<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, 1997 Commission File Number 1-10521
CITY NATIONAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Number of shares of common stock outstanding at October 31, 1997: 45,757,591
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash and due from banks ......................................................... $ 355,207 $ 331,046 $ 245,706
Interest-bearing deposits in other banks......................................... 309 10,978 30,206
Federal funds sold and securities purchased under
resale agreements............................................................. 150,000 151,200 80,000
Investment securities (market values $229,444; $194,655
and $184,926 at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively)............................................. 228,452 195,229 186,722
Securities available for sale (cost $582,134; $619,580 and
$675,466 at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively)............................................. 586,751 615,863 666,960
Trading account securities....................................................... 23,988 32,129 23,026
Loans............................................................................ 3,530,122 2,839,435 2,674,242
Less allowance for credit losses................................................. 137,850 130,089 128,589
--------- ---------- ---------
Net loans..................................................................... 3,392,272 2,709,346 2,545,653
Leveraged leases................................................................. 5,221 6,147 5,863
Premises and equipment, net...................................................... 40,704 24,196 23,364
Customers' acceptance liability.................................................. 3,341 2,339 3,654
Other real estate ............................................................... 7,434 15,116 17,156
Deferred tax asset............................................................... 55,838 65,291 65,147
Goodwill and core deposit intangibles............................................ 58,122 10,083 11,764
Other assets..................................................................... 67,020 47,533 41,334
--------- ---------- ---------
Total assets.................................................................. $4,974,659 $4,216,496 $3,946,555
--------- ---------- ---------
LIABILITIES
Demand deposits.................................................................. $1,667,458 $1,642,558 $1,274,831
Interest checking deposits....................................................... 345,367 386,211 297,890
Money market accounts............................................................ 799,488 714,127 708,803
Savings deposits................................................................. 169,619 136,691 131,967
Time deposits - under $100,000................................................... 217,756 146,076 146,965
Time deposits - $100,000 and over................................................ 614,489 360,860 379,713
--------- ---------- ---------
Total deposits................................................................ 3,814,177 3,386,523 2,940,169
Federal funds purchased and securities sold
under repurchase agreements................................................... 191,613 194,549 203,051
Other short-term borrowings...................................................... 415,047 148,642 328,632
Long-term debt................................................................... 9,800 34,800 34,800
Other liabilities................................................................ 53,781 48,896 50,866
Acceptances outstanding.......................................................... 3,341 2,339 3,654
--------- ---------- ---------
Total liabilities............................................................. 4,487,759 3,815,749 3,561,172
Commitments and contingencies --------- ---------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock authorized-5,000,000, none outstanding - - -
Common stock- par value- $1.00; authorized - 75,000,000
Issued-46,700,891; 46,302,782 and 46,094,161 at
September 30, 1997, December 31, 1996 and September 30, 1996,
respectively................................................................. 46,701 46,303 46,094
Additional paid-in capital...................................................... 298,724 275,610 272,817
Unrealized gain (loss) on available for sale securities......................... 2,662 (2,149) (4,905)
Retained earnings............................................................... 156,474 113,266 100,321
Treasury shares, at cost - 731,752; 2,394,600 and 2,211,200 at September 30,
1997, December 31, 1996 and September 30, 1996, respectively ................ (17,661) (32,283) (28,944)
--------- ---------- ---------
Total shareholders' equity................................................... 486,900 400,747 385,383
--------- ---------- ---------
Total liabilities and shareholders' equity................................... $4,974,659 $4,216,496 $3,946,555
--------- ---------- ---------
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
2
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans .............................. $ 78,651 $ 57,980 $223,679 $165,029
Interest on federal funds sold and securities
purchased under resale agreements ..................... 313 793 896 2,958
Interest on investment securities:
U.S. Treasury and federal agency securities ........... 1,836 1,746 5,242 5,206
Municipal securities .................................. 1,230 809 3,531 1,741
Other securities ...................................... 176 457 583 1,624
Interest on securities available for sale................ 9,298 10,193 28,424 30,667
Interest on trading account securities................... 691 558 1,843 1,401
-------- -------- -------- --------
Total ................................................. 92,195 72,536 264,198 208,626
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits .................................... 19,081 13,784 53,607 40,409
Interest on federal funds purchased and
securities sold under repurchase agreements ........... 2,480 3,500 8,888 10,176
Interest on other short-term borrowings ................. 5,247 4,558 12,080 9,188
Interest on long-term debt .............................. 804 504 2,476 1,439
-------- -------- -------- --------
Total ................................................. 27,612 22,346 77,051 61,212
-------- -------- -------- --------
NET INTEREST INCOME ..................................... 64,583 50,190 187,147 147,414
PROVISION FOR CREDIT LOSSES ............................ - - - -
-------- -------- -------- --------
Net interest income after provision for credit losses .. 64,583 50,190 187,147 147,414
-------- -------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts .................... 3,256 2,666 9,885 8,069
Investment services income.............................. 3,511 3,134 9,655 8,386
Trust fees ............................................. 2,257 1,789 6,427 5,242
International services income .......................... 1,912 1,451 5,279 3,653
Gain on sale of assets ................................. 384 100 1,423 788
Gain (loss) on sales of securities...................... (224) 30 (763) 322
All other income ....................................... 1,952 2,183 7,181 6,235
-------- -------- -------- --------
Total noninterest income.............................. 13,048 11,353 39,087 32,695
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and other employee benefits ................... 25,308 19,004 73,421 57,315
Net occupancy of premises .............................. 2,407 2,240 7,504 7,197
Data processing ........................................ 2,393 2,192 7,199 6,565
Professional ........................................... 5,572 3,285 14,400 9,835
FDIC insurance ......................................... 107 - 312 2
Office supplies ........................................ 1,761 1,061 4,893 3,588
Depreciation ........................................... 1,498 1,279 4,234 3,862
Promotion .............................................. 1,938 1,273 5,660 4,097
Equipment .............................................. 484 634 1,679 1,747
Amortization of goodwill and core deposit intangibles .. 1,345 750 4,546 1,620
Other operating ........................................ 2,931 3,120 11,168 9,046
Other real estate income ............................... (797) (186) (830) (227)
-------- -------- -------- --------
Total noninterest expense............................. 44,947 34,652 134,186 104,647
-------- -------- -------- --------
Income before taxes....................................... 32,684 26,891 92,048 75,462
Income taxes.............................................. 11,790 9,091 33,593 25,794
-------- -------- -------- --------
NET INCOME ............................................... $ 20,894 $ 17,800 $ 58,455 $ 49,668
-------- -------- -------- --------
NET INCOME PER SHARE ..................................... $ 0.44 $ 0.39 $ 1.22 $ 1.10
-------- -------- -------- --------
-------- -------- -------- --------
Shares used to compute net income per share .............. 47,846 45,262 47,734 44,986
-------- -------- -------- --------
-------- -------- -------- --------
</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,
-------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................... $ 58,455 $ 49,668
Adjustment to net income:
Depreciation................................................................ 4,234 3,862
Amortization of goodwill and core deposit intangibles....................... 4,546 1,620
Net decrease in trading securities.......................................... 8,141 6,702
Net decrease in deferred tax benefits....................................... 5,919 (727)
Other, net.................................................................. (3,309) (7,608)
--------- ---------
Net cash provided by operating activites.................................. 77,986 53,517
--------- ---------
INVESTING ACTIVITIES
Net decrease in short-term investments........................................ 10,669 50,490
Purchase of securities available for sale..................................... (288,767) (387,462)
Sales and maturities of securities available for sale......................... 381,397 570,181
Maturities of investment securities........................................... 9,379 25,626
Purchase of investment securities............................................. (41,996) (106,004)
Purchase of residential mortgage loans........................................ (74,681) (226,001)
Sale of residential mortgage loans............................................ 47,513 62,717
Other loan originations net of principal collections.......................... (334,623) (181,469)
Proceeds from sales of ORE.................................................... 16,918 2,441
Proceeds from sale of leveraged leases........................................ -- 1,824
Purchases of premises and equipment .......................................... (13,087) (1,444)
Net cash provided by acquisitions............................................. 42,876 --
Other, net.................................................................... 464 20,828
--------- ---------
Net cash from investing activities........................................ (243,938) (168,273)
--------- ---------
FINANCING ACTIVITIES
Net increase in federal funds purchased and securities sold under
repurchase agreements....................................................... (2,936) (55,302)
Net decrease in deposits...................................................... (23,525) (307,866)
Net increase in short term borrowings......................................... 266,405 133,532
Proceeds from (repayment) of long term debt................................... (25,000) 9,800
Proceeds from issuance of stock............................................... 9,411 5,600
Purchase of treasury shares................................................... (22,502) (19,045)
Cash dividends paid........................................................... (15,247) (11,865)
Other, net.................................................................... 2,307 (5,932)
--------- ---------
Net cash provided by financing activities................................. 188,913 (251,078)
--------- ---------
Net (increase) in cash and cash equivalents................................... 22,961 (365,834)
Cash and cash equivalents at beginning of year................................ 482,246 691,540
--------- ---------
Cash and cash equivalents at end of year...................................... $ 505,207 $ 325,706
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................. $ 73,866 $ 60,222
Income taxes.............................................................. 29,902 18,750
Non cash investing activities:
Transfer from loans to ORE ............................................... 11,433 13,635
</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,
-------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Common Stock
Balance, beginning of period................................................. $ 46,303 $ 45,554
Stock options exercised ..................................................... 398 540
-------- --------
Balance, end of period ...................................................... 46,701 46,094
-------- --------
Additional paid-in capital
Balance, beginning of period................................................. 275,610 266,829
Stock options exercised ..................................................... 2,620 5,060
Tax benefit from stock options .............................................. 2,307 928
Excess of market value of treasury shares issued for acquisitions
over historical cost ....................................................... 18,187 --
-------- --------
Balance, end of period ...................................................... 298,724 272,817
-------- --------
Treasury shares
Balance, beginning of period................................................. (32,283) (9,899)
Purchase of shares........................................................... (22,502) (19,045)
Issuance of shares for acquisitions ......................................... 30,643 --
Issuance of shares for stock options ........................................ 6,481 --
-------- --------
Balance, end of period ...................................................... (17,661) (28,944)
-------- --------
Unrealized net gains (losses) on securities available for sale
Balance, beginning of period................................................. (2,149) 1,955
Change during period ........................................................ 4,811 (6,860)
-------- --------
Balance, end of period ...................................................... 2,662 (4,905)
-------- --------
Retained earnings
Balance, beginning of period................................................. 113,266 62,518
Net income .................................................................. 58,455 49,668
Dividends paid .............................................................. (15,247) (11,865)
-------- --------
Balance, end of period ...................................................... 156,474 100,321
-------- --------
Total shareholders' equity .................................................... $486,900 $385,383
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The results of operations reflect the interim adjustments, all of which
are of a normal recurring nature and which, in the opinion of management,
are necessary for a fair presentation of the results for such interim
periods. These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
2. Securities held for investment are classified as investment securities.
Because the Company has the ability and management has the intent to hold
investment securities until maturity, investment securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts.
Trading account securities are stated at market value. Investments not
classified as trading securities nor as investment securities are
classified as securities available for sale and recorded at fair value.
Unrealized holding gains or losses for securities available for sale are
excluded from earnings, and reported as a net amount after taxes, in a
separate component of shareholders' equity, until realized.
3. On January 17, 1997, the Company completed its acquisition of Ventura
County National Bancorp (VCNB) for $49.1 million by issuing 1,344,095
treasury shares with an aggregate market value of $28.1 million and
paying $21.0 million in cash. VCNB had shareholders' equity of $30.2
million at closing. This acquisition was accounted for under the
purchase method of accounting. On January 24, 1997, the Company
completed its acquisition of Riverside National Bank (RNB) for $41.3
million. The Company issued 963,430 treasury shares with an aggregate
market value of $20.7 million as well as paying $20.6 million in cash.
RNB had shareholders' equity of $22.5 million at closing. This
acquisition was accounted for under the purchase method of accounting.
4. On March 17, 1997, the Company announced a program for the repurchase of
up to 1.5 million shares of its common stock. Shares purchased under
the buyback program will be issued upon the exercise of stock options and
for other general purposes.
5. On August 29, 1997, the Company announced the signing of a definitive
agreement pursuant to which Harbor Bancorp, headquartered in Long Beach,
will be merged into the Company in a transaction currently valued at
$34.1 million. Harbor Bancorp shareholders
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<PAGE>
will receive either cash, City National Corporation stock or a combination
of cash and stock valued at $24.10 per share, subject to several conditions
including the issuance of a minimum of 48 percent and a maximum of 55
percent stock in the aggregate. Harbor Bancorp is a holding company whose
principal wholly owned subsidiary is Harbor Bank, which has six branches
and approximately $241.3 million in assets at September 30, 1997. The
acquisition is expected to close in the first quarter of 1998.
6. For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and securities
purchased under resale agreements, and do not include items with original
maturities of over 90 days.
7. Certain prior year data have been reclassified to conform with current
year presentation.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
City National Corporation (the Corporation) is the holding company for
City National Bank (the Bank). Because the Bank constitutes substantially
all of the business of the Company, references to the Company in this Item 2
reflect the consolidated activities of the Company and the Bank.
RESULTS OF OPERATIONS
The Company recorded consolidated net income of $20.9 million, or $.44
per share, in the third quarter of 1997, compared to a net income of $17.8
million, or $.39 per share, in the third quarter of 1996. Most of the change
between third quarters resulted from an increase in net interest income of
$14.4 million and an increase in noninterest income of $1.7 million offset,
in part by a $10.3 million increase in noninterest expenses due to the
acquisitions of Ventura County National Bancorp (VCNB) and Riverside National
Bank (RNB) in January 1997, costs related to a bankwide data processing
system conversion and the hiring of additional personnel related to the
strong growth in business.
Net income for the first nine months of 1997 totaled $58.5 million, or
$1.22 per share compared with $49.7 million, or $1.10 per share in the 1996
period. The nine month increase resulted largely from a $39.7 million
increase in net interest income and a $6.4 million increase in noninterest
income, partially offset by a $29.5 million increase in noninterest expense.
Returns on average assets for the third quarter and first nine months of
1997 were 1.74% and 1.69%, respectively, compared with 1.81% for the third
quarter and 1.76% for the first nine months of 1996. Returns on average
equity for the third quarter and first nine months of 1997 decreased to
17.26% and 16.80%, respectively, from 18.89% and 18.07% in 1996 as a result
of the increase in average equity caused by the issuance of 2.3 million
shares of treasury stock for the two acquisitions completed in January 1997,
and retained earnings for the last twelve months.
Taxable equivalent net interest income was $67.1 million in the third
quarter of 1997, up 29.3% from the comparable quarter in 1996. The increase
resulted from a 31.2% increase in average loans between quarters as well as a
30.3% increase in noninterest bearing deposits. The net interest spread
increased from 4.36% to 4.61% and the net interest margin increased from
-8-
<PAGE>
5.73% to 6.13% due to the strong increase in loans, improved yields from
securities, good growth in core deposits and the recognition of a higher
level of interest income from problem loans. Management expects modest
growth in quarterly net interest income for the remainder of 1997 compared to
third quarter 1997 levels. The foregoing forward looking statement assumes,
among other things, that interest rates will not decrease in the remainder of
1997 and is based on anticipated growth in loans. Actual results may differ
materially if either of those assumptions proves to be incorrect. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
Average loans increased $821.7 million (31.2%) between third quarters to
$3,454.4 million for the quarter ended September 30, 1997. This increase
reflected higher average commercial and residential first mortgage loans
outstanding, up $491.5 million (42.3%) and $118.5 million (14.1%),
respectively. The increase in commercial loans resulted from the Bank's
internal loan generation, the acquisitions of VCNB and RNB in January 1997
and purchases of syndicated corporate loans. The increase in residential
first mortgage loans resulted from both the Bank's internal loan generation
and bulk purchases of residential first mortgage loans during 1996 and the
first quarter of 1997. Average construction loans increased $32.6 million
(32.4%) from the third quarter of 1996, and average real estate mortgage
loans increased $166.3 million (33.3%), due primarily to the acquisitions of
VCNB and RNB.
Total average investments and available for sale securities decreased by
$32.4 million (3.8%) between third quarters due to strong loan demand. Total
average deposits increased $780.2 million (27.4%) between third quarters due
primarily to the acquisitions of VCNB and RNB, approximately $470.0 million
in deposits, as well as increased deposit levels generated by the Bank's
existing branches.
For the first nine months of 1997, average loans increased $830.3 million
(33.5%), and total average investment and available for sale securities
decreased $13.3 million (1.6%). Total deposits for the nine months ended
September 30, 1997 increased $710.5 million (25.2%) compared to the 1996
period. The changes in the nine month average balances resulted from the same
factors that caused the changes between the third quarter average balances.
The provision for credit losses was zero for the nine months ended
September 30, 1997 and 1996. Loans charged off in the third quarter of 1997
were $3.4 million, compared to $3.8
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<PAGE>
million in the third quarter of 1996. Recoveries were $8.3 million in the
third quarter of 1997, compared to $5.2 million in the third quarter of 1996.
Due to the growth in the loan portfolio, the ratio of the allowance for
credit losses to total period end loans has decreased from 4.81% at September
30, 1996 to 3.90% at September 30, 1997. The provision for credit losses is
expected to remain at reduced levels for the remainder of 1997. This forward
looking statement is based on an assumption that general economic conditions
in Southern California will not deteriorate materially in the remainder of
1997, and if this assumption proves to be inaccurate, an increased provision
for credit losses may be required. See "Cautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act
of 1995", below.
Noninterest income excluding gains and losses on the sale of securities
and assets totaled $12.9 million for the third quarter of 1997, up $1.7
million (14.8%) from a year earlier. For the nine months ended September 30,
1997, noninterest income excluding gains and losses on the sale of securities
and assets totaled $38.4 million, an increase of $6.8 million (21.7%) from
last year's total of $31.6 million. Service charges on deposit accounts
increased $.6 million (22.1%) and $1.8 million (22.5%) for the quarter and
nine months ended September 30, 1997, respectively, due primarily to the
acquisitions of VCNB and RNB. Investment services income increased $.4
million (12.0%) and $1.3 million (15.1%) for the quarter and nine months
ended September 30, 1997, respectively, due to new customers and new
investment products offered to customers. Trust fees increased $.5 million
(26.2%) and $1.2 million (22.6%) for the quarter and nine months ended
September 30, 1997, respectively, due to higher amounts of new business.
International services income increased $.5 million (31.8%) and $1.6 million
(44.5%) for the quarter and nine months ended September 30, 1997,
respectively, due to increased volume in all international product categories
generated through the Bank's increased marketing efforts. Included in all
other income in the second quarter of 1997 was a $.9 million settlement of a
lawsuit with a borrower. Management expects modest growth in noninterest
income from third quarter 1997 levels during the remainder of 1997. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
Excluding net-ORE results, noninterest expense totaled $45.7 million in
the third quarter of 1997, an increase of $10.9 million (31.3%) from the
third quarter of 1996. For the first nine months of 1997, excluding net-ORE
results, noninterest expense totaled $135.0 million, an
-10-
<PAGE>
increase of $30.1 million (28.7%) from the first nine months of 1996.
Salaries and other employee benefits increased $6.3 million (33.2%) and $16.1
million (28.1%) for the quarter and nine months ended September 30, 1997 from
the comparable period in 1996, due primarily to the additional personnel
added as a result of the acquisition of VCNB and RNB and the hiring of
additional personnel to internally grow the business.
Expense categories other than staff increased $4.6 million (29.1%) and
$14.0 million (29.5%) for the quarter and nine months ended September 30,
1997 from the comparable period in 1996. The increases in professional
expenses resulted primarily from higher consulting fees attributed to the
conversion to the new data processing system which was completed in September
1997. The increase in promotion expenses resulted from the Company's
expanded advertising program. Other noninterest expense for the third
quarter and first nine months of 1997 included charges totaling $1.4 million
and $4.0 million, respectively, for expenses incurred to convert to a new
data processing platform and other systems changes. In March 1997, the
Company reached agreements with its insurance carriers regarding a lender
liability lawsuit which it settled with a former bank customer in the fourth
quarter of 1996. The insurance reimbursements of $2.5 million have been
credited to other noninterest expense. The remaining other increases resulted
from the acquisitions of VCNB and RNB. Amortization of goodwill and core
deposit intangibles increased to $1.3 million for the third quarter and $4.5
million for first nine months of 1997 from $.8 million and $1.6 million in
the applicable periods in 1996. Noninterest expense levels for the
remainder of 1997 are expected to decrease from third quarter 1997 levels
with the completion of the integration of VCNB and RNB into City National
Bank and the completion of the conversion to the new data processing systems.
See "Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of
the Private Securities Litigation Reform Act of 1995", below.
The Company's effective tax rate increased to 36.1% in the third quarter
of 1997 from 33.8% in the third quarter of 1996 primarily because of the
recognition in the first nine month of 1996 of $.9 million in previously
unrecognized deferred tax benefits. The Company expects the effective tax
rate for the remainder of 1997 to remain near third quarter 1997 levels. See
"Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
-11-
<PAGE>
N E T I N T E R E S T I N C O M E S U M M A R Y
The following table presents the components of net interest income for the
quarters ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average income/ interest Average income/ interest
Dollars in thousands- Balance expense (1) rate Balance expense (1) rate
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A S S E T S (2)
Earning assets
Loans:(3)
Commercial loans $1,652,857 $39,342 9.44 % $1,161,373 $26,184 8.97 %
Real estate - construction 133,054 4,084 12.18 100,494 2,916 11.54
Real estate - mortgage 666,195 16,373 9.75 499,851 12,018 9.56
Residential first mortgages 956,729 18,477 7.66 838,190 16,499 7.83
Installment loans 45,550 1,295 11.28 32,758 901 10.94
---------- ------- ----- --------- ------- -----
Total loans 3,454,385 79,571 9.14 2,632,666 58,518 8.84
---------- ------- ----- --------- ------- -----
Due from banks-interest bearing 413 2 1.92 25,529 310 4.83
State and municipal investment securities 108,715 1,916 6.99 71,733 1,261 6.99
Taxable investment securities 122,231 2,010 6.52 120,120 1,893 6.27
Securities available for sale 586,648 10,143 6.86 658,131 10,860 6.56
Federal funds sold and securities
purchased under resale agreements 21,918 313 5.67 56,575 793 5.58
Trading account securities 49,455 763 6.12 39,832 603 6.02
---------- ------- ----- --------- ------- -----
Total earning assets 4,343,765 94,718 8.65 3,604,586 74,238 8.19
---------- ------- ----- --------- ------- -----
Reserve for credit losses (135,597) (127,706)
Cash and due from banks 337,037 271,141
Other nonearning assets 224,273 162,813
---------- ----------
Total assets $4,769,478 $3,910,834
---------- ----------
---------- ----------
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
Noninterest - bearing deposits $1,518,937 - - $1,165,508 - -
Interest-bearing deposits:
Interest checking accounts 347,785 881 1.01 302,032 764 1.01
Money market accounts 804,442 6,163 3.04 740,223 5,569 2.99
Savings deposits 167,650 1,433 3.39 132,299 1,056 3.18
Time deposits - under $100,000 223,996 2,909 5.15 142,992 1,846 5.14
Time deposits - $100,000 and over 561,287 7,695 5.44 360,829 4,549 5.02
---------- ------- ----- --------- ------- -----
Total interest - bearing deposits 2,105,160 19,081 3.60 1,678,375 13,784 3.27
---------- ------- ----- --------- ------- -----
Total deposits 3,624,097 2,843,883
Federal funds purchased and securities
sold under repurchase agreements 183,749 2,480 5.35 271,304 3,500 5.13
Other borrowings 422,808 6,051 5.68 366,761 5,062 5.49
---------- ------- ----- --------- ------- -----
Total interest - bearing liabilities 2,711,717 27,612 4.04 2,316,440 22,346 3.83
---------- ------- ----- --------- ------- -----
Other liabilities 58,524 54,081
Shareholders' equity 480,300 374,805
---------- ---------
Total liabilities and shareholders'
equity $4,769,478 $3,910,834
---------- ----------
---------- ----------
Net interest spread 4.61 4.36
----- -----
----- -----
Fully taxable equivalent net interest income $67,106 $51,892
------- -------
------- -------
Net interest margin 6.13 % 5.73 %
----- -----
----- -----
</TABLE>
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $36,483 and $43,124 for 1997 and 1996,
respectively.
(3) Loan income includes loan fees of $2,630 and $1,863 for 1997 and 1996,
respectively.
-12-
<PAGE>
N E T I N T E R E S T I N C O M E S U M M A R Y
The following table presents the components of net interest income for the
nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average income/ interest Average income/ interest
Dollars in thousands- Balance expense (1) rate Balance expense (1) rate
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A s s e t s (2)
Earning assets
Loans:(3)
Commercial loans $1,570,668 $110,040 9.34 % $1,085,105 $73,615 9.06 %
Real estate - construction 122,766 10,766 11.72 88,431 7,709 11.64
Real estate - mortgage 633,082 46,848 9.89 511,529 37,068 9.68
Residential first mortgages 935,067 54,584 7.80 758,567 45,279 7.97
Installment loans 47,075 3,780 10.74 34,729 2,748 10.57
---------- ------- ----- --------- ------- -----
Total loans 3,308,658 226,018 9.12 2,478,361 166,419 8.97
---------- ------- ----- --------- ------- -----
Due from banks-interest bearing 2,825 100 4.73 27,318 1,146 5.60
State and municipal investment securities 104,547 5,500 7.03 50,996 2,713 7.11
Taxable investment securities 117,123 5,725 6.54 118,643 5,684 6.40
Securities available for sale 608,742 30,840 6.77 674,092 32,328 6.41
Federal funds sold and securities
purchased under resale agreements 22,012 896 5.44 71,117 2,958 5.56
Trading account securities 46,004 2,000 5.81 34,245 1,543 6.02
---------- ------- ----- --------- ------- -----
Total earning assets 4,209,911 271,079 8.60 3,454,772 212,791 8.23
---------- ------- ----- --------- ------- -----
Reserve for credit losses (136,123) (129,429)
Cash and due from banks 334,080 283,560
Other nonearning assets 220,145 161,312
---------- ----------
Total assets $4,628,013 $3,770,215
---------- ----------
---------- ----------
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
Noninterest - bearing deposits $1,471,934 - - $1,157,868 - -
Interest-bearing deposits:
Interest checking accounts 366,036 2,757 1.01 314,985 2,370 1.01
Money market accounts 793,900 17,952 3.02 727,304 16,177 2.97
Savings deposits 169,210 4,216 3.33 132,432 3,089 3.12
Time deposits - under $100,000 226,787 8,672 5.11 136,758 5,301 5.18
Time deposits - $100,000 and over 506,560 20,010 5.28 354,594 13,472 5.07
---------- ------- ----- --------- ------- -----
Total interest - bearing deposits 2,062,493 53,607 3.48 1,666,073 40,409 3.24
---------- ------- ----- --------- ------- -----
Total deposits 3,534,427 2,823,941
Federal funds purchased and securities
sold under repurchase agreements 225,770 8,888 5.26 268,661 10,176 5.06
Other borrowings 348,533 14,556 5.58 253,636 10,627 5.60
---------- ------- ----- --------- ------- -----
Total interest - bearing liabilities 2,636,796 77,051 3.91 2,188,370 61,212 3.74
---------- ------- ----- --------- ------- -----
Other liabilities 54,218 56,770
Shareholders' equity 465,065 367,207
---------- ----------
Total liabilities and shareholders'
equity $4,628,013 $3,770,215
---------- ----------
---------- ----------
Net interest spread 4.69 4.49
----- -----
----- -----
Fully taxable equivalent net interest income $194,028 $151,579
---------- ----------
---------- ----------
Net interest margin 6.16 % 5.86 %
----- -----
----- -----
</TABLE>
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $40,922 and $47,430 for 1997 and 1996,
respectively.
(3) Loan income includes loan fees of $6,516 and $5,405 for 1997 and 1996,
respectively.
-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 ineach reported
period were used in rate computations.
<TABLE>
<CAPTION>
Quarter Ended September 30, Quarter Ended September 30,
1997 vs 1996 1996 vs 1995
------------------------------------ ------------------------------------
Increase Increase
Dollars in thousands -- (decrease) (decrease)
Fully taxable equivalent basis due to (1): Net due to (1): 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 $ (191) $ (117) $ (308) $ 301 $ 2 $ 303
Loans 18,994 2,059 21,053 18,306 (3,364) 14,942
Taxable investment securities 36 81 117 (6,169) 965 (5,204)
Non-taxable investment securities 655 0 655 870 22 892
Securities available for sale (1,204) 487 (717) 8,224 92 8,316
Trading account securities 150 10 160 26 89 115
Federal funds sold and securities purchased
under resale agreements (492) 12 (480) (719) (82) (801)
------- ------ ------- ------- ------- -------
Total interest-earning assets 17,948 2,532 20,480 20,839 (2,276) 18,563
------- ------ ------- ------- ------- -------
Interest paid on:
Interest checking 117 0 117 108 13 121
Money market deposits 498 96 594 1,228 74 1,302
Savings deposits 302 75 377 361 312 673
Other time deposits 3,793 416 4,209 3,502 (107) 3,395
Other borrowings (420) 389 (31) 2,357 (576) 1,781
------- ------ ------- ------- ------- -------
Total interest-bearing liabilities 4,290 976 5,266 7,556 (284) 7,272
------- ------ ------- ------- ------- -------
$13,658 $1,556 $15,214 $13,283 $(1,992) $11,291
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, Nine Months Ended September 30,
1997 vs 1996 1996 vs 1995
------------------------------------ ------------------------------------
Increase Increase
Dollars in thousands -- (decrease) (decrease)
Fully taxable equivalent basis due to (1): Net due to (1): 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 $ (892) $ (154) $(1,046) $ 1,105 $ 26 $ 1,131
Loans 56,583 3,016 59,599 52,780 (9,458) 43,322
Taxable investment securities (76) 117 41 (20,911) 3,870 (17,041)
Non-taxable investment securities 2,818 (31) 2,787 1,431 32 1,463
Securities available for sale (3,242) 1,754 (1,488) 26,785 (367) 26,418
Trading account securities 512 (55) 457 (51) 37 (14)
Federal funds sold and securities purchased
under resale agreements (1,999) (63) (2,062) (1,126) (387) (1,513)
------- ------ ------- ------- ------- -------
Total interest-earning assets 53,704 4,584 58,288 60,013 (6,247) 53,766
------- ------ ------- ------- ------- -------
Interest paid on:
Interest checking 387 0 387 340 79 419
Money market deposits 1,499 276 1,775 2,796 803 3,599
Savings deposits 907 220 1,127 995 906 1,901
Other time deposits 9,421 488 9,909 10,768 498 11,266
Other borrowings 2,088 553 2,641 6,908 (1,378) 5,530
------- ------ ------- ------- ------- -------
Total interest-bearing liabilities 14,302 1,537 15,839 21,807 908 22,715
------- ------ ------- ------- ------- -------
$39,402 $3,047 $42,449 $38,206 $(7,155) $31,051
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
-14-
<PAGE>
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------ ----------- -------------
<S> <C> <C> <C>
Commercial $1,694,859 $1,334,577 $1,200,624
Residential first mortgage 951,688 882,573 829,460
Real estate-construction 144,989 92,322 106,854
Real estate-mortgage 695,434 499,377 505,026
Installment 43,152 30,586 32,278
---------- --------- ----------
Total loans, gross 3,530,122 2,839,435 2,674,242
Less: Allowance for credit loss (137,850) (130,089) (128,589)
---------- --------- ----------
Total loans, net $3,392,272 $2,709,346 $2,545,653
---------- --------- ----------
---------- --------- ----------
Gross loans at September 30, 1997 amounted to $3,530.1 million, up $855.9
million (32.0%) from September 30, 1996. Approximately $300.0 million of the
increase was due to the acquisitions of VCNB and RNB. The $494.2 million
increase in commercial loans was due to the Bank's own loan originations, the
acquisitions of VCNB and RNB and the purchase of additional syndicated corporate
loans. The $122.2 million increase in residential first mortgage loans resulted
from the Bank's own originations, which were supplemented by purchases of
residential first mortgages originated by third parties. Construction loans
also increased significantly from September 30, 1996, up $38.1 million to $145.0
million at September 30, 1997 as the Company continued to expand its lending for
residential construction development. The Company expects that the Bank's loan
portfolio will continue to increase from third quarter 1997 levels due primarily
to its own internal loan generation activities. See "Cautionary Statement For
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
15
</TABLE>
<PAGE>
The following table presents information concerning nonaccrual loans, ORE, and
restructured loans.
September 30, December 31, September 30,
1997 1996 1996
------------- ------------ -------------
(Dollars in thousands)
Nonaccrual loans:
Real estate -- mortgages $19,594 $25,661 $32,889
Commercial 11,443 15,882 9,727
Installment -- -- --
------- ------- -------
Total 31,037 41,543 42,616
ORE 7,433 15,116 17,156
------- ------- -------
Total nonaccrual loans
and ORE $38,470 $56,659 $59,772
------- ------- -------
------- ------- -------
Restructured loans, accrual status $ 4,165 $ 2,569 $ 2,964
------- ------- -------
------- ------- -------
Ratio of nonaccrual loans
to total loans 0.88% 1.46% 1.59%
Ratio of nonaccrual loans & ORE
to total loans & ORE 1.09 1.98 2.22
Ratio of nonaccrual loans & ORE
to total assets .77 1.34 1.51
Ratio of allowance for credit
losses to nonaccrual loans 444.15 313.14 301.74
The table below summarizes the approximate changes in nonaccrual loans for
the quarters and nine months ended September 30, 1997 and September 30, 1996.
Quarter ended Nine months ended
September 30, September 30,
-------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in millions)
Balance, beginning of period $40.8 $46.9 $41.5 $48.1
Additions from acquisitions 0 0 2.4 --
Loans placed on nonaccrual 5.2 7.3 25.7 32.3
Charge offs (2.2) (2.3) (11.0) (12.2)
Loans returned to accrual status (6.8) (3.0) (9.9) (5.2)
Repayments (including interest
applied to principal) (5.5) (4.1) (14.6) (9.9)
Transfer to ORE (0.5) (2.2) (3.2) (10.5)
----- ----- ------ ------
Balance, end of period $31.0 $42.6 $ 31.0 $ 42.6
----- ----- ------ ------
----- ----- ------ ------
At September 30, 1997, in addition to loans disclosed above as nonaccrual
or restructured, management had also identified $4.3 million of potential
problem loans about which the ability of the borrowers to comply with the
present loan repayment terms in the future is questionable.
-16-
<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>
Quarter Ended Nine months ended
September 30, September 30,
----------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Average amount of loans outstanding $3,454.4 $2,632.7 $3,308.7 $2,478.4
--------- --------- --------- --------
--------- --------- --------- --------
Balance of allowance for credit losses,
beginning of period 132.9 $ 127.2 $ 130.1 $ 131.5
Loans charged off:
Commercial 2.7 2.6 10.9 13.6
Real estate loans - construction 0.0 0.0 0.0 0.0
Real estate loans - mortgage 0.7 1.2 4.2 3.5
Installment 0.0 0.0 0.0 0.0
--------- --------- --------- --------
Total loans charged off 3.4 3.8 15.1 17.1
--------- --------- --------- --------
Less recoveries of loans previously
charged off:
Commercial 2.4 4.6 8.7 10.5
Real estate loans - construction 0.0 0.0 0.0 0.0
Real estate loans - mortgage 5.9 0.6 7.1 3.7
Installment 0.0 0.0 0.0 0.0
--------- --------- --------- --------
Total recoveries 8.3 5.2 15.8 14.2
--------- --------- --------- --------
Net loans charged off (recovered) (4.9) (1.4) (0.7) 2.9
Provisions charged to operating expense 0.0 0.0 0.0 0.0
Additions: From acquisition of VCNB 0.0 0.0 4.6 0.0
From acquisition of RNB 0.0 0.0 2.4 0.0
--------- --------- --------- --------
Balance, end of period $ 137.8 $ 128.6 137.8 128.6
--------- --------- --------- --------
--------- --------- --------- --------
Ratio of net charge-offs (recoveries)
to average loans (0.14)% (.21)% (0.02)% 0.16%
--------- --------- --------- --------
--------- --------- --------- --------
Ratio of allowance for credit losses
to total period end loans 3.90% 4.81% 3.90% 4.81%
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
-17-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion
15. This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. Upon adoption of SFAS No. 128, the Company
anticipates that its basic EPS disclosures will be increased as compared to
the primary EPS disclosures presently required by APB Opinion 15. The Company
does not expect its diluted EPS disclosures will differ materially from the
fully-diluted disclosures presently required by APB Opinion 15.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS No. 129 consolidates existing
reporting standards for disclosing information about an entity's capital
structure. SFAS No. 129 must be adopted for financial statements for periods
ending after December 15, 1997. The impact on the Company of adopting SFAS
No. 129 is not expected to be material as, the Company's existing disclosures
are generally in compliance with the disclosure requirements in SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for
18
<PAGE>
fiscal years beginning after December 15, 1997. The impact on the Company of
adopting SFAS No. 130 is not expected to be material to the Company's
existing disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting selected information about operating segments in
annual financial statements and requires reporting of interim reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
The Company is currently assessing the potential impact of SFAS No. 131.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require expanded disclosure of accounting
policies for derivative financial instruments in the footnotes to the
financial statements, and quantitative and qualitative information about
market risk inherent in market risk sensitive instruments. The required
quantitative and qualitative information should be disclosed outside the
financial statements and related notes thereto. The enhanced accounting
policy disclosure requirements are effective for the quarterly period ended
June 30, 1997. As the Company believes that the derivative financial
instrument disclosures contained within the notes to the financial statements
of its 1996 Form 10-K substantially conform with the accounting policy
requirements of these rule amendments, no further interim period disclosure
has been provided. The rule amendments that require expanded disclosure of
quantitative and qualitative information about market risk are effective with
the 1997 Form 10-K.
CAPITAL ADEQUACY REQUIREMENTS
As of September 30, 1997, the Company had a ratio of Tier 1 capital to
risk-weighted assets (Tier 1 risk-based capital ratio) of 11.43%, a ratio of
total capital to risk weighted assets (total risk-based capital ratio) of
12.71%, and a ratio of Tier 1 capital to average adjusted total assets (Tier
1 leverage ratio) of 9.09%, while the Bank had a Tier 1 risk-based capital
ratio of 9.92%, a total risk-based capital ratio of 11.20% and a Tier 1
leverage ratio of 7.86%.
19
<PAGE>
On March 17, 1997, the Company announced a program for the repurchase of
up to 1.5 million shares of its common stock. Through September 30, 1997,
the Company had repurchased 663,000 shares at a total cost of $22.5 million.
Shares purchased under the buyback program will be issued upon the exercise
of stock options and for other general purposes, including for acquisitions.
At September 30, 1997, 731,752 shares were held in treasury with a total cost
of $17.7 million.
On October 23, 1997, the Company declared a regular quarterly dividend of
$.11 per share, payable November 13, 1997 to shareholders of record as of
November 4, 1997.
ACQUISITION
On August 29, 1997, the Company announced the signing of a definitive
agreement pursuant to which Harbor Bancorp and its wholly owned subsidiary,
Harbor Bank, will be merged into the Company in a transaction currently
valued at $34.1 million and subject to final valuation per terms and
conditions of the definitive agreement. Bancorp shareholders will receive,
at their election, cash, stock or a combination thereof valued at $24.10 per
share, with a minimum of approximately 48 percent and a maximum of
approximately 55 percent stock in the aggregate. Harbor Bank, the second
largest independent bank headquartered in Long Beach, has six branches and
approximately $241.3 million in assets as of September 30, 1997. The number
of City National Corporation shares to be issued to Harbor Bancorp
shareholders will vary based on the average of the daily closing price of
City National Corporation stock on the NYSE for the twenty consecutive
trading days ending on the third trading day immediately prior to the closing
of the acquisition. If the average City National stock price so determined
is less than $23.5875, then each Harbor Bancorp share eligible to be
exchanged for stock shall be converted into 1.0217 shares of City National
Corporation stock. If the average City National stock price so determined is
more than $31.9125 but less than $34.6875, then each Harbor Bancorp share
eligible to be exchanged for stock shall be converted into .7552 of a share
of City National Corporation stock. The Company will use previously
repurchased treasury shares for the stock portion of the transaction.
The Company has filed its application for approval of the merger with
Harbor Bancorp with the Federal Reserve Board and the Bank has filed its
application for approval of the merger of Harbor Bank into City National Bank
with the Office of the Comptroller of the Currency. This
20
<PAGE>
acquisition is anticipated to close in the first quarter of 1998 and is
expected to modestly increase the Company's earnings during 1998. See
"Cautionary Statement For Purposes of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995", below.
LIQUIDITY
The Company continues to manage its liquidity through a combination of
core deposits, federal funds purchased, repurchase agreements, collateralized
borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of
San Francisco, and a portfolio of securities available for sale. Liquidity
is also provided by maturing investment securities and loans.
Average core deposits and shareholder's equity comprised 74.3% of total
funding in the third quarter of 1997, compared to 74.2% in the third quarter
of 1996. The following table shows that the Company's cumulative one year
interest rate sensitivity gap was ($418.9) million at September 30, 1996 and
($778.1) million at September 30, 1997, respectively. This change resulted
from the Company's effort to lower its exposure to decreases in net interest
income due to a rapid decline in interest rates. During the last twelve
months, the Company has increased its portfolio of loans that reprice after
one year by $563.5 million. In order to reduce its asset sensitivity, the
Company has entered into interest rate swap contracts, with maturities in
excess of one year, totaling $350.0 million. At September 30, 1997 the
unrealized gain on the Company's interest rate swap contracts was $.9
million. The Company's liability sensitive position during a period of
slowly rising interest rates is not expected to have a significant negative
impact on net interest income since rates paid on the Company's large base of
interest checking, savings and money market deposit accounts historically
have not increased proportionately with increases in interest rates.
21
<PAGE>
INTEREST RATE SENSITIVITY MANAGEMENT
At September 30, 1997 and 1996, the Company's distribution of rate-sensitive
assets and liabilities was as follows:
<TABLE>
<CAPTION>
Maturing or repricing
----------------------------------------------------------------------
After 3 After 1 year
In 3 months months but but within After
or less within 1 year 5 years 5 years Total
----------- ------------- ------------ ------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Rate-sensitive assets:
Interest-bearing deposits in other banks ........ $ 0.3 $ 0.0 $ 0.0 $ 0.0 $ 0.3
Loans ........................................... 1,674.9 319.2 408.6 1,096.4 3,499.1
Investment securities ........................... 4.1 16.6 146.3 61.5 228.5
Securities available for sale ................... 4.1 98.7 306.6 177.4 586.8
Trading account.................................. 23.9 0.0 0.0 0.0 23.9
Interest rate swaps ............................. (400.0) 50.0 350.0 0.0 0.0
Federal funds sold and securities purchased
with agreement to resell........................ 150.0 0.0 0.0 0.0 150.0
-------- ------- -------- -------- --------
Total rate-sensitive assets ................... 1,457.3 484.5 1,211.5 1,335.3 4,488.6
-------- ------- -------- -------- --------
Rate-sensitive liabilities: (1)
Interest checking ............................... 345.4 0.0 0.0 0.0 345.4
Money market deposits ........................... 799.5 0.0 0.0 0.0 799.5
Savings deposits ................................ 169.6 0.0 0.0 0.0 169.6
Other time deposits ............................. 448.2 341.1 32.1 10.7 832.2
Short-term borrowings ........................... 606.2 0.0 0.0 0.0 606.2
Long-term debt .................................. 0.0 9.8 0.0 0.0 9.8
-------- ------- -------- -------- --------
Total rate-sensitive liabilities .............. 2,368.9 350.9 32.1 10.7 2,762.7
-------- ------- -------- -------- --------
Interest rate sensitivity gap ..................... $ (911.6) $ 133.5 $1,179.4 $1,324.7 $1,726.0
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
Cumulative interest rate sensitivity gap .......... $ (911.6) $(778.1) $ 401.3 $1,726.0
-------- ------- -------- --------
-------- ------- -------- --------
Cumulative ratio of rate-sensitive assets
to rate-sensitive liabilities .................... 62% 71% 115% 162% 162%
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Maturing or repricing
----------------------------------------------------------------------
After 3 After 1 year
In 3 months months but but within After
or less within 1 year 5 years 5 years Total
----------- ------------- ------------ ------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Rate-sensitive assets:
Interest-bearing deposits in other banks ........ $ 30.2 $ 0.0 $ 0.0 $ 0.0 $ 30.2
Loans ........................................... 1,330.8 359.3 251.2 690.3 2,631.6
Investment securities ........................... 1.0 8.6 125.6 51.5 186.7
Securities available for sale.................... 50.1 24.1 304.6 288.2 667.0
Trading account.................................. 23.0 0.0 0.0 0.0 23.0
Interest rate swaps.............................. (275.0) 125.0 150.0 0.0 0.0
Federal funds sold and securities purchased
with agreement to resell ....................... 80.0 0.0 0.0 0.0 80.0
-------- ------- -------- -------- --------
Total rate-sensitive assets ................... 1,240.1 517.0 831.4 1,030.0 3,618.5
-------- ------- -------- -------- --------
Rate-sensitive liabilities: (1)
Interest checking ................................ 297.9 0.0 0.0 0.0 297.9
Money market deposits ............................ 708.8 0.0 0.0 0.0 708.8
Savings deposits ................................. 132.0 0.0 0.0 0.0 132.0
Other time deposits .............................. 212.5 258.3 55.2 0.7 526.7
Short-term borrowings ............................ 481.7 50.0 0.0 0.0 531.7
Long-term debt ................................... -- 34.8 0.0 0.0 34.8
-------- ------- -------- -------- --------
Total rate-sensitive liabilities ............... 1,832.9 343.1 55.2 0.7 2,231.9
-------- ------- -------- -------- --------
Interest rate sensitivity gap ...................... $ (592.8) $ 173.9 $ 776.2 $1,029.3 $1,386.6
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
Cumulative interest rate sensitivity gap ........... $ (592.8) $(418.9) $ 357.3 $1,386.6
-------- ------- -------- --------
-------- ------- -------- --------
Cumulative ratio of rate-sensitive assets to
rate-sensitive liabilities ........................ 68% 81% 116% 162% 162%
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
</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.
-22-
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statement made by, or on behalf of, the Company.
- -- Economic conditions. The Company's results are strongly influenced by
general economic conditions in its market area, Southern California, and a
deterioration in these conditions could have a material adverse impact on
the quality of the Bank's loan portfolio and the demand for its products
and services. In particular, changes in economic conditions in the real
estate and entertainment industries may affect the Company's performance.
- -- Interest rates. Management anticipates that short term interest rate
levels will increase in 1997, but if interest rates vary substantially from
this expectation, the Company's results could differ materially.
- -- Government regulation and monetary policy. All forward looking statements
presume a continuation of the existing regulatory environment and U. S.
Government monetary policies. The banking industry is subject to extensive
federal and state regulations, and significant new laws or changes in, or
repeal of, existing laws may cause results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit conditions for the Bank,
primarily through open market operations in U.S. government securities, the
discount rate for member bank borrowing and bank reserve requirements, and
a material change in these conditions would be likely to have an impact on
results.
- -- Competition. The Bank competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries. Results
may differ if circumstances affecting the nature or level of competitive
change, such as the merger of competing financial institutions or the
acquisition of California institutions by out-of-state companies.
- -- Credit quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance
23
<PAGE>
with the terms of their loans. The Bank has adopted underwriting and credit
monitoring procedures and credit policies, including the establishment and
review of the allowance for credit losses, that management believes are
appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Bank's
credit portfolio, but such policies and procedures may not prevent
unexpected losses that could adversely affect the Company's results.
- -- Other risks. From time to time, the Company details other risks to its
businesses and/or its financial results in its filings with the Securities
and Exchange Commission.
While management believes that its assumptions regarding these and other factors
on which forward looking statements are based are reasonable, such assumptions
are necessarily speculative in nature, and actual outcomes can be expected to
differ to some degree. Consequently, there can be no assurance that the results
described in such forward looking statements will, in fact, be achieved.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. NONE
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(REGISTRANT)
DATE: November 13, 1997 /s/ FRANK P. PEKNY
----------------- ------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 355,207
<INT-BEARING-DEPOSITS> 309
<FED-FUNDS-SOLD> 150,000
<TRADING-ASSETS> 23,988
<INVESTMENTS-HELD-FOR-SALE> 586,751
<INVESTMENTS-CARRYING> 228,452
<INVESTMENTS-MARKET> 229,444
<LOANS> 3,530,122
<ALLOWANCE> 137,850
<TOTAL-ASSETS> 4,974,659
<DEPOSITS> 3,814,177
<SHORT-TERM> 606,660
<LIABILITIES-OTHER> 57,122
<LONG-TERM> 9,800
0
0
<COMMON> 46,701
<OTHER-SE> 440,199
<TOTAL-LIABILITIES-AND-EQUITY> 4,974,659
<INTEREST-LOAN> 223,679
<INTEREST-INVEST> 37,780
<INTEREST-OTHER> 2,739
<INTEREST-TOTAL> 264,198
<INTEREST-DEPOSIT> 53,607
<INTEREST-EXPENSE> 77,051
<INTEREST-INCOME-NET> 187,147
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (763)
<EXPENSE-OTHER> 134,186
<INCOME-PRETAX> 92,048
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,455
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 8.60
<LOANS-NON> 31,037
<LOANS-PAST> 19,723
<LOANS-TROUBLED> 4,165
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 137,105<F1>
<CHARGE-OFFS> 15,073
<RECOVERIES> 15,818
<ALLOWANCE-CLOSE> 137,850
<ALLOWANCE-DOMESTIC> 137,850
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>ADJUSTED FOR ACQUISITION OF VENTURA/FRONTIER/RIVERSIDE NAT'L
BANK
</FN>
</TABLE>
