,556 $2,075,202 $2,615,201 $3,057,735 $2,738,095
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ---------------
(1) Commercial included unsecured loans to real estate developers and customers
involved in real estate investments and commercial loans where real estate
partially secures the borrowing.
(2) Equity lines of credit totaling $157,913 designated as held for sale at
December 31, 1992, were included in real estate loans -- mortgage.
Gross loans at December 31, 1993 were $1,620.6 million, down 21.9%, or
$454.6 million, from the previous year end. The decrease in loans resulted
from a decline in loan demand because of the recession and the Bank's efforts to
achieve a more conservative and diversified risk profile in its loan portfolio.
Commercial loans continue to constitute the major portion of the Bank's lending
activity, 58.0% and 56.8% at 1993 and 1992 year ends, respectively. Real estate
construction loans decreased $93.8 million, or 88.9%, between year ends because
of the transfer of certain construction loans to the real estate mortgage
category after completion of construction and because the Bank curtailed new
construction lending beginning in late 1990. Real estate mortgage loans
decreased $107.6 million, or 14.7%, primarily due to the sale of $73.7 million
of ELC loans in April 1993.
At December 31, 1993, 85.7% of commercial loans, 81.7% of real estate loans
and 13.1% of installment loans outstanding were floating interest rate loans.
Floating rate loans comprised 82.1% of the total loan portfolio at December 31,
1993. Total loans at December 31, 1993 were comprised of 62.9% due in one year
or less, 33.1% due in over one through five years and 4.0% due after 5 years.
25
21
Loan Maturities
DECEMBER 31, 1993
---------------------------------------------------------------------
REAL ESTATE-- REAL ESTATE--
COMMERCIAL CONSTRUCTION MORTGAGE INSTALLMENT TOTAL
---------- ------------- ------------- ----------- ----------
DOLLARS IN THOUSANDS
Aggregate maturities of loan
balances due:
In one year or less
Interest rates -- floating........ $657,047 $ 6,217 $ 223,658 $ 5,485 $ 892,407
Interest rates -- fixed........... 97,233 1,361 16,551 11,641 126,786
After one year but within five years
Interest rates -- floating........ 132,800 4,121 256,460 338 393,719
Interest rates -- fixed........... 35,022 -- 91,148 16,283 142,453
After five years
Interest rates -- floating........ 15,166 -- 28,470 143 43,779
Interest rates -- fixed........... 2,451 -- 7,366 11,595 21,412
---------- ------------- ------------- ----------- ----------
Total..................... $939,719 $11,699 $ 623,653 $45,485 $1,620,556
---------- ------------- ------------- ----------- ----------
---------- ------------- ------------- ----------- ----------
The loan maturities shown in the table above are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Bank and
the borrower. In addition, the Bank has preapproved up to four renewal options
of two to five years for loans comprising approximately 15% of real estate
mortgage loans. These renewal options provided for interest at specified spreads
over applicable two-, three-or five-year U.S. Treasury securities, fixed for the
term of the renewal. Renewal options are cancelled if the borrower is in default
under the terms of the loan agreement. Because the Bank is unable to estimate
the extent to which its borrowers will exercise their preapproved renewal
options, the table is based on contractual maturities excluding renewal options.
Credit Risk Management
The Company assesses and manages credit risk on an ongoing basis through
diversification, lending limits, credit review and approval policies and
internal monitoring. As part of the control process, an independent credit
review function regularly examines the Company's loan portfolio. In addition to
this internal credit process, the Company's loan portfolio is subject to
examination by external regulators in the normal course of business. Credit
quality will be influenced by underlying trends in the economic and business
cycle. The Company seeks to manage and control its risk through diversification
of the portfolio by type of loan, industry concentration and type of borrower.
The Company has taken, and continues to take, steps intended to address the
Bank's lending policies and procedures, improve the internal loan approval,
review and classification processes and increase the accountability of lending
personnel at all levels.
Real Estate Lending
The Company engages in real estate lending in the form of construction
loans and permanent loans secured by deeds of trust. Management believes that
the Southern California real estate market is currently undergoing the most
difficult real estate cycle since the end of World War II, and, accordingly,
this portfolio continues to be monitored closely.
At year-end 1993, real estate loans totaled $635.4 million, or 39.2% of
total loans, compared with 40.3% and 40.4% at year-end 1992 and 1991. Real
estate loans decreased 20.9% from 1991 to 1992 and 24.1% from 1992 to 1993. In
addition to real estate outstandings, the Company had open but unused
commitments, excluding those under ELC loans to lend against real estate at
December 31, 1993, of $7.5 million, down from $15.9 million at December 31,
1992. Such commitments, a portion of which typically expires unused, reflected
diversification by project type comparable with that of related outstandings.
26
22
On January 17, 1994 and during the days thereafter, Los Angeles, California
was struck by a series of strong earthquakes. The Bank is currently in the
process of accumulating data on the collateral securing its loans in the
affected areas. Based on the information currently available, the Bank does not
believe earthquake related losses, including those related to its facilities,
will be material to the Bank's financial condition.
REAL ESTATE CONSTRUCTION LOANS BY TYPE
DECEMBER 31
---------------------
1993 1992
-------- --------
DOLLARS IN THOUSANDS
Condo/apartment........................................ $ -- $ 19,517
Shopping centers....................................... -- 30,690
1 -- 4 family (includes land).......................... 594 12,900
Office building........................................ 7,282 24,129
Industrial............................................. -- 7,140
Other.................................................. 3,823 11,091
-------- --------
$ 11,699 $105,467
-------- --------
-------- --------
REAL ESTATE MORTGAGE LOANS BY TYPE
DECEMBER 31
---------------------
1993 1992
-------- --------
DOLLARS IN THOUSANDS
Equity lines of credit................................. $ 47,279 $157,913
Industrial............................................. 123,594 152,439
Office building........................................ 110,183 112,486
Shopping centers....................................... 68,236 66,307
Other 1 -- 4 family.................................... 37,347 55,945
Condo/apartment........................................ 54,040 49,885
Land, nonresidential................................... 32,885 36,870
Other.................................................. 150,089 99,389
-------- --------
$623,653 $731,234
-------- --------
-------- --------
The Bank's exposure to real estate construction loans has declined
significantly. During 1994, the Bank plans to re-enter the construction loan
market on a limited basis.
The decrease in real estate mortgage loans between 1992 and 1993 was
primarily due to the $110.6 million decrease in ELC loans, which resulted from
sale of $73.7 million of ELC loans in April 1993 in addition to pay downs and
refinancings. Included in the Other category are loans totaling $56.0 million
that resulted from the financing of the sale of the assets in the Disposition
Program. Management believes that these loans do not pose risks significantly
greater than the Bank's existing real estate mortgage loan portfolio.
Nonaccrual real estate loans totaled $48.0 million, or 7.56% of related
loans outstanding, at December 31, 1993, down from $96.3 million, or 11.5% of
related loans outstanding at December 31, 1992, and from $82.0 million, or 7.8%,
at December 31, 1991. The decrease in nonaccrual real estate loans at December
31, 1993 compared with the two prior year ends is due to the sale of
nonperforming loans as part of the Disposition Program and the decrease in the
amount of loans placed on nonaccrual status in 1993.
Real estate net credit losses in 1993 totaled $25.5 million, or 3.74% of
related average outstandings, and represented 47.2% of total 1993 net credit
losses. Real estate net credit losses in 1992 totaled $20.4 million, or 2.18% of
related average outstandings.
27
23
RISK ELEMENTS
Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning nonaccrual loans, ORE,
accruing loans that are contractually past due 90 days or more as to interest or
principal payments and still accruing, and restructured loans:
DECEMBER 31
-------------------------------------------------
1993 1992 1991 1990 1989
------- -------- -------- ------- -------
DOLLARS IN THOUSANDS
Nonaccrual loans:
Real estate construction....................... $ -- $ 21,219 $ 51,455 $ -- $ --
Real estate mortgage........................... 48,016 75,128 30,522 22,639 578
Commercial..................................... 23,040 63,592 69,799 45,451 11,290
Installment.................................... -- 360 779 318 3,942
------- -------- -------- ------- -------
Total..................................... 71,056 160,299 152,555 68,408 15,810
ORE............................................ 5,559 94,065 64,510 2,130 --
------- -------- -------- ------- -------
Total nonaccrual loans and ORE................. $76,615 $254,364 $217,065 $70,538 $15,810
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Total nonaccrual loans as a percentage of total 4.38% 7.72% 5.83% 2.24% .58%
loans........................................
Total nonaccrual loans and ORE as a percentage 4.71 11.73 8.10 2.31 .58
of total loans and ORE.......................
Allowance for credit losses to nonaccrual 155.51 84.90 82.44 87.83 231.59
loans........................................
Assets held for accelerated disposition........ $17,450 $ -- $ -- $ -- $ --
------- -------- -------- ------- -------
------- -------- -------- ------- -------
In-substance foreclosures -- intangible $ 4,740 $ 7,362 $ 8,734 $ -- $ --
assets.......................................
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Loans past due 90 days or more on accrual
status:
Real estate.................................... $17,412 $ 25,458 $ 42,956 $17,079 $17,241
Commercial..................................... 11,382 1,464 26,492 16,798 21,790
Installment.................................... 155 36 3,587 491 3,099
------- -------- -------- ------- -------
Total..................................... $28,949 $ 26,958 $ 73,035 $34,368 $42,130
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Restructured loans:
On accrual status.............................. $ 958 $ 1,144 $ -- $ -- $ 691
On nonaccrual status........................... -- -- -- 8,210 7,555
------- -------- -------- ------- -------
Total..................................... $ 958 $ 1,144 $ -- $ 8,210 $ 8,246
------- -------- -------- ------- -------
------- -------- -------- ------- -------
28
24
The table below summarizes the approximate changes in nonaccrual loans for
the years ended December 31, 1993 and 1992.
YEAR ENDED DECEMBER
31
---------------------
1993 1992
-------- --------
DOLLARS IN THOUSANDS
Balance, beginning of year............................. $160,299 $152,555
Loans placed on nonaccrual............................. 105,695 262,273
Charge offs............................................ (66,834) (96,603)
Loans returned to accrual status....................... (43,052) (43,181)
Repayments (including interest applied to principal)... (56,462) (52,978)
Transfers to ORE....................................... (13,892) (60,735)
Transfers to assets held for accelerated disposition,
net.................................................. (14,698) --
Transfers to in-substance foreclosures -- intangible
assets............................................... -- (1,032)
-------- --------
Balance, end of year................................... $ 71,056 $160,299
-------- --------
-------- --------
The additional interest income that would have been recorded from
nonaccrual loans if the loans had not been on nonaccrual status was $8.5
million, $12.6 million and $12.3 million for the years ended December 31, 1993,
1992 and 1991, respectively. Interest payments received on nonaccrual loans are
applied to principal unless there is no doubt as to ultimate full repayment of
principal, in which case, the interest payment is recognized as interest income.
Interest income includes $3.9 million, $3.2 million and $5.1 million for the
years ended December 31, 1993, 1992, and 1991, respectively, from collection of
interest related to nonaccrual loans. Interest income not recognized on
nonaccrual loans reduced the net interest margin by 33, 36, and 30 basis points
for the years ended December 31, 1993, 1992, and 1991, respectively.
It is the Bank's policy that a loan will be placed on nonaccrual status if
either principal or interest payments are past due in excess of 90 days unless
the loan is both well secured and in process of collection, or if full
collection of interest or principal becomes uncertain, regardless of the time
period involved.
At December 31, 1993, in addition to loans disclosed above as past due,
nonaccrual or restructured, management also identified $40.0 million of loans
about which it had serious doubts as to the ability of the borrowers to comply
with the present loan payment terms in the future. This amount was determined
based on analysis of information known to management about the borrower's
financial condition and current and expected economic conditions. Unfunded loan
commitments pertaining to these potential problem loans total $1.5 million. If
economic conditions change, adversely or otherwise, or if additional facts on
borrowers' financial condition come to light, then the amount of such potential
problem loans may change, possibly significantly. Estimated potential losses
from these potential problem loans have been provided for in determining the
allowance for credit losses.
At December 31, 1993, the allowance for credit losses was 6.82% of gross
loans, compared with 6.56% at December 31, 1992. The allowance at December 31,
1993 was equal to 155.51% of total nonaccrual loans, as compared with 84.90% at
December 31, 1992.
29
25
The following table summarizes average loans outstanding at year end and
changes in the allowance for credit losses for the five-year period 1989 to
1993.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
DOLLARS IN THOUSANDS
Average amount of loans
outstanding................ $1,737,401 $2,315,285 $2,852,311 $2,875,154 $2,527,224
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Balance of allowance for
credit losses, beginning of
year....................... $ 136,095 $ 125,766 $ 60,083 $ 36,615 $ 28,522
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial loans........... 56,012 97,751 47,600 21,707 10,020
Real estate loans --
construction............ 3,183 11,321 6,219 1,000 --
Real estate
loans -- mortgage....... 23,149 9,209 3,212 -- --
Installment loans.......... 621 1,460 779 668 1,993
---------- ---------- ---------- ---------- ----------
Total loans charged
off................... 82,965 119,741 57,810 23,375 12,013
---------- ---------- ---------- ---------- ----------
Recoveries of loans
previously charged off:
Commercial loans........... 27,842 15,243 5,242 3,727 2,346
Real estate loans --
construction............ 20 167 20 -- --
Real estate
loans -- mortgage....... 767 6 98 -- 1,300
Installment loans.......... 215 154 133 116 1,314
---------- ---------- ---------- ---------- ----------
Total recoveries........ 28,844 15,570 5,493 3,843 4,960
---------- ---------- ---------- ---------- ----------
Net loans charged off........ 54,121 104,171 52,317 19,532 7,053
Additions to allowance
charged to operating
expense.................... 30,000 114,500 118,000 43,000 15,146
Other(1)..................... (1,475) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, end of year......... $ 110,499 $ 136,095 $ 125,766 $ 60,083 $ 36,615
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge offs to
average loans.............. 3.12% 4.50% 1.83% .68% .28%
- ---------------
(1) Allowance for credit losses allocated to $73.7 million of ELC loans sold in
April 1993.
The following table reflects management's allocation of the allowance for
credit losses by loan category and the ratio of loans in each category to total
loans at December 31 for each of the last five years.
ALLOWANCE AMOUNT PERCENT OF LOANS TO TOTAL LOANS
-------------------------------------------------- --------------------------------
1993 1992 1991 1990 1989 1993 1992 1991 1990 1989
-------- -------- -------- ------- ------- ---- ---- ---- ---- ----
DOLLARS IN THOUSANDS
Commercial............................. $ 53,110 $ 72,029 $ 77,780 $45,933 $33,060 58% 57% 57% 57% 57%
Real estate -- construction............ 1,410 10,500 24,926 8,000 804 1 5 12 15 15
Real estate -- mortgage................ 55,120 52,323 21,560 4,700 1,307 38 35 28 26 25
Installment............................ 859 1,243 1,500 1,450 1,444 3 3 3 2 3
-------- -------- -------- ------- ------- ---- ---- ---- ---- ----
Total.............................. $110,499 $136,095 $125,766 $60,083 $36,615 100% 100% 100% 100% 100%
-------- -------- -------- ------- ------- ---- ---- ---- ---- ----
-------- -------- -------- ------- ------- ---- ---- ---- ---- ----
The allowance allocated to the loan categories shown above is based on
previous loan loss experience, management's evaluation of the current loan
portfolio, and anticipated economic conditions. While amounts are allocated to
specific loans and to portfolio segments, the allowance is general in nature and
is available for the portfolio in its entirety.
30
26
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 is
effective January 1, 1995; earlier implementation is encouraged.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Once a loan is determined to be impaired, SFAS No. 114 requires that
the impairment be measured based on the present value of the expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the impairment may be measured by using the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
If the measurement of the impaired loan is less than the recorded amount of
the loan, an impairment will be recognized by creating a valuation allowance
with a corresponding charge to the provision for credit losses or by adjusting
an existing valuation allowance for the impaired loan with a corresponding
charge or credit to the provision for credit losses.
The change in estimated present value of the expected future cash flows is
to be reported in future periods either entirely as an adjustment to the
provision for credit losses or by separately increasing interest income for the
amount of the present value change attributable to the passage of time. For
impaired loans that are measured by using an observable market price or the fair
value of collateral, the change, if any, in market price or fair value is to be
reported in future periods as an adjustment of the valuation allowance and,
correspondingly, the provision for credit losses.
The Company has not yet determined when it will implement SFAS No. 114, but
believes that adoption of SFAS No. 114 will not have a material impact on its
results of operations or shareholders' equity.
Other Real Estate
The Company's ORE totaled $5.6 million at year end 1993, down from $94.1
million a year ago, and $64.5 million at December 31, 1991. The decrease in ORE
resulted from the transfer of $91.1 million of ORE during 1993 to the
Disposition Program. The Company's policy is to record these properties at the
estimated fair value, net of selling expenses, at the time they are transferred
into ORE, thereby tying future gains or losses from sale or potential additional
writedowns to underlying changes in the market. The fair value of the ORE is
based on a current appraisal. As a result of writedowns, including the $36.5
million taken upon adoption of the Disposition Program in March 1993, net costs
of other real estate totaled $25.7 million in 1993, up from $20.8 million in
1992 and $2.5 million in 1991. Net ORE expense for 1993 included a $12.8 million
gain recorded in the fourth quarter upon the sale of a portion of the assets in
the Disposition Program.
ORE BY TYPE
DECEMBER 31
--------------------
1993 1992
------ -------
DOLLARS IN THOUSANDS
Shopping centers........................................ $ -- $24,835
Industrial.............................................. -- 17,545
1 -- 4 family........................................... 1,938 15,662
Land (excluding 1 -- 4 family).......................... 3,200 14,941
Apartments.............................................. -- 8,553
Office buildings........................................ -- 5,962
Other................................................... 421 6,567
------ -------
Total................................................. $5,559 $94,065
------ -------
------ -------
31
27
The following table summarizes the changes in ORE balances:
YEAR ENDED DECEMBER
31
---------------------
1993 1992
------- -------
DOLLARS IN THOUSANDS
Balance, beginning of year............................................. $94,065 $64,510
Additions.............................................................. 17,298 72,813
Sales.................................................................. (5,639) (16,037)
Writedowns............................................................. (40,283) (18,388)
Payments and other reductions.......................................... (5,496) (8,833)
Transfers to assets held for accelerated disposition, net.............. (54,386) --
------- -------
Balance, end of year................................................... $ 5,559 $94,065
------- -------
------- -------
Assets Held for Accelerated Disposition
In March 1993, the Bank adopted an accelerated asset disposition program to
aggressively dispose of ORE and certain problem loans with an aggregate book
value before the Disposition Program of $119.5 million.
The Bank signed a definitive agreement to sell, as of November 1, 1993, all
six asset pools in its Accelerated Asset Disposition Program to WHC-THREE
Investors, L.P. ("WHC-THREE"), a limited partnership. The sale of the loans
contained in the Disposition Program for $48.3 million closed concurrently with
the signing of the definitive agreement and a gain of $12.8 million was
recognized at that time, net of disposition expenses and reserves. The sale of
the Disposition Program ORE, which is carried at $17.5 million at December 31,
1993, is expected to close in the first part of 1994 at which time a pretax gain
of approximately $3.5 million is expected to be recognized. From November 17,
1993 until closing, WHC-THREE has provided interim mortgages totaling $26.3
million which will be cancelled in exchange for title to the ORE properties at
the closing of the sale of these properties.
The Bank provided loans totaling $56.0 million (75% financing) for this
sale at terms comparable with other real estate loans in its portfolio. The
terms of the notes require annual pay downs and payment of the remaining
principal in five years, in addition to payments when individual real estate
assets securing the loans are sold or refinanced.
DEPOSITS
Maturity distribution of time deposits of $100,000 or more at December 31,
1993 is as follows:
PUBLIC
TIME CERTIFICATES
DEPOSITS OF DEPOSITS TOTAL
-------- ------------- ---------
DOLLARS IN THOUSANDS
Under 3 months.............................................. $1,400 $ 113,565 $ 114,965
3 to 6 months............................................... -- 24,338 24,338
6 to 12 months.............................................. 120 15,026 15,146
Over 12 months.............................................. -- 13,984 13,984
-------- ------------- ---------
Total.................................................. $1,520 $ 166,913 $ 168,433
-------- ------------- ---------
-------- ------------- ---------
Deposits
At December 31, 1993 and 1992, the aggregate amount of deposits by foreign
depositors in domestic offices totaled approximately $27.0 million and $33.0
million, respectively, the majority of which was interest bearing. The Bank had
no brokered deposits at December 31, 1993 or 1992.
32
28
SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings and weighted average
rates.
1993 1992 1991
--------------------------------- -------------------------------- --------------------------------
BALANCE AT AVERAGE AVERAGE BALANCE AT AVERAGE AVERAGE BALANCE AT AVERAGE AVERAGE
YEAR END BALANCE RATE YEAR END BALANCE RATE YEAR END BALANCE RATE
----------- -------- -------- ----------- -------- ------- ----------- -------- -------
DOLLARS IN THOUSANDS
Federal funds purchased
and securities sold
under repurchase
agreements............ $ 202,459 $265,082 2.83% $ 339,149 $488,520 3.32% $ 579,326 $531,590 5.37%
Other short-term
borrowings............ 15,000 14,000 3.17 15,000 14,279 3.66 15,000 14,561 5.96
The maximum amount of federal funds purchased and securities sold with
agreements to repurchase at any month end was $422,964, $622,308 and $679,862 in
1993, 1992 and 1991.
The maximum amount of other short-term borrowings at any month end was
$15,000 during the three years ended December 31, 1993, 1992 and 1991.
MARKET DATA ON SHARES OF COMMON STOCK
Principal Market: NYSE
Stock Symbol: CYN
1993 1992
-------------- --------------
TRADING PRICES TRADING PRICES
-------------- --------------
First quarter................................. Hi 11 1/8 Hi 15 1/8
Lo 6 5/8 Lo 11 1/2
Second quarter................................ Hi 10 1/2 Hi 13 1/4
Lo 6 5/8 Lo 10 7/8
Third quarter................................. Hi 8 3/4 Hi 12
Lo 6 5/8 Lo 6 3/8
Fourth quarter................................ Hi 8 3/8 Hi 8 3/8
Lo 7 1/8 Lo 4 3/4
Market prices based on the sales prices during quarter as reported in The Wall
Street Journal.
The number of shareholders of record as of December 31, 1993 was 2,629.
No dividends were declared in 1993 or 1992.
FORM 10-K
For shareholders and others interested in information beyond that shown in
this report, the Company's Annual Report on Form 10-K for 1993, required to be
filed with the Securities and Exchange Commission, may be obtained without
charge by writing to:
Heng Chen, Senior Vice President
Finance Division, City National Bank
400 North Roxbury Drive,
Beverly Hills, CA 90210.
33
29
QUARTERLY OPERATING RESULTS
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- -------- ------------ ------------ ---------
DOLLARS IN THOUSANDS
1993
Interest income
From loans.................................... $ 36,118 $ 32,489 $ 30,528 $ 32,015 $ 131,150
From investments.............................. 8,451 8,211 10,072 11,908 38,642
-------- -------- ------------ ------------ ---------
44,569 40,700 40,600 43,923 169,792
Interest expense................................ (12,122) (10,320) (9,965) (9,589) (41,996)
-------- -------- ------------ ------------ ---------
Net interest income............................. 32,447 30,380 30,635 34,334 127,796
Provision for credit losses..................... (11,500) (7,500) (5,500) (5,500) (30,000)
-------- -------- ------------ ------------ ---------
Net interest income after provision for credit
losses........................................ 20,947 22,880 25,135 28,834 97,796
Noninterest income.............................. 11,679 14,559 10,307 9,265 45,810
Noninterest expense............................. (72,763) (32,134) (30,430) (31,573) (166,900)
-------- -------- ------------ ------------ ---------
Income (loss) before taxes from continuing
operations.................................... (40,137) 5,305 5,012 6,526 (23,294)
Income taxes (benefit).......................... (14,283) 1,543 1,537 1,943 (9,260)
-------- -------- ------------ ------------ ---------
Income (loss) from continuing operations........ (25,854) 3,762 3,475 4,583 (14,034)
Income from discontinued operations............. -- 7,128 -- -- 7,128
-------- -------- ------------ ------------ ---------
Net income (loss)............................... $(25,854) $ 10,890 $ 3,475 $ 4,583 $ (6,906)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
Income (loss) per share from continuing
operations.................................... $ (.80) $ .11 $ .08 $ .10 $ (.35)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
Net income (loss) per share(1).................. $ (.80) $ .30 $ .08 $ .10 $ (.17)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
- ---------------
(1) Because of the higher number of shares outstanding due to the Offering, the
net loss per share for 1993 does not equal the sum of the net income (loss)
per share for each of the quarters.
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- -------- ------------ ------------ ---------
DOLLARS IN THOUSANDS
1992
Interest income
From loans.................................... $ 49,579 $ 45,513 $ 41,446 $ 38,644 $ 175,182
From investments.............................. 16,512 16,045 14,428 10,882 57,867
-------- -------- ------------ ------------ ---------
66,091 61,558 55,874 49,526 233,049
Interest expense................................ (26,219) (23,476) (19,913) (14,825) (84,433)
-------- -------- ------------ ------------ ---------
Net interest income............................. 39,872 38,082 35,961 34,701 148,616
Provision for credit losses..................... (4,500) (95,000) (7,500) (7,500) (114,500)
-------- -------- ------------ ------------ ---------
Net interest income after provision for credit
losses........................................ 35,372 (56,918) 28,461 27,201 34,116
Noninterest income.............................. 10,954 11,493 11,370 13,177 46,994
Noninterest expense............................. (39,795) (49,568) (44,226) (40,123) (173,712)
-------- -------- ------------ ------------ ---------
Income (loss) before taxes from continuing
operations.................................... 6,531 (94,993) (4,395) 255 (92,602)
Income taxes (benefit).......................... 2,014 (32,146) (1,824) (494) (32,450)
-------- -------- ------------ ------------ ---------
Income (loss) from continuing operations........ 4,517 (62,847) (2,571) 749 (60,152)
Income from discontinued operations............. 189 235 241 139 804
-------- -------- ------------ ------------ ---------
Net income (loss)............................... $ 4,706 $(62,612) $ (2,330) $ 888 $ (59,348)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
Income (loss) per share from continuing
operations.................................... $ .14 $ (1.95) $ (.08) $ .02 $ (1.87)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
Net income (loss) per share..................... $ .14 $ (1.94) $ (.07) $ .03 $ (1.84)
-------- -------- ------------ ------------ ---------
-------- -------- ------------ ------------ ---------
34
30
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions, and that the financial statements
reasonably present the Company's financial position and results of operations in
conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgments that it believes are reasonable under the circumstances.
The independent auditors audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Corporation has an Audit Committee composed
solely of three nonmanagement Directors. The Committee meets periodically with
financial management, the internal auditors and the independent auditors to
review accounting, control, auditing and financial reporting matters.
Bram Goldsmith Frank P. Pekny
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick
To the Board of Directors and Shareholders of
City National Corporation:
We have audited the accompanying consolidated balance sheet of City
National Corporation and subsidiaries as of December 31, 1993, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of City National Corporation and subsidiaries
for the year ended December 31, 1992 and for each of the years in the two-year
period ended December 31, 1992, were audited by other auditors whose report
dated January 13, 1993 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurances about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1993 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of City
National Corporation and subsidiaries at December 31, 1993 and the results of
their operations and their cash flows for the year ended December 31, 1993 in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3, the Company changed its method of accounting
for investments as of December 31, 1993 to adopt the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." As
discussed in Notes 1 and 9, the Company changed its method of accounting for
income taxes as of January 1, 1993 to adopt the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
KPMG PEAT MARWICK
Los Angeles, California
January 21, 1994
35
31
CONSOLIDATED BALANCE SHEET
DECEMBER 31
-------------------------
1993 1992
---------- ----------
DOLLARS IN THOUSANDS
ASSETS
Cash and due from banks............................................. $ 234,504 $ 390,967
Interest-bearing deposits in other banks............................ 649 14,956
Federal funds sold and securities purchased under resale
agreements........................................................ 265,000 468,850
Investment securities (market value $902,738 in 1993 and $420,367 in
1992)............................................................. 902,481 413,645
Securities available for sale (market value $2,000 in 1993 and
$30,662 in 1992).................................................. 2,000 30,277
Trading account securities.......................................... 39,765 10,258
Loans............................................................... 1,620,556 2,075,202
Less allowance for credit losses.................................... (110,499) (136,095)
---------- ----------
Net loans......................................................... 1,510,057 1,939,107
Leveraged leases.................................................... 13,852 14,365
Premises and equipment, net......................................... 20,359 23,519
Customers' acceptance liability..................................... 5,150 7,020
Other real estate................................................... 5,559 94,065
Deferred tax asset.................................................. 18,050 37,120
Assets held for accelerated disposition............................. 17,450 --
Other assets........................................................ 65,750 69,953
---------- ----------
Total assets...................................................... $3,100,626 $3,514,102
---------- ----------
---------- ----------
LIABILITIES
Demand deposits..................................................... $1,088,026 $1,259,590
Interest checking deposits.......................................... 324,034 349,803
Money market deposits............................................... 742,381 825,824
Savings deposits.................................................... 107,221 95,705
Time deposits -- under $100,000..................................... 96,672 119,082
Time deposits -- $100,000 and over.................................. 168,433 261,272
---------- ----------
Total deposits.................................................... 2,526,767 2,911,276
---------- ----------
Federal funds purchased and securities sold under repurchase
agreements........................................................ 202,459 339,149
Other short-term borrowings......................................... 15,000 15,000
Mortgages payable................................................... 26,319 --
Other liabilities................................................... 26,857 13,713
Acceptances outstanding............................................. 5,150 7,020
---------- ----------
Total liabilities................................................. 2,802,552 3,286,158
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, authorized -- 5,000,000 shares in 1993, none
outstanding....................................................... --
Common Stock, par value $1.00, authorized -- 75,000,000 shares in
1993 and 50,000,000 shares in 1992................................
Outstanding -- 45,027,417 shares in 1993 and 32,239,714 shares in
1992.............................................................. 45,027 32,240
Additional paid in capital.......................................... 262,471 198,222
Accumulated deficit................................................. (9,424) (2,518)
---------- ----------
Total shareholders' equity........................................ 298,074 227,944
---------- ----------
Total liabilities and shareholders' equity........................ $3,100,626 $3,514,102
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Financial Statements.
36
32
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
------------------------------------
1993 1992 1991
---------- ---------- ----------
DOLLARS IN THOUSANDS
INTEREST INCOME
Interest and fees on loans......................................... $ 131,150 $ 175,182 $ 273,628
Interest on interest-bearing deposits in other banks............... 30 67 297
Interest on federal funds sold and securities purchased under
resale agreements................................................ 9,357 19,592 33,450
Interest on investment securities:
U.S. treasury and federal agency securities...................... 26,190 30,127 38,982
Municipal securities............................................. 122 5,488 8,367
Other securities................................................. 783 941 2,428
Interest on securities available for sale.......................... 1,001 74 --
Interest on trading account........................................ 1,159 1,578 3,682
---------- ---------- ----------
Total.......................................................... 169,792 233,049 360,834
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits............................................... 33,974 67,690 150,901
Interest on federal funds purchased and securities sold under
repurchase agreements............................................ 7,499 16,220 28,550
Interest on other short-term borrowings............................ 523 523 868
---------- ---------- ----------
Total.......................................................... 41,996 84,433 180,319
---------- ---------- ----------
Net interest income................................................ 127,796 148,616 180,515
Provision for credit losses........................................ 30,000 114,500 118,000
---------- ---------- ----------
Net interest income after provision for credit losses.............. 97,796 34,116 62,515
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts................................ 11,570 10,618 9,305
Trust fees......................................................... 7,390 7,480 7,087
Customer trading account income.................................... 6,288 6,439 5,141
Credit card merchant fees.......................................... -- 4,537 4,142
Gain on sale of selected ELC loans................................. 4,460 -- --
Gain on sale of merchant draft business............................ 1,941 -- --
Net gain on securities available for sale.......................... -- 1,629 --
All other income................................................... 14,161 16,291 17,657
---------- ---------- ----------
Total.......................................................... 45,810 46,994 43,332
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and other employee benefits............................... 69,783 83,563 83,211
Net occupancy of premises.......................................... 11,828 11,546 11,286
Data processing.................................................... 7,757 8,007 7,857
Professional....................................................... 7,348 8,437 7,921
FDIC insurance..................................................... 7,202 7,504 7,867
Office supplies.................................................... 4,994 5,951 6,122
Depreciation....................................................... 4,516 4,725 4,883
Equipment.......................................................... 1,996 2,283 2,674
Promotion.......................................................... 1,900 3,012 3,598
Other operating.................................................... 11,902 17,859 12,883
Consolidation charge............................................... 12,000 -- --
ORE................................................................ 25,674 20,825 2,548
---------- ---------- ----------
Total.......................................................... 166,900 173,712 150,850
---------- ---------- ----------
Loss from continuing operations before taxes....................... (23,294) (92,602) (45,003)
Income taxes (benefit)............................................. (9,260) (32,450) (22,387)
---------- ---------- ----------
Loss from continuing operations.................................... (14,034) (60,152) (22,616)
Income from discontinued operations................................ 7,128 804 1,396
---------- ---------- ----------
Net loss........................................................... $ (6,906) $ (59,348) (21,220)
---------- ---------- ----------
---------- ---------- ----------
Loss per share from continuing operations............................ $ (.35) $ (1.87) $ (.70)
---------- ---------- ----------
---------- ---------- ----------
Loss per share..................................................... $ (.17) $ (1.84) $ (.66)
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute loss per share.............................. 39,580,069 32,239,714 32,214,230
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
37
33
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
---------------------------------------
1993 1992 1991
--------- ---------- ----------
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................... $ (6,906) $ (59,348) $ (21,220)
Adjustments to net loss:
Provision for credit losses.................................. 30,000 114,500 118,000
Writedown on ORE............................................. 40,283 18,388 1,531
(Gain)/loss on sales of ORE and disposition program.......... (15,568) (365) 352
Depreciation................................................. 4,516 4,725 4,883
Net (increase) decrease in trading account securities........ (29,507) 102,029 (579)
Net (increase) decrease in deferred tax benefits............. 19,070 (3,972) (31,380)
Increase (decrease) in accrued liabilities, net.............. 11,879 2,734 58
Other, net................................................... (5,287) (17,170) (6,612)
--------- ---------- ----------
Net cash provided by operating activities.................... 48,480 161,521 65,033
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in short-term investments......................... 14,307 15,044 20,001
Securities sold................................................ -- 34,615 4,395
Maturities of investment securities............................ 230,357 522,641 424,872
Maturities of securities available for sale.................... 18,928 -- --
Purchase of investment securities.............................. (711,798) (271,608) (533,986)
Loan originations and principal collections, net............... 354,191 363,017 322,043
Proceeds from sales of ORE and disposition program assets...... 41,639 16,402 3,928
Proceeds from sales of loans................................... 76,684 -- --
Other, net..................................................... 9,450 11,647 (3,327)
--------- ---------- ----------
Net cash provided by (used in) investing activities..... 33,758 691,758 237,926
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements.................. (136,690) (240,177) 91,057
Net decrease in deposits....................................... (384,509) (752,943) (437,879)
Proceeds from issuance of stock................................ 76,989 -- --
Cash dividends paid............................................ -- -- (15,434)
Other, net..................................................... 1,659 (1,963) (1,142)
--------- ---------- ----------
Net cash provided by (used in) financing activities..... (442,551) (995,083) (363,398)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........... (360,313) (141,804) (60,439)
Cash and cash equivalents at beginning of year................. 859,817 1,001,621 1,062,060
--------- ---------- ----------
Cash and cash equivalents at end of year................ $ 499,504 $ 859,817 $1,001,621
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest..................................................... $ 42,771 $ 88,700 $ 184,400
Income taxes................................................. (30,018) (6,909) 20,000
Noncash investing activities:
Transfer from loans to foreclosed assets..................... 28,590 72,813 68,191
Transfers from (to) investment securities to/from securities
available for sale......................................... (8,201) 30,277 --
Loan to facilitate sale of disposition program assets........ 55,955 -- --
Noncash financing activities:
Proceeds from mortgages payable................................ 26,319 -- --
--------- ---------- ----------
--------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
38
34
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL
SHARES COMMON PAID IN ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT EQUITY
----------- ------- ---------- ----------- -------------
DOLLARS IN THOUSANDS
Balances, December 31, 1990.............. 32,125,565 $32,126 $ 197,218 $ 88,344 $ 317,688
Net loss................................. -- -- -- (21,220) (21,220)
Stock options exercised.................. 88,665 88 637 -- 725
Tax benefit from stock options........... -- -- 165 -- 165
Cash dividends -- $.32 per share......... --......... -- -- (10,294) (10,294)
----------- ------- ---------- ----------- -------------
Balances, December 31, 1991.............. 32,214,230 32,214 198,020 56,830 287,064
Net loss................................. -- -- -- (59,348) (59,348)
Stock options exercised.................. 25,484 26 164 -- 190
Tax benefit from stock options........... -- -- 38 -- 38
----------- ------- ---------- ----------- -------------
Balances, December 31, 1992.............. 32,239,714 32,240 198,222 (2,518) 227,944
Net loss................................. -- -- -- (6,906) (6,906)
Stock options exercised.................. 70,892 71 417 -- 488
Proceeds from rights offering............ 12,716,811 12,716 63,785 -- 76,501
Tax benefit from stock options........... -- -- 47 -- 47
----------- ------- ---------- ----------- -------------
Balances, December 31, 1993.............. 45,027,417 $45,027 $ 262,471 $ (9,424) $ 298,074
----------- ------- ---------- ----------- -------------
----------- ------- ---------- ----------- -------------
See accompanying Notes to Consolidated Financial Statements.
39
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of City National Corporation (the
Corporation) and of City National Bank (the Bank) and its subsidiaries conform
to generally accepted accounting principles and to prevailing practices within
the banking industry.
Basis of Presentation
The consolidated financial statements of the Company include the accounts
of the Corporation, the Bank (100% owned), and its wholly owned subsidiaries
after elimination of all material intercompany transactions. The Bank also has,
through its subsidiaries, a 32% interest in a real estate partnership. The
Bank's equity in the net income and capital of this partnership is included in
the consolidated financial statements. Certain prior years' data have been
reclassified to conform to current year presentation.
Securities
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires classification of securities as
investment securities, available-for-sale securities or trading account
securities. The Company had previously classified securities as investment
securities (recorded at amortized cost), available-for-sale securities (recorded
at the lower of cost or market) or trading account securities (recorded at
market).
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
available-for-sale securities and recorded at fair value. Unrealized holding
gains or losses for available-for-sale securities are excluded from earnings and
reported as a net amount, after taxes, in a separate component of shareholders'
equity until realized. Customer trading account income consists of fees,
commissions and markups on securities transactions with customers.
Loans
Loans are generally carried at amounts advanced less principal payments
collected and unamortized nonrefundable fees. Interest income is accrued as
earned. Loans held for sale are recorded at the lower of cost or market value.
Loans are placed on nonaccrual status when a loan becomes 90 days past due
as to interest or principal unless the loan is both well secured and in process
of collection. Loans are also placed on nonaccrual status when the full
collection of interest or principal becomes uncertain. When a loan is placed on
nonaccrual status, the accrued and unpaid interest receivable is reversed.
Thereafter, interest collected on the loan is accounted for on the cash or cost
recovery method until it qualifies for return to accrual status. Generally, a
loan may be returned to accrual status when all delinquent principal and
interest is brought current in accordance with the terms of the loan agreement
and certain performance criteria have been met.
Allowance for Credit Losses
The provision for credit losses charged to operations reflects management's
judgment of the adequacy of the allowance for credit losses and is determined
through periodic analytical reviews of the loan portfolio, consideration of the
Bank's loan loss experience, trends in problem loans, concentrations of credit
risk, current and expected future economic conditions as well as the results of
the Company's ongoing examination process and that of its regulators.
Leveraged Leases
Income from leveraged leases is recognized over the terms of the leases
based upon the unrecovered equity investment.
40
36
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed generally on a
straight-line basis over the estimated useful life of each type of asset. Gains
and losses on dispositions are reflected in current operations. Maintenance and
repairs are charged to operating expenses.
Other Real Estate (ORE)
Other real estate is comprised of real estate acquired in satisfaction of
loans and in-substance foreclosures. In-substance foreclosures are properties in
which a borrower with little or no equity in the collateral effectively abandons
control of the property or has no economic interest to continue involvement in
the property. The borrower's ability to rebuild equity, based on current
financial conditions, is considered doubtful. Property acquired by foreclosure
or deed in lieu of foreclosure and properties classified as in-substance
foreclosures are transferred to ORE and are recorded at fair value, less
estimated costs to sell, at the date of transfer of the property constructively
or actually received. The fair value of the ORE property is based upon a current
appraisal. Losses that result from the ongoing periodic valuation of these
properties are charged against ORE expense in the period in which they are
identified. Expenses for holding costs are charged to operations as incurred.
Income Taxes
The Company has adopted SFAS No. 109, "Accounting for Income Taxes," which
mandates the asset and liability method of accounting for deferred taxes
effective January 1, 1993. The Company had previously accounted for deferred
taxes under the deferral method required by Accounting Principles Board (APB)
Opinion 11. Pursuant to the deferral method, which was applied in 1992 and prior
years, deferred income taxes were recognized for income and expense items that
were reported in different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the year of the calculation. Under
the deferral method, deferred taxes were not adjusted for subsequent changes in
tax rates.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of existing differences between financial reporting and tax
reporting basis of assets and liabilities, as well as for operating losses and
tax credit carry forwards, using enacted tax laws and rates. Deferred tax assets
will be reduced through a valuation allowance whenever it becomes more likely
than not that all, or some portion, will not be realized. Deferred income taxes
(benefit) represents the net change in the deferred tax asset or liability
balance during the year. This amount, together with income taxes currently
payable or refundable in the current year, represents the total income taxes
(benefit) for the year.
Income Per Share
Income per share is computed on the basis of the average number of common
shares outstanding during each period plus the common stock equivalents that
would arise from exercise of common stock options in periods when there is a
dilutive effect.
Other
The Corporation and its subsidiaries are on the accrual basis of accounting
for income and expenses. In accordance with the usual practice of banks, assets
and liabilities of individual trust, agency and fiduciary funds have not been
included in the accounts.
Statement of Cash Flows
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. Generally, federal funds are purchased and
sold for one day periods.
Discontinued Operations
In December 1992, the Bank entered into an agreement with Systematics, Inc.
to sell its data processing business, City National Information Services (CNIS).
Accordingly, all income and expenses related to CNIS have been removed from
continuing operations and are now included in the Consolidated Statement of
Operations under the caption "Income from discontinued operations." Prior
periods have been restated. Except where noted, footnote disclosures relate
solely to continuing operations.
41
37
NOTE 2 -- INVESTMENT SECURITIES
The following is a summary of data for the major categories of investment
securities:
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
DECEMBER 31 VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
DOLLARS IN THOUSANDS
1993
U.S. Government and federal agency securities......... $880,180 $ 2,883 $ 2,807 $880,256
State and municipal securities........................ 6,475 182 -- 6,657
Other securities...................................... 15,826 4 5 15,825
-------- ---------- ---------- --------
Total....................................... $902,481 $ 3,069 $ 2,812 $902,738
-------- ---------- ---------- --------
-------- ---------- ---------- --------
1992
U.S. Government and federal agency securities......... $403,973 $ 6,722 $ -- $410,695
Other securities...................................... 9,672 -- -- 9,672
-------- ---------- ---------- --------
Total....................................... $413,645 $ 6,722 $ -- $420,367
-------- ---------- ---------- --------
-------- ---------- ---------- --------
There were no sales of investment securities in 1993. Investment securities
gains (losses) amounted to $1.6 million and none during 1992 and 1991,
respectively.
The carrying values and estimated market values of investment securities at
December 31, 1993, by contractual maturity, are shown below:
CARRYING VALUE MARKET VALUE
-------------- ------------
DOLLARS IN THOUSANDS
Due in one year or less.............................. $386,873 $388,263
Due after one year through five years................ 331,487 331,233
Due after five years through ten years............... 10,589 10,600
Due after ten years.................................. 167,700 166,810
Federal Reserve Bank and other securities............ 5,832 5,832
-------------- ------------
Total...................................... $902,481 $902,738
-------------- ------------
-------------- ------------
Securities totaling $249.4 million at December 31, 1993 were pledged to
secure trust funds, public deposits and for other purposes required or permitted
by law.
NOTE 3 -- SECURITIES AVAILABLE FOR SALE
The Company adopted SFAS No. 115 as of December 31, 1993. The impact on
shareholders' equity or the results of operations was not material. Prior years'
financial statements have not been restated to apply the provisions of SFAS No.
115.
At December 31, 1993, securities available for sale consisted of
convertible preferred stock with a carrying value, which approximates market
value, of $2.0 million. At December 31, 1992, securities available for sale
consisted of state and municipal securities with a carrying value and an
estimated market value of $20.4 million and $20.6 million, respectively, in the
one year or less maturity category, $9.8 million and $9.9 million, respectively,
in the over one through five years maturity category and $.1 million and $.1
million, respectively, in the over five years through ten years category.
42
38
NOTE 4 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of the major categories of loans:
DECEMBER 31
--------------------------
1993 1992
----------- -----------
DOLLARS IN THOUSANDS
Commercial.......................................................... $ 939,719 $ 1,177,948
Real estate -- construction......................................... 11,699 105,467
Real estate -- mortgage............................................. 623,653 573,321
Equity lines of credit, held for sale............................... -- 157,913
Installment......................................................... 45,485 60,553
----------- -----------
Total loans............................................... $ 1,620,556 $ 2,075,202
----------- -----------
----------- -----------
Equity lines of credit are carried as loans held for sale at December 31,
1992. In the second quarter of 1993, the Bank sold $73.7 million of ELC loans
and reclassified the remaining balance to real estate mortgage loans due to the
Bank's improved liquidity. At December 31, 1993, ELC loans totaled $47.3
million.
The Company has a significant amount of credit exposure to the commercial
real estate industry, particularly in Southern California.
In the normal course of business, the Bank has loans to officers and
directors as well as loans to companies and individuals affiliated with or
guaranteed by officers and directors of the Corporation and the Bank. These
loans were made in the ordinary course of business at rates and terms no more
favorable than those offered to other customers with a similar credit standing.
The aggregate dollar amounts of these loans were $17.5 million and $40.1 million
(excluding $8.5 million in loans to a director who resigned in 1992), at
December 31, 1993 and 1992, respectively. During 1993, advances and repayments
totaled $1.0 million and $8.4 million, respectively. In addition, a $15.2
million loan is no longer reported as a loan to a director, as a result of the
director's resignation in October 1993. Interest income recognized on these
loans amounted to $2.3 million, $3.5 million and $8.1 million during 1993, 1992
and 1991, respectively. At December 31, 1993, none of these loans were on
nonaccrual status. Based on analysis of information presently known to
management about the loans to officers and directors and their affiliates,
management believes all such borrowers have the ability to comply with the
present loan repayment terms.
Loans past due 90 days or more and still accruing interest totaled $28.9
million, $27.0 million and $73.0 million at December 31, 1993, 1992 and 1991,
respectively. Restructured loans totaled $1.0 million, $1.1 million and none at
December 31, 1993, 1992 and 1991, respectively. In-substance foreclosures of
intangible assets totaling $4.7 million and $7.4 million at December 31, 1993
and 1992, respectively, are included in Other Assets in the Consolidated Balance
Sheet.
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39
The following is a summary of activity in the allowance for credit losses:
1993 1992 1991
-------- -------- --------
DOLLARS IN THOUSANDS
Balance, January 1......................................... $136,095 $125,766 $ 60,083
Provision charged to expense............................... 30,000 114,500 118,000
Charge offs................................................ (82,965) (119,741) (57,810)
Recoveries................................................. 28,844 15,570 5,493
-------- -------- --------
Net credit losses.......................................... (54,121) (104,171) (52,317)
Other(1)................................................... (1,475) -- --
-------- -------- --------
Balance, December 31....................................... $110,499 $136,095 $125,766
-------- -------- --------
-------- -------- --------
- ------------------
(1) Allowance for credit losses allocated to $73.7 million of ELC loans sold in
April 1993.
The following is a summary of nonperforming loans and related interest
forgone:
DECEMBER 31
----------------------------------
1993 1992 1991
-------- -------- --------
DOLLARS IN THOUSANDS
Nonaccrual loans........................................... $ 71,056 160,299 $152,555
-------- -------- --------
-------- -------- --------
Contractual interest due................................... $ 12,356 15,841 $ 17,375
-------- -------- --------
Interest recognized........................................ 3,871 3,208 5,073
-------- -------- --------
Net interest forgone....................................... $ 8,485 $ 12,633 $ 12,302
-------- -------- --------
-------- -------- --------
The following is a summary of forgone interest on nonaccrual loans at
December 31, assuming such loans were on nonaccrual status throughout the year.
The forgone interest based on loans outstanding at year end does not include
interest forgone on loans on nonaccrual status that were either charged off
prior to year end or transferred to ORE prior to year end.
DECEMBER 31
----------------------------------
1993 1992 1991
-------- -------- --------
DOLLARS IN THOUSANDS
Contractual interest due................................... $ 7,975 $ 16,944 $ 17,980
Interest recognized........................................ 2,632 9,536 8,977
-------- -------- --------
Net interest forgone....................................... $ 5,343 $ 7,408 9,003
-------- -------- --------
-------- -------- --------
NOTE 5 -- ASSETS HELD FOR ACCELERATED DISPOSITION
In March 1993, the Bank adopted an accelerated asset disposition program
(the Disposition Program) to aggressively dispose of ORE and certain problem
loans with an aggregate book value before the Disposition Program of $119.5
million.
The Bank signed a definitive agreement, as of November 1, 1993, to sell all
six asset pools in the Disposition Program to WHC-THREE Investors, L.P.
("WHC-THREE"), a limited partnership. The sale of the loans contained in the
Disposition Program for $48.3 million closed concurrently with the signing of
the definitive agreement and a gain of $12.8 million was recognized at that time
net of disposition expenses and reserves. This gain is included in other real
estate expense in the Consolidated Statement of Operations. The sale of the
Disposition Program ORE, which is carried at $17.5 million at December 31, 1993,
is expected to close in the first part of 1994 at which time a pretax gain of
approximately $3.5 mil-
44
40
lion is expected to be recognized. From November 17, 1993 until closing,
WHC-THREE has provided interim mortgages totaling $26.3 million which will be
cancelled in exchange for title to the ORE properties at the closing of the sale
of these properties. These interim mortgages are included in Mortgages Payable
in the Consolidated Balance Sheet.
The Bank provided $56.0 million (75% financing) for this sale at terms
comparable to other real estate loans in its portfolio. The terms of the notes
require annual pay downs and payment of the remaining principal in five years,
in addition to payments when individual real estate assets securing the loans
are sold or refinanced.
NOTE 6 -- NET INVESTMENT IN LEVERAGED LEASES
The following is a summary of the net investment in leveraged leases:
1993 1992
------- -------
DOLLARS IN THOUSANDS
Net rental receivables................................................. $ 9,100 $ 9,633
Estimated residual values (ranging from 5% to 20% of original asset
cost)................................................................ 6,660 6,660
Deferred expenses...................................................... 175 296
Less: deferred income.................................................. (2,083) (2,224)
------- -------
Investment in leveraged leases......................................... 13,852 14,365
Less: deferred taxes arising from leveraged leases..................... (7,799) (12,713)
------- -------
Net investment in leveraged leases..................................... $ 6,053 $ 1,652
------- -------
------- -------
The Bank is the lessor of transportation and other equipment under
leveraged lease agreements expiring in various years extending to the year 2006.
The equity investment represents between 27% and 38% of the purchase price; the
remaining amount was furnished by third-party financing in the form of
nonrecourse long-term debt and is secured by the property. For federal income
tax purposes, the Bank, as an equity participant, is entitled to allowable
investment tax credits, deductions for depreciation of asset cost, and related
debt service costs, based on its share of the investment.
On January 14, 1994, the Bank closed the sale of its interest in two
leveraged leases with a carrying value of $3.2 million at December 31, 1993. The
gain on the sale of $1.3 million will be recognized in the first quarter of
1994.
NOTE 7 -- PREMISES AND EQUIPMENT
The following is a summary of data for the major categories of premises and
equipment:
ACCUMULATED
DEPRECIATION AND CARRYING
COST AMORTIZATION VALUE
------- ---------------- --------
DOLLARS IN THOUSANDS
DECEMBER 31, 1993
Premises, including land of $2,490....................... $34,313 $ 20,715 $13,598
Furniture, fixtures and equipment........................ 31,730 24,969 6,761
------- -------- -------
Total.......................................... $66,043 $ 45,684 $20,359
------- -------- -------
------- -------- -------
DECEMBER 31, 1992
Premises, including land of $2,490....................... $33,662 $ 19,003 $14,659
Furniture, fixtures and equipment........................ 31,623 22,763 8,860
------- -------- -------
Total.......................................... $65,285 $ 41,766 $23,519
------- -------- -------
------- -------- -------
45
41
Depreciation and amortization expense was $4.5 million in 1993, $4.7
million in 1992 and $4.9 million in 1991. Net rental payments on operating
leases included in net occupancy of premises in the Consolidated Statement of
Operations were $8.9 million in 1993, $8.4 million in 1992 and $8.7 million in
1991. The future net minimum rental commitments were as follows at December 31,
1993:
NET MINIMUM RENTAL COMMITMENTS
-------------------------------
DOLLARS IN THOUSANDS
1994...................................... $ 6,442
1995...................................... 4,783
1996...................................... 4,608
1997...................................... 3,759
1998...................................... 3,077
1999-2003................................. 9,245
2004-2008................................. 1,512
After 2008................................ 1,379
-------
Total........................... $34,805
-------
-------
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions and escalation clauses. Future net
minimum rental commitments at December 31, 1993 exclude lease commitments that
the Company intends to settle. The estimated costs of settlement have been
accrued as part of the consolidation charge for the branch consolidation plan.
The Bank paid $.9 million, $.5 million and $.5 million during 1993, 1992 and
1991, respectively, for rent and operating expense pass throughs to a real
estate partnership in which the Bank owns a 32% interest, and Mr. Bram
Goldsmith, Chairman and Chief Executive Officer, indirectly owns a 14% interest.
NOTE 8 -- CONSOLIDATION CHARGE
In November 1993, the Bank announced a consolidation plan to improve
efficiency and operational productivity in its branch network. Six branches will
be closed and the number of lending locations reduced. To cover the costs
associated with this action, the Bank recorded a consolidation charge of $12.0
million in the fourth quarter of 1993, comprised of $7.5 million for disposition
of lease commitments, $1.5 million for disposition of fixed assets and $3.0
million for severance costs and other expenses directly related to the
consolidation. At December 31, 1993, the balance in the consolidation reserve
totaled $12.0 million and is included in Other Liabilities in the Consolidated
Balance Sheet.
NOTE 9 -- INCOME TAXES
The Company adopted SFAS No. 109, effective January 1, 1993. Adopting this
Statement did not have a material impact on the financial position or results of
operations of the Company. Under SFAS No. 109, deferred tax assets will be
reduced through a valuation allowance whenever it becomes more likely than not
that all, or some portion, will not be realized. The Company established
valuation reserves of $17.1 million, primarily against deferred state income tax
benefits, upon adoption of SFAS No. 109 as of January 1, 1993. The Company had
previously accounted for deferred taxes under the deferred method required by
APB Opinion 11. Under APB Opinion 11, deferred taxes were recognized for income
and expense items that were reported in different years for financial statement
purposes and income tax purposes using the tax rate
46
42
applicable for the year of the calculation. Under the deferral method, deferred
taxes were not adjusted for subsequent changes in tax rates.
Income tax (benefit) in the Consolidated Statement of Operations includes
the following amounts:
CURRENT DEFERRED TOTAL
-------- -------- --------
DOLLARS IN THOUSANDS
1993
Federal.................................................... $(25,250) $ 15,990 $ (9,260)
State...................................................... -- -- --
-------- -------- --------
Total............................................ $(25,250) $ 15,990 $ (9,260)
-------- -------- --------
-------- -------- --------
1992
Federal.................................................... $(28,478) $ (3,972) $(32,450)
State...................................................... -- -- --
-------- -------- --------
Total............................................ $(28,478) $ (3,972) $(32,450)
-------- -------- --------
-------- -------- --------
1991
Federal.................................................... $ 5,968 $(30,700) $(24,732)
State...................................................... 3,025 (680) 2,345
-------- -------- --------
Total............................................ $ 8,993 $(31,380) $(22,387)
-------- -------- --------
-------- -------- --------
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1993 are presented below:
1993
--------------------
DOLLARS IN THOUSANDS
Deferred tax assets:
Allowance for credit losses...................... $ 29,925
Accrued expenses................................. 5,340
State income taxes............................... 15,020
ORE writedowns................................... 898
Other............................................ 485
--------
Total gross deferred tax assets........ 51,668
Valuation allowance.............................. (18,426)
--------
33,242
--------
Deferred tax liabilities:
Leveraged leases................................. 7,799
Installment sales................................ 6,437
Depreciation..................................... 221
Loan fees........................................ 320
Other............................................ 415
--------
Total gross deferred tax liabilities... 15,192
--------
Net deferred tax assets.......................... $ 18,050
--------
--------
It is more likely than not that the reversing deductible temporary
differences, net of the recorded valuation allowance, at December 31, 1993 will
be realized by the availability of reversing taxable temporary differences,
recovery of taxes paid in applicable carryback years, and projected taxable
income for 1994.
47
43
The following is a listing of the elements of deferred tax benefits for
1992 and 1991:
1992 1991
------- --------
DOLLARS IN THOUSANDS
Lower credit loss deduction for tax return purposes..................... $(4,413) $(34,784)
Higher income for tax return purposes from leveraged leases............. (880) (2,219)
Higher state tax deduction for tax return purposes...................... 1,263 1,833
Lower depreciation for tax return purposes.............................. (106) 70
Lower loss from ORE for tax return purposes............................. (1,306) --
Higher income from investments for return purposes...................... (2,136) --
Unrealized net operating losses......................................... 4,754 3,066
All other -- net........................................................ (1,148) 654
------- --------
Total......................................................... $(3,972) $(31,380)
------- --------
------- --------
Income tax benefit resulted in effective tax rates that differ from the
statutory federal income tax rate for the following reasons:
% OF PRETAX LOSS
1993 1992 1991
------ ------ ------
Statutory benefit................................................ (35.0)% (34.0)% (34.0)%
Net state income tax............................................. -- -- 3.4
Tax exempt income................................................ (3.5) (2.7) (8.4)
Realized net operating loss carry back........................... (1.1) -- (9.3)
All other -- net................................................. (.2) 1.7 (1.4)
----- ----- -----
Effective tax benefit............................................ (39.8) (35.0) (49.7)
----- ----- -----
----- ----- -----
At December 31, 1993, the Company had an income tax refund receivable
(included in other assets) of $24.5 million resulting from carry back of the
1993 federal income tax loss to prior years.
The Company had California net operating loss carry forwards of $40.1
million on a tax-return basis, of which $29.8 million will expire in 1997 and
$10.3 million will expire in 1998.
NOTE 10 -- RETIREMENT PLAN
The Company has a profit sharing retirement plan covering all employees
with at least one year of continuous service. Contributions are made on an
annual basis into a trust fund and are allocated to the participants based on
their salaries and length of service. The contribution requirement is based on a
percentage of annual operating income before security gains or losses. Due to
the Company's losses, no contributions were made for 1993, 1992 or 1991.
Effective January 1, 1992, the Company amended the profit sharing
retirement plan to include an IRS Section 401(k) feature. Employees may
contribute up to 10% of their pretax salary, but not more than the maximum
allowed under IRS regulations. The Bank matches 10% of the first four percent of
covered compensation contributed using forfeitures. For 1993 and 1992, the
Bank's matching contribution was $122,000 and $123,000, respectively.
The Company does not provide for any post-retirement employee benefits
beyond the profit sharing retirement plan.
48
44
NOTE 11 -- STOCK OPTION PLANS
Under the 1985 Stock Option Plan, 5,614,530 shares of the Corporation's
common stock were reserved for grant of stock options. The Corporation's 1983
Stock Option Plan has expired but options granted thereunder remain outstanding.
The grants will be at prices at least equal to the market price of the
Corporation's stock on the effective date of the grant. In each succeeding year
following the date of grant, 25% of the options become exercisable. After ten
years from grant, all unexercised options will expire.
The Corporation on January 31, 1990 (in connection with a five year
Employment Agreement), granted to Mr. Bram Goldsmith, Chairman of the Board and
Chief Executive Officer, a nonqualified stock option for 400,000 shares of the
Corporation's common stock at the market price at the date of the grant, $21.25,
together with tax offset bonus rights. Such options are exercisable 25% per year
beginning at the end of the first year of such employment contract. In November
1993, the stock option was adjusted to 436,080 shares at an exercise price of
$19.50 per share to reflect the effect of the Corporation's rights offering in
May 1993. The tax offset bonus rights entitle Mr. Goldsmith to receive an amount
in cash equal to 11.1% of the excess of the fair market value of each share on
the date of exercise over the option price per share multiplied by the number of
shares exercised.
The following is a summary of the transactions under the Stock Option Plans
described above:
1993 1992
----------------------- -----------------------
NUMBER(1) NUMBER(1)
OF OF
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------
Options outstanding, January 1............ 3,936 $5.50--23.75 4,042 $6.51--23.75
Granted................................... 1,587 6.31-- 6.99 193 5.50--13.13
Exercised................................. (71) 5.50-- 9.13 (25) 6.61--11.90
Cancelled................................. (564) 6.88--23.75 (274) 7.44--11.63
----- ------------ ----- ------------
Options outstanding, December 31.......... 4,888 $5.05--21.79 3,936 $5.50--23.75
----- ------------ ----- ------------
----- ------------ ----- ------------
- ---------------
(1) In thousands
At December 31, 1993, nonqualified and incentive stock options covering
843,433 and 2,008,848 shares, respectively, of the Corporation's common stock
were exercisable under the Plans. At December 31, 1993, 805,189 shares were
available for future grants.
In November 1993, as provided under the Stock Option Plans, the exercise
prices of options awarded before June 1993 and the number of shares under option
were adjusted by approximately 8% and 9%, respectively, to reflect the effect of
the Corporation's rights offering in May 1993.
The Corporation also grants annually to each director stock options with a
value of $3,000 at an exercise price of $1 per share. Such options fully vest
six months after grant. During 1993 and 1992, 3,267 and 2,580 shares,
respectively, were granted to directors.
NOTE 12 -- AVAILABILITY OF FUNDS FROM SUBSIDIARIES; RESTRICTIONS ON CASH
BALANCES; CAPITAL
Historically, the majority of the funds for the payment of dividends by the
Corporation have been obtained from its subsidiary, City National Bank. Under
federal banking law, dividends declared by national banks in any calendar year
may not, without the approval of the OCC, exceed net profits (as defined), for
that year combined with its retained net profits for the preceding two calendar
years. Federal banking law also prohibits the Corporation from borrowing from
its bank subsidiaries on less than a fully secured basis.
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances. Cash balances maintained to meet reserve requirements
are not available for use by the Bank or the Corporation. During 1993 and 1992,
reserve balances averaged approximately $49.9 million and $60.3 million,
respectively.
49
45
The minimum Tier 1 and total capital ratios are 4.00% and 8.00%,
respectively. The minimum leverage ratio capital requirement is from 3.00% to
5.00% depending on an institution's composite rating by its primary regulator.
The capital ratios for the Company and the Bank were in excess of all these
minimum capital requirements as of December 31, 1993.
NOTE 13 -- AGREEMENT WITH OCC
On November 18, 1992, the Bank entered into a written agreement with the
Office of the Comptroller of the Currency (OCC). Among the requirements in the
agreement was a requirement that the Bank raise $65 million in new Tier 1
capital so as to maintain Tier 1 capital of at least 10% of risk-weighted assets
and Tier 1 capital of at least 7% of adjusted average total assets. The
Agreement also required the Bank to develop a three-year capital plan and a
three-year business plan and continue to improve its policies and procedures in
the lending and credit administration areas. Each of these requirements was
successfully met prior to December 31, 1993. As a result, on January 21, 1994,
the OCC lifted the Agreement.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments include
commitments to extend credit, letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount reflected in the Consolidated Balance Sheet.
Exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit, letters of credit
and financial guarantees written, is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company had outstanding loan commitments aggregating $681.4 million and
$863.8 million at December 31, 1993 and 1992, respectively. In addition, the
Company had $94.1 million and $120.6 million outstanding in bankers acceptances
and letters of credit, of which $58.2 million and $80.2 million related to
standby letters of credit at December 31, 1993 and 1992, respectively.
Substantially all of the Company's loan commitments are on a variable rate basis
and are comprised of real estate and commercial loan commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis.
The Corporation and its subsidiaries are defendants in various pending
lawsuits claiming substantial amounts. Based upon present knowledge, management
and in-house counsel are of the opinion that the final outcome of such lawsuits
will not have a material adverse effect upon the financial position of the
Company or the future results of its operations.
NOTE 15 -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Due from Banks and Federal Funds Sold
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
50
46
Securities and Trading Account
For securities held as investments or available for sale, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. For
trading account securities, fair values are based on quoted market prices or
dealer quotes.
Loans
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using dealer
quotes, adjusted for differences in loan characteristics. The fair value of
other types of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. In establishing the credit
risk component of the fair value calculations for loans, the Company concluded
that the allowance for credit losses represented a reasonable estimate of the
credit risk component of the fair value of loans at December 31, 1993 and 1992.
Deposits
The fair value of demand and interest checking deposits, savings deposits,
and certain money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Other Short-term Borrowings
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
Mortgages Payable
The fair value of mortgages payable approximates the carrying value as the
mortgages mature in the first quarter of 1994.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. The Company
does not make fixed-rate loan commitments. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements, or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- ----------- -----------
DOLLARS IN THOUSANDS
Financial assets:
Cash and due from banks....................... $235,153 $ 235,153 $ 405,923 $ 405,923
Federal funds sold and securities purchased
under resale agreements..................... 265,000 265,000 468,850 468,850
Investment securities......................... 902,481 902,738 413,645 420,367
Securities available for sale................. 2,000 2,000 30,277 30,662
Trading account assets........................ 39,765 39,765 10,258 10,258
Loans, net of allowance for credit losses..... 1,510,057 1,511,398 1,939,107 1,942,545
Financial liabilities:
Deposits...................................... 2,526,767 2,528,895 2,911,276 2,912,549
Federal funds purchased and securities sold
under repurchase agreements................. 202,459 202,459 339,149 339,149
Other short-term borrowings................... 15,000 15,000 15,000 15,000
Mortgages payable............................. 26,319 26,319 -- --
Commitments to extend credit.................. (3,850) (3,850) (1,303) (1,303)
51
47
NOTE 16 -- DISCONTINUED OPERATIONS
in December 1992, the Bank entered into an agreement to sell its data
processing business, City National Information Services (CNIS), to Systematics,
Inc. for $12.0 million. The closing of the sale occurred on June 1, 1993. A
pretax gain of $10.8 million, which is net of certain software licensing
payments and programming expenses shared with Systematics, Inc., was recognized
at closing.
The Company has reclassified the prior years' operations of CNIS and
presented them as "Income from discontinued operations" on the Consolidated
Statement of Operations. Included in other assets at December 31, 1993 was a
receivable of $8.8 million for a portion of the purchase price which was paid on
January 4, 1994.
Selected financial data for the discontinued operation are summarized
below:
1993 1992 1991
------- ------- -------
DOLLARS IN THOUSANDS
Revenues...................................................... $ -- $36,547 $39,344
Gain from sale of CNIS........................................ 10,800 -- --
Expenses...................................................... -- 35,303 37,021
------- ------- -------
Income before income taxes.................................... 10,800 1,244 2,323
Income taxes.................................................. 3,672 440 927
------- ------- -------
Income from discontinued operations........................... $ 7,128 $ 804 $ 1,396
------- ------- -------
------- ------- -------
Billings to the Bank by CNIS amounted to $6.8 million, $7.0 million and
$6.9 million for 1993, 1992 and 1991, respectively, and are included in Data
Processing expenses. Under the Bank's 1991 contract with Systematics, the
minimum annual purchases for data processing services were $5.4 million per
year. This obligation will continue until December 31, 2000 and will increase
annually at 80% of the increase in the Consumer Price Index.
NOTE 17 -- PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheet
DECEMBER 31,
---------------------
1993 1992
-------- --------
DOLLARS IN THOUSANDS
Assets:
Cash................................................................. $ 57 $ 15
Short-term investments............................................... 5,500 3,289
Investments at equity................................................ -- 399
Other investments.................................................... 12,443 2,000
Other assets......................................................... 373 217
Deferred tax benefits................................................ -- 93
Investment in City National Bank..................................... 279,785 221,941
-------- --------
Total assets................................................. $298,158 $227,954
-------- --------
-------- --------
Liabilities:
Other liabilities.................................................... $ 84 $ 10
Total shareholders' equity........................................... 298,074 227,944
-------- --------
Total liabilities and shareholders' equity................... $298,158 $227,954
-------- --------
-------- --------
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48
Condensed Statement of Operations:
1993 1992 1991
-------- -------- --------
DOLLARS IN THOUSANDS
Income:
Dividends from Bank............................................ $ -- $ -- $ 4,950
Interest and dividend income................................... 634 238 417
-------- -------- --------
Total income......................................... 634 238 5,367
Expenses....................................................... 269 255 201
-------- -------- --------
Income before income taxes (benefit) and equity in
undistributed loss of Bank................................... 365 (17) 5,166
Income taxes (benefit)......................................... 115 (40) 2
-------- -------- --------
Income before equity in undistributed loss of Bank............. 250 23 5,164
Equity in loss of Bank......................................... (7,156) (59,371) (26,384)
-------- -------- --------
Net loss....................................................... $ (6,906) $(59,348) $(21,220)
-------- -------- --------
-------- -------- --------
Condensed Statement of Cash Flows
1993 1992 1991
-------- -------- --------
DOLLARS IN THOUSANDS
Operating Activities:
Net loss....................................................... $ (6,906) $(59,348) $(21,220)
Adjustments to net loss:
Equity in undistributed loss of Bank......................... 7,156 59,371 26,384
Decrease in dividend receivable from Bank.................... -- -- 5,400
Other, net................................................... 11 (82) 98
-------- -------- --------
Net cash provided by (used in) operating activities....... 261 (59) 10,662
-------- -------- --------
Investing Activities:
Capital contributed to Bank.................................... (65,000) -- --
Net decrease (increase) in short-term investments.............. (2,211) (2,379) 2,886
Sale (purchase) of other investments........................... (10,443) 2,200 1,000
Other, net..................................................... 399 -- --
-------- -------- --------
Net cash provided by (used in) investing activities.......... (77,255) (179) 3,886
-------- -------- --------
Financing Activities:
Cash dividends paid............................................ -- -- (15,434)
Sale of common stock (net of expenses)......................... 76,501 -- --
Stock options exercised........................................ 488 190 725
Other, net..................................................... 47 37 165
-------- -------- --------
Net cash provided by (used in) financing activities.......... 77,036 227 (14,544)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... 42 (11) 4
Cash and cash equivalents at beginning of year................. 15 26 22
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 57 $ 15 $ 26
-------- -------- --------
-------- -------- --------
NOTE 18 -- SUBSEQUENT EVENT (UNAUDITED)
On January 17, 1994 and during the days thereafter, Los Angeles, California
was struck by a series of strong earthquakes. The Bank is currently accumulating
data on the collateral securing its loans in the effected areas. Based on
information currently available, the Bank does not believe earthquake related
losses, including those related to its facilities, will be material to the
Bank's financial condition.
53