SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1999 Commission File Number 1-10521
CITY NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-2568550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
City National Center
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
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Number of shares of common stock outstanding at July 31, 1999: 45,576,001
PART 1 - FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1999 1998 1998
- -------------------------------------------- ------------- ---------------- -------------
A S S E T S
Cash and due from banks .................................................. $ 264,476 $ 285,843 $ 401,092
Federal funds sold ....................................................... 50,000 405,000 -
Investment securities (fair value $204,102 at June 30, 1998) ............. - - 202,477
Securities available-for-sale (cost $1,042,300; $990,152 and $584,607 at
June 30, 1999, December 31, 1998 and June 30, 1998,
respectively) ........................................................ 1,023,582 1,012,526 598,719
Trading account securities ............................................... 41,979 35,015 49,048
Loans .................................................................... 4,722,739 4,530,427 4,228,226
Less allowance for credit losses ......................................... 140,185 135,339 135,837
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Net loans ............................................................ 4,582,554 4,395,088 4,092,389
Premises and equipment, net .............................................. 59,019 55,766 51,706
Customers' acceptance liability .......................................... 2,404 1,759 4,519
Deferred tax asset ....................................................... 56,604 45,738 52,328
Goodwill and core deposit intangibles .................................... 69,916 73,706 65,888
Bank owned life insurance ................................................ 43,626 42,545 41,043
Affordable housing investments ........................................... 45,719 13,262 11,978
Other assets ............................................................. 62,229 61,533 56,647
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Total assets ......................................................... $ 6,302,108 $ 6,427,781 $ 5,627,834
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L I A B I L I T I E S
Demand deposits .......................................................... $ 2,148,956 $ 2,382,724 $ 2,004,952
Interest checking deposits ............................................... 399,631 452,249 359,232
Money market deposits .................................................... 892,096 927,651 894,393
Savings deposits ......................................................... 193,560 183,353 161,413
Time deposits-under $100,000 ............................................. 177,933 187,710 197,731
Time deposits-$100,000 and over .......................................... 872,149 753,715 768,534
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Total deposits ....................................................... 4,684,325 4,887,402 4,386,255
Federal funds purchased and securities sold under repurchase agreements .. 458,642 276,311 297,736
Other short-term borrowings .............................................. 196,137 317,001 88,979
Subordinated debt ........................................................ 123,359 123,265 124,030
Long-term debt ........................................................... 230,000 200,000 125,000
Other liabilities ........................................................ 45,825 60,240 64,903
Acceptances outstanding .................................................. 2,404 1,759 4,519
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Total liabilities .................................................... 5,740,692 5,865,978 5,091,422
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C O M M I T M E N T S A N D C O N T I N G E N C I E S
S H A R E H O L D E R S' E Q U I T Y
Preferred Stock authorized - 5,000,000 : none outstanding ................ - - -
Common Stock-par value-$1.00; authorized - 75,000,000; issued - 46,885,182 46,885 46,885 46,885
Additional paid-in capital ............................................... 279,373 287,363 294,423
Accumulated other comprehensive income (loss) ............................ (10,793) 12,901 8,362
Retained earnings ........................................................ 280,196 243,275 206,065
Treasury shares, at cost - 1,097,112; 877,945 and 532,731 shares at
June 30, 1999, December 31, 1998 and June 30, 1998,
respectively) ........................................................ (34,245) (28,621) (19,323)
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Total shareholders' equity ........................................... 561,416 561,803 536,412
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Total liabilities and shareholders' equity ........................... $ 6,302,108 $ 6,427,781 $ 5,627,834
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See accompanying Notes to the Unaudited Consolidated Financial Statements
2
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
In thousands, except per share amounts 1999 1998 1999 1998
- -------------------------------------- ----------- ----------- ----------- -----------
Interest Income
Loans ........................................................................... $ 92,868 $ 89,631 $ 187,667 $ 179,705
Securities ...................................................................... 16,187 12,022 31,873 24,281
Trading account securities ...................................................... 836 809 1,338 1,414
Federal funds sold and securities purchased under resale agreements ............. 479 897 984 1,407
--------- --------- --------- ---------
Total interest income ....................................................... 110,370 103,359 221,862 206,807
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INTEREST EXPENSE
Deposits ........................................................................ 21,083 21,493 40,824 42,325
Federal funds purchased and securities sold under repurchase agreements ......... 6,379 4,675 13,949 9,567
Other short-term borrowings ..................................................... 1,433 1,338 2,718 3,337
Subordinated debt ............................................................... 1,965 2,016 4,005 3,792
Other long-term debt ............................................................ 3,398 1,565 6,574 2,690
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Total interest expense ...................................................... 34,258 31,087 68,070 61,711
--------- --------- --------- ---------
Net interest income ............................................................. 76,112 72,272 153,792 145,096
Provision for credit losses ..................................................... - - - -
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Net interest income after provision for credit losses ........................... 76,112 72,272 153,792 145,096
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NONINTEREST INCOME
Service charges on deposit accounts ............................................. 4,090 4,178 8,165 9,210
Investment services ............................................................. 4,619 3,727 8,939 7,418
Trust fees ...................................................................... 4,474 2,211 8,865 4,453
International services .......................................................... 2,395 2,037 4,386 3,723
Bank owned life insurance ....................................................... 541 586 1,080 1,043
Gain on sale of assets .......................................................... 1,121 1,645 1,179 1,658
Gain on sale of securities ...................................................... 1,192 235 2,445 1,209
Other ........................................................................... 3,255 2,727 5,773 4,997
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Total noninterest income .................................................... 21,687 17,346 40,832 33,711
--------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries and other employee benefits ............................................ 32,313 27,841 64,826 57,583
Professional .................................................................... 4,926 5,764 9,711 11,674
Net occupancy of premises ....................................................... 4,486 3,386 7,972 6,335
Information services ............................................................ 2,938 2,090 5,459 4,698
Marketing and advertising ....................................................... 2,581 2,917 5,145 5,354
Depreciation .................................................................... 2,705 2,049 5,149 4,079
Office services ................................................................. 2,029 1,872 3,865 3,983
Equipment ....................................................................... 473 501 1,124 1,009
Amortization of goodwill and core deposit intangibles ........................... 1,911 1,747 3,971 3,382
Other operating ................................................................. 3,419 4,936 6,425 9,327
Other real estate (income) ...................................................... 53 (130) 88 (85)
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Total noninterest expense ................................................... 57,834 52,973 113,735 107,339
--------- --------- --------- ---------
Income before income taxes ...................................................... 39,965 36,645 80,889 71,468
Income taxes .................................................................... 13,859 13,009 28,782 25,363
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NET INCOME ...................................................................... 26,106 23,636 52,107 46,105
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Other comprehensive income
Unrealized gains (loss) on securities available-for-sale .................... (23,196) 3,603 (42,129) 4,452
Reclassification adjustment for gains (losses) included in noninterest income 511 (202) 1,035 381
Income taxes (benefits) ..................................................... (9,606) 1,182 (17,400) 1,820
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Other comprehensive income (loss) ............................................... (13,079) 2,219 (23,694) 3,013
--------- --------- --------- ---------
Comprehensive income ............................................................ $ 13,027 $ 25,855 $ 28,413 $ 49,118
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Net income per share, basic .................................................... $ 0.57 $ 0.51 $ 1.14 $ 0.99
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Net income per share, diluted .................................................. $ 0.55 $ 0.49 $ 1.10 $ 0.95
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Shares used to compute income per share, basic .................................. 45,739 46,604 45,864 46,640
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Shares used to compute income per share, diluted ................................ 47,121 48,517 47,229 48,608
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See accompanying Notes to the Unaudited Consolidated Financial Statements
3
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended
June 30,
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DOLLARS IN THOUSANDS 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 52,107 $ 46,105
Adjustments to net income:
Gain on sales of ORE ............................................ 35 256
Depreciation .................................................... 5,149 4,079
Amortization of goodwill and core deposit intangibles ........... 3,971 3,665
Net increase (decrease) in trading securities ................... 6,964 (18,514)
Deferred income tax (benefit) ................................... (7,869) (7,970)
Gain on sale of securities ...................................... 2,445 1,209
Net increase in other liabilities (assets) ...................... (53,137) 24,286
Other, net ...................................................... 9,674 12,927
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Net cash provided by operating activites .................... 19,339 66,043
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ............................ (152,772) (237,209)
Sales of securities available-for-sale ............................... 42,158 208,537
Maturities of securities available-for-sale .......................... 58,113 51,911
Maturities of investment securities .................................. - 26,667
Purchase of investment securities .................................... - (3,040)
Purchase of residential mortgage loans ............................... - (32,396)
Sale of residential mortgage loans ................................... 41,357 -
(Loan originations) and principal collections, net ................... (236,288) (232,135)
Proceeds from sales of ORE ........................................... 1,162 1,478
Purchase of premises and equipment ................................... (9,367) (10,059)
Net cash from acquisitions ........................................... - 43,622
Bank owned life insurance premium paid ............................... (11) (40,000)
Other, net ........................................................... 352 483
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Net cash used by investing activities ........................... (255,296) (222,141)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased and securities sold
under repurchase agreements ..................................... 32,331 (58,691)
Net decrease in deposits ............................................. (203,077) (47,693)
Net increase in short-term borrowings ................................ 29,136 26,404
Net increase in other long-term debt ................................. 30,000 75,000
Net proceeds of subordinated debt .................................... - 124,004
Proceeds from exercise of stock options .............................. 5,295 8,202
Stock repurchases .................................................... (20,549) (36,758)
Cash dividends paid .................................................. (15,186) (13,129)
Other, net ........................................................... 1,640 2,453
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Net cash provided (used) by financing activities ................ (140,410) 79,792
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Net decrease in cash and cash equivalents ............................ (376,367) (76,306)
Cash and cash equivalents at beginning of year ....................... 690,843 477,398
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Cash and cash equivalents at end of period ........................... $ 314,476 $ 401,092
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................... $ 67,932 $ 54,812
Income taxes ................................................ 26,800 6,450
Non-cash investing activities:
Transfer from loans to foreclosed assets .................... 158 1,867
See accompanying Notes to the Unaudited Consolidated Financial Statements
4
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
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Dollars in thousands 1999 1998
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Common Stock
Balance, beginning of period ........................ $ 46,885 $ 46,701
Stock issued for acquisitions ....................... - 131
Stock options exercised ............................. - 53
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Balance, end of period .............................. 46,885 46,885
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Additional paid-in capital
Balance, beginning of period ........................ 287,363 297,654
Tax benefit from stock options ...................... 1,640 2,454
Excess of cost of treasury shares reissued
over stock option exercise amounts ............. (9,630) (12,592)
Excess of market value of shares issued
for acquisitions over historical cost .......... - 6,907
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Balance, end of period .............................. 279,373 294,423
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Accumulated other comprehensive income
Balance, beginning of period ........................ 12,901 5,349
Other comprehensive income (loss) net of income taxes (23,694) 3,013
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Balance, end of period .............................. (10,793) 8,362
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Retained earnings
Balance, beginning of period ........................ 243,275 173,089
Net income .......................................... 52,107 46,105
Dividends paid ...................................... (15,186) (13,129)
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Balance, end of period .............................. 280,196 206,065
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Treasury shares
Balance, beginning of period ........................ (28,621) (14,123)
Purchase of shares .................................. (20,549) (36,758)
Issuance of shares for acquisitions ................. - 10,817
Issuance of shares for stock options ................ 14,925 20,741
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Balance, end of period .............................. (34,245) (19,323)
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Total shareholders' equity ................................ $ 561,416 $ 536,412
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See accompanying Notes to the Unaudited Consolidated Financial Statements
5
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The results of operations reflect the interim adjustments, all of which are
of a normal recurring nature and which, in the opinion of management, are
necessary for a fair presentation of the results for such interim periods.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
2. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. This Statement is effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No.133" (SFAS 137), which extended the
effective date to fiscal years beginning after June 15, 2000. The Company
uses interest rate swaps to manage interest rate exposure, which are
accounted for as hedging activities and does not believe that the
implementation will have a significant impact on the Company's financial
position, net income or net comprehensive income.
3. Trading account securities are stated at market value. Investments not
classified as trading securities are classified as securities
available-for-sale and recorded at fair value. Unrealized holding gains or
losses for securities available-for-sale are excluded from net income and
are reported as comprehensive income included as a separate component of
shareholders' equity net of taxes.
4. Certain prior periods' data have been reclassified to conform to current
period presentation.
5. Under the Company's current one million-share common stock buyback program,
which was announced on July 29, 1999, no shares were repurchased as of July
31, 1999. Under the Company's buyback program announced on September 8,
1998 and completed on July 28, 1999, a total of one million shares were
purchased at a cost of $32.2 million. Shares purchased under the buyback
program will be reissued upon the exercise of stock options and for other
general corporate purposes.
6. On June 4, 1999, the company announced a definitive agreement for the
acquisition of $0.4 billion American Pacific State Bank in an all cash
transaction valued at approximately $89 million. The transaction is
expected to close in the second half of the year.
7. The Bank has requested regulatory approval from the Office of the
Comptroller of the Currency to close its Fountain Valley branch that was
acquired in the Company's acquisition of Harbor Bancorp in 1998.
8. Payments were made in the first half of 1999 for $0.3 million of purchase
price adjustments recorded as part of the acquisition of North American
Trust Company in 1998. Reserves for excess space of $0.5 million still
exist to be used over the remaining 6.5 years of a lease.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Item 2 reflect
the consolidated activities of the Corporation and the Bank.
See "Cautionary Statement for Purposes of the `Safe Harbor' Provision of the
Private Securities Litigation Reform Act of 1995", on page 18 in connection with
"forward looking" statements included in the Overview section of Results of
Operations and in the Loan Portfolio section of the Balance Sheet Analysis.
The Company regularly evaluates, and holds discussions with, various
potential acquisition candidates. As a general rule the Company does not
publicly announce such acquisitions until after a definitive agreement has
been reached, as in the June 4, 1999 announcement of the acquisition of $0.4
billion American Pacific State Bank for approximately $89.0 million in an all
cash transaction. Also as a matter of policy, the Company generally does not
make any specific projections as to future earnings nor does it endorse any
projections regarding future performance which may be made by others.
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded consolidated net income of $26.1 million, or $0.55 per
diluted common share, in the second quarter of 1999, compared to $23.6 million,
or $0.49 per diluted common share, in the second quarter of 1998. Increased net
income was primarily due to $3.8 million in higher net interest income, and $4.3
million higher noninterest income, partially offset by $4.9 million in higher
noninterest expense.
Net income for the first six months of 1999 totaled $52.1 million, or $1.10 per
diluted common share compared with $46.1 million or $.95 per diluted common
share in the 1998 period. The six-month increase resulted largely from a $8.7
million increase in net interest income and a $7.1 million increase in
noninterest income partially offset by a $6.4 million increase in noninterest
expense.
Return on average assets for the second quarter and first half of 1999 were
1.68% and 1.71% respectively compared with 1.73% and 1.72% for the corresponding
periods of 1998. Return on average equity for the second quarter and first half
of 1999 increased to 18.62% and 18.65% from 17.66% and 17.33% in 1998.
Earnings before the amortization of goodwill and core deposits intangibles
(net of applicable taxes) ("cash" earnings) for the quarter and six months
ended June 30, 1999 were $27.6 million or $0.58 per diluted common share and
$55.2 million or $1.17 per diluted common share, respectively compared to
$25.0 million or $0.52 per diluted common share and $49.0 million or $1.01
per diluted common share in the corresponding periods of 1998. On the same
basis, the returns on average assets were 1.79% and 1.82% for the quarter and
six months ended June 30, 1999, respectively compared to 1.85% and 1.84% in
1998. Cash return on average common equity were 21.94% and 22.06% for the
quarter and six months ended June 30, 1999, respectively compared to 20.94%
and 20.47% for the year ago periods. "Cash" earnings are presented because
they measure the Company's ability to support growth, pay dividends and
repurchase stock. The Company's "cash" earnings per share and other ratios
are not necessarily comparable to similarly titled measures reported by other
companies.
Net interest income on a fully taxable-equivalent basis increased 5.3% to $78.7
million in the second quarter of 1999 compared with $74.8 million in the
year-ago quarter, but decreased 1.7% from $80.1 million in the prior quarter.
The year-over-year increase resulted from the 14.8% increase in average interest
earning assets between quarters. Interest recovered on nonaccrual and
charged-off loans was $4.1 million in the first six months of 1999 compared with
$5.1 million for the same period a year ago. The second quarter fully
taxable-net interest spread and the net interest margin decreased to 4.02% and
5.48%, respectively from 4.33% and 5.95%, for the comparable period a year ago.
The combination of strong growth in earning assets, which outpaced growth in
lower cost core deposits, and the slightly lower prime rate that took effect in
the fourth quarter of 1998, contributed to a decrease in net interest
7
margin. The Company announced on July 1, 1999 that it had raised its prime
rate by 25 basis points to 8.00%. Management expects modest growth in net
interest income for the remainder of 1999 from the first half 1999 levels,
assuming, among other things, that loan balances will continue to grow.
Actual results may vary if the assumption proves to be incorrect.
Average loans increased $491.3 million (12.0%) in the second quarter to
$4,602.6 million compared to the prior-year quarter and $91.7 million (2.0%)
from the first quarter of 1999. The year-over-year growth was driven
primarily by increases in commercial and construction loans. Commercial loan
average balances increased $375.0 million (17.8%) to $2,486.6 million while
construction loan average balances also increased $126.1 million (87.0%) to
$271.8 million as a result of continued strength in the Southern California
economy.
Total loans at June 30, 1999 were $4.7 billion compared with $4.5 billion at
both March 31, 1999 and December 31, 1998. Relationship-originated loans
increased $345.0 million in the first half of 1999 while non-relationship-
syndicated loans, which continue to be less than 10.0% of the portfolio, and
purchased residential mortgage loans declined $153.0 million due to repayments
and a $41.4 million loan sale in the second quarter.
Total average deposits increased $352.4 million (8.4%) between second quarters
due primarily to increased deposit levels generated by banking offices and the
Bank's specialty deposit department. Total average securities increased $278.4
million (32.3%).
Total deposits as of June 30, 1999 increased $298.1 million (6.8%) compared to
June 30, 1998 and were $80.6 million (1.8%) higher than March 31, 1999.
The Company recorded no credit loss provision for the quarters and six months
ended June 30, 1999 and 1998 due to changes in the portfolio and net credit
recoveries of $4.9 million in the first half of 1999 compared with net credit
losses of $4.7 million in the first half of 1998. Loans charged off in the
second quarter of 1999 were $1.5 million, compared to $4.1 million in the second
quarter of 1998. Recoveries were $3.0 million and $2.9 million in the quarters
ended June 30, 1999 and 1998, respectively. The allowance for credit losses was
2.97% of total loans at June 30, 1999 compared to 3.21% at June 30, 1998 and
3.07% at March 31, 1999. The provision for credit losses is expected to remain
at reduced levels but not necessarily at zero for the remainder of 1999. This
assumes that general economic conditions in Southern California will not
deteriorate materially during the balance of 1999, and if this assumption proves
to be inaccurate, a higher provision for credit losses may be required. The
provision levels for the balance of 1999 will depend on numerous factors
including the general economic conditions that impact borrowers.
Noninterest income of $21.7 million for the second quarter of 1999 continued a
sustained growth trend, increasing by $4.4 million (25.4%) over the $17.3
million reported in the same period a year ago and by $2.5 million (13.3%) over
the $19.1 million for the first quarter of 1999. Investment services and trust
fees increased in the second quarter of 1999 compared to the year-earlier
quarter as a result of strong, internally generated new business as well as new
revenue generated from the North American Trust Company ("NATC") acquisition,
which was completed at the end of 1998. Essentially, all categories of
noninterest income increased over the first quarter. Noninterest income is
expected to maintain its growth trend over prior year results for the remainder
of 1999. Gains on sale of assets and securities amounted to $2.3 million for the
quarter compared with $1.9 million in the year ago quarter and $1.3 million in
the first quarter of 1999. Included in the total gains on sale of securities and
assets in the second quarter of 1999 was a $1.0 million gain from the sale of
$41.4 million of purchased residential mortgage loans.
Noninterest expense totaled $57.8 million in the second quarter of 1999, an
increase of $4.9 million (9.2%) from the second quarter of 1998. For the first
half of 1999 noninterest expense totaled $113.7 million, an increase of $6.4
million (6.0%) from the first half of 1998. Salaries and other employee benefits
increased $4.5 million (16.1%) and $7.2 million (12.6%) for the quarter and six
months ended June 30, 1999 from the comparable periods in 1998. This increase is
primarily due to the additional personnel added as a result of the acquisition
of NATC, the hiring of additional personnel related to new branch openings and
other growth opportunities, and a more performance based compensation structure.
The expense categories other than staff were up 2% quarter to quarter and were
down 2% for the six months ended June 30, 1999 from the comparable periods in
1998. All of the $0.2 million of NATC integration expenses accrued in 1998 were
paid in the first half of 1999. Noninterest expense levels for the remainder of
1999 are expected to be higher than in 1998 reflecting the growth of the Company
and the acquisition of NATC.
8
The Year 2000 issue is the result of computer programs written using two digits
(rather than four) to define years. Computers or other equipment with
date-sensitive software may recognize "00" as 1900 rather than 2000. This could
result in system failure or miscalculations. If the Company or significant
customers, suppliers or other third parties fail to properly address Year 2000
issues, the Company's ability to operate could be affected. The Company's Year
2000 Readiness discussion follows:
During the first half of 1999, efforts continued to address Year 2000 matters in
accordance with the Company's five-phase project plan, which covers information
technology as well as embedded systems. The five phases are awareness,
assessment, renovation, validation and implementation with contingency planning
as a part of the validation phase. As previously reported, the first two phases
of awareness and assessment have been completed. The Company has now completed
its renovation, validation and implementation phases. As an additional
precaution the Company has developed a contingency plan for each of its mission
critical business units which establishes trigger dates for implementation of
the plan for each software application. The contingency plans will provide for
field testing to validate the contingency plans. However, these plans do not
guarantee that circumstances beyond the Company's control will not adversely
impact operations. At this time, based on assessments and testing to date, the
Company does not foresee any Year 2000 issues that would materially impair the
Bank's ability to conduct business.
The Company is engaged in the ongoing process of considering and examining
whether or not there would be a material effect on its business, net income or
balance sheet if its vendors, suppliers and customers do not become Year 2000
compliant in a timely manner. With regard to customer readiness, the Company has
queried and continues to query all commercial borrowers with loans of $1.0
million and over. For those customers having responded, it has been determined
that their compliance efforts at this time appear satisfactory or their business
would have no significant impact by Year 2000 matters. In addition, there is a
group of customers who have indicated their compliance will be in the future and
the Company continues to monitor their progress. The Company is also considering
customized action plans and disengagement strategies for any high risk
borrowers. The Company in its review of the adequacy of its allowance for credit
losses has considered the potential for Year 2000 risks to its borrowers.
Where the Company is a third party vendor to customers, as in the area of cash
management, the Company appears to have reached year 2000 readiness. The Company
is continuing to evaluate its risk and responsibilities with respect to the
premises it occupies. The Company's analysis of the corporate counterparties for
its investments and current hedging position was also completed in the first
quarter of 1999.
In the first half of 1999, approximately $1.4 million was directly and
indirectly expensed on Year 2000 matters. This amount excludes hardware and
software that was replaced in the normal course of business. Total direct and
indirect expenses are expected to be approximately $2.2 million for all of 1999.
The Company's effective tax rate of 34.7% in the second quarter of 1999 was
slightly lower than the previous year's second quarter and for all of 1998
reflecting an increase in state tax credits received as an incentive for making
or renewing loans in certain designated areas in and around Los Angeles. It is
expected that the Company's tax rate will remain in the 35.0% range for the
remainder of 1999 due to state tax credits and the Company's additional
investment in affordable housing limited partnerships.
9
The following table presents the components of net interest income on a fully
taxable equivalent basis for the three months ended June 30, 1999 and 1998.
NET INTEREST INCOME SUMMARY
JUNE 30, 1999 JUNE 30, 1998
---------------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- -------------- ----------- --------- -------------- ----------- --------
A S S E T S
Earning assets (1)
Loans:
Commercial $ 2,486,626 $ 51,441 8.30 % $ 2,112,175 $ 46,936 8.91 %
Residential first mortgages 1,018,360 18,313 7.21 1,050,142 19,401 7.41
Real estate - construction 271,802 6,517 9.62 145,739 4,097 11.28
Real estate - commercial mortgage 776,706 16,746 8.65 750,962 18,928 10.11
Installment 49,120 1,239 10.12 52,335 1,416 10.85
-------------- ------------ -------------- ------------
Total loans (2) 4,602,614 94,256 8.21 4,111,353 90,778 8.86
Securities 1,060,974 17,428 6.59 802,369 13,303 6.65
Federal funds sold and securities
purchased under resale agreements 37,925 479 5.07 61,203 897 5.88
Trading account securities 79,992 833 4.18 60,170 863 5.75
-------------- ------------ -------------- ------------
Total earning assets 5,781,505 112,996 7.84 5,035,095 105,841 8.43
------------ ------------
Allowance for credit losses (139,832) (136,407)
Cash and due from banks 275,716 311,800
Other nonearning assets 301,708 275,745
-------------- --------------
Total assets $ 6,219,097 $ 5,486,233
-------------- --------------
-------------- --------------
L I A B I L I T I E S A N D
S H A R E H O L D E R S' E Q U I T Y
Interest-bearing deposits:
Interest checking accounts $ 407,123 558 0.55 $ 387,318 962 1.00
Money market accounts 948,835 6,858 2.90 860,745 6,573 3.06
Savings deposits 190,546 2,157 4.54 167,468 1,477 3.54
Time deposits - under $100,000 178,001 2,056 4.63 203,770 2,677 5.27
Time deposits - $100,000 and over 838,562 9,454 4.52 746,843 9,804 5.27
-------------- ------------ -------------- ------------
Total interest - bearing deposits 2,563,067 21,083 3.30 2,366,144 21,493 3.64
Federal funds purchased and securities
sold under repurchase agreements 530,200 6,379 4.83 346,605 4,675 5.41
Other borrowings 505,962 6,796 5.39 326,710 4,919 6.04
-------------- ------------ -------------- ------------
Total interest - bearing liabilities 3,599,229 34,258 3.82 3,039,459 31,087 4.10
------------ ------------
Noninterest - bearing deposits 2,001,168 1,845,647
Other liabilities 56,271 64,191
Shareholders' equity 562,429 536,936
-------------- --------------
Total liabilities and shareholders'
equity $ 6,219,097 $ 5,486,233
-------------- --------------
-------------- --------------
Net interest spread 4.02 % 4.33 %
-------- -------
-------- -------
Fully taxable equivalent net interest income $ 78,738 $ 74,754
------------ ------------
------------ ------------
Net interest margin 5.48 % 5.95 %
-------- -------
-------- -------
(1) Includes average nonaccrual loans of $22,585 and $34,641 for 1999 and 1998,
respectively.
(2) Loan income includes loan fees of $3,669 and $3,179 for 1999 and 1998,
respectively.
10
The following table presents the components of net interest income on a fully
taxable equivalent basis for the six months ended June 30, 1999 and 1998.
NET INTEREST INCOME SUMMARY
JUNE 30, 1999 JUNE 30, 1998
---------------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- -------------- ----------- --------- -------------- ----------- --------
A S S E T S
Earning assets (1)
Loans:
Commercial $ 2,460,056 $104,250 8.55 % $2,071,038 $ 94,751 9.23 %
Residential first mortgages 1,027,516 37,026 7.27 1,029,031 38,718 7.59
Real estate - construction 258,728 12,478 9.73 149,525 8,220 11.09
Real estate - commercial mortgage 761,954 34,309 9.08 760,515 37,399 9.92
Installment 48,780 2,369 9.79 51,338 2,850 11.19
-------------- ------------ -------------- ------------
Total loans (2) 4,557,034 190,432 8.43 4,061,447 181,938 9.03
Securities 1,050,636 34,262 6.58 808,238 27,169 6.78
Federal funds sold and securities
purchased under resale agreements 37,397 984 5.31 50,347 1,407 5.64
Trading account securities 65,872 1,259 3.85 52,029 1,537 5.96
-------------- ------------ -------------- ------------
Total earning assets 5,710,939 226,937 8.01 4,972,061 212,051 8.60
------------ ------------
Allowance for credit losses (139,161) (138,586)
Cash and due from banks 285,960 312,389
Other nonearning assets 302,539 272,931
--------------- --------------
Total assets $6,160,277 $5,418,795
--------------- --------------
--------------- --------------
L I A B I L I T I E S A N D
S H A R E H O L D E R S' E Q U I T Y
Interest-bearing deposits:
Interest checking accounts $ 404,486 1,157 0.58 $ 387,987 1,921 1.00
Money market accounts 944,108 13,593 2.90 846,714 12,737 3.03
Savings deposits 186,895 4,133 4.46 170,623 2,978 3.52
Time deposits - under $100,000 181,866 4,237 4.70 210,546 5,466 5.24
Time deposits - $100,000 and over 781,875 17,704 4.57 734,121 19,223 5.28
-------------- ------------ -------------- ------------
Total interest - bearing deposits 2,499,230 40,824 3.29 2,349,991 42,325 3.63
Federal funds purchased and securities
sold under repurchase agreements 581,360 13,949 4.84 355,232 9,567 5.43
Other borrowings 487,080 13,297 5.51 327,251 9,819 6.05
-------------- ------------ -------------- ------------
Total interest - bearing liabilities 3,567,670 68,070 3.85 3,032,474 61,711 4.10
------------ ------------
Noninterest - bearing deposits 1,967,893 1,789,535
Other liabilities 61,359 63,251
Shareholders' equity 563,355 533,535
---------------- --------------
Total liabilities and shareholders'
equity $6,160,277 $5,418,795
--------------- --------------
--------------- --------------
Net interest spread 4.16 % 4.50 %
-------- --------
-------- --------
Fully taxable equivalent net interest income $158,867 $150,340
------------ ------------
------------ ------------
Net interest margin 5.55 % 6.10 %
-------- --------
-------- --------
(1) Includes average nonaccrual loans of $23,334 and $35,131 for 1999 and
1998, respectively.
(2) Loan income includes loan fees of $8,260 and $5,698 for 1999 and 1998,
respectively.
11
The following tables set forth the changes in net interest income on a
fully taxable equivalent basis broken down by volume and rates. The change
in interest due to both volume and in rate has been allocated to change due
to volume and rate in proportion to the relationship of the absolute dollar
amounts of the change in each.
CHANGES IN NET INTEREST INCOME
FOR THE THREE FOR THE THREE
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1999 VS 1998 1998 VS 1997
- --------------------- ---------------------------------------- --------------------------------------
INCREASE (DECREASE) NET INCREASE (DECREASE) NET
DUE TO INCREASE DUE TO INCREASE
-------------------------- --------------------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------------ ----------- ----------- ------------ ----------- ----------
Interest earned on:
Loans $ 10,411 $ (6,933) $ 3,478 $ 16,887 $ (1,883) $ 15,004
Securities 4,246 (121) 4,125 (443) (354) (797)
Trading account securities 241 (271) (30) 34 (104) (70)
Federal funds sold and
securities purchased
under resale agreements (307) (111) (418) 617 9 626
------------ ----------- ----------- ------------ ----------- ----------
Total interest-earning assets 14,591 (7,436) 7,155 17,095 (2,332) 14,763
------------ ----------- ----------- ------------ ----------- ----------
Interest paid on:
Interest checking deposits 47 (451) (404) 16 (13) 3
Money market deposits 643 (358) 285 458 81 539
Savings deposits 223 457 680 (94) 146 52
Other time deposits 831 (1,802) (971) 2,678 189 2,867
Other borrowings 4,714 (1,133) 3,581 1,352 370 1,722
------------ ----------- ----------- ------------ ----------- ----------
Total interest-bearing liabilities 6,458 (3,287) 3,171 4,410 773 5,183
------------ ----------- ----------- ------------ ----------- ----------
$ 8,133 $ (4,149) $ 3,984 $ 12,685 $ (3,105) $ 9,580
------------ ----------- ----------- ------------ ----------- ----------
------------ ----------- ----------- ------------ ----------- ----------
FOR THE SIX FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1999 VS 1998 1998 VS 1997
- --------------------- ---------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO NET DUE TO NET
-------------------------- INCREASE -------------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------------ ----------- ----------- ------------ ----------- ----------
Interest earned on:
Loans $ 21,147 $ (12,653) $ 8,494 $ 37,109 $ (1,618) $ 35,491
Securities 7,918 (825) 7,093 (943) 157 (786)
Trading account securities 348 (626) (278) 83 78 161
Federal funds sold and
securities purchased
under resale agreements (345) (78) (423) 789 35 824
------------ ----------- ----------- ------------ ----------- ----------
Total interest-earning assets 29,068 (14,182) 14,886 37,038 (1,348) 35,690
------------- ----------- ----------- ------------ ----------- ----------
Interest paid on:
Interest checking deposits 78 (842) $ (764) 79 (35) 44
Money market deposits 1,419 (563) 856 869 78 947
Savings deposits 304 851 1,155 (36) 232 196
Other time deposits 490 (3,238) (2,748) 6,217 395 6,612
Other borrowings 10,028 (2,168) 7,860 3,488 986 4,474
------------- ----------- ----------- ------------ ----------- ----------
Total interest-bearing liabilities 12,319 (5,960) 6,359 10,617 1,656 12,273
------------- ----------- ----------- ------------ ----------- ----------
$ 16,749 $ (8,222) $ 8,527 $ 26,421 $ (3,004) $ 23,417
------------- ----------- ----------- ------------ ----------- ----------
------------- ----------- ----------- ------------ ----------- ----------
12
BALANCE SHEET ANALYSIS
AVAILABLE-FOR-SALE SECURITY PORTFOLIO
Comparative period-end available-for-sale security portfolio balances are
presented below:
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
------------------------------ ----------------------------- ---------------------------
DOLLARS IN THOUSANDS COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- -------------------- ------------- -------------- ------------ -------------- ------------ ------------
U.S. Gov. and federal agency $ 263,000 $ 262,571 $ 268,838 $ 275,145 $ 270,080 $ 272,775
Mortgage-backed 385,870 375,673 348,826 351,469 145,843 147,203
State and Municipal 151,293 149,094 121,743 123,845 2,180 2,185
Other debt 142,765 136,26 145,852 152,692 43,331 45,965
------------- -------------- ------------ -------------- ------------ ------------
Total debt securities 942,928 923,600 885,259 903,151 461,434 468,128
Marketable equity securities 99,372 99,982 104,893 109,375 123,173 130,591
-------------- -------------- ------------ -------------- ------------ ------------
Total securities $ 1,042,300 $ 1,023,582 $ 990,152 $ 1,012,526 $ 584,607 $ 598,719
-------------- -------------- ------------ -------------- ------------ ------------
-------------- -------------- ------------ -------------- ------------ ------------
The following table provides the expected remaining maturities and
yields (taxable-equivalent basis) of debt securities within the
available-for-sale portfolio as of June 30, 1999.
ONE YEAR OVER 1 YEAR OVER 5 YEARS
OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL
----------------- ------------------- ------------------- ------------------- ------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%)
- -------------------- -------- -------- --------- -------- --------- -------- --------- -------- --------- --------
U.S. Gov. and federal agency $ 70,378 6.20 $ 142,202 5.98 $ 49,991 6.11 $ - - $ 262,571 6.06
Mortgage-backed - - - - 14,456 6.14 361,217 6.56 375,673 6.55
State and Municipal 22,107 6.40 57,727 6.87 66,698 6.30 2,562 6.37 149,094 6.54
Other debt - - 103 7.00 89,839 7.50 46,320 7.82 136,262 7.61
-------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total debt securities $ 92,485 6.25 $ 200,032 6.23 $ 220,984 6.73 $ 410,099 6.70 $ 923,600 6.56
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Amortized cost $ 91,995 $ 199,457 $ 229,795 $ 421,681 $ 942,928
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Dividend income included in interest income on securities in the
Consolidated Statement of Income and Comprehensive Income in the second
quarter of 1999 and 1998 were $1.3 million and $2.1 million, and for the six
months were $2.6 million and $4.6 million, respectively.
13
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
LOANS
JUNE 30, DECEMBER 31, JUNE 30,
DOLLARS IN THOUSANDS 1999 1998 1998
- -------------------- -------------------- ------------------- -------------------
Commercial $ 2,537,110 $ 2,457,946 $ 2,186,855
Residential first mortgage 1,044,656 1,038,229 1,039,802
Real estate - construction 288,501 237,015 203,936
Real estate - mortgage 802,246 747,711 744,512
Installment 50,226 49,526 53,121
-------------------- ------------------- -------------------
Total loans, gross 4,722,739 4,530,427 4,228,226
Less: Allowance for credit losses (140,185) (135,339) (135,837)
-------------------- ------------------- -------------------
Total loans, net $ 4,582,554 $ 4,395,088 $ 4,092,389
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Gross loans at June 30, 1999 amounted to $4,722.7 million, up $494.5 million
(11.7%) from June 30, 1998 and up $192.3 million (4.2%) from December 31,
1998. During the quarter, relationship-originated loans increased $260.9
million while purchased residential first mortgages and non-relationship
syndicated loans fell $56.7 million due to repayments and loan sales.
Contributing to the $350.3 million increase in commercial loans from June 30,
1998 were loan originations and the purchase of syndicated corporate loans.
Construction loans also increased by $84.6 million from June 30, 1998 as the
Company continued to expand its lending for residential construction
development. The $4.9 million increase in residential first mortgage loans
from the year ago quarter resulted from the Bank's own originations. The
Company expects that the Bank's loan portfolio will increase from second
quarter 1999 levels due primarily to its own internal loan generation
activities but could include some higher yielding residential loan purchases.
The following table presents information concerning nonaccrual loans, ORE,
and restructured loans.
NONACCRUAL LOANS, ORE AND RESTRUCTURED LOANS
JUNE 30, DECEMBER 31, JUNE 30,
DOLLARS IN THOUSANDS 1999 1998 1998
- -------------------- ------------ ------------ ------------
Nonaccrual loans:
Commercial $ 11,250 $ 4,763 $ 12,578
Real estate 14,569 17,204 20,576
Installment 714 1,171 -
------------ ------------ ------------
Total 26,533 23,138 33,154
ORE 1,696 3,480 2,195
------------ ------------ ------------
Total nonaccrual loans and ORE $ 28,229 $ 26,618 $ 35,349
------------ ------------ ------------
------------ ------------ ------------
Restructured loans, accruing $ 1,771 $ 1,982 $ 2,868
------------ ------------ ------------
------------ ------------ ------------
Total non accrual loans as a
percentage of total loans......................... 0.56 % 0.51 % 0.78 %
Total non accrual loans and ORE as a
percentage of total loans and ORE................. 0.60 0.59 0.84
Allowance for credit losses to total loans.............. 2.97 2.99 3.21
Allowance for credit losses
to nonaccrual loans............................... 528.34 584.92 409.72
14
The table below summarizes the approximate changes in nonaccrual loans for
the quarters and six months ended June 30, 1999 and June 30, 1998.
CHANGES IN NONACCRUAL LOANS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ----------------------------------
Dollars in millions 1999 1998 1999 1998
- ------------------- ----------- ------------ ------------ ------------
Balance, beginning of period $ 23.3 $ 36.8 $ 23.1 $ 27.6
Additions from acquisitions - - - 3.1
Loans placed on nonaccrual 10.9 4.4 14.9 24.8
Charge offs (0.3) (2.3) (0.7) (7.6)
Loans returned to accrual status (0.1) - (0.2) -
Repayments (including interest
applied to principal) (7.3) (5.7) (10.6) (14.7)
----------- ------------ ------------ ------------
Balance, end of period $ 26.5 $ 33.2 $ 26.5 $ 33.2
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
At June 30, 1999, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $4.5 million of problem loans
about which the ability of the borrowers to comply with the present loan
repayment terms in the future is questionable.
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding and changes in
the allowance for credit losses for the periods presented:
CHANGES IN ALLOWANCE FOR CREDIT LOSSES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
DOLLARS IN MILLIONS 1999 1998 1999 1998
- -------------------------------------- ------------- ------------- ------------- ------------
Average amount of loans outstanding $ 4,602.6 $ 4,111.4 $ 4,557.0 $ 4,061.4
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Balance of allowance for credit losses,
beginning of period $ 138.7 $ 137.0 $ 135.3 $ 137.8
Loans charged off:
Commercial 1.4 3.8 2.4 11.2
Real estate 0.1 0.3 0.2 0.6
------------- ------------- ------------- ------------
Total loans charged off 1.5 4.1 2.6 11.8
------------- ------------- ------------- ------------
Less recoveries of loans previously charged off:
Commercial 2.8 2.9 7.2 7.1
Real estate 0.2 - 0.3 -
------------- ------------- ------------- ------------
Total recoveries 3.0 2.9 7.5 7.1
------------- ------------- ------------- ------------
Net loans (charged off) / recovered 1.5 (1.2) 4.9 (4.7)
Additions to allowance from operating expenses - - - -
Additions to allowance from acquisitions - - - 2.7
------------- ------------- ------------- ------------
Balance, end of period $ 140.2 $ 135.8 $ 140.2 $ 135.8
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Ratio of net charge-offs
to average loans N/M 0.03% N/M 0.12%
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Ratio of allowance for credit losses
to total period end loans 2.97% 3.21%
------------ -----------
------------ -----------
15
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for "well capitalized"
institutions and the capital ratios for the Company and the Bank at June 30,
1999, December 31, 1998 and June 30, 1998.
Regulatory
Well Capitalized June 30, December 31, June 30,
Standards 1999 1998 1998
-------------------- ----------------- ------------------- --------------
City National Corporation
- -------------------------------
Tier 1 leverage 4.00 % 8.18 % 7.99 % 8.49 %
Tier 1 risk-based capital 6.00 9.82 9.43 10.18
Total risk-based capital 10.00 13.53 13.20 14.19
City National Bank
- -------------------------------
Tier 1 leverage 4.00 % 7.92 % 7.53 % 7.78 %
Tier 1 risk-based capital 6.00 9.51 8.90 9.31
Total risk-based capital 10.00 13.20 12.65 13.34
Under the Company's current one million-share common stock buyback program,
which was announced on July 29, 1999 no shares were repurchased as of July 31,
1999. Under the Company's buyback program announced on September 8 1998 and
completed on July 28, 1999, a total of one million shares were purchased at a
cost of $32.2 million. Shares purchased under the buyback program will be
reissued upon the exercise of stock options and for other general corporate
purposes.
On July 29, 1999, the Company declared a regular quarterly dividend of $0.165
per share, payable August 23, 1999 to shareholders of record as of August 11,
1999.
ASSET/LIABILITY MANAGEMENT
The principal objectives of asset/liability management are to maximize net
interest margin subject to margin volatility and liquidity constraints. Margin
volatility results when the rate reset (or repricing) characteristics of assets
are materially different from those of the Company's liabilities. Liquidity risk
results from the mismatching of asset and liability cash flows. Management
chooses asset/liability strategies that promote stable earnings and reliable
funding. Interest rate risk and funding positions are kept within limits
established by the Company's board of directors to ensure that risk-taking is
not excessive and that liquidity is properly managed.
The Company has established three measurement processes to quantify and manage
exposure to interest rate risk: net interest income simulation modeling, gap
analysis, and present value of equity analysis. Net interest income simulations
are used to identify the direction and severity of interest rate risk exposure
across a twelve month forecast horizon. Gap analysis provides insight into
structural mismatches of assets and liability repricing characteristics and
reflects the attrition and prepayment behavior of deposit and loan customers.
Present value of equity calculations are used to estimate the theoretical price
sensitivity of shareholder equity to changes in interest rates.
Generally, an asset sensitive gap indicates that net interest income will
improve during a period of rising interest rates. The gap report is based on the
contractual cash flows of all asset and liability balances on the Company's
books. The contractual life of those balances may differ substantially from
their expected lives however. For example, checking accounts are all subject to
immediate withdrawal. Experience suggests that these accounts will have an
average life of several years. Also, certain loans (such as first mortgages) are
subject to prepayment. The cash flows in the gap report are adjusted to reflect
these behaviors. The gap report also includes the effects that interest rate
swaps have had on the repricing profile of the Company.
16
The use of interest rate swaps to manage interest rate exposure involves the
risk of dealing with counterparties and their ability to meet contractual terms.
These counterparties must receive appropriate credit approval before the Company
enters into an interest rate contract. Notional principal amounts express the
volume of these transactions, although the amounts potentially subject to credit
and market risks are much smaller. At June 30, 1999, the Company's interest rate
swaps were entered into as hedges against a decrease in interest income
generated from prime based loans if the prime decreased or to convert fixed rate
deposits and debt into floating rate liabilities. The Company has not entered
into transactions involving any other interest rate derivative financial
instruments, such as interest rate floors, caps and interest rate futures
contracts.
At June 30, 1999, the one-year cumulative gap was a net liability position of
$(585.5) million (9% of total assets) compared with a net liability position
of $(407.0) million (6% of total assets) at December 31, 1998. The decrease
resulted from continuing interest rate risk mitigation activities and
relatively low holdings of short-term rate-sensitive assets. As of June 30,
1999, the Company has $945.0 million of notional principal in receive
fixed-pay LIBOR interest rate swaps, of which $515.0 million have maturities
greater than one year. The Company's interest-rate risk-management
instruments had a fair value of $(1.8) million and $6.4 million and an
exposure to credit risk of $0.7 million and $6.4 million at June 30, 1999 and
December 31, 1998, respectively. The credit exposure represents the cost to
replace, on a present value basis and at current market rates, the net
positive value of all contracts for each counterparty that were outstanding
at the end of the period. The Company's swap agreements require the deposit
of collateral to mitigate the amount of credit risk if certain credit
exposure thresholds are exceeded. As of June 30, 1999 the Company had
deposited $2.0 million par value in securities to mitigate credit exposure.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Company's interest rate sensitivity position. To supplement
traditional gap analysis, the Company uses simulation modeling to estimate the
potential effects of changing interest rates. This process allows the Company to
fully explore the complex relationships within the gap over time and various
interest rate scenarios.
At June 30, 1999, the Company's outstanding foreign exchange contracts totaled
$25.6 million. The Company enters into foreign exchange contracts with its
customers and counterparty banks solely for the purpose of offsetting or hedging
transaction and economic exposures arising out of commercial transactions. The
Company's policies prohibit outright speculation by the Company and its
employees. The Company actively manages its foreign exchange exposures within
prescribed risk limits and controls. All foreign exchange contracts outstanding
at June 30, 1999 had remaining maturities of six months or less.
LIQUIDITY MANAGEMENT
The Company continues to manage its liquidity through the combination of core
deposits, federal funds purchased, repurchase agreements, collateralized
borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of
San Francisco, and a portfolio of securities availabie-for-sale. Liquidity is
also provided by maturing investment securities and loans.
Average core deposits and shareholders' equity comprised 69.0% of total funding
in the second quarter of 1999, compared to 72.9% in the second quarter of 1998.
This decrease has required that the Company increase its use of more costly
alternative funding sources. Despite the decrease in percentage of funding
derived from core deposits and shareholders' equity, the Company has not faced
any liquidity constraints.
17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statement made by, or on behalf of, the Company.
- --Economic conditions. The Company's results are strongly influenced by general
economic conditions in its market area, Southern California, and a deterioration
in these conditions could have a material adverse impact on the quality of the
Bank's loan portfolio and the demand for its products and services. In
particular, changes in economic conditions in the real estate and entertainment
industries may affect the Company's performance.
- --Interest rates. Management anticipates that interest rates will remain flat or
slightly higher. If interest rates vary substantially from present levels, this
may cause the Company's results to differ materially.
- --Government regulation and monetary policy. All forward looking statements
presume a continuation of the existing regulatory environment and U.S.
Government monetary policies. The banking industry is subject to extensive
federal and state regulations, and significant new laws or changes in, or repeal
of, existing laws may cause results to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Bank, primarily through open
market operations in U.S. Government securities, the discount rate for member
bank borrowing and bank reserve requirements, and a material change in these
policies would be likely to have an impact on results.
- --Competition. The Bank competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries. Results may
differ if circumstances affecting the nature or level of competition change,
such as the merger of competing financial institutions.
- --Credit quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. The Bank has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Bank's credit portfolio, but such policies and procedures may not prevent
unexpected losses that could adversely affect the Company's results.
- --Other risks. From time to time, the Company details other risks to its
business and/or its financial results in its filings with the Securities and
Exchange Commission.
While management believes that its assumptions regarding these and other factors
on which forward looking statements are based are reasonable, such assumptions
are necessarily speculative in nature, and actual outcomes can be expected to
differ to some degree. Consequently, there can be no assurance that the results
described in such forward looking statements will, in fact, be achieved.
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PART 11. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 21, 1999, the Registrant held its annual meeting of
stockholders. The stockholders elected the four Class III directors
listed in the Registrant's proxy statement; approved the Registrant's
1999 Omnibus Plan and the reservation of 3,500,000 shares of Common
Stock for issuance or delivery under the plan; and approved the
Registrant's Variable Bonus Plan to enable bonuses paid thereunder to
qualify as deductible, performance-based compensation under Section
162(m) of the Internal Revenue Code. The following table sets forth
the number of votes cast for, or withheld with respect to, each
director nominated for election. Under applicable Delaware law, votes
withheld have the same effect as votes cast against a nominee, and for
this reason the ballot did not offer a separate opportunity to vote
against a nominee. Additionally, the table sets forth the number of
votes cast for or against the 1999 Omnibus Plan and the Variable Bonus
Plan, as well as the number of abstentions. Broker non-votes were
treated as not present at the meeting and had no effect.
DIRECTORS FOR WITHHELD
--------------------------------- ---------------- -----------------
Bram Goldsmith 40,762,224 142,966
Richard L. Bloch 40,770,289 134,901
Charles E. Rickershauser, Jr. 40,767,761 137,429
Kenneth Ziffren 40,788,529 116,661
MATTERS FOR AGAINST ABSTENTION
--------------------------------- ---------------- ----------------- -----------------
1999 Omnibus Plan 26,575,173 6,941,129 7,388,888
Variable Bonus Plan 39,503,227 1,185,325 216,638
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.2.3 First Amendment to Employment Agreement made
as of June 1, 1999, by and between Bram
Goldsmith and City National Bank, including
Seventh Amendment to Split Dollar Life
Insurance Agreement Collateral Assignment
Plan between City National Bank and the
Goldsmith 1980 Insurance Trust, dated June
1, 1999.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on April 9,
1999 under item 5 containing a press release dated
April 9, 1999 relating to an error in its current
Proxy Statement concerning the value of unexercised
stock options for certain executives, and a revised
table of "Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year End Option Values" appearing on
page 12 of the Company's 1999 Proxy Statement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: August 13, 1999 /s/ FRANK P. PEKNY
--------------- -------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
20