<PAGE>
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 September 30, 1994 Commission File Number 1-10521
CITY NATIONAL CORPORATION
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
- - - ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive, Beverly Hills, California 90210
- - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
SOCH
subject to such filing requirements for the past 90 days.
YES X NO
-------- --------
Number of shares of common stock outstanding at October 31, 1994: 45,142,206
This Form 10-Q contains 29 pages.
<PAGE>
CITY NATIONAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31, September 30,
1994 1993 1993
----------- ------------ ------------
<S> <C> <C> <C>
(Dollars in thousands)
Cash and due from banks ................................... $ 227,630 $ 234,504 $ 200,792
Interest-bearing deposits in other banks................... 673 649 621
Federal funds sold and securities purchased under
resale agreements ....................................... 183,000 265,000 520,800
Investment securities (market values $700,073, $902,738
and $576,798 at September 30, 1994, December 31, 1993 and
September 30, 1993, respectively) 726,374 902,481 569,721
Securities available for sale (cost $197,596 and $2,000 at
September 30, 1994 and December 31, 1993, respectively).. 192,164 2,000 -
Trading account securities ................................ 41,781 39,765 22,410
Loans...................................................... 1,534,454 1,620,556 1,610,189
Less allowance for credit losses .......................... 112,308 110,499 123,353
----------- ------------ ------------
Net loans ............................................... 1,422,146 1,510,057 1,486,836
Leveraged leases .......................................... 9,756 13,852 13,474
Premises and equipment, net ............................... 18,282 20,359 20,927
Customers' acceptance liability ........................... 6,177 5,150 4,851
Other real estate ......................................... 8,269 5,559 5,114
Deferred tax asset ........................................ 26,300 18,050 30,120
Assets held for accelerated disposition.................... - 17,450 51,222
Other assets .............................................. 35,299 65,750 58,799
----------- ------------ ------------
Total assets ............................................ $ 2,897,851 $ 3,100,626 $ 2,985,687
=========== ============ ============
LIABILITIES
Demand deposits ........................................... $ 948,374 $ 1,088,026 $ 973,551
Interest checking deposits ................................ 279,267 324,034 284,901
Money market accounts ..................................... 704,466 742,381 805,937
Savings deposits .......................................... 87,623 107,221 98,893
Time deposits - under $100,000 ............................ 82,764 96,672 102,745
Time deposits - $100,000 and over ......................... 137,453 168,433 189,313
----------- ----------- -----------
Total deposits .......................................... 2,239,947 2,526,767 2,455,340
Federal funds purchased and securities sold
under repurchase agreements ............................. 250,969 202,459 205,091
Other short-term borrowings ............................... 46,002 15,000 15,000
Mortgages payable ......................................... - 26,319 -
Other liabilities ......................................... 32,130 26,857 11,884
Acceptances outstanding ................................... 6,177 5,150 4,851
----------- ----------- -----------
Total liabilities ....................................... 2,575,225 2,802,552 2,692,166
----------- ----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock, authorized-5,000,000 shares
none outstanding
Common stock- par value- $1.00
Authorized-75,000,000 shares
Outstanding-45,127,214, 45,027,417 and 45,021,360
at September 30, 1994, December 31, 1993 and
September 30, 1993, respectively......................... 45,127 45,027 45,021
Additional paid-in capital ................................ 263,151 262,471 262,507
Unrealized losses on securities available for sale......... (3,529) - -
Accumulated earnings (deficit)............................. 17,877 (9,424) (14,007)
----------- ----------- -----------
Total shareholders' equity .............................. 322,626 298,074 293,521
----------- ----------- -----------
Total liabilities and shareholders' equity............... $ 2,897,851 $ 3,100,626 $ 2,985,687
=========== =========== ===========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
-2-
<PAGE>
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
----------------------------- ---------------------------
1994 1993 1994 1993
------------- ------------- ------------- -------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ............................... $32,988 $30,528 $94,143 $99,135
Interest on federal funds sold and securities purchased
under resale agreements ............................... 1,841 2,892 5,194 6,792
Interest on investment securities:
U.S. Treasury and federal agency securities............ 7,869 6,489 24,856 17,631
Municipal securities .................................. 240 - 587 -
Other securities ...................................... 443 216 1,131 555
Interest on securities available for sale................. 3,266 216 5,913 1,001
Interest on trading account securities.................... 394 258 823 754
-------------- ------------- ------------- -------------
Total ................................................. 47,041 40,599 132,647 125,868
-------------- ------------- ------------- -------------
Interest expense:
Interest on deposits ..................................... 7,377 8,202 21,774 26,104
Interest on federal funds purchased and securities sold
under repurchase agreements ........................... 2,248 1,643 5,754 5,959
Interest on other short-term borrowings................... 268 119 557 343
-------------- ------------- ------------- -------------
Total ................................................. 9,893 9,964 28,085 32,406
-------------- ------------- ------------- -------------
Net interest income ...................................... 37,148 30,635 104,562 93,462
Provision for credit losses .............................. - 5,500 6,000 24,500
-------------- -------------- ------------- -------------
Net interest income after provision for credit losses..... 37,148 25,135 98,562 68,962
-------------- -------------- ------------- -------------
Noninterest income:
Service charges on deposit accounts ...................... 2,186 3,184 7,352 8,577
Trust fees ............................................... 1,677 1,875 5,195 5,708
Customer trading account income .......................... 1,919 1,475 5,128 4,808
Gain on sale of Equity Line of Credit loans............... - - - 4,460
Gain on sale of leverage leases .......................... - - 1,331 -
Gain on sale of merchant draft business................... - - - 1,941
Gain (loss) on sale of securities ........................ (647) - (647) -
All other income ......................................... 3,003 3,773 8,974 11,051
-------------- -------------- ------------- -------------
Total noninterest income............................... 8,138 10,307 27,333 36,545
-------------- -------------- ------------- -------------
Noninterest expense:
Salaries and other employee benefits ..................... 16,124 17,966 48,580 54,076
Net occupancy of premises ................................ 2,386 2,959 7,769 8,537
Data processing .......................................... 1,672 1,903 5,250 5,887
Professional ............................................. 2,184 1,981 5,579 5,236
FDIC insurance ........................................... 1,387 1,580 4,387 5,622
Office supplies .......................................... 1,140 1,146 3,481 3,688
Depreciation ............................................. 1,031 1,098 3,124 3,322
Promotion ................................................ 649 522 2,195 1,352
Equipment ................................................ 724 421 1,845 1,475
Other operating .......................................... 2,620 2,874 7,742 7,887
Other real estate expense (income)........................ (203) (2,020) (5,503) 38,244
-------------- -------------- ------------- -------------
Total noninterest expense............................... 29,714 30,430 84,449 135,326
-------------- -------------- ------------- -------------
Income (loss) before taxes.................................. 15,572 5,012 41,446 (29,819)
Income taxes (benefit) ..................................... 5,160 1,537 14,145 (11,202)
-------------- -------------- ------------- -------------
Net income (loss) from continuing operations................ 10,412 3,475 27,301 (18,617)
Net income from gain on sale of discontinued operations..... - - - 7,128
-------------- -------------- ------------- -------------
Net income (loss) .......................................... $10.412 $3,475 $27,301 $(11,489)
============== ============== ============= =============
Income (loss) per share from continuing operations.......... $0.23 $0.08 $0.60 ($0.49)
Income (loss) per share .................................... $0.23 $0.08 $0.60 (0.30)
============== ============== ============= =============
Shares used to compute earnings (loss) per share............ 45,726 45.021 45,608 34,746
============== ============== ============= =============
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
-3-
<PAGE>
City National Corporation
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
---------------------------
1994 1993
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Operating Activities
Net income (loss) ................................................ $ 27,301 $ (11,489)
Adjustment to net income (loss):
Provision for credit losses .................................. 6,000 24,500
Writedowns of ORE ............................................ - 40,327
Gain on sales of ORE and Disposition Program assets........... (5,361) -
Gain on sale of leveraged leases.............................. (1,331) -
Depreciation ................................................. 3,124 3,322
Net (increase) in trading securities ........................ (2,016) (12,152)
Net (increase) decrease in deferred tax benefits ............. (8,250) 7,000
Tax refunds................................................... 24,955 -
Other, net ................................................... 26,255 4,136
---------- ----------
Net cash provided by operating activities................. 70,677 55,644
---------- ----------
Investing Activities
Net decrease (increase)in short term investments ................. (24) 14,335
Purchases of securities available for sale ....................... (253,836) -
Sales and maturities of securities available for sale............. 53,904 -
Maturities of investment securities .............................. 484,556 183,509
Purchases of investment securities................................ (305,205) (310,834)
Loan originations and principal collections, net ................. 173,842 333,222
Purchase of residential mortgage loans............................ (122,257) -
Proceeds from sales of loans ..................................... - 73,699
Proceeds from sales of ORE and Disposition Program assets ........ 7,861 17,117
Proceeds from sale of leveraged lease............................. 5,141 -
Other, net ....................................................... 6,524 8,438
---------- ----------
Net cash provided by investing activities .................... 50,506 319,486
---------- ----------
Financing Activities
Net increase (decrease) in federal funds purchased and securities
sold under repurchase agreements ............................. 48,510 (134,058)
Net decrease in deposits ......................................... (286,820) (455,936)
Net increase in short term borrowings............................. 31,002 -
Proceeds from issuance of stock................................... 685 77,017
Other, net ....................................................... (3,434) (378)
---------- ----------
Net cash used in financing activities ........................ (210,057) (513,355)
---------- ----------
Net decrease in cash and cash equivalents ........................ (88,874) (138,225)
Cash and cash equivalents at beginning of period ................. 499,504 859,817
---------- ---------
Cash and cash equivalents at end of period ....................... $ 410,630 $ 721,592
========== =========
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest................................................... $ 28,131 $ 33,099
Income taxes............................................... (6,986) (30,023)
Non-Cash Investing activities:
Transfer from loans to OREO and Disposition Program........ 3,784 78,560
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
-4-
<PAGE>
CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------------
1994 1993
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Common Stock
Balance, beginning of period .................. $45,027 $32,240
Stock options exercised ........................ 100 64
Proceeds from Rights Offering................... - 12,717
------------- --------------
Balance, end of period ......................... 45,127 45,021
------------- --------------
Additional paid in capital
Balance, beginning of period .................. 262,471 198,222
Stock options exercised ........................ 585 383
Tax benefit from stock options ................. 95 49
Proceeds from Rights Offering................... - 63,853
------------- --------------
Balance, end of period ......................... 263,151 262,507
------------- -------------
Unrealized net losses on securities available for sale
Balance, beginning of period .................. - -
Change during period ........................... (3,529) -
------------- -------------
Balance, end of period ......................... (3,529) -
------------- -------------
Accumulated earnings (deficit)
Balance, beginning of period ................. (9,424) (2,518)
Net income (loss) .............................. 27,301 (11,489)
------------- --------------
Balance, end of period ......................... 17,877 (14,007)
------------- -------------
Total shareholders' equity ....................... $322,626 $293,521
============= =============
See accompanying Notes to the Unaudited Consolidated Financial Statements
</TABLE>
-5-
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF THE REGISTRANT
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,
1993.
2. In March of 1993, the Company adopted a program (the Disposition Program)
to accelerate the disposition of certain assets, consisting of other real
estate owned (ORE), including in-substance foreclosures, and certain
nonaccrual loans. The assets included in the Disposition Program were
segregated as "assets held for accelerated disposition" on the consolidated
balance sheet. The book value of these assets prior to the adoption of the
Disposition Program was $88.9 million of ORE and $30.6 million of
nonaccrual loans. A credit loss provision of $4.0 million and additional
ORE writedowns and expense accruals of $36.5 million and certain charge
offs in the amount of $12.4 million were recorded during the first quarter
of 1993 to record the assets at their estimated liquidation values. The
Bank signed a definitive agreement to sell, as of November 1, 1993, all six
asset pools in the Disposition Program. 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. During the first and second quarters of 1994, the
Company completed the sale of the ORE contained in the Disposition Program.
Gains of $3.5 million and $0.7 million, respectively, from the Disposition
Program were recognized in the first and second quarters of 1994,
respectively.
3. Securities held for investment are classified as investment securities.
Because the Company has the ability and management has the intent to hold
investment securities until maturity, investment securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts.
Trading account securities are stated at market value. Investments not
classified as trading securities nor as investment securities are
classified as securities available for sale and recorded at fair value.
Unrealized holding gains or losses for securities available for sale are
excluded from earnings
-6-
<PAGE>
and reported as a net amount after taxes, in a separate component of
shareholders' equity, until realized.
4. For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, non-interest bearing amounts due from banks, federal funds
sold and securities purchased under resale agreements, and do not include
items with original maturities of over 90 days.
5. On October 26, 1994, the Board of Directors of City National Corporation
declared a quarterly dividend of $0.05 per share of common stock, payable
on November 18, 1994, to shareholders of record on November 8, 1994.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
The following discussion summarizes some of the developments significant to
City National Corporation during the third quarter of 1994. However, the
Company's consolidated financial statements for the quarter and the entire
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Quarterly Report should be reviewed for a more
complete understanding of the Company's financial position and its results of
operations.
City National Corporation (the Corporation) is the holding company for City
National Bank (the Bank). Because the Bank constitutes substantially all of the
business of the Company, references to the Company in this Item 2 reflect the
consolidated activities of the Company and the Bank.
The Company recorded consolidated net income of $10.4 million, or $.23 per
share, in the third quarter of 1994, compared to a net income of $3.5 million,
or $.08 per share, in the third quarter of 1993, and net income of $8.2 million,
or $.18 per share, in the second quarter of 1994. Most of the change between
third quarters resulted from an increase in net interest income in the third
quarter of 1994 of $6.5 million and a decrease in the provision for credit
losses of $5.5 million.
Returns on average assets for the third quarter and the first nine months
of 1994 were 1.47% and 1.29%, respectively. Returns on average equity for the
third quarter and the first nine months of 1994 were 13.04% and 11.80%,
respectively.
The allowance for credit losses at September 30, 1994 was $112.3 million,
or 7.32% of loans outstanding, compared to 7.07% at June 30, 1994 and 7.66% at
September 30, 1993. The Company had net recoveries of $6.9 million in the third
quarter of 1994, compared to net charge-offs of $6.2 million, or 1.52% of
average loans, in the third quarter of 1993, and $9.1 million, or 2.43% of
average loans, in the second quarter of 1994. Based on its review of the loan
portfolio and the level of the allowance for credit losses, management
anticipates that net charge offs for 1994 will decrease from 1993 levels. If
credit quality continues to improve and the Southern California economy
continues on its recent positive trend, a provision for credit losses may not be
required in the last quarter of 1994, and the aggregate provision in 1995 will
likely approximate the 1994 provision.
-8-
<PAGE>
Nonaccrual loans totaled $56.1 million at September 30, 1994, or 3.7% of
total loans, down from $60.7 million, or 4.1% of total loans, at June 30, 1994,
and $97.3 million, or 6.0% of total loans, a year earlier. The reduction in
nonaccrual loans between third quarters was principally attributable to payments
and charge offs.
In April 1994, the Bank implemented a consolidation plan to improve
efficiency and operational productivity in its branch network. The streamlining
reduced 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
house teams of lenders specializing in serving mid-size businesses, as well as
the Bank's larger, more complex relationships. The consolidation plan was
expected to result in expense savings of approximately $8.0 million per year,
before the effect of inflation and other factors. However, this was expected to
be partially offset by decreased income resulting from reductions in loans and
deposits caused by the consolidation. See "Consolidation Charge Reserve,"
below.
On October 26, 1994, the Board of Directors of City National Corporation
declared a quarterly dividend of $.05 per share of common stock, payable on
November 18, 1994, to shareholders of record on November 8, 1994. Future
dividend amounts will be subject to periodic review by the Board of Directors,
with the objective of paying annual dividends equal to approximately one-third
of prior year's earnings. The Company last paid a quarterly dividend in the
third quarter of 1991, but suspended its dividend as part of the Company's
efforts to safeguard its capital position.
NET INTEREST INCOME
Taxable equivalent net interest income was $37.4 million in the third
quarter of 1994, up 21.2% from the year-ago quarter. The increase resulted
primarily from the increase in the net interest spread from 3.97% to 4.76%. The
net interest spread improved because the increases in the prime interest rates
during the last two quarters resulted in higher yields on loans, while rates
paid on interest bearing liabilities increased only slightly between quarters.
The taxable equivalent net interest margin increased from 4.77% in the third
quarter of 1993 to 5.76% in the third quarter of 1994.
-9-
<PAGE>
Net interest income was $105.3 million on a fully-taxable equivalent basis
in the first nine months of 1994, up 11.4% from the year-ago period. This
increase was primarily due to increases in yields on loans, decreases in rates
paid on most deposit accounts and a higher average balance in securities.
Management expects interest earning assets to increase slightly from the
$2.579 billion average level for the third quarter of 1994. The increases in
interest earning assets and the recent increases in the prime interest rate, if
sustained, are expected to result in higher net interest income for the fourth
quarter of 1994, as compared to the first three quarters of 1994.
Average loans declined $160.2 million (9.8%) between third quarters to
$1.472 billion at September 30, 1994. The majority of this decrease reflected
lower average commercial loans outstanding, down $112.4 million (11.8%). This
decline resulted from decreased loan demand because of continued economic
weakness in Southern California and strong competition for loans. Average
construction loans decreased $55.2 million (77.7%) from the third quarter of
1993, primarily as a continuing result of the Bank's significant cutback in new
construction loan commitments, beginning in late 1990 and the transfer of
certain construction loans to the real estate mortgage category after completion
of construction.
Average loans for the first nine months of 1994 declined $274.1 million, or
15.3%, from the first nine months of 1993. Of this decrease, $161.1 million,
$70.0 million and $29.9 million were from commercial, real estate construction
and real estate mortgage loans, respectively.
Average taxable securities increased $371.4 million (71.3%) between third
quarters and $420.3 million (97.5%) between the first nine months, as a result
of the investment of the Bank's excess liquidity in government, agency and
mortgage backed securities during the last twelve months.
Average federal funds sold and securities purchased under resale agreements
decreased $213.4 million (57.2%) between third quarters and $117.5 million
(39.5%) between the first nine months. These decreases resulted from the Bank's
decision to invest more of its liquidity in securities offering higher yields.
Total deposits decreased $119.8 million (5.1%) between third quarters and
$110.2 million (4.7%) between the first nine months. Average time deposits of
$100,000 and over
-10-
<PAGE>
decreased $50.3 million (26.0%) between third quarters and $61.5 million (29.1%)
between the first nine months. Total average interest bearing core deposits
declined $69.0 million (5.5%) between third quarters and $48.0 million (3.8%)
between the first nine months.
Average federal funds purchased and securities sold under repurchase
agreements decreased $21.4 million (9.3%) between third quarters and $69.4
million (24.8%) between the first nine months, due to the Company's reduced
requirement for overnight short term funding.
-11-
<PAGE>
Net Interest Income Summary
The following table presents the components of net interest income for the
quarters ended September 30, 1994 and 1993.
<TABLE>
<CAPTION>
9-30-94 9-30-93
------------------------------------ -----------------------------------------
Interest Average Interest Average
Average income/ interest Average income/ interest
Dollars in thousands Balance expense rate (1) Balance expense rate (1)
- - - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets (2)
Earning assets
Loans: (3)
Commercial loans $841,237 $19,102 9.07 % $953,679 $17,385 7.30 %
Real estate - construction 15,877 418 10.45 71,088 1,080 6.03
Real estate - mortgage 576,168 12,392 8.53 557,517 10,807 7.69
Installment loans 38,887 1,077 10.99 50,074 1,256 9.95
---------- --------- -------- ---------- --------- --------
Total loans 1,472,169 32,989 8.93 1,632,358 30,528 7.42
---------- --------- -------- ---------- --------- --------
State and municipal securities 20,796 240 7.10 12,845 216
Taxable securities 892,491 11,577 5.15 521,062 6,705 5.11
Federal funds sold and securities
purchased under resale agreements 159,400 1,841 4.58 372,836 2,892 3.08
Trading account securities 34,264 394 4.91 30,966 258 3.63
---------- --------- -------- ---------- --------- --------
Total earning assets 2,579,120 47,041 7.28 2,570,067 40,599 6.31
---------- --------- -------- ---------- --------- --------
Allowance for credit losses (111,600) (127,266)
Cash and due from banks 250,208 257,516
Other nonearning assets 93,841 201,073
----------- ----------
Total assets $2,811,569 $2,901,390
=========== ==========
Liabilities and Shareholders' Equity
Noninterest - bearing deposits $900,495 - - $900,988 - -
Interest-bearing deposits:
Interest checking accounts 277,888 676 0.97 277,416 774 1.11
Money market accounts 724,205 4,181 2.29 766,256 4,371 2.26
Savings deposits 92,111 456 1.96 99,547 533 2.12
Time deposits - under $100,000 85,656 792 3.67 105,684 990 3.72
Time deposits - $100,000 and over 142,972 1,272 3.53 193,232 1,534 3.15
----------- --------- -------- ---------- --------- --------
Total interest - bearing deposits 1,322,832 7,377 2.21 1,442,135 8,202 2.26
----------- --------- -------- ---------- --------- --------
Total deposits 2,223,327 2,343,123
Federal funds purchased and securities
sold under repurchase agreements 209,466 2,248 4.26 230,891 1,643 2.82
Other short - term borrowings 25,954 268 4.10 14,733 119 3.20
---------- --------- -------- ---------- --------- --------
Total interest - bearing liabilities 1,558,252 9,893 2.52 1,687,759 9,964 2.34
---------- --------- -------- ---------- --------- --------
Other liabilities 36,072 21,194
Shareholders' equity 316,750 291,449
Total liabilities and shareholders ----------- ----------
equity $2,811,569 $2,901,390
=========== ==========
Net interest income/spread $37,148 4.76 % $30,635 3.97 %
========= ======== ========= ========
Fully taxable equivalent net interest income $37,449 $30,899
========= =========
Net interest margin (4) 5.76 % 4.77 %
</TABLE>
(1) The average rate data in this table are presented on a taxable
equivalent basis. Rates are calculated assuming that interest income
exempt from federal income taxes or income taxed at a rate less than
the statutory tax rates has been adjusted to a taxable equivalent
basis using the federal income tax rates in effect during the years
presented.
(2) Includes average nonaccrual loans of $57,379 and $100,594 for 1994 and
1993, respectively.
(3) Loan income includes loan fees of $2,181 and $1,406 for 1994 and 1993,
respectively.
(4) Fully taxable net interest income divided by interest-earning assets.
-12-
<PAGE>
Net Interest Income Summary
The following table presents the components of net interest income for the nine
months ended September 30, 1994 and 1993.
<TABLE>
<CAPTION>
9-30-94
----------------------------------------------
Interest Average
Average income/ interest
Dollars in thousands Balance expense rate (1)
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets (2)
Earning assets
Loans: (3)
Commercial loans $868,444 $54,394 8.43 %
Real estate - construction 14,589 974 8.93
Real estate - mortgage 589,363 35,774 8.12
Installment loans 40,874 3,001 9.82
------------- ----------- --------
Total loans 1,513,270 94,143 8.35
------------- ----------- --------
State and municipal securities 16,098 587 7.57
Taxable securities 851,528 31,900 5.01
Federal funds sold and securities
purchased under resale agreements 179,628 5,194 3.87
Trading account securities 27,235 823 4.36
------------ ----------- --------
Total earning assets 2,587,759 132,647 6.89
------------ ----------- --------
Allowance for credit losses (112,553)
Cash and due from banks 248,819
Other nonearning assets 110,466
------------
Total assets $2,834,491
============
Liabilities and Shareholders' Equity
Noninterest - bearing deposits $899,293 - -
Interest-bearing deposits:
Interest checking accounts 285,583 2,060 0.96
Money market accounts 729,999 12,172 2.23
Savings deposits 97,465 1,430 1.96
Time deposits - under $100,000 90,552 2,450 3.62
Time deposits - $100,000 and over 149,837 3,662 3.27
------------ ----------- --------
Total interest - bearing deposits 1,353,436 21,774 2.15
------------ ----------- --------
Total deposits 2,252,729
Federal funds purchased and securities
sold under repurchase agreements 210,141 5,754 3.66
Other short - term borrowings 19,583 557 3.80
------------ ----------- --------
Total interest - bearing liabilities 1,583,160 28,085 2.37
------------ ----------- --------
Other liabilities 42,771
Shareholders' equity 309,267
Total liabilities and shareholders' ------------
equity $2,834,491
============
Net interest income/spread $104,562 4.52 %
=========== ========
Fully taxable equivalent net interest income $105,326
===========
Net interest margin (4) 5.44 %
<CAPTION>
9-30-93
-----------------------------------------------
Interest Average
Average income/ interest
Balance expense rate (1)
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets (2)
Earning assets
Loans: (3)
Commercial loans $1,029,540 $55,809 7.32 %
Real estate - construction 84,560 4,264 6.74
Real estate - mortgage 619,232 34,983 7.55
Installment loans 54,046 4,079 10.09
------------ --------- --------
Total loans 1,787,378 99,135 7.46
------------ --------- --------
State and municipal securities 20,663 1,001 9.37
Taxable securities 431,270 18,186 5.64
Federal funds sold and securities
purchased under resale agreements 297,098 6,792 3.06
Trading account securities 30,706 754 3.62
------------ --------- --------
Total earning assets 2,567,115 125,868 6.61
------------ --------- --------
Allowance for credit losses (132,002)
Cash and due from banks 274,984
Other nonearning assets 215,887
------------
Total assets $2,925,984
============
Liabilities and Shareholders' Equity
Noninterest - bearing deposits $900,000 - -
Interest-bearing deposits:
Interest checking accounts 281,441 2,675 1.27
Money market accounts 756,193 13,485 2.38
Savings deposits 103,273 1,746 2.26
Time deposits - under $100,000 110,672 3,138 3.79
Time deposits - $100,000 and over 211,347 5,060 3.20
------------ --------- --------
Total interest - bearing deposits 1,462,926 26,104 2.39
------------ --------- --------
Total deposits 2,362,926
Federal funds purchased and securities
sold under repurchase agreements 279,539 5,959 2.85
Other short - term borrowings 14,334 343 3.20
------------ --------- --------
Total interest - bearing liabilities 1,756,799 32,406 2.47
------------ --------- --------
Other liabilities 20,573
Shareholders' equity 248,612
Total liabilities and shareholders' ------------
equity $2,925,984
============
Net interest income/spread $93,462 4.14 %
========= ========
Fully taxable equivalent net interest income $94,584
=========
Net interest margin (4) 4.93 %
</TABLE>
(1) Average rate data in this table are presented on a taxable
equivalent basis. Rates are calculated assuming that interest income
exempt from federal income taxes or income taxed at a rate less than
the statutory tax rates has been adjusted to a taxable equivalent
basis using the federal income tax rates in effect during the years
presented.
(2) Includes average nonaccrual loans of $64,203 and $112,492 for 1994
and 1993, respectively.
(3) Loan income includes loan fees of $5,085 and $3,899 for 1994 and
1993, respectively.
(4) Fully taxable net interest income divided by interest-earning
assets.
-13-
<PAGE>
The following tables set forth, for the periods indicated, the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Average balances in all categories in each reported period were used
in the volume computations. Average yields and rates in each reported period
were used in rate computations.
<TABLE>
<CAPTION>
Quarter Ended September 30, Quarter Ended September 30,
1994 vs 1993 1993 vs 1992
--------------------------------------- --------------------------------------------
Increase Increase
Dollars in thousands - (decrease) (decrease)
Fully taxable equivalent basis (1) due to (2): Net due to (2): Net
------------------------ increase -------------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
-------- -------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
in other banks $ 2 $ (1) $ 1 $ (3) $ 1 $ (2)
Loans (3,209) 5,653 2,444 (11,335) 170 (11,165)
Taxable securities 4,825 170 4,995 978 (1,492) (514)
Non-taxable securities 155 (65) 90 (1,510) (151) (1,661)
Federal funds sold and
securities purchased
under resale agreements (2,091) 1,040 (1,051) (2,392) (337) (2,729)
-------- -------- -------- --------- --------- ------------
Total interest-earning
assets (318) 6,797 6,479 (14,262) (1,809) (16,071)
-------- -------- -------- --------- --------- ------------
Interest paid on:
Interest checking 1 (99) (98) (198) (489) (687)
Money market deposits (247) 57 (190) (1,788) (1,391) (3,179)
Savings deposits (39) (38) (77) (104) (168) (272)
Other time deposits (625) 165 (460) (2,831) (766) (3,597)
Short-term borrowings (76) 830 754 (2,016) (200) (2,216)
-------- -------- -------- --------- --------- ------------
Total interest-bearing
liabilities (986) 915 (71) (6,937) (3,014) (9,951)
-------- -------- -------- --------- --------- ------------
$ 668 $ 5,882 $ 6,550 $ (7,325) $ 1,205 $ (6,120)
======== ======== ======== ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, Nine Months Ended September 30,
1994 vs 1993 1993 vs 1992
---------------------------------------- -------------------------------------------
Increase Increase
Dollars in thousands - (decrease) (decrease)
Fully taxable equivalent basis (1) due to (2): Net due to (2): Net
------------------------ increase ------------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
-------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
in other banks (6) $ (8) $ (14) $ 4 $ 11 $ 15
Loans (7,407) 2,192 (5,215) (33,121) (4,846) (37,967)
Taxable securities 14,421 (583) 13,838 (3,085) (3,979) (7,064)
Non-taxable securities (298) (292) (590) (4,921) (453) (5,374)
Federal funds sold and
securities purchased
under resale agreements (1,678) 80 (1,598) (7,273) (2,396) (9,669)
-------- -------- -------- --------- --------- ------------
Total interest-earning
assets 5,032 1,389 6,421 (48,396) (11,663) (60,059)
-------- -------- -------- --------- --------- ------------
Interest paid on:
Interest checking (10) (605) (615) (766) (1,666) (2,432)
Money market deposits (466) (847) (1,313) (6,202) (5,615) (11,817)
Savings deposits (95) (221) (316) (112) (632) (744)
Other time deposits (2,086) 0 (2,086) (10,459) (4,109) (14,568)
Short-term borrowings (512) 521 9 (5,554) (2,087) (7,641)
-------- -------- -------- --------- --------- ------------
Total interest-bearing
liabilities (3,169) (1,152) (4,321) (23,093) (14,109) (37,202)
------- ------- ------- -------- --------- ------------
$ 8,201 $ 2,541 $ 10,742 $ (25,303) $ 2,446 $ (22,857)
======= ======= ======= ======== ========= ============
</TABLE>
(1) 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 in the periods presented.
(2) The change in interest due to both rate and volume has been allocated to
change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
-14-
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses was zero and $6.0 million for the quarter
and nine months ended September 30, 1994, compared with $5.5 million and $24.5
million for the corresponding periods in 1993. Loans charged off in the third
quarter of 1994 were $4.5 million, compared to $16.4 million in the third
quarter of 1993 and $17.4 million in the second quarter of 1994. Recoveries
were $11.4 million in the third quarter of 1994, compared to $10.2 million in
the third quarter of 1993 and $8.3 million in the second quarter of 1994.
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 collectability 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 Board of Directors and continuously reviews loan quality.
Such reviews also assist management in establishing the level of the allowance
for credit losses.
If credit quality continues to improve and the Southern California economy
continues on its recent positive trend, management anticipates, based on its
review of the loan portfolio and the level of the allowance for credit losses,
that a provision for credit losses may not be necessary in the fourth quarter of
1994, and the aggregate provision in 1995 will likely approximate the 1994
provision.
NON-INTEREST INCOME
Non-interest income for the third quarter of 1994 totaled $8.1 million,
down $2.2 million (21.0%) from a year earlier. Non-interest income for the
first nine months of 1994 was $27.3 million, a decrease of $9.2 million (25.2%)
from the first nine months of 1993. Service charges on deposit accounts
decreased $1.0 million (31.3%) and $1.2 million (14.3%), respectively, for the
quarter and nine months ended September 30, 1994. Due to the effect of
increases in interest rates utilized for purposes of account analysis, future
-15-
<PAGE>
service charge income on deposit accounts may be less than third quarter 1994
levels. Trust fees decreased $.2 million (10.6%) and $.5 million (9.0%) for the
quarter and nine months ended September 30, 1994 due to lower volumes. Customer
trading income increased $.4 million (30.1%) and $.3 million (6.6%) for the
quarter and nine months ended September 30, 1994, respectively. Other income in
1994 included a pre-tax gain of $1.3 million from the sale of two leveraged
leases in the first quarter, while other income in 1993 included $1.9 million
from sale of the Bank's merchant credit card business in the first quarter and
$4.5 million from the Bank's sale of $73.7 million in ELC loans in the second
quarter. All other income decreased $.8 million (20.4%) and $2.1 million
(18.8%) for the quarter and nine months ended September 30, 1994, because of
lower escrow, foreign exchange, letter of credit and proof of deposit fees. A
securities loss of $.6 million was recorded in the third quarter of 1994,
compared to none in the prior periods. Management does not expect a significant
increase in non-interest income from third quarter 1994 levels during the
remainder of 1994.
NON-INTEREST EXPENSE
Excluding net ORE results, non-interest expense totaled $29.9 million in
the third quarter of 1994, a decrease of $2.5 million (7.8%) from the third
quarter of 1993, and $90.0 million for the first nine months of 1994, a decrease
of $7.1 million (7.3%) from the first nine months of 1993. Salaries and other
employee benefits decreased $1.8 million (10.3%) and $5.5 million (10.2%) for
the quarter and nine months ended September 30, 1994, respectively, from
comparable periods in 1993. This decrease was net of $2.4 million profit
sharing expense in 1994, compared to none in 1993. Full-time equivalent staff
levels, which had declined from approximately 1,650 at December 31, 1992 to
1,220 at September 30, 1994, stabilized in the second and third quarters of
1994.
The remaining expense categories other than staff decreased $.7 million
(4.8%) and $1.6 million (3.8%) for the quarter and nine months ended September
30, 1994, respectively, from the comparable periods in 1993. These decreases
resulted from the continued realization of savings from the Company's expense
management efforts and from the implementation of the branch consolidation
program. See "Consolidation Charge Reserve," below. The increases in promotion
expenses resulted from the Company's increased
-16-
<PAGE>
advertising program. The increases in professional expenses were due to higher
legal fees for defense and collection matters.
Net ORE result in the third quarter of 1994 was a credit of $.2 million,
compared to a credit of $2.0 million in the prior year. For the first nine
months of 1994, net ORE result was a credit of $5.5 million, of which $4.2
million represented gains on the sale of assets in the Disposition Program,
compared to expense of $38.2 million in the first nine months of 1993, $36.5
million of which resulted from the initiation of the Disposition Program in
March 1993.
INCOME TAXES
The third quarter 1994 effective tax rate was 33.1%, compared to 30.7% for
the third quarter of 1993. The effective tax expense (benefit) rates for the
first nine months of 1994 and 1993 were 34.1% and (37.6%), respectively. The
effective rates differed from the statutory federal tax rates of 35% due
primarily to tax exempt income.
As a result of the Company's net operating loss carry-forwards, no regular
California franchise tax provision has been recorded in 1994. No California tax
benefit was taken in 1993. At September 30, 1994, the Company had fully utilized
its California net operating loss carry-forwards and had unrecognized California
tax benefits of $13.7 million, all of which relate to deductible temporary
differences. Realization of these tax benefits is dependent on having sufficient
taxable income during the years when these deductible temporary differences are
expected to reverse. The Company's improved profitability may allow it to
recognize in the fourth quarter of 1994 the benefit of deductible timing
differences anticipated to reverse in the next calendar year.
-17-
<PAGE>
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
<TABLE>
<CAPTION>
Sept. 30, June 30, Dec. 31, Sept. 30,
1994 1994 1993 1993
--------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and financial(1) $ 823,341 $ 868,346 $ 939,719 $ 949,471
Real estate - construction 19,351 14,622 11,699 66,255
Real estate - mortgage(2) 506,715 529,793 617,067 542,701
Residential first mortgage 147,552 38,135 6,586 2,777
Installment 37,495 39,546 45,485 48,985
---------- ---------- ---------- ----------
Total loans, gross 1,534,454 1,490,442 1,620,556 1,610,189
Less: Allowance for credit losses (112,308) (105,380) (110,499) (123,353)
---------- ---------- ---------- ----------
Total loans, net $1,422,146 $1,385,062 $1,510,057 $1,486,836
========== ========== ========== ==========
</TABLE>
(1) Commercial and financial loans include unsecured loans to real estate
developers and customers involved in real estate investments, as well as
commercial loans where real estate partially secures the borrowing.
(2) Does not include first mortgages on residential properties.
Gross loans at September, 30, 1994 amounted to $1,534 million, down $76
million (4.7%) from September 30, 1993. The decrease in loans resulted from
decreased loan demand because of continued economic weakness in Southern
California. Commercial loans continue to constitute the major portion of the
Bank's lending activity, 53.7% at September 30, 1994 and 59.0% at September 30,
1993. Real estate construction loans decreased $46.9 million, or 70.8%, between
September 30, 1993 and September 30, 1994, because new construction lending was
curtailed beginning in late 1990, and certain construction loans were
transferred to the real estate mortgage category after completion of
construction. Real estate mortgage loans decreased $36.0 million, or 6.6%,
between September 30, 1993 and 1994, due to paydowns. However, residential first
mortgage loans increased $144.8 million between September 30, 1993 and 1994,
primarily as a result of purchases of residential mortgages originated by third
parties, which supplemented mortgages originated by the Bank beginning in late
1993.
Substantially all of the Bank's loans are in Southern California. At
September 30, 1994, real estate construction and mortgage loans constituted
34.3% of the Bank's loan portfolio. No other industry comprised 10% or more of
the portfolio.
-18-
<PAGE>
REAL ESTATE CONSTRUCTION LOANS BY TYPE
<TABLE>
<CAPTION>
Sept. 30, June 30, Dec. 31, Sept. 30,
1994 1994 1993 1993
--------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Office building $ 8,195 $ 7,997 $ 7,282 $25,497
Condominium and apartment - - - 13,777
Shopping center 1,723 - - 4,019
1-4 family 3,837 1,482 594 4,790
Industrial 600 - - 6,133
Other 4,996 5,143 3,823 12,039
------- ------- ------- -------
$19,351 $14,622 $11,699 $66,255
======= ======= ======= =======
</TABLE>
REAL ESTATE MORTGAGE LOANS BY TYPE
<TABLE>
<CAPTION>
Sept. 30, June 30, Dec. 31, Sept.30,
1994 1994 1993 1993
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Equity lines of credit $ 27,931 $ 30,323 $ 47,279 $ 59,360
Industrial 107,031 113,942 123,594 125,430
Office building 97,688 103,613 110,183 98,841
Shopping center 67,015 63,964 68,236 66,363
Land, residential 14,258 22,486 30,761 30,878
Condominium and apartment 39,227 43,208 54,040 36,498
Land, non-residential 9,472 10,114 32,885 26,209
Other 144,093 142,143 150,089 99,122
-------- -------- -------- --------
$506,715 $529,793 $617,067 $542,701
======== ======== ======== ========
</TABLE>
-19-
<PAGE>
RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning nonaccrual loans, ORE,
accruing loans which are contractually past due 90 days or more as to interest
or principal payments and still accruing, and restructured loans.
<TABLE>
<CAPTION>
Sept. 30, June 30, Dec. 31, Sept. 30,
1994 1994 1993 1993
--------- -------- -------- --------
(Dollars in thousands)
Nonaccrual loans:
<S> <C> <C> <C> <C>
Real estate - construction $ - $ - $ - $16,831
Real estate - mortgage 45,670 46,179 48,016 43,057
Commercial 10,443 14,509 23,040 37,388
Installment - - - -
------ ------ ------ ------
Total 56,113 60,688 71,056 97,276
ORE 8,269 7,564 5,559 5,114
------- ------- ------- --------
Total nonaccrual loans
and ORE $64,382 $ 68,252 $ 76,615 $102,390
======= ======= ======= ========
Assets held for
accelerated disposition - - $ 17,450 $ 51,222
====== ====== ====== =======
In-substance foreclosures
intangible assets $ 3,889 $ 4,097 $ 4,740 $ 4,791
======= ====== ======= ======
Ratio of nonaccrual loans
to total loans 3.66% 4.07% 4.38% 6.04%
Ratio of nonaccrual loans
and ORE to total loans and ORE 4.17 4.56 4.71 6.34
Ratio of allowance for credit
losses to nonaccrual loans 200.07 173.64 155.51 126.81
Accruing loans past due
90 days or more:
Real estate $19,744 $ 19,125 $17,412 $ 20,363
Commercial 2,018 10,599 11,382 5,185
Installment 139 137 155 9
------- ------- ------- --------
Total $21,901 $ 29,861 $ 28,949 $ 25,557
======= ======= ======= ========
Restructured loans; all on
accrual status except
for $6,230 at Sept. 30, 1994 $ 8,349 $ 2,125 $ 958 $ 1,014
======= ======= ======= ========
</TABLE>
-20-
<PAGE>
NONACCRUAL LOANS
The table below summarizes the approximate changes in nonaccrual loans for
the quarters ended September 30, 1994, June 30, 1994, and September 30, 1993,
and for the nine month periods ended September 30, 1994 and 1993.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------------------- -----------------------
Sept. 30, June 30, Sept.30, Sept.30, Sept.30,
1994 1994 1993 1994 1993
---------- ---------- --------- --------- ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 60.7 $ 65.1 $105.0 $ 71.1 $160.3
Loans placed on nonaccrual 6.4 30.5 12.7 55.9 86.2
Charge offs (3.8) (12.3) (11.3) (22.6) (47.5)
Loans returned to accrual (1.0) (6.0) (1.1) (13.4) (30.6)
Repayments (including interest
applied to principal) (5.3) (15.9) (14.4) (33.3) (44.6)
Transfer to ORE (.9) (.7) (.2) (1.6) (11.8)
Transfer from (to) Disposition
Program, net - - 6.6 - (14.7)
----- ------ ------ ------ ------
Balance, end of period $ 56.1 $ 60.7 $ 97.3 $ 56.1 $ 97.3
===== ====== ====== ====== ======
</TABLE>
The additional interest income that would have been recorded from
nonaccrual loans (including restructured loans on nonaccrual status), if the
loans had not been on nonaccrual status, was $1.4 million and $2.7 million for
the quarters and $3.4 million and $8.5 million for the nine-month periods ended
September 30, 1994 and 1993, respectively. Interest payments received on
nonaccrual loans are generally applied to principal, unless there is no doubt as
to the ultimate full repayment of principal, in which case the interest payment
is recognized as interest income. Interest income included $.6 million and $.2
million for the quarters and $2.7 million and $1.3 million for the nine-month
periods ended September 30, 1994 and 1993, respectively, from the collection of
interest related to nonaccrual loans, including loans paid off during the
quarter. Interest income not recognized on nonaccrual loans reduced the net
interest margin by 21 and 42 basis points for the quarters and 17 and 44 basis
points for the nine-month periods ended September 30, 1994 and 1993,
respectively.
POTENTIAL PROBLEM LOANS
At September 30, 1994, in addition to loans disclosed above as past due,
nonaccrual or restructured, management had also identified $28 million of loans
about which it had serious doubts as to the ability of the borrowers to comply
with the present loan payment
-21-
<PAGE>
terms in the future. This amount was determined based on analysis of information
known to management about the borrowers' financial conditions and current and
expected economic conditions. If economic conditions change, or if additional
information relating to borrowers' financial conditions comes to light, then the
amount of such potential problem loans may change significantly. Currently
estimated potential losses from these potential problem loans have been
considered in determining the adequacy of the allowance for credit losses.
OTHER REAL ESTATE
The following tables summarize the changes in the Company's ORE balances.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------------------- ------------------------
Sept. 30, June 30, Sept.30, Sept.30, Sept.30,
1994 1994 1993 1994 1993
---------- ---------- --------- --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $7,564 $3,677 $ 9,581 $ 5,559 $ 94,065
Additions 1,286 2,498 301 3,784 12,541
Sales (493) (195) (322) (2,505) (4,843)
Writedowns (41) - (622) (41) (40,327)
Payments and other reductions (47) (118) (1,798) (230) (5,407)
Transfer from (to)
Disposition Program - 1,702 (2,026) 1,702 (50,915)
----- ------- ------- ------ --------
Balance, end of period $ 8,269 $ 7,564 $ 5,114 $ 8,269 $ 5,114
====== ======= ======= ======= ========
</TABLE>
-22-
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding and changes in the
allowance for credit losses for the periods presented:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------------------- ------------------------
Sept. 30, June 30, Sept.30, Sept.30, Sept.30,
1994 1994 1993 1994 1993
---------- -------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 1,472.2 $ 1,496.8 $ 1,632.4 $ 1,513.3 $ 1,787.4
======== ======== ======== ======== ========
Balance of allowance for credit losses,
beginning of period $ 105.4 $ 111.5 $ 124.1 $ 110.5 $ 136.1
------- ------- ------- ------- -------
Loans charged off:
Commercial 1.9 10.2 10.7 17.4 31.7
Real estate loans - construction - - .6 - 3.4
Real estate loans - mortgage 2.6 7.0 5.0 13.0 22.0
Installment - .2 .1 .4 .8
-------- -------- -------- -------- --------
Total loans charged off 4.5 17.4 16.4 30.8 57.9
-------- -------- -------- -------- --------
Less recoveries of loans previously
charged off:
Commercial 11.1 7.9 9.8 25.7 21.5
Real estate loans - construction - - - .1 -
Real estate loans - mortgage .1 .1 .2 .2 .3
Installment .2 .3 .2 .6 .4
-------- -------- -------- -------- --------
Total recoveries 11.4 8.3 10.2 26.6 22.2
-------- -------- -------- -------- --------
Net loans charged off(recovered) (6.9) 9.1 6.2 4.2 35.7
Provisions charged to operating
expense - 3.0 5.5 6.0 24.5
Other/1/ - - - - (1.5)
-------- -------- -------- -------- --------
Balance, end of period $ 112.3 $ 105.4 $ 123.4 $ 112.3 $ 123.4
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans NM 2.43% 1.52% 0.38% 2.66%
== ==== ==== ==== ====
</TABLE>
(1) Credit loss allowance allocated to $73.7 million of equity line of
credit loans sold in April 1993.
At September 30, 1994, the allowance for credit losses was 7.32% of gross
loans, compared to 7.66% at September 30, 1993. The allowance at September 30,
1994 was equal to 200.1% of total nonaccrual loans, as compared to 126.8% at
September 30, 1993.
Management believes that the adoption of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," upon their
January 1, 1995, effective date
-23-
<PAGE>
will not have a material impact on the Company's results of operations or
shareholders' equity.
INVESTMENT SECURITIES
A comparative period-end table is presented below:
<TABLE>
<CAPTION>
September 30, June 30, September 30,
1994 1994 1993
-------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities:
Cost $726,374 $705,392 $569,721
======== ======== ========
Market $700,073 $681,973 $576,798
======== ======== ========
Market in excess of (below) cost $(26,301) $(23,419) $ 7,077
======== ======== ========
</TABLE>
The Company has the ability and management has the intent to hold its
investment securities until maturity.
Due to the rise in interest rates in 1994, the market value of the
Company's investment securities portfolio is $26.3 million (3.6%) lower than its
carrying value. Under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," unrealized gains or losses on investment securities do
not affect shareholders' equity until realized.
SECURITIES AVAILABLE FOR SALE
Securities available for sale amounted to $192.2 million at market (cost of
$197.6 million) at September 30, 1994, compared to $2.0 million (both cost and
market) at December 31, 1993 and none at September 30, 1993. The unrealized
gains or losses on available for sale securities is included, net of tax effect,
in shareholders' equity. During the first nine months of 1994, in order to
provide flexibility with respect to future loan funding, the Company designated
certain securities at the time of purchase as securities available for sale.
DEFERRED TAX ASSETS
Deferred tax assets amounted to $26.3 million at September 30, 1994 and
$30.1 million at September 30, 1993. These deferred tax assets were primarily
due to the inability of the Bank to take loan loss deductions for income tax
purposes with respect to anticipated
-24-
<PAGE>
loan losses for which an allowance had been established on its financial
accounting records. It is more likely than not that the reversing deductible
temporary differences, net of the recorded valuation allowances, at September
30, 1994 will be realized by the availability of reversing taxable temporary
differences, recovery of taxes paid in applicable carry-back years, and
projected taxable income.
CONSOLIDATION CHARGE RESERVE
In November 1993, the Bank announced a consolidation plan to improve
efficiency and operational productivity in its branch network. To cover the
costs associated with this action, the Bank recorded a consolidation charge of
$12.0 million in the fourth quarter of 1993, consisting of $7.5 million for the
disposition of lease commitments, $1.5 million for the disposition of fixed
assets and $3.0 million for severance costs and other costs directly related to
the consolidation. At September 30, 1994, the balance remaining in the
consolidation reserve was $8.6 million. The Bank is continuing to negotiate
settlements of lease commitments and believes the reserve balance at September
30, 1994 is adequate to cover these lease liabilities and the remaining expenses
expected to be incurred as part of the consolidation program.
CAPITAL ADEQUACY REQUIREMENTS
As of September 30, 1994, the Company had a ratio of Tier 1 capital to
risk-weighted assets (Tier 1 risk-based capital ratio) of 18.92%, a ratio of
total capital to risk weighted assets (total risk-based capital ratio) of
20.23%, and a ratio of Tier 1 capital to average adjusted total assets (Tier 1
leverage ratio) of 11.62%, while the Bank had a Tier 1 risk-based capital ratio
of 17.90%, a total risk-based capital ratio of 19.21% and a Tier 1 leverage
ratio of 11.00%.
Based on the availability of recovery of taxes paid in the current and
prior years and projected taxable income for the next twelve months, there is no
limitation under OCC guidelines on the amount of recorded deferred tax assets
includable in regulatory capital at September 30, 1994.
-25-
<PAGE>
LIQUIDITY
A fundamental objective of the asset/liability management strategy of the
Company 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 composed of liabilities, especially core deposits. Average core deposits
increased to 84.6% of total funding in the third quarter of 1994, compared to
83.0% in the third quarter of 1993.
Liquidity is also provided by assets such as federal funds sold, securities
purchased under resale agreements and trading account securities which may be
immediately converted into cash at a minimal cost. Liquidity may also be
provided by maturing investment securities. At September 30, 1994, investment
securities maturing within one year amounted to $137.2 million, and securities
available for sale amounted to $192.2 million. Maturing loans also provide
liquidity, and $.9 billion of the Bank's loans are scheduled to mature in the
next twelve months.
City National Corporation has no outstanding debt obligations and limited
financial requirements. At September 30, 1994, it had securities of $18.6
million and resale agreements with the Bank of $.5 million.
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 to 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 tends to adversely affect net interest
income, while a positive gap tends to result in an increase in net interest
income. During a period of falling
-26-
<PAGE>
interest rates, a negative gap tends to result in an increase in net interest
income, while a positive gap tends to affect net interest income adversely.
The following table shows that the Company's positive interest rate
sensitivity gap increased from $824.1 million at September 30, 1993 to $1,033.8
million at September 30, 1994. This increase was due to a $97.3 million increase
in rate sensitive assets, especially securities and a $112.4 million decrease in
rate sensitive liabilities. The Company's highly asset sensitive position in
this period of rising interest rates will have a positive effect on net interest
income. However, while the interest rate sensitivity gap is a useful measure and
contributes towards effective asset and liability management, it is difficult to
predict the net interest margin based solely on that measure.
-27-
<PAGE>
At September 30, 1994 and 1993, the Company's distribution of rate-sensitive
assets and liabilities was as follows:
<TABLE>
<CAPTION>
Maturing or repricing in
----------------------------------------------------------------------
After 3 After 1 year
3 months months but but within After
or less within 1 year 5 years 5 years Total
---------- ------------- ------------ --------- ---------
September 30, 1994 (Dollars in millions)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Interest-bearing deposits in other banks......$ 0.7 $ - $ - $ - $ 0.7
Loans ........................................ 1,061.1 227.2 142.8 47.2 1,478.3
Investment securities ........................ 45.0 90.3 285.1 305.9 726.3
Securities available for sale................. - - 133.1 59.1 192.2
Trading account securities.................... 41.8 - - - 41.8
Federal funds sold and securities
purchased under resale agreements........ 183.0 - - - 183.0
--------- -------- -------- --------- ---------
Total rate-sensitive assets.............. 1,331.6 317.5 561.0 412.2 2,622.3
--------- -------- -------- --------- ---------
Rate-sensitive liabilities: (1)
Interest checking ............................ 279.3 - - - 279.3
Money market deposits ........................ 704.5 - - - 704.5
Savings deposits ............................. 87.6 - - - 87.6
Other time deposits .......................... 120.8 64.1 35.3 - 220.2
Short-term borrowings ........................ 296.9 - - - 296.9
--------- -------- -------- -------- ---------
Total rate-sensitive liabilities......... 1,489.1 64.1 35.3 - 1,588.5
--------- -------- -------- -------- ---------
Interest rate sensitivity gap......................$ (157.5) $ 253.4 $ 525.7 $ 412.2 $ 1,033.8
========= ======== ======== ========= =========
Cumulative interest rate sensitivity gap...........$ (157.5) $ 95.9 $ 621.6 $ 1,033.8
========= ======== ======== =========
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities......................... 89% 106% 139% 165% 165%
========= ======== ======== ========= =========
<CAPTION>
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
---------- ------------- ------------ --------- ---------
September 30, 1993 (Dollars in millions)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Interest-bearing deposits in other banks......$ 0.6 $ - $ - $ - $ 0.6
Loans ........................................ 1,277.4 49.5 160.3 26.0 1,513.2
Investment securities ........................ 59.3 162.2 268.3 80.0 569.8
Trading account securities.................... 22.4 - - - 22.4
Federal funds sold and securities
purchased under resale agreements........ 419.0 - - - 419.0
--------- -------- -------- --------- ---------
Total rate-sensitive assets.............. 1,778.7 211.7 428.6 106.0 2,525.0
--------- -------- -------- --------- ---------
Rate-sensitive liabilities: (1)
Interest checking ............................ 276.1 - - - 276.1
Money market deposits ........................ 775.4 - - - 775.4
Savings deposits ............................. 96.7 - - - 96.7
Other time deposits .......................... 177.9 79.6 35.5 - 293.0
Short-term borrowings ........................ 259.7 - - - 259.7
--------- -------- -------- -------- ---------
Total rate-sensitive liabilities......... 1,585.8 79.6 35.5 - 1,700.9
--------- -------- -------- --------- ---------
Interest rate sensitivity gap......................$ 192.9 $ 132.1 $ 393.1 $ 106.0 $ 824.1
========= ======== ======== ========= =========
Cumulative interest rate sensitivity gap...........$ 192.9 $ 325.0 $ 718.1 $ 824.1
========= ======== ======== =========
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities......................... 112% 120% 142% 148% 148%
========= ======== ======== ========= =========
</TABLE>
(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.
-28-
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: November 10, 1994 /s/ Frank P. Pekny
------------------- ---------------------------
FRANK P. PEKNY
Executive Vice President
and Treasurer
-29-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 227,630
<INT-BEARING-DEPOSITS> 673
<FED-FUNDS-SOLD> 183,000
<TRADING-ASSETS> 41,781
<INVESTMENTS-HELD-FOR-SALE> 192,164
<INVESTMENTS-CARRYING> 726,374
<INVESTMENTS-MARKET> 700,073
<LOANS> 1,534,454
<ALLOWANCE> 112,308
<TOTAL-ASSETS> 2,897,851
<DEPOSITS> 2,239,947
<SHORT-TERM> 296,971
<LIABILITIES-OTHER> 38,307
<LONG-TERM> 0
<COMMON> 45,127
0
0
<OTHER-SE> 277,499
<TOTAL-LIABILITIES-AND-EQUITY> 2,897,851
<INTEREST-LOAN> 94,143
<INTEREST-INVEST> 26,574
<INTEREST-OTHER> 11,930
<INTEREST-TOTAL> 132,647
<INTEREST-DEPOSIT> 21,774
<INTEREST-EXPENSE> 28,085
<INTEREST-INCOME-NET> 104,562
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> (647)
<EXPENSE-OTHER> 84,449
<INCOME-PRETAX> 41,446
<INCOME-PRE-EXTRAORDINARY> 41,446
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,301
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 5.44
<LOANS-NON> 56,113
<LOANS-PAST> 21,901
<LOANS-TROUBLED> 8,349
<LOANS-PROBLEM> 28,000
<ALLOWANCE-OPEN> 110,499
<CHARGE-OFFS> 30,732
<RECOVERIES> 26,541
<ALLOWANCE-CLOSE> 112,308
<ALLOWANCE-DOMESTIC> 112,308
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
