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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-10521
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CITY NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 888-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
</TABLE>
NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
---------------------
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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Number of shares of common stock outstanding at February 28, 1997:
46,516,383
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28 1997: $961,208,987
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE DISCLOSED PURSUANT TO PART III OF THIS REPORT
EITHER SHALL BE (I) DEEMED TO BE INCORPORATED BY REFERENCE FROM SELECTED
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR CITY NATIONAL CORPORATION'S 1997
ANNUAL MEETING OF SHAREHOLDERS, IF SUCH PROXY STATEMENT IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120
DAYS AFTER THE END OF THE CORPORATION'S MOST RECENTLY COMPLETED FISCAL YEAR, OR
(II) INCLUDED IN AN AMENDMENT TO THIS REPORT FILED WITH THE COMMSSION ON FORM
10-K.
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PART I
ITEM 1. BUSINESS
City National Corporation (the Corporation) was organized in Delaware in
1968 to acquire the outstanding capital stock of City National Bank (the Bank).
Because the Bank comprises substantially all of the business of the Corporation,
references to the "Company" reflect the consolidated activities of the
Corporation and the Bank. The Corporation owns all the outstanding shares of the
Bank.
The Bank, which was founded in 1953 and opened for business in January 1954,
conducts business in Southern California and now operates 33 banking offices in
Los Angeles, Orange, Riverside, San Diego and Ventura counties. On December 31,
1995, the Bank completed its acquisition of First Los Angeles Bank (First LA), a
ten branch bank based in Century City, California, for $85.0 million in cash.
Immediately prior to the close, First LA sold certain real estate secured loans
to its parent for $71.0 million. First LA had total assets of $867.0 million at
the date of acquisition. In early 1996, the Bank consolidated the Beverly Hills,
Avenue of the Stars and Downtown Los Angeles branches of First LA with its
existing branches and also consolidated the Bank's Newport Beach retail branch
with that of the former First LA MacArthur Court branch.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp, a two bank holding company with six branches and total assets
at December 31, 1996 of $279.8 million. The total purchase price was
approximately $49.1 million. The Company issued approximately 1.3 million
treasury shares with a market value of approximately $28.1 million and paid the
remainder in cash. On January 24, 1997, the Company completed its acquisition of
Riverside National Bank, a four branch bank with total assets at December 31,
1996 of $252.2 million. The total purchase price was approximately $41.4
million. The Company issued approximately 1.0 million treasury shares with a
market value of approximately $20.7 million and paid the remainder in cash.
The Bank primarily serves middle-market companies, professional and business
borrowers and associated individuals with commercial banking and fiduciary
needs. The Bank provides revolving lines of credit, term loans, asset based
loans, real estate secured loans, residential first trust deed mortgages, trade
facilities, and deposit, cash management and other business services. The Bank's
City National Investments Division offers personal, employee benefit and estate
services, and deals in money market and other investments for its own account
and for its customers. The Bank offers mutual funds in association with other
companies.
COMPETITION
The banking business is highly competitive. The Bank competes with domestic
and foreign banks for deposits, loans and other banking business. In addition,
other financial intermediaries, such as savings and loans, money market mutual
funds, credit unions and other financial services companies, compete with the
Bank.
Non-depository institutions can be expected to increase the extent to which
they act as financial intermediaries. Large institutional users and sources of
credit may also increase the extent to which they interact directly, meeting
business credit needs outside the banking system. Furthermore, the geographic
constraints on portions of the financial services industry can be expected to
continue to erode.
MONETARY POLICY
The earnings of the Bank are affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities in the U.S. and abroad. In particular, the Board of Governors of the
Federal Reserve System (Federal Reserve Board) exerts a substantial influence on
interest rates and credit conditions, primarily through open market operations
in U.S. government securities, varying the discount rate on member bank
borrowings and setting reserve requirements against
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deposits. Federal Reserve Board monetary policies have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to do so in the future.
SUPERVISION AND REGULATION
Bank holding companies, banks and their non-bank affiliates are extensively
regulated under both federal and state law. The following is not intended to be
an exhaustive description of the statutes and regulations applicable to the
Corporation's or the Bank's business. The description of statutory and
regulatory provisions is qualified in its entirety by reference to the
particular statutory or regulatory provisions.
Moreover, major new legislation and other regulatory changes affecting the
Corporation, the Bank, banking and the financial services industry in general
have occurred in the last several years and can be expected to occur in the
future. The nature, timing and impact of new and amended laws and regulations
cannot be accurately predicted.
BANK HOLDING COMPANIES
Bank holding companies are regulated under the Bank Holding Company Act (BHC
Act) and are supervised by the Federal Reserve Board. Under the BHC Act, the
Corporation files reports of its operations with the Federal Reserve Board and
is subject to examination by it.
The BHC Act requires, among other things, the Federal Reserve Board's prior
approval whenever a bank holding company proposes to (i) acquire all or
substantially all the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the voting shares of a bank, or (iii)
merge or consolidate with another bank holding company. In 1996, legislation was
approved that will substantially streamline the application process for
well-capitalized and well-managed bank holding companies.
In September 1994, the Riegle-Neal Interstate Banking and Branch Efficiency
Act (the Riegle-Neal Act) was enacted. Under the Riegle-Neal Act, interstate
banking is allowed in three different forms:
- Effective September 1995, a bank owned by a holding company may acquire a
subsidiary bank anywhere in the United States.
- Effective September 1995, a bank owned by a holding company may act as an
agent in accepting deposits or servicing loans for any other bank or
savings or loan owned by the holding company.
- Effective June 1, 1997, a bank itself may establish a branch in another
state, but only if the bank's home state permits interstate mergers and
branches, and the other state has not passed a law to prohibit interstate
mergers or branches.
Interstate bank subsidiaries and branch banks are subject to concentration
limits, Community Reinvestment Act requirements, bank supervisory controls and
other restrictions of the Riegle-Neal Act or of state law.
California law permits bank holding companies in other states to acquire
California banks and bank holding companies, provided the acquiring company's
home state has enacted "reciprocal" legislation that expressly authorizes
California bank holding companies to acquire banks or bank holding companies in
that state on terms and conditions substantially no more restrictive than those
applicable to such an acquisition in California by a bank holding company from
the other state.
The BHC Act also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any activities without the Federal Reserve Board's
prior approval other than (1) managing or controlling banks and other
subsidiaries authorized by the BHC Act, or (2) furnishing services to, or
performing services for, its
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subsidiaries. The BHC Act authorizes the Federal Reserve Board to approve the
ownership of shares in any company, the activities of which have been determined
to be so closely related to banking or to managing or controlling banks as to be
a proper incident thereto.
Consistent with its "source of strength" policy (see "Capital Adequacy
Requirements," below), the Federal Reserve Board has stated that, as a matter of
prudent banking, a bank holding company generally should not pay cash dividends
unless its net income available to common shareholders has been sufficient to
fund fully the dividends, and the prospective rate of earnings retention appears
consistent with the company's capital needs, asset quality and overall financial
condition.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit.
The Federal Reserve Board may, among other things, issue cease-and-desist
orders with respect to activities of bank holding companies and nonbanking
subsidiaries that represent unsafe or unsound practices or violate a law,
administrative order or written agreement with a federal banking regulator. The
Federal Reserve Board can also assess civil money penalties against companies or
individuals who violate the BHC Act or other federal laws or regulations, order
termination of nonbanking activities by nonbanking subsidiaries of bank holding
companies and order termination of ownership and control of a nonbanking
subsidiary by a bank holding company.
NATIONAL BANKS
The Bank is a national bank and, as such, is subject to supervision and
examination by the Office of the Comptroller of the Currency (OCC) and
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged,
and limitations on the types of investments that may be made and services that
may be offered. Various consumer laws and regulations also affect the Bank's
operations. These laws primarily protect depositors and other customers of the
Bank, rather than the Corporation and its shareholders.
"Brokered deposits" are deposits obtained by a bank from a "deposit broker"
or that pay above-market rates of interest. Because the Bank is categorized as a
well capitalized financial institution, the Bank can accept brokered deposits
without the prior approval of the Federal Deposit Insurance Corporation (FDIC).
The Corporation's principal asset is its investment in, and its loans and
advances to, the Bank. Bank dividends are one of the Corporation's principal
sources of liquidity. The Bank's ability to pay dividends is limited by certain
statutes and regulations. OCC approval is required for a national bank to pay a
dividend if the total of all dividends declared in any calendar year exceeds the
total of the bank's net profits (as defined) for that year combined with its
retained net profits for the preceding two calendar years, less any required
transfer to surplus. A national bank may not pay any dividend that exceeds its
net profits then on hand after deducting its loan losses and bad debts, as
defined by the OCC. The OCC and the Federal Reserve Board have also issued
banking circulars emphasizing that the level of cash dividends should bear a
direct correlation to the level of a national bank's current and expected
earnings stream, the bank's need to maintain an adequate capital base and other
factors. National banks that are not in compliance with regulatory capital
requirements generally are not permitted to pay dividends. The Bank is in
compliance with such requirements. The OCC also can prohibit a national bank
from engaging in an unsafe or unsound practice in its business. Depending on the
bank's financial condition, payment of dividends could be deemed to constitute
an unsafe or unsound practice. Except under certain circumstances and with prior
regulatory approval, a bank may not pay a dividend if, after so doing, it would
be undercapitalized. The Bank's ability to pay dividends in the future is, and
could be further, influenced by regulatory policies or agreements and by capital
guidelines.
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The Bank's ability to make funds available to the Corporation is also
subject to restrictions imposed by federal law on the Bank's ability to extend
credit to the Corporation to purchase assets from it, to issue a guarantee,
acceptance or letter of credit on its behalf (including an endorsement or
standby letter of credit), to invest in its stock or securities, or to take such
stock or securities as collateral for loans to any borrower. Such extensions of
credit and issuances generally must be secured and are generally limited, with
respect to the Corporation, to 10% of the Bank's capital stock and surplus.
The Bank is insured by the FDIC and therefore is subject to its regulations.
Among other things, the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) provided authority for special assessments against insured
deposits and required the FDIC to develop a general risk-based assessment
system. During 1995, the Bank Insurance Fund reached its targeted level of 1.25%
of estimated insured deposits. The FDIC reduced the assessment rate for well
capitalized banks to $2,000 per year for 1996. Beginning January 1, 1997, the
FDIC will collect an assessment against Bank Insurance Fund-assessable deposits
to be paid to the Financing Corporation of approximately 1.29 basis points on
total deposits, as defined.
Banks and bank holding companies are also subject to the Community
Reinvestment Act of 1977, as amended (CRA). CRA requires the Bank to ascertain
and meet the credit needs of the communities it serves, including low- and
moderate-income neighborhoods. The Bank's compliance with CRA is reviewed and
evaluated by the OCC, which assigns the Bank a publicly available CRA rating at
the conclusion of the examination. Further, an assessment of CRA compliance is
also required in connection with applications for OCC approval of certain
activities, including establishing or relocating a branch office that accepts
deposits or merging or consolidating with, or acquiring the assets or assuming
the liabilities of, a federally regulated financial institution. An unfavorable
rating may be the basis for OCC denial of such an application, or approval may
be conditioned upon improvement of the applicant's CRA record. In the case of a
bank holding company applying for approval to acquire a bank or other bank
holding company, the Federal Reserve Board will assess the CRA record of each
subsidiary bank of the applicant, and such records may be the basis for denying
the application.
In the most recently completed CRA compliance examination, conducted in
1995, the OCC assigned the Bank a rating of "Satisfactory," the second highest
of four possible ratings. From time to time, banking legislation has been
proposed that would require consideration of the Bank's CRA rating in connection
with applications by the Corporation or the Bank to the Federal Reserve Board or
the OCC for permission to engage in additional lines of business. The
Corporation cannot predict whether such legislation will be adopted, or its
effect upon the Bank and the Corporation if adopted. In April 1995, the federal
regulatory agencies issued a comprehensive revision to the rules governing CRA
compliance. In assigning a CRA rating to a bank, the new regulations place
greater emphasis on measurements of performance in the area of lending
(specifically, the bank's home mortgage , small business, small farm and
community development loans), investment (the bank's community development
investments) and service (the bank's community development services and the
availability of its retail banking services), although examiners are still given
a degree of flexibility in taking into account unique characteristics and needs
of the bank's community and its capacity and constraints in meeting such needs.
The new regulations also require increased collection and reporting of data
regarding certain kinds of loans. Although the regulation became generally
effective on July 1, 1995, various provisions have different effective dates,
and the new CRA evaluation criteria will go into effect for examination
beginning on July 1, 1997. Although management cannot predict the impact of the
substantial changes in the new rules on the Bank's CRA rating, it will continue
to take steps to comply with the requirements in all respects.
In 1995, the OCC adopted regulations under FDICIA incorporating guidelines
establishing standards for safety and soundness, including operational and
managerial standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, assets growth and compensation, fees and benefits, as well as
prohibiting compensation deemed excessive. If the OCC finds that a bank has
failed to meet any applicable standard, it may require the
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institution to submit an acceptable plan to achieve compliance, and if the bank
fails to comply, the OCC must, by order, require it to correct the deficiency.
The guidelines are general in nature and are not expected to require material
changes in the Bank's operations.
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, those banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
The OCC has enforcement powers with respect to national banks for violations
of federal laws or regulations that are similar to the powers of the Federal
Reserve Board with respect to bank holding companies and nonbanking
subsidiaries. See "Bank Holding Companies," above.
CAPITAL ADEQUACY REQUIREMENTS
Both the Federal Reserve Board and the OCC have adopted similar, but not
identical, "risk-based" and "leverage" capital adequacy guidelines for bank
holding companies and national banks, respectively. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
ranging from zero percent for risk-free assets (E.G., cash) to 100% for
relatively high-risk assets (E.G., commercial loans). These risk weights are
multiplied by corresponding asset balances to determine a risk-adjusted asset
base. Certain off-balance sheet items (E.G., standby letters of credit) are
added to the risk-adjusted asset base. The minimum required ratio of total
capital to risk-weighted assets for both bank holding companies and national
banks is presently 8%. At least half of the total capital is required to be
"Tier 1 capital," consisting principally of common shareholders' equity, a
limited amount of perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less certain intangible items. The
remainder (Tier 2 capital) may consist of a limited amount of subordinated debt,
certain hybrid capital instruments and other debt securities, preferred stock
and a limited amount of the general loan-loss allowance. As of December 31,
1996, the Corporation had a ratio of total capital to risk-weighted assets
(Total risk-based capital ratio) of 14.55% and a ratio of Tier 1 capital to
risk-weighted assets (Tier 1 risk-based capital ratio) of 13.26%, while the Bank
had a total risk-based capital ratio of 12.53% and a Tier 1 risk-based capital
ratio of 11.24%.
The minimum Tier 1 leverage ratio, consisting of Tier 1 capital to average
adjusted total assets, is 3% for bank holding companies and national banks that
have the highest regulatory examination rating and are not contemplating
significant growth or expansion. All other bank holding companies and national
banks are expected to maintain a ratio of at least 1% to 2% or more above the
stated minimum. As of December 31, 1996, the Corporation had a Tier 1 leverage
ratio of 9.75%, and the Bank's Tier 1 leverage ratio was 8.22%.
The OCC has adopted regulations under FDICIA establishing capital categories
for national banks and prompt corrective actions for undercapitalized
institutions. The regulations create five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. The following table shows the minimum total
risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios, all of
which must be satisfied for a bank to be classified as well
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capitalized, adequately capitalized or undercapitalized, respectively, together
with the Bank's ratios at December 31, 1996:
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MINIMUM
MINIMUM TOTAL MINIMUM TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
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City National Bank............................ 12.53% 11.24% 8.22%
Well capitalized(1)........................... 10.00% 6.00% 5.00%
Adequately capitalized........................ 8.00% 4.00% 4.00%(2)
Undercapitalized.............................. 6.00% 4.00% 3.00%
</TABLE>
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(1) A bank may not be classified as well capitalized if it is subject to a
specific agreement with the OCC to meet and maintain a specified level of
capital.
(2) 3% for institutions having a composite rating of "1" in the most recent OCC
examination.
If any one or more of a bank's ratios are below the minimum ratios required
to be classified as undercapitalized, it will be classified as significantly
undercapitalized or, if in addition its ratio of tangible equity to total assets
is 2% or less, it will be classified as critically undercapitalized. A bank may
be reclassified by the OCC to the next level below that determined by the
criteria described above if the OCC finds that it is in an unsafe or unsound
condition or if it has received a less-than-satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity in its most
recent examination and the deficiency has not been corrected, except that a bank
cannot be reclassified as critically undercapitalized for such reasons.
Under FDICIA and its implementing regulations, the OCC may subject national
banks to a broad range of restrictions and regulatory requirements. A national
bank may not pay management fees to any person having control of the
institution, nor, except under certain circumstances and with prior regulatory
approval, make any capital distribution if, after doing so, it would be
undercapitalized. Undercapitalized banks are subject to increased monitoring by
the OCC, are restricted in their asset growth, must obtain regulatory approval
for certain corporate activities, such as acquisitions, new branches and new
lines of business, and, in most cases, must submit to the OCC a plan to bring
their capital levels to the minimum required in order to be classified as
adequately capitalized. The OCC may not approve a capital restoration plan
unless each company that controls the bank guarantees that the bank will comply
with it. Significantly and critically undercapitalized banks are subject to
additional mandatory and discretionary restrictions and, in the case of
critically undercapitalized institutions, must be placed into conservatorship or
receivership unless the OCC and the FDIC agree otherwise.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support each such bank. In addition, a bank holding company is
required to guarantee that its subsidiary bank will comply with any capital
restoration plan required under FDICIA. The amount of such a guarantee is
limited to the lesser of (i) 5% of the bank's total assets at the time it became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the bank into compliance with all applicable capital
standards as of the time the bank fails to comply with the capital restoration
plan. A holding company guaranty of a capital restoration plan results in a
priority claim to the holding company's assets ahead of its other unsecured
creditors and shareholders that is enforceable even in the event of the holding
company's bankruptcy or the subsidiary bank's insolvency.
ITEM 2. PROPERTIES
The Company has its principal offices in the City National Center, 400 North
Roxbury Drive, Beverly Hills, California 90210, which the Bank owns and
occupies. As of December 31, 1996, the Bank and its
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subsidiaries actively maintained premises composed of 23 banking offices, a
computer center, and certain other properties.
Since 1967, the Bank's Pershing Square Regional Office and a number of Bank
departments have been the major tenant of the office building located at 600
South Olive Street in downtown Los Angeles. The building was originally
developed and built by a partnership between a wholly-owned subsidiary of the
Bank, Citinational Bancorporation, and Buckeye Construction Co. and Buckeye
Realty and Management Corporation (two corporations then affiliated with Mr.
Bram Goldsmith, who in 1975 became Chairman of the Board of the Corporation);
since its completion, the building has been owned by Citinational-Buckeye
Building Co., a limited partnership of which Citinational Bancorporation and
Olive-Sixth Buckeye Co. are the only general partners, each with a 29%
partnership interest. Citinational Bancorporation has an additional 3% interest
as a limited partner of Citinational-Buckeye Building Co.; the remainder is held
by other, unaffiliated limited partners. Olive-Sixth Buckeye Co. is a limited
partnership of which Mr. Goldsmith is a 49% general partner; therefore, Mr.
Goldsmith has an indirect 14% ownership interest in Citinational-Buckeye
Building Co. The remaining general partner and all limited partners of
Olive-Sixth Buckeye Co. are not affiliated with the Corporation. Since 1990,
Citinational-Buckeye Building Co. has managed the building, which is expected to
be almost fully leased by mid-1997.
The major encumbrance on real properties owned directly by the Bank or its
subsidiaries is a deed of trust on the 600 South Olive Street building, securing
a note in favor of City National Bank on which the unpaid balance at December
31, 1996, was $15,935,718.
The Bank's subsidiary, Citinational Bancorporation, also owns two buildings
located on Olympic Boulevard in downtown Los Angeles, approximately 80,000
square feet of which is subject to a lease between Citinational Bancorporation
and ALLTEL Financial Information Systems, Inc. (formerly Systematics Financial
Services, Inc.), that expires on December 31, 2000. In February 1997, as part of
the termination of the Bank's data processing agreement with ALLTEL Financial
Information Systems, Inc., Citinational Bancorporation agreed to a phased
reduction of the space leased by ALLTEL Financial Information Systems, Inc. and
an accelerated termination date of June 30, 1998.
As of December 31, 1996, twenty-two additional branch locations and several
non-branch locations throughout Southern California are leased by the Bank at
annual rentals (exclusive of operating charges and real property taxes) of
approximately $9,900,000, with expiration dates ranging from 1998 to 2016,
exclusive of renewal options.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various pending
lawsuits claiming substantial amounts. Based on present knowledge, management
and in-house counsel are of the opinion that the final outcome of such lawsuits
will not have a material adverse effect upon the Corporation. During the fourth
quarter of 1996, the Company recorded a $3.4 million pre-tax charge as a result
of the settlement of a lender liability lawsuit.
The Company is not aware of any material proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than 5% of the voting securities of the Company, or any associate of any such
director, officer or security holder is a party adverse to the Company or any of
its subsidiaries or has a material interest adverse to the Company or any of its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Shown below are names and ages of all executive officers of the Corporation
and officers of the Bank who may be deemed to be executive officers of the
Corporation, with indication of all positions and offices with the Corporation
and the Bank. Mr. Russell Goldsmith is the son of Mr. Bram Goldsmith.
Capacities in which served:
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
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<S> <C> <C>
Bram Goldsmith..................... 74 Chief Executive Officer (until October 1995) Chairman of the Board,
City National Corporation; Chairman of the Board and Chief Executive
Officer, City National Bank, until October 1995
Russell Goldsmith.................. 47 Chief Executive Officer and Vice Chairman, City National Corporation.
October 1995 to present; Chairman of the Board and Chief Executive
Officer, City National Bank, October 1995 to present; President,
Goldsmith Entertainment Company, production and media company, 1994 to
1995; Consultant, Spelling Entertainment Group, Inc, television and
home video company, 1994 to 1995; Chairman of the Board and Chief
Executive Officer, Republic Pictures Corporation, entertainment
company, until 1994
George H. Benter, Jr............... 55 President and Chief Operating Officer, City National Bank, since 1992;
President, City National Corporation, since 1993; Vice Chairman and
Chief Credit Officer, Security Pacific National Bank, commercial bank,
until 1992
Frank P. Pekny..................... 53 Vice Chairman and Chief Financial Officer, City National Bank since
1995; Executive Vice President and Chief Financial Officer, City
National Bank, 1992 to October 1995; Executive Vice President and
Treasurer/Chief Financial Officer, City National Corporation, since
1992; Executive Vice President, BankAmerica Corporation, April 1992 to
September 1992; Executive Vice President, Security Pacific
Corporation, bank holding company, 1990 to 1992; Vice Chairman and
Chief Financial Officer, Security Pacific National Bank, commercial
bank 1988 to 1992
Robert A. Moore.................... 54 Executive Vice President and Manager, Credit Services, City National
Bank, since 1992; Senior Vice President and Chief Credit Officer,
Corporate Banking Group, Security Pacific National Bank, commercial
bank, 1991 to 1992
Jeffery L. Puchalski............... 41 Executive Vice President and Senior Risk Management Officer, Risk
Management, City National Bank from 1992
Richard H. Sheehan, Jr............. 53 Senior Vice President, Secretary and General Counsel, City National
Bank and City National Corporation 1994 to present; Senior Vice
President and Assistant General Counsel, Bank of America, NT & SA,
commercial bank, 1992 to 1994; Senior Vice President and Assistant
General Counsel, Security Pacific National Bank, commercial bank,
until 1992
Heng W. Chen....................... 44 Senior Vice President--Finance and Controller, City National Bank
since 1995, Senior Vice President, Finance, City National Bank from
1988; Controller, City National Corporation since 1995, Assistant
Treasurer, City National Corporation from 1992
</TABLE>
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed and traded principally on the New
York Stock Exchange under the symbol "CYN." Information concerning the range of
high and low sales prices for the Corporation's common stock, and the dividends
declared, for each quarterly period within the past two fiscal years is set
forth below.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- --------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
1996
March 31....................................................... $ 14.13 $ 12.63 $ 0.09
June 30........................................................ 16.50 15.50 .09
September 30................................................... 19.00 14.63 .09
December 31.................................................... 22.25 17.38 .09
1995
March 31....................................................... $ 12.38 $ 10.00 $ 0.05
June 30........................................................ 11.75 9.75 .07
September 30................................................... 15.38 11.25 .07
December 31.................................................... 14.25 12.63 .07
</TABLE>
As of February 28, 1997 the closing price of the Corporation's stock on the
New York Stock Exchange was $24.25 per share. As of the date, there were
approximately 2,400 record holders of the Corporation's common stock. On January
22, 1997, the Board of Directors authorized a regular quarterly cash dividend on
common stock at an increased rate of $.11 per share payable on February 13,
1997.
For a discussion of dividends restriction on the Corporation's common stock,
see Note 12 (Availability of Funds From Subsidiaries, Restrictions on Cash
Balances; Capital) to the consolidated financial statements on page A-46 of this
report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page A-2 under the caption
"SELECTED FINANCIAL INFORMATION," and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item appears on pages A-3 through A-25,
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS," and is incorporated
herein by reference.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages A-29 through A-53,
and on page A-26 under the captions "1996 QUARTERLY OPERATING RESULTS" and "1995
QUARTERLY OPERATING RESULTS" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, to the extent not included under the
caption "Executive Officers of the Registrant" in Part I of this report, or
below, will appear under the caption "Election of Directors" in the
Corporation's definitive proxy statement for the 1997 Annual Meeting of
Stockholders (the "1997 Proxy Statement"), and such information either shall be
(i) deemed to be incorporated herein by reference to that portion of the 1997
Proxy Statement, if filed with the Securities and exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the Corporation's
most recently completed fiscal year, or (ii) included in an amendment to this
report filed with the Commission on Form 10-K.
The Corporation's Board is composed of the following directors:
<TABLE>
<CAPTION>
NAME OCCUPATION AND EMPLOYER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
George H. Benter, Jr.................................... President and Chief Operating Officer, City National
Bank and City National Corporation
Richard L. Bloch........................................ President Pinon Farm, Inc. Equestrian training facility
Mirion P. Bowers, MD.................................... President and Chief Executive Officer, Hospital of the
Good Samaritan, acute care hospital; practicing
physician
Stuart D. Buchalter..................................... Of counsel, Buchalter, Nemer, Fields & Younger, a
Professional Corporation, law firm
Bram Goldsmith.......................................... Chairman of the Board, City National Corporation
Russell Goldsmith....................................... Vice Chairman and Chief Executive Officer, City National
Corporation; Chairman of the Board and Chief Executive
Officer, City National Bank
Burton S. Horwitch...................................... Chairman, Deena, Inc manufacturer of women's apparel
Charles E. Rickershauser. Jr............................ Attorney
Edward Sanders.......................................... Principal, Sanders, Barnet, Goldman, Simons & Mosk, a
Professional Corporation, law firm
Andrea L. Van De Kamp................................... Chairman of West Coast Operation, Sotheby's, appraisals
and auctions
Kenneth Ziffren......................................... Senior partner, Ziffren, Brittenham, Branca & Fischer,
law firm
</TABLE>
11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear under the captions
"Compensation of Directors and Executive Officers," "Board Compensation and
Directors Nominating Committee Report on Executive Compensation" and
"Stockholder Return Graph" in the 1997 Proxy Statement, and such information
either shall be (i) deemed to be incorporated herein by reference to those
portions of the 1997 Proxy Statement, if filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the Corporation's most recently completed fiscal year, or (ii) included in an
amendment to this report filed with the Commission on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear under the captions "Record
Date, Number of Shares Outstanding and Voting Rights; Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the 1997
Proxy Statement, and such information either shall be (i) deemed to be
incorporated herein by reference to that portion of the 1997 Proxy Statement, if
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the Corporation's most recently completed
fiscal year, or (ii) included in an amendment to this report filed with the
Commission on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the caption "Certain
Transactions with Management and Others" in the 1997 Proxy Statement, and such
information either shall be (i) deemed to be incorporated herein by reference to
that portion of the 1997 Proxy Statement, if filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the Corporation's most recently completed fiscal year, or (ii) included
in an amendment to this report filed with the Commission on Form 10-K. Also see
Note 5 (Loans and Allowance for Credit Losses) to the consolidated financial
statements on page A-39 of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
<TABLE>
<S> <C>
Managements' Responsibility for Financial Statements........................ A-27
Independent Auditors' Report................................................ A-28
Consolidated Balance Sheet at December 31, 1996 and 1995.................... A-29
Consolidated Statement of Income for each of the years in the three-year
period ended December 31, 1996............................................ A-30
Consolidated Statement of Cash Flows for each of the years in the three-year
period ended December 31, 1996............................................ A-31
Consolidated Statement of Changes in Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996.................... A-32
Notes to the Consolidated Financial Statements.............................. A-33
</TABLE>
2. All other schedules and separate financial statements of 50% or less
owned companies accounted for by the equity method have been omitted because
they are not applicable.
12
<PAGE>
3. Exhibits (listed by numbers corresponding to Exhibit Table of Item 601 in
Regulation S-K)
<TABLE>
<CAPTION>
NO.
<S> <C>
3.1 Certificate of Incorporation (This Exhibit is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.)
3.2 By-Laws, as amended to date
10.1 Data Processing Agreement by and between Systematics, Inc. and City National Bank dated
January 1, 1991, as amended (This Exhibit is incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.)
10.2 Employment Agreement made as of January 31, 1990, by and between Bram Goldsmith and City
National Bank (This Exhibit is incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.)
10.2.1 Description of amendments of Bram Goldsmith employment agreement effective September 1, 1992
(This exhibit is incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10.3 Split Dollar Life Insurance Agreement Collateral Assignment Plan between City National Bank
and the Goldsmith 1980 Insurance Trust, dated as of June 13, 1980, as amended to date (This
Exhibit is incorporated by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.)
10.4 Description of amendments to Bram Goldsmith employment agreement (This Exhibit is incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.6 Lease dated January 11, 1991, between Citinational-Buckeye Building Co. and City National Bank
for rental of space on the 20th floor until December 31, 1996, as amended (This Exhibit is
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.7 Lease dated September 30, 1991, between Citinational-Buckeye Building Co. and City National
Bank for rental of space on the 9th floor until December 31, 1996 (This Exhibit is
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.10 City National Corporation 1985 Stock Option Plan, as amended to date (This Exhibit is
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.11 Agreement By and Between City National Bank Beverly Hills, California and the Comptroller of
the Currency, dated November 18, 1992 (This Exhibit is incorporated by reference to the
Registrant's Current Report on Form 8-K dated November 18, 1992.)
10.11.1 Termination of the Formal Agreement, Office of the Comptroller of the Currency, dated January
21, 1994 (This Exhibit is incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.)
10.12 Memorandum of Understanding by and between City National Corporation and the Federal Reserve
Bank of San Francisco, dated February 24, 1993 (This Exhibit is incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31, 1992.)
10.12.1 Letter from The Federal Reserve Bank of San Francisco to City National Bank dated February 23,
1994 (This Exhibit is incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.)
10.13 Asset Purchase Agreement by and between Systematics Financial Services, Inc. and City National
Bank, dated December 17, 1992 (This Exhibit is incorporated by reference to the Company's
Annual Report in Form 10-K for the year ended December 31, 1992.)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NO.
<S> <C>
10.18 Asset Sale Agreement (Pool 1) by and between City National Bank as Seller and WHC-THREE
Investors, L.P., as Purchaser, dated November 1, 1993 (This Exhibit is incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.)
10.19 Asset Sale Agreement (Pools 2 Through 6) by and between City National Bank as Seller and
WHC-THREE Investors, L.P., as Purchaser, dated November 1, 1993 (This Exhibit is incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1993.)
10.20 Purchase and Sale Agreement and Escrow Instructions dated March 2, 1995 by and between
Weddington Investment Partnership and City National Bank for the purchase of the property
located at 12515 Ventura Boulevard, Studio City, California (This Exhibit is incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.)
10.21 Stock Purchase Agreement dated August 17, 1995 by and among City National Bank, First Los
Angeles Bank, San Paolo U.S. Holding Company and San Paolo Bank Holding S.P.A. (This Exhibit
is incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995.)
10.21.1 Amendment to Stock Purchase Agreement dated December 1995, by and among City National Bank,
First Los Angeles Bank, San Paolo U.S. Holding Company and San Paolo Bank Holding S.P.A. (This
report is incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
dated January 11, 1996.)
10.22 Employment Agreement dated as of October 16, 1995, between Russell Goldsmith and City National
Bank (This Exhibit is incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.)
10.22.1 Stock Option Agreement Under the City National Corporation 1985 Stock Option Plan dated as of
October 16, 1995, between City National Corporation and Russell Goldsmith (This Exhibit is
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.23 Agreement for Separation from Employment and Release dated November 3, 1995, between City
National Bank and Steven D. Broidy (This Exhibit is incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.)
10.24 City National Corporation 1995 Omnibus Plan (This Exhibit is incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.25 Agreement and Plan of Merger dated September 15, 1996 between City National Corporation and
Ventura County National Bancorp (This Exhibit is incorporated by reference to the Company's
Form S-4 filed on December 5, 1996)
10.26 Agreement and Plan of Merger dated October 15, 1996 between City National Corporation, City
National Bank and Riverside National Bank (This Exhibit is incorporated by reference to the
Company's Form S-4 filed on December 19, 1996)
21 Subsidiaries of the registrant
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
</TABLE>
(b) During the calendar quarter ended December 31, 1996, the registrant did
not file any current reports on Form 8-K.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ RUSSELL GOLDSMITH
-----------------------------------------
Russell Goldsmith,
March 12, 1997 CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ RUSSELL GOLDSMITH
-------------------------------------------
Russell Goldsmith Chief Executive Officer And Director March 12, 1997
(Principal Executive Officer)
/s/ FRANK P. PEKNY
------------------------------------------- Executive Vice President And
Frank P. Pekny Treasurer/Chief Financial Officer March 12, 1997
(Principal Financial Officer)
/s/ HENG W. CHEN
-------------------------------------------
Heng W. Chen Controller March 12, 1997
(Principal Accounting Officer)
/s/ BRAM GOLDSMITH
------------------------------------------- Chairman of the Board and Director March 12, 1997
Bram Goldsmith
/s/ GEORGE H. BENTER, JR.
------------------------------------------- President and Director March 12, 1997
George H. Benter, Jr.
------------------------------------------- Director March 12, 1997
Richard L. Bloch
------------------------------------------- Director March 12, 1997
Mirion P. Bowers, M.D.
------------------------------------------- Director March 12, 1997
Stuart D. Buchalter
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ BURTON S. HORWITCH
------------------------------------------- Director March 12, 1997
Burton S. Horwitch
/s/ CHARLES E. RICKERSHAUSER, JR.
------------------------------------------- Director March 12, 1997
Charles E. Rickershauser, Jr.
/s/ EDWARD SANDERS
------------------------------------------- Director March 12, 1997
Edward Sanders
/s/ ANDREA L. VAN DE KAMP
------------------------------------------- Director March 12, 1997
Andrea L. Van De Kamp
/s/ KENNETH ZIFFREN
------------------------------------------- Director March 12, 1997
Kenneth Ziffren
</TABLE>
16
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INCREASE
DOLLARS IN THOUSANDS, (DECREASE)
EXCEPT PER SHARE AMOUNTS 1996 1995 AMOUNT
- ------------------------------------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
FOR THE YEAR
Net income........................................................... $ 66,563 $ 48,792 $ 17,771
Net income, per common share......................................... 1.47 1.06 0.41
Dividends, per common share.......................................... 0.36 0.26 0.10
AT YEAR END
Assets............................................................... $ 4,216,496 $ 4,157,551 $ 58,945
Deposits............................................................. 3,386,523 3,248,035 138,488
Loans................................................................ 2,839,435 2,346,611 492,824
Securities........................................................... 811,092 975,407 (164,315)
Shareholders' equity................................................. 400,747 366,957 33,790
Book value, per common share......................................... 9.13 8.19 0.94
AVERAGE BALANCES
Assets............................................................... $ 3,821,314 $ 2,849,807 $ 971,507
Deposits............................................................. 2,871,870 2,062,412 809,458
Loans................................................................ 2,539,323 1,758,671 780,652
Securities........................................................... 839,564 705,122 134,442
Shareholders' equity................................................. 373,491 350,551 22,940
SELECTED RATIOS
Return on average assets............................................. 1.74% 1.71% 0.03%
Return on average shareholders' equity............................... 17.82 13.92 3.90
Tier 1 leverage...................................................... 9.75 11.17 (1.42)
Tier 1 risk-based capital............................................ 13.26 13.60 (0.34)
Total risk-based capital............................................. 14.55 14.91 (0.36)
Dividend payout ratio, per share..................................... 24.49 24.53 (0.04)
Net interest margin.................................................. 5.87 6.26 (0.39)
Efficiency ratio..................................................... 57.92 59.38 (1.46)
</TABLE>
A-1
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1995 1994 1993 1992
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income................................. $ 282,123 $ 217,594 $ 181,825 $ 169,792 $ 233,049
Interest expense............................... 82,389 55,331 38,414 41,996 84,433
----------- ----------- ----------- ----------- -----------
Net interest income............................ 199,734 162,263 143,411 127,796 148,616
Provision for credit losses.................... -- -- 7,535 60,163 128,878
Noninterest income (other than gains and losses
on securities transactions).................. 43,808 35,162 36,180 45,810 45,365
Gains (losses) on securities transactions...... 187 (596) (3,383) -- 1,629
Noninterest expense (other than ORE and
consolidation charge)........................ 144,795 118,684 121,296 129,226 150,546
Consolidation charge........................... -- -- -- 12,000 --
ORE expense (income)........................... (200) (608) (5,297) (4,489) 8,788
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
taxes........................................ 99,134 78,753 52,674 (23,294) (92,602)
Income taxes (benefit)......................... 32,571 29,961 15,511 (9,260) (32,450)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations....... 66,563 48,792 37,163 (14,034) (60,152)
Income from discontinued operations............ -- -- -- 7,128 804
----------- ----------- ----------- ----------- -----------
Net income (loss)............................ $ 66,563 $ 48,792 $ 37,163 $ (6,906) $ (59,348)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE DATA:
Income (loss) per share from continuing
operations.................................... $ 1.47 $ 1.06 $ 0.81 $ (0.35) $ (1.87)
Net income (loss) per share.................... 1.47 1.06 0.81 (0.17) (1.84)
Cash dividends declared........................ 0.36 0.26 0.05 -- --
Book value per share........................... 9.13 8.19 7.32 6.62 7.07
Shares used to compute income (loss) per
share........................................ 45,146 45,886 45,626 39,580 32,240
BALANCE SHEET DATA--AT PERIOD END:
Assets.......................................... $ 4,216,496 $ 4,157,551 $ 3,012,775 $ 3,100,626 $ 3,514,102
Loans.......................................... 2,839,435 2,346,611 1,643,918 1,628,803 2,167,992
Securities..................................... 811,092 975,407 749,435 904,481 443,922
Interest-earning assets........................ 3,844,834 3,784,245 2,716,524 2,838,698 3,105,978
Deposits....................................... 3,386,523 3,248,035 2,417,762 2,526,767 2,911,276
Shareholders' equity........................... 400,747 366,957 330,721 298,074 227,944
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets.......................................... $ 3,821,314 $ 2,849,807 $ 2,831,471 $ 2,944,461 $ 3,918,949
Loans.......................................... 2,539,323 1,758,671 1,537,997 1,762,663 2,403,657
Securities..................................... 839,564 705,122 854,823 517,059 548,734
Interest-earning assets........................ 3,505,422 2,624,436 2,594,241 2,623,164 3,550,920
Deposits....................................... 2,871,870 2,062,412 2,241,175 2,380,106 3,133,109
Shareholders' equity........................... 373,491 350,551 313,196 260,649 259,629
ASSET QUALITY:
Nonaccrual loans................................ $ 41,543 $ 48,124 $ 58,801 $ 79,303 $ 253,089
ORE............................................ 15,116 7,439 4,726 2,052 8,637
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans and ORE............... $ 56,659 $ 55,563 $ 63,527 $ 81,355 $ 261,726
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets held for accelerated disposition........ $ -- $ -- $ -- $ 17,450 $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PERFORMANCE RATIOS:
Return on average assets........................ 1.74% 1.71% 1.31% (0.23)% (1.51)%
Return on average shareholders' equity......... 17.82 13.92 11.87 (2.65) (22.84)
Net interest spread............................ 4.47 4.84 4.60 4.12 3.44
Net interest margin............................ 5.87 6.26 5.57 4.92 4.30
Average shareholders' equity to average
assets....................................... 9.77 12.30 11.06 8.85 6.62
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans................. 1.46% 2.05% 3.58% 4.87% 11.67%
Nonaccrual loans and ORE to total assets....... 1.34 1.34 2.11 2.62 7.45
Allowance for credit losses to total loans..... 4.58 5.60 6.41 6.78 6.28
Allowance for credit losses to nonaccrual
loans........................................ 313.14 273.28 179.15 139.34 53.77
Net charge offs (recoveries) to average loans.. 0.06 (0.40) 0.83 4.78 4.93
</TABLE>
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
City National Corporation (the "Company") is the holding company for City
National Bank (the "Bank"). In light of the fact that the Bank comprises
substantially all of the business of the Company, references to the "Company"
mean the Company and the Bank together.
Consolidated net income was $66.6 million, or $1.47 per share in 1996,
compared to $48.8 million, or $1.06 per share in 1995. The increase in net
income reflects the growth in the Company's loans and deposits during 1996, the
acquisition of First Los Angeles Bank ("First LA") on December 31, 1995 and
recognition of $4.2 million in nonrecurring tax benefits. Fully taxable
equivalent net interest income in 1996 increased $41.4 million over 1995 and
noninterest income increased $8.6 million compared with 1995. Partially
offsetting these increases were a $26.5 million increase in noninterest expense,
compared with 1995, and a $2.6 million increase in income tax expense in 1996.
The return on average assets was 1.74% and the return on average common
equity was 17.82%, compared with 1.71% and 13.92%, respectively, in 1995.
Average assets increased from $2,849.8 million in 1995 to $3,821.3 million
in 1996, an increase of $971.5 million or 34.1%, largely due to increased loan
demand, the acquisition of First LA and the origination and purchases of
residential first mortgages. Total average loans increased $780.7 million or
44.4% between 1995 and 1996 due to the origination and purchases of residential
first mortgage loans, the acquisition of First LA, which had total loans
outstanding at December 31, 1995 of $337.5 million and increases in construction
and commercial loans. Average core deposits (checking, savings and money market
accounts and time certificates of deposit of less than $100,000) increased from
$1,922.4 million in 1995 to $2,508.2 million in 1996, an increase of $585.8
million or 30.5% due to the acquisition of First LA on December 31, 1995 and the
Company's increased marketing efforts in 1996.
Nonaccrual loans declined to $41.5 million at December 31, 1996, or 1.46% of
total loans, compared to $48.1 million, or 2.05% a year earlier. ORE totaled
$15.1 million at year end, up from $7.4 million a year earlier.
The allowance for credit losses at December 31, 1996 was $130.1 million or
4.58% of loans outstanding at year end. Net charge offs totaled $1.4 million in
1996, compared with net recoveries of $7.1 million in 1995.
Based on its review of the loan portfolio, management considers the
allowance for credit losses to be adequate and anticipates that a provision for
credit losses may not be required for 1997. However, credit quality will be
influenced by underlying trends in the economic cycle, particularly for Southern
California, among other factors, which are beyond management's control.
Consequently, no assurances can be given that the Company will not sustain loan
losses, in any particular period, that are sizable in relation to the allowance
for credit losses. Additionally, subsequent evaluations of the loan portfolio,
in light of factors then prevailing, by the Company and its regulators may
indicate a requirement for increases in the allowance for credit losses through
charges to the provision for credit losses.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp (VCNB) for $49.1 million by issuing approximately 1.3 million
treasury shares with an aggregate market value of approximately $28.1 million
and paying approximately $21.0 million in cash. VCNB had shareholders' equity of
$30.2 million at closing. This acquisition will be 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 approximately 1.0
million treasury shares with an aggregate market value of approximately $20.7
million as well as paying approximately $20.6 million in cash. RNB had
shareholders' equity of $22.5 million at closing. This transaction will be
accounted for under the purchase method of accounting.
A-3
<PAGE>
At the close of business December 31, 1995 the Bank purchased all of the
outstanding stock of First Los Angeles Bank for $85.0 million in cash.
Immediately prior to the close, First LA sold certain real estate secured loans
to its parent for $71.0 million. This acquisition has been accounted for under
the purchase method of accounting.
The Company paid dividends of $.26 per share of common stock in 1995 and
$.36 per share of common stock in 1996. On January 22, 1997, the Board of
Directors authorized a regular quarterly cash dividend on common stock at an
increased rate of $.11 per share to shareholders of record on February 3, 1997,
payable on February 13, 1997.
In May 1995, The Board of Directors authorized the purchase of up to 5%, or
2.28 million shares of the Corporation's common stock from time to time in open
market transactions. In October 1996, the Board of Directors authorized the
repurchase of an additional 400,000 shares of the Corporation's common stock to
be used for pending acquisitions. At December 31, 1996, a total of 2.4 million
shares had been repurchased at a cost of $32.3 million. In January 1997, 2.3
million shares were reissued for the stock portions of the total consideration
for the VCNB and RNB acquisitions.
On March 3, 1997, the Company announced that its board of directors had
adopted a Stockholder Rights Plan designed to assure that all City National
shareholders would receive fair treatment in the event of any future "change of
control" (as that term is defined in the Rights Plan) of the Company. The Rights
Plan provides each City National Stockholder with one right for each common
share held. Under certain conditions, each right would be exercisable to
purchase that number of City National common shares having at that time a market
value equal to two times the then current exercise price. The rights are subject
to redemption by the board of directors at $.001 per right at any time prior to
the first date upon which they become exercisable.
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
YEAR
ENDED
INCREASE INCREASE DECEMBER
YEAR (DECREASE) YEAR (DECREASE) 31,
ENDED ---------------------- ENDED -------------------- ---------
1996 AMOUNT % 1995 AMOUNT % 1994
--------- ----------- --- --------- --------- --- ---------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income(1)......................... $ 288,049 $ 68,423 31 $ 219,626 $ 36,666 20 $ 182,960
Interest expense........................... 82,389 27,058 49 55,331 16,917 44 38,414
--------- ----------- --- --------- --------- --- ---------
Net interest income........................ 205,660 41,365 25 164,295 19,749 14 144,546
Provision for credit losses................ -- -- -- -- (7,535) (100) 7,535
Noninterest income......................... 43,808 8,646 25 35,162 (1,018) (3) 36,180
Gain (loss) on securities transactions..... 187 783 131 (596) 2,787 82 (3,383)
Noninterest expense:
Staff expense............................ 77,011 11,636 18 65,375 979 2 64,396
Other expense............................ 67,784 14,475 27 53,309 (3,591) (6) 56,900
Consolidation charge..................... -- -- -- -- -- -- --
ORE expense (income)..................... (200) 408 67 (608) 4,689 89 (5,297)
--------- ----------- --- --------- --------- --- ---------
Total.................................. 144,595 26,519 22 118,076 2,077 2 115,999
--------- ----------- --- --------- --------- --- ---------
Income (loss) before income taxes.......... 105,060 24,275 30 80,785 26,976 50 53,809
Income taxes (benefit)..................... 32,571 2,610 9 29,961 14,450 93 15,511
Less adjustments(1)........................ 5,926 3,894 192 2,032 897 79 1,135
--------- ----------- --- --------- --------- --- ---------
Income (loss) from continuing operations... 66,563 17,771 36 48,792 11,629 31 37,163
Income from discontinued operations........ -- -- -- -- -- -- --
--------- ----------- --- --------- --------- --- ---------
Net income (loss)...................... $ 66,563 $ 17,771 36 $ 48,792 $ 11,629 31 $ 37,163
--------- ----------- --- --------- --------- --- ---------
--------- ----------- --- --------- --------- --- ---------
Net income (loss) per share............ $ 1.47 $ 0.41 39 $ 1.06 $ 0.25 31 $ 0.81
--------- ----------- --- --------- --------- --- ---------
--------- ----------- --- --------- --------- --- ---------
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Interest income(1)......................... $ 171,134 $ 237,283
Interest expense........................... 41,996 84,433
--------- ---------
Net interest income........................ 129,138 152,850
Provision for credit losses................ 60,163 128,878
Noninterest income......................... 45,810 45,365
Gain (loss) on securities transactions..... -- 1,629
Noninterest expense:
Staff expense............................ 69,783 83,563
Other expense............................ 59,443 66,983
Consolidation charge..................... 12,000 --
ORE expense (income)..................... (4,489) 8,788
--------- ---------
Total.................................. 136,737 159,334
--------- ---------
Income (loss) before income taxes.......... (21,952) (88,368)
Income taxes (benefit)..................... (9,260) (32,450)
Less adjustments(1)........................ 1,342 4,234
--------- ---------
Income (loss) from continuing operations... (14,034) (60,152)
Income from discontinued operations........ 7,128 804
--------- ---------
Net income (loss)...................... $ (6,906) $ (59,348)
--------- ---------
--------- ---------
Net income (loss) per share............ $ (0.17) $ (1.84)
--------- ---------
--------- ---------
</TABLE>
- ---------
(1) Includes amounts to convert nontaxable income to a fully taxable equivalent
basis.
A-4
<PAGE>
OPERATIONS SUMMARY ANALYSIS
NET INTEREST INCOME
1996 COMPARED WITH 1995
Taxable equivalent net interest income totaled $205.7 million in 1996, up
$41.4 million, or 25.2%, from 1995. The increase from 1995 to 1996 was due to a
$881.0 million, or 33.6% increase in total earning assets, which was partially
offset by a decline in the net interest margin from 6.26% to 5.87%.
Average loans increased from $1,758.7 million in 1995 to $2,539.3 million in
1996, an increase of $780.7 million or 44.4%. The majority of this increase
reflects higher average residential first mortgage loans outstanding, up $407.7
million or 108.5%. During 1996, the Bank continued to purchase residential
mortgages to supplement its in-house origination program. Average commercial
loans increased $248.9 million or 28.5% due to improved loan demand and the
purchase of syndicated commercial loans. Average construction loans increased
$39.3 million or 80.0% due to the Bank's emphasis in this area. Average real
estate mortgage loans increased $86.1 million or 20.3% due to the impact of the
acquisition of First LA. Average loan balances are expected to increase in 1997,
resulting from continued loan growth and the acquisitions of VCNB and RNB. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
Average total investment and available-for-sale securities increased $134.4
million or 19.1% between 1995 and 1996 as a result of the acquisition of First
LA, which had substantial excess liquidity.
Average noninterest-bearing deposits increased from $898.6 million in 1995
to $1,193.0 million in 1996, an increase of $294.4 million or 32.8%, while
average interest-bearing core deposits increased from $1,023.8 million in 1995
to $1,315.3 million in 1996, an increase of $291.5 million or 28.5%. Average
time deposits of $100,000 or more increased $223.6 million or 159.7% between
1995 and 1996. These increases resulted from the Bank's increased marketing
efforts as well as from the acquisition of First LA.
RATIOS TO AVERAGE ASSETS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest income(1)............................................... 5.38% 5.76% 5.10% 4.39% 3.90%
Noninterest income................................................... 1.15 1.21 1.16 1.56 1.20
Less provision for credit losses..................................... -- -- 0.27 2.04 3.29
Less noninterest expense:
Staff expense........................................................ 2.02 2.29 2.27 2.37 2.13
Other expense........................................................ 1.77 1.87 2.01 2.02 1.71
Consolidation charge................................................. -- -- -- 0.41 --
ORE expense (income)................................................. (0.01) (0.02) (0.19) (0.15) 0.22
--------- --------- --------- --------- ---------
Total............................................................ 3.78 4.14 4.09 4.65 4.06
--------- --------- --------- --------- ---------
Income (loss) before income taxes(1)................................. 2.75 2.83 1.90 (0.74) (2.25)
--------- --------- --------- --------- ---------
Net income (loss) from continuing operations......................... 1.74 1.71 1.31 (0.47) (1.53)
Net income from discontinued operations.............................. -- -- -- 0.24 0.02
--------- --------- --------- --------- ---------
Net income (loss)................................................ 1.74% 1.71% 1.31% (0.23)% (1.51)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent basis.
1995 COMPARED WITH 1994
Fully taxable equivalent net interest income totaled $164.3 million in 1995,
up $19.7 million, or 13.7% from 1994. The increase from 1994 to 1995 was due to
the favorable impact of higher interest rates during
A-5
<PAGE>
1995 on the Company's asset-sensitive balance sheet. The net interest margin
increased from 5.57% to 6.26%.
Average loans increased from $1,538.0 million in 1994 to $1,758.7 million in
1995, an increase of $220.7 million or 14.3%. The majority of this increase
reflects higher average residential first mortgage loans outstanding, up $307.2
million or 446.7%. During 1995, the Bank continued to purchase residential
mortgages to supplement its in-house origination program. This increase and an
increase in average construction loans of $31.2 million or 173.9% offset
decreases in average real estate mortgage loans of $122.3 million or 22.4%.
Average investment securities decreased $174.9 million or 24.5% between 1994
and 1995 as a result of the maturities of securities, the proceeds of which were
used to fund loans. Average federal funds sold and securities purchased under
resale agreements decreased $57.1 million or 32.9% between 1994 and 1995.
Average securities available-for-sale increased $25.2 million or 18.1% between
1994 and 1995.
Average noninterest-bearing deposits declined from $907.2 million in 1994 to
$898.6 million in 1995, a decrease of $8.6 million or .9%, while average
interest-bearing core deposits declined from $1,188.5 million in 1994 to
$1,023.8 million in 1995, a decrease of $164.7 million or 13.8%. Average time
deposits of $100,000 or more decreased $5.4 million or 3.7% between 1994 and
1995. The Bank's interest and noninterest-bearing deposits decreased as a result
of disintermediation as depositors were attracted to higher yields on
alternative investments, including the money market mutual funds offered by the
Bank, and as a result of higher earnings credited to depositors' accounts,
thereby allowing them to maintain lower balances to pay for bank services.
Average federal funds purchased and securities sold under repurchase
agreements increased $98.0 million or 45.6% between 1994 and 1995. During 1995,
the Bank became a member of the Federal Home Loan Bank of San Francisco (the
FHLB). As of December 31, 1995, the Bank had outstanding borrowings from the
FHLB of $90.0 million. These changes reflect the Company's increased use of
wholesale funding sources.
A-6
<PAGE>
CHANGE IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1996 VS 1995 1995 VS 1994
---------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: NET DUE TO: NET
DOLLARS IN THOUSANDS-FULLY ---------------------- INCREASE ---------------------- INCREASE
TAXABLE EQUIVALENT BASIS VOLUME(1) RATE(1) (DECREASE) VOLUME(1) RATE(1) (DECREASE)
- ------------------------------------------- ---------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits in other
banks.................................. $ 1,060 $ (23) $ 1,037 $ 360 $ 47 $ 407
Loans.................................... 70,457 (13,881) 56,576 20,107 19,291 39,398
Taxable securities....................... (24,710) 4,458 (20,252) (9,425) 3,064 (6,361)
State and municipal securities........... 2,381 (37) 2,344 434 (37) 397
Securities available for sale............ 32,222 100 32,322 1,585 633 2,218
Trading account securities............... (44) (109) (153) 518 340 858
Federal funds sold and securities
purchased under resale agreements...... (2,930) (521) (3,451) (2,841) 2,590 (251)
---------- ---------- ---------- ----------- --------- -----------
Total interest-earning assets.......... 78,436 (10,013) 68,423 10,738 25,928 36,666
---------- ---------- ---------- ----------- --------- -----------
Interest paid on:
Interest checking........................ 431 (144) 287 (174) 54 (120)
Money market deposits.................... 3,891 806 4,697 (3,093) 3,773 680
Savings deposits......................... 1,405 1,481 2,886 (305) -- (305)
Other time deposits...................... 14,483 364 14,847 (490) 3,251 2,761
Other borrowings......................... 6,391 (2,050) 4,341 8,466 5,435 13,901
---------- ---------- ---------- ----------- --------- -----------
Total interest-bearing liabilities..... 26,601 457 27,058 4,404 12,513 16,917
---------- ---------- ---------- ----------- --------- -----------
$ 51,835 $ (10,470) $ 41,365 $ 6,334 $ 13,415 $ 19,749
---------- ---------- ---------- ----------- --------- -----------
---------- ---------- ---------- ----------- --------- -----------
</TABLE>
- ---------
(1) The change in interest due to both rate and volume has been allocated to the
change due to volume and rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
A-7
<PAGE>
NET INTEREST INCOME SUMMARY
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
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>
Assets
Earning assets(2)
Loans:
Commercial loans........................ $1,123,819 $ 101,039 8.99% $ 874,875 $ 88,629 10.13%
Real estate-construction................ 88,498 10,295 11.63 49,160 6,168 12.55
Real estate-mortgage.................... 509,565 49,452 9.70 423,462 42,297 9.99
Residential first mortgage.............. 783,648 62,293 7.95 375,932 29,454 7.83
Installment loans....................... 33,793 3,615 10.70 35,242 3,570 10.13
--------- ----------- ----------- --------- ----------- -----------
Total loans(3)........................ 2,539,323 226,694 8.93 1,758,671 170,118 9.67
--------- ----------- ----------- --------- ----------- -----------
Due from banks-interest bearing........... 25,989 1,461 5.62 7,151 424 5.93
State and municipal investment
securities.............................. 57,461 4,061 7.07 23,793 1,717 7.22
Taxable investment securities............. 116,970 7,457 6.38 516,495 27,709 5.36
Securities available for sale............. 665,133 42,841 6.44 164,834 10,519 6.38
Federal funds sold and securities
purchased under resale agreements....... 64,230 3,562 5.55 116,387 7,013 6.03
Trading account securities................ 36,316 1,973 5.43 37,105 2,126 5.73
--------- ----------- ----------- --------- ----------- -----------
Total earning assets.................. 3,505,422 288,049 8.22 2,624,436 219,626 8.37
--------- ----------- ----------- --------- ----------- -----------
Allowance for credit losses............... (129,788) (110,570)
Cash and due from banks................... 284,331 239,032
Other nonearning assets................... 161,349 96,909
--------- ---------
Total assets.......................... $3,821,314 $2,849,807
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity
Noninterest-bearing deposits................ $1,192,960 -- -- $ 898,600 -- --
Interest-bearing deposits:
Interest checking accounts................ 316,146 2,925 0.93 268,593 2,638 0.98
Money market accounts..................... 726,942 21,589 2.97 595,467 16,892 2.84
Savings deposits.......................... 132,591 4,450 3.36 79,391 1,564 1.97
Time deposits--under $100,000............. 139,572 7,196 5.16 80,341 3,826 4.76
Time deposits--$100,000 and over.......... 363,659 18,596 5.11 140,020 7,119 5.08
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing deposits....... 1,678,910 54,756 3.26 1,163,812 32,039 2.75
--------- ----------- ----------- --------- ----------- -----------
Total deposits........................ 2,871,870 2,062,412
Federal funds purchased and securities
sold under repurchase agreements........ 253,853 12,835 5.06 287,015 16,404 5.72
Other borrowings.......................... 265,638 14,798 5.57 114,865 6,888 6.00
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing liabilities.... 2,198,401 82,389 3.75 1,565,692 55,331 3.53
--------- ----------- ----------- --------- ----------- -----------
Other liabilities........................... 56,462 34,964
Shareholders' equity........................ 373,491 350,551
--------- ---------
Total liabilities and shareholders'
equity.............................. $3,821,314 $2,849,807
--------- ---------
--------- ---------
Net interest spread........................... 4.47 4.84
Fully taxable equivalent net interest income
and margin.................................. $ 205,660 5.87% $ 164,295 6.26%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $45,813, $46,931, $69,164, $131,381 and
$247,792 for 1996, 1995, 1994, 1993 and 1992, respectively.
(3) Loan income includes loan fees of $7,492, $6,850, $6,835, $5,304 and $5,427
for 1996, 1995, 1994, 1993 and 1992, respectively.
A-8
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------- ----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 865,672 $ 74,893 8.65% $1,007,343 $ 75,155 7.46% $1,323,493 $ 96,437 7.29%
17,947 1,853 10.32 70,783 5,023 7.10 219,456 15,761 7.18
545,724 45,474 8.33 629,188 46,294 7.36 794,744 57,497 7.23
68,768 4,541 6.60 3,089 186 6.02 -- -- --
39,886 3,959 9.93 52,260 5,234 10.02 65,964 6,836 10.36
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,537,997 130,720 8.50 1,762,663 131,892 7.48 2,403,657 176,531 7.34
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
655 17 2.60 835 30 3.59 2,637 67 2.54
17,799 1,320 7.42 1,905 176 9.24 85,710 8,254 9.63
697,421 34,070 4.89 499,484 26,973 5.40 461,871 31,068 6.73
139,603 8,301 5.95 15,670 1,448 9.24 1,153 111 9.63
173,451 7,264 4.19 307,078 9,357 3.05 553,540 19,592 3.54
27,315 1,268 4.64 35,529 1,258 3.54 42,352 1,660 3.92
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
2,594,241 182,960 7.05 2,623,164 171,134 6.52 3,550,920 237,283 6.68
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
(113,100) (129,873) (141,537)
249,768 272,610 368,297
100,562 178,560 141,269
--------- --------- ---------
$2,831,471 $2,944,461 $3,918,949
--------- --------- ---------
--------- --------- ---------
$ 907,234 -- -- $ 914,642 -- -- $1,029,758 -- --
285,983 2,758 0.96 283,871 3,379 1.19 328,555 6,175 1.88
719,203 16,212 2.25 767,121 17,858 2.33 1,023,280 31,386 3.07
95,097 1,869 1.97 103,161 2,255 2.19 106,608 3,135 2.94
88,195 3,226 3.66 108,135 4,063 3.76 129,105 6,106 4.73
145,463 4,958 3.41 203,176 6,419 3.16 515,803 20,888 4.05
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,333,941 29,023 2.18 1,465,464 33,974 2.32 2,103,351 67,690 3.22
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
2,241,175 2,380,106 3,133,109
215,130 8,552 3.98 265,082 7,499 2.83 488,520 16,220 3.32
20,348 839 4.12 16,147 523 3.24 14,279 523 3.66
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,569,419 38,414 2.45 1,746,693 41,996 2.40 2,606,150 84,433 3.24
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
41,622 22,477 23,412
313,196 260,649 259,629
--------- --------- ---------
$2,831,471 $2,944,461 $3,918,949
--------- --------- ---------
--------- --------- ---------
4.60 4.12 3.44
$ 144,546 5.57% $ 129,138 4.92% $ 152,850 4.30%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
A-9
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgment of the adequacy of the allowance for credit losses and is determined
through periodic analysis of the loan portfolio. This analysis includes a
detailed review of the classification and categorization of problem and
potential problem loans and loans to be charged off; an assessment of the
overall quality and collectibility of the portfolio; and consideration of the
loan loss experience, trends in problem loans and concentrations of credit risk,
as well as current and expected future economic conditions (particularly in
Southern California). The Bank has an internal risk analysis and review staff
that reports to the Audit and Examining Committee of the Board of Directors and
continuously reviews loan quality. Such reviews also assist management in
establishing the level of the allowance for credit losses.
For 1996 and 1995, the Company did not record a provision for credit losses
compared with a provision for credit losses of $7.5 million for 1994. In 1996,
net charge offs totaled $1.4 million compared with net recoveries in 1995 of
$7.1 million and net charge offs in 1994 of $12.7 million. The combination of
low net charge offs, a change in the risk profile of the loan portfolio, 31.1%
of which now consists of residential first mortgages, the continued reduction in
problem loans, and the improvement of the Southern California economy allowed
the Company not to have to record any provision for credit losses in 1996. Based
on its review of the loan portfolio, management anticipates that a provision for
credit losses for 1997 may not be required. However, credit quality will be
influenced by underlying trends in the economic cycle, particularly in Southern
California among other factors, which are beyond management's control.
Consequently, no assurances can be given that the Company will not sustain loan
losses, in any particular period, that are sizable in relation to the allowance
for credit losses. Additionally, subsequent evaluation of the loan portfolio, in
light of factors then prevailing, by the Company and its regulators may indicate
a requirement for increases in the allowance for credit losses through charges
to the provision for credit losses. See "Cautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995", below.
NONINTEREST INCOME
Noninterest income in 1996 totaled $44.0 million, up $9.4 million from 1995
which was up $1.8 million from 1994. A breakdown of noninterest income by
category is reflected below.
ANALYSIS OF CHANGES IN NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------------- ----------------------
DOLLARS IN MILLIONS 1996 AMOUNT % 1995 AMOUNT % 1994
- -------------------------------------------------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment services income........................ $ 11.5 $ 2.7 30.7 $ 8.8 $ 1.6 22.2 $ 7.2
Service charges on deposit accounts............... 10.8 2.7 33.3 8.1 (1.2) (12.9) 9.3
Trust fees........................................ 7.2 0.7 10.8 6.5 (0.3) (4.4) 6.8
Gain on sale of assets............................ 1.1 1.1 NM -- (1.5) (100.0) 1.5
Gain (loss) on sale of securities................. 0.2 0.8 (133.3) (0.6) 2.8 (82.4) (3.4)
All other income.................................. 13.2 1.4 11.9 11.8 0.4 3.5 11.4
--------- --- --------- --------- ----- --------- ---------
Total..................................... $ 44.0 $ 9.4 27.2 $ 34.6 $ 1.8 5.5 $ 32.8
--------- --- --------- --------- ----- --------- ---------
--------- --- --------- --------- ----- --------- ---------
</TABLE>
Investment services income, which includes fees, commissions and markups on
securities transactions with customers, and fees on money market mutual funds,
increased in 1996, compared to 1995, by $2.7 million or 30.7% primarily due to
higher fees and new investment products offered to customers. The increase in
investment services income from 1994 to 1995 was also attributable to the same
factors. At December 31, 1996 the Company had $6.9 billion of assets under
custody or management in its trust department, compared to $6.3 billion at
December 31, 1995.
A-10
<PAGE>
Service charges on deposit accounts increased $2.7 million, or 33.3%,
compared to a 12.9% decrease in 1995. The increase in 1996 is the result of the
acquisition of First LA and strong growth in deposits. Service charges on
deposit accounts were lower in 1995 as a result of disintermediation as
depositors were attracted to higher yields on alternative investments and as a
result of higher earnings being credited to depositors' accounts, thereby
allowing them to maintain lower balances to pay for bank services.
Trust fees increased $.7 million or 10.8% from 1995 to 1996 and decreased
$.3 million or 4.4% from 1994 to 1995. All other income categories, which
include foreign exchange, letter of credit fees, escrow and proof of deposit
fees in addition to other miscellaneous income, increased in 1995 and 1996 due
to higher volumes, particularly in foreign exchange income in 1996 due to the
hiring of two experienced traders.
Securities gains in 1996 totaled $.2 million compared to losses of $.6
million and $3.4 million in 1995 and 1994, respectively. The losses realized in
1994 resulted from the Company's sales of certain low yielding securities for
reinvestment into higher yielding assets, including residential first mortgages.
NONINTEREST EXPENSE
Noninterest expense, before ORE expense, totaled $144.8 million in 1996, up
$26.1 million or 22.0% from 1995 which was down $2.6 million or 2.2% from 1994.
A breakdown of noninterest expense by category is reflected below.
ANALYSIS OF CHANGES IN NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------------- ----------------------
1996 AMOUNT % 1995 AMOUNT % 1994
--------- ----------- --------- --------- ----------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits................. $ 77.0 $ 11.6 17.7 $ 65.4 $ 1.0 1.6 $ 64.4
--------- ----- --------- --------- ----- --------- ---------
All other:
Professional............................... 13.7 4.9 55.7 8.8 0.5 6.0 8.3
Net occupancy of premises.................. 9.0 1.1 13.9 7.9 (2.4) (23.3) 10.3
Data processing............................ 8.7 1.2 16.0 7.5 0.3 4.2 7.2
Promotion.................................. 5.6 1.2 27.3 4.4 1.4 46.7 3.0
Depreciation............................... 5.1 1.0 24.4 4.1 0.0 0.0 4.1
Office supplies............................ 4.8 0.8 20.0 4.0 (0.6) (13.0) 4.6
FDIC insurance............................. -- (2.5) (100.0) 2.5 (3.3) (56.9) 5.8
Equipment.................................. 2.2 (0.1) (4.3) 2.3 (0.3) (11.5) 2.6
Lender liability settlement................ 3.4 3.4 NM -- -- -- --
Other operating............................ 15.3 3.5 29.7 11.8 0.8 7.3 11.0
--------- ----- --------- --------- ----- --------- ---------
67.8 14.5 27.2 53.3 (3.6) (6.3) 56.9
--------- ----- --------- --------- ----- --------- ---------
ORE expense (income)........................... (0.2) 0.4 (66.7) (0.6) 4.7 (88.7) (5.3)
--------- ----- --------- --------- ----- --------- ---------
Total.................................. $ 144.6 $ 26.5 22.4 $ 118.1 $ 2.1 1.8 $ 116.0
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
</TABLE>
Staff expense increased 17.7% in 1996 compared to a 1.6% increase in
1995.The increase in 1996 is the result of the additional personnel that joined
the Bank as a result of the acquisition of First LA and the hiring of new
personnel in the Bank's expansion efforts. The increase in 1995 is due to the
higher costs associated with performance incentives and contributions to the
Profit Sharing Plan. On a full-time equivalent basis, staff levels have
increased from approximately 1,175 at December 31, 1995 to 1,320 at December 31,
1996. Staff levels are expected to increase in 1997 as a result of the
completion of the acquisitions of VCNB and RNB in January 1997. See "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
A-11
<PAGE>
Excluding ORE expense, the remaining expense categories increased $14.5
million, or 27.2%, between 1995 and 1996 due to higher professional expenses for
consulting and other professional services, increases in occupancy, data
processing, depreciation and office supplies due to the acquisition of First LA,
increased promotional expense to attract and retain business and a $3.4 million
charge to reflect the settlement of a lender liability lawsuit in the fourth
quarter of 1996. These increases were partially offset by the $2.5 million
decrease in FDIC insurance premiums from 1995 to 1996. Excluding ORE expense,
the remaining expense categories decreased $3.6 million in 1995, compared with
1994. This decrease resulted from the decrease in FDIC insurance and occupancy
expense as a result of the Bank's consolidation program. Partially offsetting
these decreases were increases of $1.4 million in promotion expense and a $1.0
million charge for acquisition related costs recorded in the fourth quarter of
1995. Due to the acquisitions of VCNB and RNB, most categories of noninterest
expense are expected to increase in 1997 above the 1996 levels. See "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
In February 1997, the Company and ALLTEL Information Services, Inc. mutually
agreed to terminate their processing agreement effective July 31, 1997. This
agreement had been scheduled to expire on December 31, 2000. Billings to the
Bank by ALLTEL Information Sevices, Inc. amounted to $7.2 million in 1996. The
Company expects a decrease in its data processing expense utilizing a new
service provider. See "Cautionary Statement for Purposes of the 'Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995", below.
ORE activities resulted in net income of $.2 million, $.6 million and $5.3
million in 1996, 1995 and 1994, respectively. The $5.3 million gain from ORE
activities in 1994 was primarily due to the completion of the Accelerated
Disposition Program in 1994.
In October 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation." The statement
requires that companies either adopt the preferred method of accounting for
stock plans and charge the fair value of the shares awarded under those plans to
operating income or continue to account for such plans under provisions of APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25"). The
Company adopted SFAS No. 123 on January 1, 1996 and elected to continue to apply
the accounting provisions of APB No. 25. The proforma effects on net income and
net income per share are shown below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net income, as reported........................................................................ $ 66,563 $ 48,792
Pro forma net inome............................................................................ 65,140 47,824
Earnings per share, as reported................................................................ $ 1.47 $ 1.06
Pro forma earnings per share................................................................... 1.44 1.04
</TABLE>
INCOME TAXES
The 1996 effective tax rate was 32.9% compared to 38.0% in 1995 and 29.4% in
1994. The effective rates differed from the applicable statutory federal tax
rate due to various factors including state taxes, tax exempt income and
recognition of previously unrecorded deferred tax benefits.
The Company recognized $5.0 million, $.9 million and $3.9 million in
previously unrecorded California deferred tax benefits in 1996, 1995 and 1994,
respectively. The recognition of the California deferred tax benefits in 1996
resulted from the Company's continued and increasing profitability and the
Company's evaluation of deferred tax assets which it believes are more likely
than not to be realized on future tax returns. The low effective tax rate for
1994 resulted from utilization of the Company's California net operating loss
carry forwards and the recognition of $3.9 million of California deferred tax
benefits.
The effective tax rate for 1997 is expected to increase but will still be
below the combined statutory federal and California tax rates due to the impact
of municipal securities and leases, dividends received deduction from preferred
stock, and tax credits from investments in low income housing. See "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
A-12
<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 Form 10-K which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statement made by, or on behalf of, the Company.
- ECONOMIC CONDITIONS. The Company's results are strongly influenced by
general economic conditions in its market area, Southern California, and
a deterioration in these conditions could have a material adverse impact
on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in economic conditions in
the real estate and entertainment industries may affect the Company's
performance.
- INTEREST RATES. Management anticipates that interest rate levels will
remain generally constant in 1997, but if interest rates vary
substantially from present levels, this may cause the Company's results
to differ materially.
- GOVERNMENT REGULATION AND MONETARY POLICY. All forward-looking statements
presume a continuation of the existing regulatory environment and U.S.
Government monetary policies. The banking industry is subject to
extensive federal and state regulations, and significant new laws or
changes in, or repeals 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 with the terms of their loans.
The Bank has adopted underwriting and credit monitoring procedures and
credit policies, including the establishment and review of the allowance
for credit losses, that management believes are appropriate to minimize
this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying the Bank's credit portfolio, but such
policies and procedures may not prevent unexpected losses that could
adversely affect the Company's results.
- OTHER RISKS. From time to time, the Company details other risks to its
business and/or its financial results in its filings with the Securities
and Exchange Commission.
While management believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance that
the results described in such forward-looking statements will, in fact, be
achieved.
BALANCE SHEET ANALYSIS
CAPITAL
At December 31, 1996, the Company's and the Bank's Tier 1 capital, which is
comprised of common shareholders' equity and certain regulatory adjustments,
amounted to $385.3 million and $322.0 million, respectively. At December 31,
1995, the Company's and the Bank's Tier 1 capital amounted to
A-13
<PAGE>
$344.2 million and $318.7 million, respectively. The increase from December 31,
1995 resulted from the retention of 1996 earnings and from the exercise of stock
options, less dividends paid and amounts related to shares repurchased.
The following table presents the regulatory standards for well capitalized
institutions and the capital ratios for the Company and the Bank at December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31
WELL CAPITALIZED -------------------------------
STANDARDS 1996 1995 1994
----------------- --------- --------- ---------
<S> <C> <C> <C> <C>
CITY NATIONAL CORPORATION
Tier 1 leverage........................................................... 5.00% 9.75% 11.17% 11.87%
Tier 1 risk-based capital................................................. 6.00 13.26 13.60 17.50
Total risk-based capital.................................................. 10.00 14.55 14.91 18.81
CITY NATIONAL BANK
Tier 1 leverage........................................................... 5.00 8.22 10.40 11.31
Tier 1 risk-based capital................................................. 6.00 11.24 12.64 16.69
Total risk-based capital.................................................. 10.00 12.53 13.95 17.99
</TABLE>
The Company paid a dividend of $.26 per share of common stock in 1995 and
$.36 per share in 1996. On January 22, 1997, the Board of Directors authorized a
regular quarterly cash dividend on common stock at an increased rate of $.11 per
share to shareholders of record on February 3, 1997, payable on February 13,
1997.
In May of 1995, the Board of Directors authorized the purchase of up to 5%,
or 2.28 million shares of the Corporation's common stock from time to time in
open market transactions. In October 1996, the Board of Directors authorized the
repurchase of an additional 400,000 shares of the Corporation's common stock to
be used for pending acquisitions. At December 31, 1996, a total of 2.4 million
shares had been repurchased at a cost of $32.3 million. In January 1997, 2.3
million shares were reissued for the stock portions of the total acquisition
consideration for VCNB and RNB.
LIQUIDITY MANAGEMENT
The objective of liquidity management is the ability to maintain cash flow
adequate to fund the Company's operations and meet obligations and other
commitments on a timely and cost effective basis. The Company manages to this
objective through the selection of asset and liability maturity mixes that it
believes best meet the needs of the Company. The Company's liquidity position is
enhanced by its ability to raise additional funds as needed in the money
markets.
The Company's core deposit base in recent years provided the majority of the
Company's funding requirements. This relatively stable and low-cost source of
funds has, along with shareholders' equity provided 75% and 80% of funding for
average total assets in 1996 and 1995, respectively.
A significant portion of remaining funding of average total assets is
provided by short term federal fund purchases and sales of securities under
repurchase agreements. This funding source totaled $253.9 million and $287.0
million in 1996 and 1995, respectively. Additionally, the Bank increased its
funding from other borrowings, primarily Federal Home Loan Bank advances, from
$114.9 million on average in 1995 to $265.6 million in 1996.
Liquidity is also provided by reductions in assets such as federal funds
sold, securities purchased under resale agreements and trading account
securities which may be immediately converted to cash at minimal cost. The
aggregate of these assets averaged $100.5 million during 1996, down $53.0
million, or 34.5% from the prior year. This decrease resulted from the Company's
decision to continue to maintain a substantially lower level of liquidity due to
the stabilization in deposits and the Company's improved operating performance.
Liquidity is also provided by the portfolio of available-for-sale securities
which total $615.9 million at December 31, 1996. In addition, the unpledged
portion of securities at December 31, 1996 totaled
A-14
<PAGE>
$242.2 million and would be available as collateral for borrowing. Maturing
loans also provide liquidity, and $1,242.8 million of the Bank's loans are
scheduled to mature in 1997.
ASSET LIABILITY MANAGEMENT
The principal objectives of asset/liability management are to maximize net
interest margin subject to margin volatility and liquidity constraints. Margin
volatility results when the rate reset (or repricing) characteristics of assets
are materially different from those of the Company's liabilities. Liquidity risk
results from the mismatching of asset and liability cash flows. Management
chooses asset/liability strategies that promote stable earnings and reliable
funding. Interest rate risk and funding positions are kept within limits
established by the Company's board of directors to ensure that risk-taking is
not excessive and that liquidity is properly managed.
The Company has established three measurement processes to quantify and
manage exposure to interest rate risk: net interest income simulation modeling,
gap analysis, and present value of equity analysis. Net interest income
simulations are used to identify the direction and severity of interest rate
risk exposure across a twelve month forecast horizon. Gap analysis provides
insight into structural mismatches of assets and liability repricing
characteristics. Present value of equity calculations are used to estimate the
theoretical price sensitivity of shareholder equity to changes in interest
rates.
The table on page A-16 compares the Company's interest rate gap position as
of December 31, 1996 and 1995. Generally, an asset sensitive gap indicates that
net interest margin will improve during a period of rising interest rates.
The gap report shows that the Company's cumulative one year interest rate
sensitivity gap decreased from $525.0 million at December 31, 1995 to ($309.7)
million at December 31, 1996. This change resulted from the Company's efforts to
lower its exposure to decreases in net interest income due to a rapid decline in
interest rates. The Company has increased its portfolio of loans that reprice
after one year by $545.3 million during 1996. In addition, the Company has
entered into interest rate swaps with remaining maturities at December 31, 1996
in excess of one year totalling $225.0 million to achieve its interest rate risk
management objectives. The Company's one year 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.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Company's interest rate sensitivity position. To supplement
traditional gap analysis, the Company uses simulation modeling to estimate the
potential effects of changing interest rates. This process allows the Company to
fully explore the complex relationships within the gap over time and various
interest rate scenarios.
A-15
<PAGE>
At December 31, 1996 and 1995, 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
-------- ------------- ------------ -------- --------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Rate-sensitive assets:
Interest-bearing deposits in other banks.................. $ 11.0 $ -- $ -- $ -- $ 11.0
Loans..................................................... 1,400.8 364.9 259.5 772.7 2,797.9
Taxable investment securities............................. -- 5.0 71.7 30.1 106.8
Nontaxable securities..................................... -- 6.8 57.3 24.3 88.4
Securities available for sale............................. 31.5 4.0 291.9 288.5 615.9
Trading account securities................................ 32.1 -- -- -- 32.1
Interest rate swaps....................................... (325.0 ) 100.0 225.0 -- --
Federal funds sold and securities purchased under resale
agreements.............................................. 151.2 -- -- -- 151.2
-------- ------------- ------ -------- --------
Total rate-sensitive assets............................. 1,301.6 480.7 905.4 1,115.6 3,803.3
-------- ------------- ------ -------- --------
Rate-sensitive liabilities:(1)
Interest checking deposits................................ 386.2 -- -- -- 386.2
Money market accounts..................................... 714.1 -- -- -- 714.1
Savings deposits.......................................... 136.7 -- -- -- 136.7
Time deposits............................................. 202.8 274.2 29.1 0.8 506.9
Federal funds purchased and securities sold under
repurchase agreements................................... 194.5 -- -- -- 194.5
Other borrowings.......................................... 148.7 34.8 -- -- 183.5
-------- ------------- ------ -------- --------
Total rate-sensitive liabilities........................ 1,783.0 309.0 29.1 0.8 2,121.9
-------- ------------- ------ -------- --------
Interest rate sensitivity gap............................... $(481.4 ) $ 171.7 $876.3 $1,114.8 $1,681.4
-------- ------------- ------ -------- --------
-------- ------------- ------ -------- --------
Cumulative interest rate sensitivity gap.................... $(481.4 ) $(309.7) $566.6 $1,681.4
-------- ------------- ------ --------
-------- ------------- ------ --------
Cumulative ratio of rate-sensitive assets to rate-sensitive
liabilities............................................... 73% 85% 127% 179% 179%
-------- ------------- ------ -------- --------
-------- ------------- ------ -------- --------
DECEMBER 31, 1995
Rate-sensitive assets:
Interest-bearing deposits in other banks.................. $ 80.7 $ -- $ -- $ -- $ 80.7
Loans..................................................... 1,524.3 286.2 141.1 345.8 2,297.4
Taxable investment securities............................. 43.4 20.4 21.1 8.8 93.7
Nontaxable securities..................................... -- -- 9.1 7.2 16.3
Securities available for sale............................. 367.5 18.9 296.1 182.9 865.4
Trading account securities................................ 29.7 -- -- -- 29.7
Federal funds sold and securities purchased under resale
agreements.............................................. 351.8 -- -- -- 351.8
-------- ------------- ------ -------- --------
Total rate-sensitive assets............................. 2,397.4 325.5 467.4 544.7 3,735.0
-------- ------------- ------ -------- --------
Rate-sensitive liabilities:(1)
Interest checking deposits................................ 380.2 -- -- -- 380.2
Money market accounts..................................... 801.4 -- -- -- 801.4
Savings deposits.......................................... 89.0 -- -- -- 89.0
Time deposits............................................. 251.3 197.5 35.9 0.7 485.4
Federal funds purchased and securities sold under
repurchase agreements................................... 258.4 -- -- -- 258.4
Other borrowings.......................................... 170.1 25.0 25.0 -- 220.1
Interest rate swaps....................................... 25.0 -- (25.0) -- --
-------- ------------- ------ -------- --------
Total rate-sensitive liabilities........................ 1,975.4 222.5 35.9 0.7 2,234.5
-------- ------------- ------ -------- --------
Interest rate sensitivity gap............................... $ 422.0 $ 103.0 $431.5 $ 544.0 $1,500.5
-------- ------------- ------ -------- --------
-------- ------------- ------ -------- --------
Cumulative interest rate sensitivity gap.................... $ 422.0 $ 525.0 $956.5 $1,500.5
-------- ------------- ------ --------
-------- ------------- ------ --------
Cumulative ratio of rate-sensitive assets to rate-sensitive
liabilities............................................... 121% 124% 143% 167% 167%
-------- ------------- ------ -------- --------
-------- ------------- ------ -------- --------
</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.
A-16
<PAGE>
SECURITIES
The Company classifies its securities as investment, available-for-sale or
trading. Securities which the Company has the ability and intent to hold to
maturity are classified as investment securities. Securities held to facilitate
customer trading orders are classified as trading securities. All other
securities are classified as available-for-sale. In November 1995, the Financial
Accounting Standards Board issued its Guide to Implementation of SFAS No. 115
and allowed companies a single opportunity to reclassify securities between the
classifications of investment and available-for-sale without tainting the
classification of any securities. In December 1995, the Company reclassified
securities with a book value of $402.3 million and fair value of $401.2 million
from the investment classification to the available-for-sale category.
INVESTMENT SECURITIES
Investment securities at December 31, 1996 were up $85.2 million or 77.5%
from 1995. This increase was due primarily to the purchase of state and
municipal securities during 1996. The average expected maturity of total
investment securities was 4.8 years at December 31, 1996 compared to 2.9 years
at the end of 1995. The carrying amounts of investment securities at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Mortgage-backed securities............................................................................ $ 97,638 $ 80,935
State and municipal securities........................................................................ 88,445 19,833
Other securities...................................................................................... 9,146 9,238
----------- -----------
Total......................................................................................... $ 195,229 $ 110,006
----------- -----------
----------- -----------
</TABLE>
The following table shows the maturities of investment securities at
December 31, 1996.
<TABLE>
<CAPTION>
OVER 5
YEARS
OVER 1 YEAR THRU 5 THRU 10
TOTAL ONE YEAR OR LESS YEARS YEARS
----------------------- ------------------------- ----------------------- ---------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
--------- ------------ ----------- ------------ --------- ------------ ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities............... $ 97,638 6.45% $ -- -- % $ 7,403 6.55% $ 16,785
State and municipal securities........... 88,445 6.72 5,787 6.88 52,967 6.61 24,161
Other securities(2)...................... 9,146 6.49 -- -- 2,418 7.61 1,000
--------- --- ----------- --- --------- --- ---------
Total............................ $ 195,229 6.57 $ 5,787 6.88 $ 62,788 6.64 $ 41,946
--------- ----------- --------- ---------
--------- ----------- --------- ---------
Fair value....................... 194,655 $ 5,831 $ 63,124 $ 41,695
--------- ----------- --------- ---------
--------- ----------- --------- ---------
<CAPTION>
OVER 10 YEARS
-----------------------
YIELD(1) AMOUNT YIELD(1)
------------ --------- ------------
<S> <C> <C> <C>
Mortgage-backed securities............... 5.88% $ 73,450 6.57%
State and municipal securities........... 6.84 5,530 7.06
Other securities(2)...................... 6.61 5,728 6.00
--- --------- ---
Total............................ 6.45 $ 84,708 6.56
---------
---------
Fair value....................... $ 84,005
---------
---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
AVAILABLE-FOR-SALE SECURITIES
At December 31, 1996, securities available-for-sale totaled $615.9 million,
a decrease of $249.5 million or 28.8% from December 31, 1995. This decrease was
due to the investment of seasonal year end liquidity in short term notes at
December 31, 1995, whereas the seasonal year end liquidity in 1996 was used to
pay down wholesale funding sources. In addition, principal repayments during
1996 from mortgage-back securities were redeployed into residential first
mortgages. The average expected maturity of total available-for-sale securities
at December 31, 1996 was 2.6 years.
A-17
<PAGE>
The carrying amounts of available for sale securities at the dates indicated
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
U.S. Government and federal agency securities......................................................... $ 372,316 $ 587,950
Mortgage-backed securities............................................................................ 127,936 212,704
State and municipal securities........................................................................ 14,067 17,386
Other securities...................................................................................... 101,544 47,361
----------- -----------
Total......................................................................................... $ 615,863 $ 865,401
----------- -----------
----------- -----------
</TABLE>
The following table shows the maturities of available for sale securities at
December 31, 1996.
<TABLE>
<CAPTION>
OVER 5
YEARS
OVER 1 YEAR THRU 5 THRU 10
TOTAL ONE YEAR OR LESS YEARS YEARS
---------------------- ---------------------- ---------------------- ---------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
--------- ----------- --------- ----------- --------- ----------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agency
securities.............................. $ 372,316 5.69% $ 15,002 5.51% $ 344,568 5.69% $ 12,746
Mortgage-backed securities................ 127,936 6.28 -- -- -- -- --
State and municipal securities............ 14,067 6.76 -- -- 13,545 6.75 522
Other securities(2)....................... 101,544 10.74 29,104 11.46 45,644 10.44 2,140
--------- ----- --------- ----- --------- ----- ---------
Total............................. $ 615,863 6.67 $ 44,106 9.44 $ 403,757 6.27 $ 15,408
--------- --------- --------- ---------
--------- --------- --------- ---------
Amortized Cost.................... $ 619,580 $ 44,229 $ 404,660 $ 15,685
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
OVER 10 YEARS
----------------------
YIELD(1) AMOUNT YIELD(1)
----------- --------- -----------
<S> <C> <C> <C>
U.S. Government and federal agency
securities.............................. 5.87% -- --%
Mortgage-backed securities................ -- 127,936 6.28
State and municipal securities............ 7.14 -- --
Other securities(2)....................... 11.83 24,656 10.35
----- --------- -----
Total............................. 6.74 $ 152,592 6.94
---------
---------
Amortized Cost.................... $ 155,006
---------
---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities, except preferred stock, are reported in the "over ten
years" category.
LOAN PORTFOLIO
LOANS BY TYPE
The amount of loans outstanding at the indicated year ends are shown in the
following table according to type of loans. The Company's lending activities are
predominately in Southern California. The Bank has no foreign loans.
LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Commercial(1).................................... $ 1,334,577 $ 1,080,125 $ 906,417 $ 944,459 $ 1,185,310
Real estate loans--construction.................. 92,322 81,318 31,201 11,699 105,467
Real estate loans--mortgage...................... 499,377 553,095 457,030 620,574 816,662
Residential first mortgage....................... 882,573 593,546 212,595 6,586 --
Installment loans................................ 30,586 38,527 36,675 45,485 60,553
------------- ------------- ------------- ------------- -------------
Total loans...................................... $ 2,839,435 $ 2,346,611 $ 1,643,918 $ 1,628,803 $ 2,167,992
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
- ---------
(1) Commercial included unsecured loans to real estate developers and customers
involved in real estate investments and commercial loans where real estate
partially secures the borrowing.
Gross loans at December 31, 1996 were $2,839.4 million, up 21.0% or $492.8
million from the previous year end. The increase in loans resulted from
purchases of $250.7 million and originations of
A-18
<PAGE>
residential first mortgages and from increased loan demand. Additionally, the
Company also increased its purchases of participations in large corporate loans.
Commercial loans increased $254.5 million or 23.6%, and represented 47.0% of the
Company's total loan portfolio at December 31, 1996. Commercial real estate
loans decreased $53.7 million or 9.7% as pay downs, mostly from the loans
acquired as part of the acquisition of First LA, were not offset by new
originations. Residential first mortgage loans increased to 31.1% of total loans
as a result of loan purchases and originations by the Bank's residential
mortgage division. The Company does not expect to substantially increase its
purchased residential first mortgage loan portfolio in 1997. At December 31,
1996, residential first mortgage loans totaled $882.6 million.
At December 31, 1996, 54.3% of commercial loans, 48.0% of real estate loans
and 16.2% of installment loans outstanding were floating interest rate loans.
Floating rate loans comprised 50.6% of the total loan portfolio at December 31,
1996 and 68.2 % at December 31, 1995. Total loans at December 31, 1996 were
comprised of 43.8% due in one year or less, 24.4% due in 1--5 years and 31.8%
due after 5 years.
The loan maturities shown in the table below are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Bank and
the borrower. Because the Bank is unable to estimate the extent to which its
borrowers will renew their loans the table is based on contractual maturities.
LOAN MATURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------
REAL ESTATE-- REAL ESTATE-- REAL ESTATE--
COMMERCIAL CONSTRUCTION MORTGAGE RESIDENTIAL INSTALLMENT TOTAL
------------ ------------- ------------- ------------- ----------- ------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Aggregate maturities of loan balances
due:
In one year or less
Interest rates--floating......... $ 523,620 $ 80,485 $ 119,977 $ 26,224 $ 4,921 $ 755,227
Interest rates--fixed............ 413,944 -- 65,577 -- 8,088 487,609
After one year but within five years
Interest rates--floating......... 170,774 11,837 210,639 75,435 48 468,733
Interest rates--fixed............ 119,248 -- 89,933 1,512 15,162 225,855
After five years
Interest rates--floating......... 30,345 -- 2,684 180,896 -- 213,925
Interest rates--fixed............ 76,646 -- 10,567 598,506 2,367 688,086
------------ ------------- ------------- ------------- ----------- ------------
Total loans.................. $ 1,334,577 $ 92,322 $ 499,377 $ 882,573 $ 30,586 $ 2,839,435
------------ ------------- ------------- ------------- ----------- ------------
------------ ------------- ------------- ------------- ----------- ------------
</TABLE>
A-19
<PAGE>
CREDIT RISK MANAGEMENT
The Company assesses and manages credit risk on an ongoing basis through
diversification guidelines, lending limits, credit review and approval policies
and internal monitoring. As part of the control process, an independent credit
review function regularly examines the Company's loan portfolio and other credit
related products, including unused commitments and letters of credit. In
addition to this internal credit process, the Company's loan portfolio is
subject to examination by external regulators in the normal course of business.
Credit quality will be influenced by underlying trends in the economic and
business cycle. The Company seeks to manage and control its risk through
diversification of the portfolio by type of loan, industry concentration and
type of borrower.
REAL ESTATE LENDING, EXCLUDING RESIDENTIAL FIRST MORTGAGE
The Company engages in real estate lending in the form of construction loans
and permanent loans secured by deeds of trust.
REAL ESTATE CONSTRUCTION LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Condo/apartment............................................................................. $ 10,878 $ 2,606
Shopping centers............................................................................ 18,866 26,647
1-4 family (includes land).................................................................. 32,915 43,635
Office building............................................................................. 3,642 5,159
Industrial.................................................................................. 11,913 2,279
Other....................................................................................... 14,108 992
--------- ---------
Total............................................................................... $ 92,322 $ 81,318
--------- ---------
--------- ---------
</TABLE>
COMMERCIAL REAL ESTATE MORTGAGE LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Industrial................................................................................ $ 109,205 $ 87,653
Office building........................................................................... 67,207 132,921
Shopping centers.......................................................................... 41,842 50,081
Other 1-4 family.......................................................................... 8,261 21,683
Condo/apartment........................................................................... 55,544 62,063
Land, nonresidential...................................................................... 14,128 8,799
Churches/religious........................................................................ 18,588 23,720
Equity lines of credit.................................................................... 28,052 24,502
Other..................................................................................... 156,550 141,673
---------- ----------
Total............................................................................. $ 499,377 $ 553,095
---------- ----------
---------- ----------
</TABLE>
Construction loan balances increased to $92.3 million at December 31, 1996,
compared with $81.3 million at December 31, 1995.
At year-end 1996, commercial real estate mortgage loans total $499.4
million, or 17.6% of total loans, compared with 23.6% and 27.8% at year-end 1995
and 1994. The decrease in commercial real estate mortgage loans was due to
payoffs, especially of the loans acquired as part of the acquisition of First
LA, and amortization of existing loans without new originations to offset the
decreases. In addition to real
A-20
<PAGE>
estate outstandings, the Company had open but unused commitments, excluding
those under equity lines of credit, to lend against real estate at December 31,
1996, of $67.8 million, compared to $64.4 million at December 31, 1995.
Nonaccrual real estate loans at December 31, 1996 totaled $25.7 million, or
5.1% of related loans outstanding, down from $39.5 million, or 7.1% of related
loans outstanding at December 31, 1995. The decrease in nonaccrual real estate
loans at December 31, 1996 compared to 1995 is due in large part to the decrease
in the amount of loans placed on nonaccrual status during 1996. Real estate net
credit losses in 1996 were less than $.1 million compared to $4.0 million in
1995.
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:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ----------
<CAPTION>
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate construction....................................... $ -- $ -- $ -- $ -- $ 21,219
Real estate mortgage........................................... 25,661 39,536 35,534 51,523 160,556
Commercial..................................................... 15,882 8,316 23,267 27,780 70,954
Installment.................................................... -- 272 -- -- 360
--------- --------- --------- --------- ----------
Total.................................................... 41,543 48,124 58,801 79,303 253,089
ORE.............................................................. 15,116 7,439 4,726 2,052 8,637
--------- --------- --------- --------- ----------
Total nonaccrual loans and ORE................................... $ 56,659 $ 55,563 $ 63,527 $ 81,355 $ 261,726
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Total nonaccrual loans as a percentage of total loans............ 1.46% 2.05% 3.58% 4.87% 11.67%
Total nonaccrual loans and ORE as a percentage of total loans and
ORE............................................................ 1.98 2.36 3.85 4.99 12.02
Allowance for credit losses to nonaccrual loans.................. 313.14 273.28 179.15 139.34 53.77
Assets held for accelerated disposition.......................... $ -- $ -- $ -- $ 17,450 $ --
Loans past due 90 days or more on accrual status:
Real estate.................................................... $ 4,076 $ 3,816 $ 2,830 $ 17,412 $ 25,458
Commercial..................................................... 8,076 2,623 1,068 11,382 1,464
Installment.................................................... 292 58 404 155 36
--------- --------- --------- --------- ----------
Total.................................................... $ 12,444 $ 6,497 $ 4,302 $ 28,949 $ 26,958
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Restructured loans:
On accrual status.............................................. $ 2,569 $ 5,483 $ 2,061 $ 958 $ 1,144
On nonaccrual status........................................... -- 1,707 7,043 -- --
--------- --------- --------- --------- ----------
Total.................................................... $ 2,569 $ 7,190 $ 9,104 $ 958 $ 1,144
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
A-21
<PAGE>
The table below summarizes the approximate changes in nonaccrual loans for
the years ended December 31, 1996 and 1995.
CHANGES IN NONACCRUAL LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
<CAPTION>
DOLLARS IN THOUSANDS
<S> <C> <C>
Balance, beginning of the year............................................................ $ 48,124 $ 58,801
Loans placed on nonaccrual................................................................ 44,353 32,145
Loans acquired: First LA.................................................................. -- 12,636
Charge offs............................................................................... (13,608) (12,488)
Loans returned to accrual status.......................................................... (11,034) (5,432)
Repayments (including interest applied to principal)...................................... (14,995) (36,184)
Transfers to ORE.......................................................................... (11,297) (1,354)
---------- ----------
Balance, end of year...................................................................... $ 41,543 $ 48,124
---------- ----------
---------- ----------
</TABLE>
The additional interest income that would have been recorded from nonaccrual
loans, if the loans had not been on nonaccrual status was $2.1 million, $4.6
million and $4.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Interest payments received on nonaccrual loans are applied to
principal unless there is no doubt as to ultimate full repayment of principal,
in which case, the interest payment is recognized as interest income. Interest
income includes $4.1 million, $2.7 million and $3.5 million for the years ended
December 31, 1996, 1995, and 1994, respectively, from collection of interest
related to nonaccrual loans. Interest income not recognized on nonaccrual loans
reduced the net interest margin by 6, 17, and 18 basis points for the years
ended December 31, 1996, 1995, and 1994, respectively.
It is the Bank's policy that a loan will be placed on nonaccrual status if
either principal or interest payments are past due in excess of ninety days
unless the loan is both well secured and in process of collection, or if full
collection of interest or principal becomes uncertain, regardless of the time
period involved.
At December 31, 1996, management could not identify any significant amounts
of loans about which it had serious doubts as to the ability of the borrowers to
comply with the present loan payment terms in the future, beyond the loans
disclosed above as past due, nonaccrual or restructured. If economic conditions
change, adversely or otherwise, or if additional facts on borrowers' financial
condition come to light, then the amount of potential problem loans may change,
possibly significantly.
At December 31, 1996, the allowance for credit losses was 4.58% of gross
loans compared to 5.60% at December 31, 1995. The allowance at December 31, 1996
was equal to 313.1% of total nonaccrual loans up from 273.3% at December 31,
1995.
A-22
<PAGE>
The following table summarizes average loans outstanding during the year and
changes in the allowance for credit losses for the five-year period 1992 to
1996.
<TABLE>
<CAPTION>
RISK ELEMENTS
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding.... $2,539,323 $1,758,671 $1,537,997 $1,762,663 $2,403,657
--------- --------- --------- --------- ---------
Balance of allowance for credit losses,
beginning of year.................... $ 131,514 $ 105,343 $ 110,499 $ 136,095 $ 125,766
--------- --------- --------- --------- ---------
Loans charged off:
Commercial loans..................... 14,647 11,124 22,038 56,012 100,092
Real estate loans--construction...... -- -- -- 13,949 17,597
Real estate loans--mortgage.......... 5,338 5,869 26,354 42,546 14,970
Residential first mortgage........... 253 -- -- -- --
Installment loans.................... 104 48 128 621 1,460
--------- --------- --------- --------- ---------
Total loans charged off............ 20,342 17,041 48,520 113,128 134,119
--------- --------- --------- --------- ---------
Recoveries of loans previously charged
off:
Commercial loans..................... 13,325 22,045 34,163 27,842 15,243
Real estate loans--construction...... -- -- 161 20 167
Real estate loans--mortgage.......... 5,313 1,862 758 767 6
Residential first mortgage........... -- -- -- -- --
Installment loans.................... 279 228 747 215 154
--------- --------- --------- --------- ---------
Total recoveries................... 18,917 24,135 35,829 28,844 15,570
Net loans charged off (recovered)...... 1,425 (7,094) 12,691 84,284 118,549
Additions to allowance charged to
operating expense.................... -- -- 7,535 60,163 128,878
Acquisition of First LA................ -- 19,077
Other(1)............................... -- -- -- (1,475) --
--------- --------- --------- --------- ---------
Balance, end of period................. $ 130,089 $ 131,514 $ 105,343 $ 110,499 $ 136,095
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge offs (recoveries)
to average loans..................... 0.06% (0.40)% 0.83% 4.78% 4.93%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ---------
(1) Allowance for credit losses allocated to $73.7 million of equity lines of
credit sold in April, 1993.
The following table reflects management's allocation of the allowance for
credit losses by loan category and the ratio of loans in each category to total
loans at December 31 for each of the last five years.
A-23
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
ALLOWANCE AMOUNT PERCENT OF LOANS TO TOTAL LOANS
----------------------------------------------------- ------------------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- --------- --------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial..................... $ 75,754 $ 37,778 $ 55,179 $ 53,110 $ 72,029 47% 46% 55% 58%
Real estate-construction....... 2,405 4,550 2,341 1,410 10,500 3 3 2 1
Real estate-mortgage........... 37,748 77,730 43,745 55,020 52,323 18 24 28 38
Residential first mortgage..... 13,283 10,705 3,200 100 -- 31 25 13 --
Installment.................... 899 751 878 859 1,243 1 2 2 3
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total.................. $ 130,089 $ 131,514 $ 105,343 $ 110,499 $ 136,095 100% 100% 100% 100%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Commercial..................... 57%
Real estate-construction....... 5
Real estate-mortgage........... 35
Residential first mortgage..... --
Installment.................... 3
---------
Total.................. 100%
---------
---------
</TABLE>
The allowance allocated to the loan categories shown above are based on
previous loan loss experience, management's evaluation of the current loan
portfolio, and anticipated economic conditions. While the allowance is allocated
to specific loans and to portfolio segments, the allowance is general in nature
and is available for the portfolio in its entirety. Due to an increase in
problem loans in the commercial category and a decrease in problem loans in the
real estate mortgage category during 1996, an increased portion of the allowance
for credit losses was allocated to the commercial loan category at December 31,
1996.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Once a loan is determined to be impaired, SFAS No. 114 requires that
the impairment be measured based on the present value of the expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the impairment may be measured by using the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
If the measurement of the impaired loan is less than the recorded amount of
the loan, an impairment will be recognized by creating a valuation allowance
with a corresponding charge to the provision for credit losses or by adjusting
an existing valuation allowance for the impaired loan with a corresponding
charge or credit to the provision for credit losses. As amended by SFAS No. 118,
the change in estimated value of an impaired loan may be reported in a manner
consistent with the existing methods currently used by the Company.
At December 31, 1996 and 1995, the Company had identified impaired loans
with recorded investments of $33.3 million and $28.2 million, respectively.
Allowances of $.5 million and $1.4 million on loans with outstanding balances of
$3.3 million and $6.7 million at December 31, 1996 and 1995, respectively,
representing the difference between the value of the collateral supporting the
loans and their outstanding balance is included in the allowance for credit
losses. The Company's policy is to record cash receipts on impaired loans first
as reductions to principal and then to interest income.
OTHER REAL ESTATE
The Company's OREO totaled $15.1 million at year end 1996 compared to $7.4
million a year ago due to increases in both commercial real estate OREO as well
as single family residential OREO. The Company's policy is to record these
properties at estimated fair value, net of estimated selling expenses, at the
time they are transferred into ORE, thereby tying future gains or losses from
sale or potential additional write downs to underlying changes in the market.
A-24
<PAGE>
DEPOSITS
The maturity distribution of time deposits of $100,000 or more at December
31, 1996 is as follows:
<TABLE>
<CAPTION>
PUBLIC TIME CERTIFICATES
DOLLARS IN THOUSANDS DEPOSITS OF DEPOSIT TOTAL
- ---------------------------------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Under 3 months.............................................................. $ 32,220 $ 143,675 $ 175,895
3 to 6 months............................................................... 14,800 71,685 86,485
6 to 12 months.............................................................. 6,315 81,401 87,716
Over 12 months.............................................................. 500 10,264 10,764
----------- ----------- ----------
Total............................................................... $ 53,835 $ 307,025 $ 360,860
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
At December 31, 1996 and 1995, the aggregate amount of deposits by foreign
depositors in domestic offices totaled $30.2 million and $19.7 million,
respectively, the majority of which was interest bearing. The Bank had brokered
deposits of $18.4 million and $41.7 million, all from the First LA acquisition,
at December 31, 1996 and 1995, respectively.
SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings and weighted average
rates.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------ ------------------------------------ ----------------------
BALANCES AT AVERAGE BALANCES AT AVERAGE BALANCES AT AVERAGE
DOLLARS IN THOUSANDS YEAR-END BALANCE AVERAGE RATE YEAR-END BALANCE AVERAGE RATE YEAR-END BALANCE
- -------------------------------- ----------- --------- ------------ ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds purchased and
securities sold under
repurchase agreements......... $ 194,549 $ 253,853 5.06% $ 258,353 $ 287,015 5.72% $ 182,120 $ 215,130
Other short-term borrowings..... 148,642 265,638 5.57 195,100 114,865 6.00 50,000 20,348
<CAPTION>
DOLLARS IN THOUSANDS AVERAGE RATE
- -------------------------------- ------------
<S> <C>
Federal funds purchased and
securities sold under
repurchase agreements......... 3.98%
Other short-term borrowings..... 4.12
</TABLE>
- ---------
The maximum amount of federal funds purchased and securities sold with
agreements to repurchase at any month end was $490.0 million, $428.6 million and
and $269.4 million in 1996, 1995 and 1994.
The maximum amount of other short-term borrowings at any month end was
$206.6 million during the year ended December 31, 1996, and $195.1 million and
$50.0 million during the years ended December 31, l995 and 1994.
A-25
<PAGE>
1996 QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
- ----------------------------------------------- ---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
From loans................................. $ 53,223 $ 53,826 $ 57,980 $ 59,673 $ 224,702
From investments........................... 15,098 13,943 14,556 13,824 57,421
---------- ---------- ------------- ------------ -----------
68,321 67,769 72,536 73,497 282,123
Interest expense............................... (19,161) (19,705) (22,346) (21,177) (82,389)
---------- ---------- ------------- ------------ -----------
Net interest income............................ 49,160 48,064 50,190 52,320 199,734
Provision for credit losses.................... -- -- -- -- --
---------- ---------- ------------- ------------ -----------
Net interest income after provision for credit
losses....................................... 49,160 48,064 50,190 52,320 199,734
Noninterest income............................. 10,645 10,405 11,323 11,435 43,808
Gain (loss) on sale of securities.............. 742 (450) 30 (135) 187
Noninterest expense............................ (35,987) (34,049) (34,838) (39,921) (144,795)
ORE (expense) income........................... (174) 215 186 (27) 200
---------- ---------- ------------- ------------ -----------
Income before taxes............................ 24,386 24,185 26,891 23,672 99,134
Income taxes................................... (8,534) (8,169) (9,091) (6,777) (32,571)
---------- ---------- ------------- ------------ -----------
Net income..................................... $ 15,852 $ 16,016 $ 17,800 $ 16,895 $ 66,563
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share........................... $ 0.35 $ 0.36 $ 0.39 $ 0.37 $ 1.47
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
</TABLE>
1995 QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
- ----------------------------------------------- ---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
From loans................................. $ 37,702 $ 41,257 $ 43,254 $ 46,649 $ 168,862
From investments........................... 11,668 11,761 11,959 13,344 48,732
---------- ---------- ------------- ------------ -----------
49,370 53,018 55,213 59,993 217,594
Interest expense............................... (10,857) (12,566) (15,074) (16,834) (55,331)
---------- ---------- ------------- ------------ -----------
Net interest income............................ 38,513 40,452 40,139 43,159 162,263
Provision for credit losses.................... -- -- -- -- --
---------- ---------- ------------- ------------ -----------
Net interest income after provision for credit
losses....................................... 38,513 40,452 40,139 43,159 162,263
Noninterest income............................. 8,222 8,520 9,337 9,083 35,162
Gain (loss) on sale of securities.............. 344 291 (137) (1,094) (596)
Noninterest expense............................ (29,625) (30,214) (28,058) (30,787) (118,684)
ORE (expense) income........................... (152) (59) 195 624 608
---------- ---------- ------------- ------------ -----------
Income before taxes............................ 17,302 18,990 21,476 20,985 78,753
Income taxes................................... (6,685) (7,429) (8,193) (7,654) (29,961)
---------- ---------- ------------- ------------ -----------
Net income..................................... $ 10,617 $ 11,561 $ 13,283 $ 13,331 $ 48,792
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share........................... $ 0.23 $ 0.25 $ 0.29 $ 0.29 $ 1.06
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
</TABLE>
A-26
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions, and that the consolidated financial
statements reasonably present the Company's financial position and results of
operations in conformity with generally accepted accounting principles.
Management also has included in the Company's consolidated financial statements
amounts that are based on estimates and judgements that it believes are
reasonable under the circumstances.
The independent auditors audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Corporation has an Audit Committee composed
solely of three non-management Directors. The Committee meets periodically with
financial management, the internal auditors and the independent auditors to
review accounting control, auditing and financial matters.
/s/ RUSSELL GOLDSMITH
------------------------------------------------------------------
Russell Goldsmith
Chief Executive Officer
/s/ BRAM GOLDSMITH
------------------------------------------------------------------
Bram Goldsmith
Chairman of the Board
/s/ FRANK P. PEKNY
------------------------------------------------------------------
Frank P. Pekny
Executive Vice President and
Chief Financial Officer
A-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of
City National Corporation:
We have audited the accompanying consolidated balance sheet of City National
Corporation and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurances about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of City
National Corporation and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 24, 1997
A-28
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1996 1995
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............................................................. $ 331,046 $ 339,737
Interest-bearing deposits in other banks............................................. 10,978 80,696
Federal funds sold and securities purchased under resale agreements.................. 151,200 351,803
Investment securities (fair value $194,655 in 1996 and $110,524 in 1995)............. 195,229 110,006
Securities available for sale (cost $619,580 in 1996 and $862,276 in 1995)........... 615,863 865,401
Trading account securities........................................................... 32,129 29,728
Loans................................................................................ 2,839,435 2,346,611
Less allowance for credit losses..................................................... 130,089 131,514
----------- -----------
Net loans.......................................................................... 2,709,346 2,215,097
Leveraged leases..................................................................... 6,147 8,400
Premises and equipment, net.......................................................... 24,196 23,607
Customers' acceptance liability...................................................... 2,339 2,656
Other real estate.................................................................... 15,116 7,439
Deferred tax asset................................................................... 65,291 64,420
Other assets......................................................................... 57,616 58,561
----------- -----------
Total assets....................................................................... $ 4,216,496 $ 4,157,551
----------- -----------
----------- -----------
LIABILITIES
Demand deposits...................................................................... $ 1,642,558 $ 1,490,934
Interest checking deposits........................................................... 386,211 380,230
Money market deposits................................................................ 714,127 801,369
Savings deposits..................................................................... 136,691 89,042
Time deposits--under $100,000........................................................ 146,076 142,731
Time deposits--$100,000 and over..................................................... 360,860 343,729
----------- -----------
Total deposits....................................................................... 3,386,523 3,248,035
Federal funds purchased and securities sold under repurchase agreements.............. 194,549 258,353
Other short-term borrowings.......................................................... 148,642 195,100
Long-term debt....................................................................... 34,800 25,000
Other liabilities.................................................................... 48,896 61,450
Acceptances outstanding.............................................................. 2,339 2,656
----------- -----------
Total liabilities.................................................................. 3,815,749 3,790,594
----------- -----------
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
Preferred Stock authorized--5,000,000, none outstanding.............................. -- --
Common Stock--par value--$1.00; authorized--75,000,000 Issued--46,302,782 shares in
1996 and 45,553,724 shares in 1995................................................. 46,303 45,554
Additional paid-in capital........................................................... 275,610 266,829
Unrealized gain (loss) on available for sale securities.............................. (2,149) 1,955
Retained earnings.................................................................... 113,266 62,518
Treasury shares, at cost--2,394,600 shares in 1996 and 762,500 shares in 1995........ (32,283) (9,899)
----------- -----------
Total shareholders' equity......................................................... 400,747 366,957
----------- -----------
Total liabilities and shareholders' equity......................................... $ 4,216,496 $ 4,157,551
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-29
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans..................................................... $ 224,702 $ 168,862 $ 130,129
Interest on federal funds sold and securities purchased under resale
agreements................................................................... 3,562 7,013 7,264
Interest on investment securities:
U. S. Treasury and federal agency securities................................. 6,829 25,853 32,521
Municipal securities......................................................... 2,607 1,091 848
Other securities............................................................. 2,089 2,280 1,566
Interest on securities available-for-sale...................................... 40,485 10,480 8,301
Interest on trading account.................................................... 1,849 2,015 1,196
--------- --------- ---------
Total...................................................................... 282,123 217,594 181,825
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits........................................................... 54,756 32,039 29,023
Interest on federal funds purchased and securities sold under repurchase
agreements................................................................... 12,835 16,404 8,552
Interest on other short-term borrowings........................................ 12,835 5,829 839
Interest on long-term debt..................................................... 1,963 1,059 --
--------- --------- ---------
Total...................................................................... 82,389 55,331 38,414
--------- --------- ---------
Net interest income............................................................ 199,734 162,263 143,411
Provision for credit losses.................................................... -- -- 7,535
--------- --------- ---------
Net interest income after provision for credit losses.......................... 199,734 162,263 135,876
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts............................................ 10,798 8,073 9,294
Investment services income..................................................... 11,453 8,779 7,168
Trust fees..................................................................... 7,176 6,496 6,762
Gain (loss) on sale of assets.................................................. 1,124 (83) 1,494
Gain (loss) on sale of securities.............................................. 187 (596) (3,383)
All other income............................................................... 13,257 11,897 11,462
--------- --------- ---------
Total...................................................................... 43,995 34,566 32,797
--------- --------- ---------
NONINTEREST EXPENSE
Salaries and other employee benefits........................................... 77,011 65,375 64,396
Professional................................................................... 13,698 8,836 8,264
Net occupancy of premises...................................................... 8,976 7,923 10,286
Data processing................................................................ 8,659 7,476 7,202
Promotion...................................................................... 5,563 4,419 2,962
Depreciation................................................................... 5,143 4,120 4,145
Office supplies................................................................ 4,828 3,955 4,658
FDIC insurance................................................................. 2 2,486 5,774
Equipment...................................................................... 2,249 2,272 2,653
Other operating................................................................ 18,666 11,822 10,956
ORE (income)................................................................... (200) (608) (5,297)
--------- --------- ---------
Total...................................................................... 144,595 118,076 115,999
--------- --------- ---------
INCOME BEFORE INCOME TAXES..................................................... 99,134 78,753 52,674
Income tax expense............................................................. 32,571 29,961 15,511
--------- --------- ---------
NET INCOME..................................................................... $ 66,563 $ 48,792 $ 37,163
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE........................................................... $ 1.47 $ 1.06 $ 0.81
--------- --------- ---------
--------- --------- ---------
Shares used to compute income per share........................................ 45,146 45,886 45,626
--------- --------- ---------
--------- --------- ---------
Dividends per share............................................................ $ 0.36 $ 0.26 $ 0.05
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-30
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $ 66,563 $ 48,792 $ 37,163
Adjustment to net income:
Provision for credit losses.................................................... -- -- 7,535
Writedowns on ORE.............................................................. 229 96 --
Gain on sales of ORE........................................................... (325) (1,055) (5,597)
Depreciation................................................................... 5,143 4,120 4,145
Net (increase) decrease in trading securities.................................. (2,401) (4,197) 14,234
Net (increase) decrease in deferred tax benefits............................... (871) (6,077) (10,200)
Prepaid income taxes........................................................... (4,932) -- --
Net increase in other liabilities (assets)..................................... (24,699) (6,277) 165
Other, net..................................................................... 18,362 6,047 35,745
--------- --------- ---------
Net cash provided by operating activites................................... 57,069 41,449 83,190
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in short-term investments................................ 69,718 (80,022) (25)
Purchase of securities available-for-sale........................................ (418,339) (184,905) (249,087)
Sales and maturities of securities available-for-sale............................ 656,100 160,413 151,961
Maturities of investment securities.............................................. 34,819 181,615 532,297
Purchase of investment securities................................................ (123,706) (32,951) (313,786)
Purchase of residential mortgage loans........................................... (250,726) (178,084) (187,623)
Sale of residential mortgage loans............................................... 62,717 -- --
(Loan originations) and principal collections, net............................... (340,802) (206,580) 118,765
Proceeds from sales of ORE....................................................... 5,730 6,489 20,543
Proceeds from sale of leveraged leases........................................... 1,824 329 5,141
Net cash from acquisitions....................................................... -- 95,624 --
Other, net....................................................................... 31,049 17,688 33,661
--------- --------- ---------
Net cash provided (used) by investing activities........................... (271,616) (220,384) 111,847
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements.......................................................... (63,804) 83,633 (20,339)
Net increase (decrease) in deposits.............................................. 138,488 33,717 (109,005)
Net increase (decrease) in short-term borrowings................................. (46,458) 145,000 35,000
Proceeds from issuance of long-term debt......................................... 9,800 25,000 --
Proceeds from issuance of common stock........................................... 7,847 3,131 1,147
Stock repurchases................................................................ (22,384) (9,899) --
Cash dividends paid.............................................................. (15,815) (11,755) (2,258)
Other, net....................................................................... (2,421) 5,967 (3,405)
--------- --------- ---------
Net cash provided (used) by financing activities........................... 5,253 274,794 (98,860)
--------- --------- ---------
Net decrease in cash and cash equivalents........................................ (209,294) 95,859 96,177
Cash and cash equivalents at beginning of year................................... 691,540 595,681 499,504
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 482,246 $ 691,540 $ 595,681
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest..................................................................... $ 82,535 $ 53,198 $ 38,406
Income taxes................................................................. 31,750 36,248 4,444
Non-cash investing activities:
Transfer from loans to foreclosed assets..................................... 15,608 2,465 4,023
Transfers from investment securities to securities available for sale........ -- 402,304 --
Non-cash financing activities:
Proceeds from mortgages payable.............................................. -- -- (26,319)
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
A-31
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES RETAINED TOTAL
SHARES COMMON PAID-IN AVAILABLE- EARNINGS TREASURY SHAREHOLDERS'
DOLLARS IN THOUSANDS ISSUED STOCK CAPITAL FOR-SALE (DEFICIT) STOCK EQUITY
- --------------------------------------- --------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993............ 45,027,417 $ 45,027 $ 262,471 $ -- $ (9,424) $ -- $ 298,074
Net income............................. -- -- -- -- 37,163 -- 37,163
Stock options exercised................ 165,261 166 981 -- -- -- 1,147
Tax benefit from stock options......... -- -- 159 -- -- -- 159
Cash dividends......................... -- -- -- -- (2,258) -- (2,258)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- (3,564) -- -- (3,564)
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1994............ 45,192,678 45,193 263,611 (3,564) 25,481 -- 330,721
Net income............................. -- -- -- -- 48,792 -- 48,792
Stock options exercised................ 361,046 361 2,770 -- -- -- 3,131
Tax benefit from stock options......... -- -- 448 -- -- -- 448
Cash dividends......................... -- -- -- -- (11,755) -- (11,755)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- 5,519 -- -- 5,519
Repurchased shares..................... -- -- -- -- -- (9,899) (9,899)
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1995............ 45,553,724 45,554 266,829 1,955 62,518 (9,899) 366,957
Net income............................. -- -- -- -- 66,563 -- 66,563
Stock options exercised................ 749,058 749 7,098 -- -- -- 7,847
Tax benefit from stock options......... -- -- 1,683 -- -- -- 1,683
Cash dividends......................... -- -- -- -- (15,815) -- (15,815)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- (4,104) -- -- (4,104)
Repurchased shares..................... -- -- -- -- -- (22,384) (22,384)
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1996............ 46,302,782 $ 46,303 $ 275,610 $ (2,149) $ 113,266 $ (32,283) $ 400,747
--------- ----------- ----------- ------------- ----------- ----------- -------------
--------- ----------- ----------- ------------- ----------- ----------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of City National Corporation (the
Corporation) and of City National Bank (the Bank) and its subsidiaries conform
to generally accepted accounting principles and to prevailing practices within
the banking industry. The preparation of these consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates.
The Company, through its primary subsidiary the Bank, engages in commercial
banking serving primarily middle market companies, professional and business
borrowers, and associated individuals with commercial banking, fiduciary,
residential mortgage, and personal banking services.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
the Corporation, the Bank (100% owned), and its wholly owned subsidiaries after
elimination of all material intercompany transactions. The Company also has,
through its subsidiaries, a 32% interest in a real estate partnership. The
Company's equity in the net income and capital of this partnership are included
in the consolidated financial statements. Certain prior years' data have been
reclassified to conform to current year presentation.
SECURITIES
Securities held-for-investment are classified as investment securities.
Because the Company has the ability and management has the intent to hold
investment securities until maturity, investment securities are stated at cost
adjusted for amortization of premiums and accretion of discounts. Trading
account securities are stated at market value. Investments not classified as
trading securities nor as investment securities are classified as
available-for-sale securities and recorded at fair value. Unrealized gains or
losses on available-for-sale securities are excluded from earnings and reported
as an amount net of taxes as a separate component of shareholders' equity.
Premiums or discounts on investment and available-for-sale securities are
amortized or accreted into income using the interest method. Realized gains or
losses on sales of investment or available-for-sale securities are recorded
using the specific identification method. Investment services income consists of
fees, commissions and markups on securities transactions with customers and
money market mutual fund fees.
LOANS
Loans are generally carried at principal amounts outstanding less unearned
income. Unearned income includes deferred unamortized fees net of direct
incremental loan origination costs as required by SFAS No. 91. Interest income
is accrued as earned. Net deferred fees are accreted into interest income using
the interest method or straight line method if not materially different. Loans
held for sale are recorded at the lower of cost or market.
Loans are placed on nonaccrual status when a loan becomes 90 days past due
as to interest or principal unless the loan is both well secured and in process
of collection. Loans are also placed on nonaccrual status when the full
collection of interest or principal becomes uncertain. When a loan is placed on
nonaccrual status, the accrued and unpaid interest receivable is reversed.
Thereafter, interest collected on the loan is accounted for on the cash
collection or cost recovery method until qualifying for return to accrual
status. Generally, a loan may be returned to accrual status when all delinquent
principal and
A-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest are brought current in accordance with the terms of the loan agreement
and certain performance criteria have been met.
The Company considers a loan to be impaired when it is probable that it will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Once a loan is determined to be impaired, the impairment is
measured based on the present value of the expected future cash flows discounted
at the loan's effective interest rate, except that as a practical expedient, the
impairment is measured by using the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
When the measurement of the impaired loan is less than the recorded amount
of the loan, an impairment is recognized by creating a valuation allowance with
a corresponding charge to the provision for credit losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for credit losses.
The Company's policy is to record cash receipts received on impaired loans
first as reductions to principal and then to interest income.
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgement of the adequacy of the allowance for credit losses and is determined
through periodic analytical reviews of the loan portfolio, problem loans and
consideration of such other factors as the Bank's loan loss experience, trends
in problem loans, concentrations of credit risk, and current and expected future
economic conditions, as well as the results of the Company's ongoing examination
process and that of its regulators.
LEVERAGED LEASES
Income from leveraged leases is recognized over the terms of the leases
based upon the unrecovered equity investment.
PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed generally on a straight-line basis
over the estimated useful life of each type of asset. Gains and losses on
dispositions are reflected in current operations. Maintenance and repairs are
charged to operating expenses.
OTHER REAL ESTATE (ORE)
Other real estate is comprised of real estate acquired in satisfaction of
loans. Properties acquired by foreclosure or deed in lieu of foreclosure are
transferred to ORE and are recorded at fair value less estimated costs to sell,
at the date of transfer of the property. The fair value of the ORE property is
based upon a current appraisal. Losses that result from the ongoing periodic
valuation of these properties are charged against ORE expense in the period in
which they are identified. Expenses for holding costs are charged to operations
as incurred.
INCOME TAXES
The Company files a consolidated federal income tax return and a combined
state income tax return. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of existing differences between financial
reporting and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carry forwards, using enacted tax laws and
rates. Deferred tax assets will be
A-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reduced through a valuation allowance whenever it becomes more likely than not
that all, or some portion, will not be realized. Deferred income taxes (benefit)
represents the net change in the deferred tax asset or liability balance during
the year. This amount, together with income taxes currently payable or
refundable in the current year, represents the total income tax expense
(benefit) for the year.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed on the basis of the average number of
common shares outstanding during each period plus the additional dilutive effect
of the common stock equivalents. The dilutive effect of outstanding stock
options is calculated using the treasury stock method. The number of shares to
compute fully diluted earnings per share, which is not materially different from
primary earnings per share, total 45,875,000; 46,288,000 and 45,743,000 for
1996, 1995 and 1994, respectively.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions and are amortized over seven
years. Goodwill and other intangibles are evaluated periodically for other than
temporary impairment. Should such an assessment indicate that the undiscounted
value of an intangible may be impaired, the net book value of the intangible
would be written down to net estimated recoverable value.
OTHER
The Company and its subsidiaries are on the accrual basis of accounting for
income and expenses. In accordance with the usual practice of banks, assets and
liabilities of individual trust, agency and fiduciary funds have not been
included in the accounts.
INTEREST-RATE-RISK MANAGEMENT ACTIVITIES
For those interest-rate instruments that alter the repricing characteristics
of assets or liabilities, the net differential to be paid or received on the
instrument is treated as an adjustment to the yield on the underlying assets or
liabilities (the accrual method). To qualify for accrual accounting, the
interest-rate instrument must be designated to specific assets or liabilities or
pools of assets or liabilities, and must be effective at altering the
interest-rate characteristics of the related assets or liabilities. To be
effective, there must be correlation between the interest-rate index on the
underlying asset or liability and the variable rate paid on the investment. The
Company measures initial and ongoing correlation by analysis of the relative
movements of the interest-rate indices over time. If correlation were to cease,
the interest-rate instrument would be accounted for as a trading instrument.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1,
A-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996, the company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
NOTE 2. ACQUISITIONS
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp. The Company paid approximately $49.1 million for VCNB by
issuing approximately 1.3 million treasury shares with an aggregate market value
of approximately $28.1 million and paid the remainder in cash. This transaction
will be accounted for under the purchase method of accounting.
On January 24, 1997, the Company completed its acquisition of Riverside
National Bank. The Company paid approximately $41.4 million for RNB by issuing
approximately 1.0 million treasury shares with an aggregate market value of
approximately $20.7 million and paid the remainder in cash. This transaction
will be accounted for under the purchase method of accounting.
On December 31, 1995, at the close of business, the Bank acquired all of the
outstanding stock of First LA for $85 million in cash in a transaction that has
been accounted for as a purchase. Immediately prior to the close, First LA sold
certain real estate secured loans to its parent for $71.0 million. First LA had
total assets, loans, securities, cash and other assets of $867 million, $338
million, $343 million, $110 million, and $76 million, respectively at December
31, 1995. Additionally, First LA had $796 million of deposits at December 31,
1995. Merger related expenses of $.7 million and $1.0 million were recorded in
1996 and 1995, respectively, to cover certain integration, data processing, and
lease termination expenses related to the acquisition. The Company recorded core
deposit intangible assets of $12.6 million at December 31, 1995 related to the
First LA acquisition. At December 31, 1996, the remaining unamortized balance
was $10.0 million. The recording of First LA's assets and liabilities at fair
value did not result in any goodwill.
The following table presents an unaudited pro forma combined summary of
operations of the Company and First LA for the years ended December 31, 1995 and
1994. The unaudited pro forma combined summary of operations is presented as if
the merger had been effective January 1, 1994. This information combines the
historical results of the Company and First LA after giving effect to
amortization of purchase accounting adjustments. The unaudited pro forma
combined summary of operations is based on the Company's historical results and
those of First LA. The unaudited pro forma combined summary of operations is
intended for informational purposes only and is not necessarily indicative of
the future results of the Company or of the results of the Company that would
have occurred had the acquisition been in effect for the full year presented.
A-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1995 1994
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Interest income........................................................................... $ 275,809 $ 240,064
Interest expense.......................................................................... 78,472 56,344
---------- ----------
Net interest income............................................................... 197,337 183,720
Provision for credit losses............................................................... 14,225 28,735
Noninterest income........................................................................ 39,247 38,101
Noninterest expense....................................................................... 155,769 163,743
---------- ----------
Income before income taxes................................................................ 66,590 29,343
Income taxes.............................................................................. 29,961 15,811
---------- ----------
Net income........................................................................ $ 36,629 $ 13,532
---------- ----------
---------- ----------
Net income per share.............................................................. $ 0.80 $ 0.30
---------- ----------
---------- ----------
</TABLE>
The unaudited pro forma combined net income per share were calculated based
on the pro forma combined net income and the actual average common shares and
share equivalents outstanding during the years presented. Because the
acquisition was essentially a cash transaction, the average shares and share
equivalents outstanding are the same as those in the Company's Consolidated
Statement of Income for the years presented.
NOTE 3. INVESTMENT SECURITIES
The following is a summary of the amortized cost and estimated fair value
for the major categories of investment securities:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED
DECEMBER 31 VALUE GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------ ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
1996
Mortgage-backed securities.................................... $ 97,638 $ 194 $ 1,074 $ 96,758
State and municipal securities................................ 88,445 550 244 88,751
Other securities.............................................. 9,146 -- -- 9,146
---------- ----- ----------- ----------
Total..................................................... $ 195,229 $ 744 $ 1,318 $ 194,655
---------- ----- ----------- ----------
---------- ----- ----------- ----------
1995
Mortgage-backed securities.................................... $ 80,935 $ 644 $ 268 $ 81,311
State and municipal securities................................ 19,833 161 5 19,989
Other securities.............................................. 9,238 -- 14 9,224
---------- ----- ----------- ----------
Total..................................................... $ 110,006 $ 805 $ 287 $ 110,524
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
In November 1995 the Financial Accounting Standards Board issued its Guide
to Implementation of SFAS No. 115 and allowed companies a single opportunity
during the period from November 15, 1995 to December 31, 1995 to reclassify
securities between the categories of held-to-maturity and available-for-sale
without tainting the classification of any securities. In December 1995, the
Company reclassified securities with a book value of $402.3 million and fair
value of $401.2 million from the investment securities classification to
available-for-sale.
A-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying value and estimated fair values of investment securities at
December 31, 1996 by contractual maturity, are shown below:
<TABLE>
<CAPTION>
OVER 5
OVER 1 YEAR YEARS THRU
TOTAL ONE YEAR OR LESS THRU 5 YEARS 10 YEARS
----------------------- ------------------------- ------------------------- -----------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
- ----------------------------------- --------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities......... $ 97,638 6.45% $ -- --% $ 7,403 6.55% $ 16,785
State and municipal securities..... 88,445 6.72 5,787 6.88 52,967 6.61 24,161
Other securities(2)................ 9,146 6.49 -- -- 2,418 7.61 1,000
--------- --- ----------- --- ----------- --- -----------
Total............................ $ 195,229 6.57 $ 5,787 6.88 $ 62,788 6.64 $ 41,946
--------- --- ----------- --- ----------- --- -----------
--------- --- ----------- --- ----------- --- -----------
Fair value....................... 194,655 $ 5,831 $ 63,124 $ 41,695
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
<CAPTION>
OVER 10 YEARS
-------------------------
DOLLARS IN THOUSANDS YIELD(1) AMOUNT YIELD(1)
- ----------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Mortgage-backed securities......... 5.88% $ 73,450 6.57%
State and municipal securities..... 6.84 5,530 7.06
Other securities(2)................ 6.61 5,728 6.00
--- ----------- ---
Total............................ 6.45 $ 84,708 6.56
--- ----------- ---
--- ----------- ---
Fair value....................... $ 84,005
-----------
-----------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
NOTE 4. SECURITIES AVAILABLE-FOR-SALE
The following is a summary of amortized cost and estimated fair value for
the major categories of securities available-for-sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31 COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
1996
U.S. Government and federal agency securities................. $ 375,120 $ 484 $ 3,288 $ 372,316
Mortgage-backed securities.................................... 130,680 270 3,014 127,936
State and municipal securities................................ 13,995 91 19 14,067
Other securities.............................................. 99,785 2,156 397 101,544
---------- ----------- ----------- ----------
Total..................................................... $ 619,580 $ 3,001 $ 6,718 $ 615,863
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
1995
U.S. Government and federal agency securities................. $ 586,529 $ 2,265 $ 844 $ 587,950
Mortgage-backed securities.................................... 212,266 959 521 212,704
State and municipal securities................................ 17,353 73 40 17,386
Other securities.............................................. 46,128 1,357 124 47,361
---------- ----------- ----------- ----------
Total..................................................... $ 862,276 $ 4,654 $ 1,529 $ 865,401
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
As described in Note 3 above, the Company reclassified certain securities
with an amortized cost of $402.3 million and an estimated fair value of $401.2
million at the time of reclassification from investment to available-to-sale.
Sales of available-for-sale securities resulted in losses of $.2 million in
1996, $.2 million in 1995 and $3.4 million in 1994.
A-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The estimated fair value and amortized cost of securities available-for-sale
at December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
OVER 5
YEARS
OVER 1 YEAR THRU 10
TOTAL ONE YEAR OR LESS THRU 5 YEARS YEARS
----------------------- ------------------------- ----------------------- -----------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
- ---------------------------------- --------- ------------ ----------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agency
securities...................... $ 372,316 5.69% $ 15,002 5.51% $ 344,568 5.69% $ 12,746
Mortgage-backed securities........ 127,936 6.28 -- -- -- -- --
State and municipal securities.... 14,067 6.76 -- -- 13,545 6.75 522
Other securities(2)............... 101,544 10.74 29,104 11.46 45,644 10.44 2,140
--------- ----- ----------- ----- --------- ----- -----------
Total........................... $ 615,863 6.67 $ 44,106 9.44 $ 403,757 6.27 $ 15,408
--------- ----- ----------- ----- --------- ----- -----------
--------- ----- ----------- ----- --------- ----- -----------
Amortized Cost.................. $ 619,580 $ 44,229 $ 404,660 $ 15,685
--------- ----------- --------- -----------
--------- ----------- --------- -----------
<CAPTION>
OVER 10 YEARS
-----------------------
DOLLARS IN THOUSANDS YIELD(1) AMOUNT YIELD(1)
- ---------------------------------- ------------ --------- ------------
<S> <C> <C> <C>
U.S. Government and federal agency
securities...................... 5.87% $ -- --%
Mortgage-backed securities........ -- 127,936 6.28
State and municipal securities.... 7.14 -- --
Other securities(2)............... 11.83 24,656 10.35
----- --------- -----
Total........................... 6.74 $ 152,592 6.94
----- --------- -----
----- --------- -----
Amortized Cost.................. $ 155,006
---------
---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the over ten years category
Securities totaling $568.9 million were pledged to secure trust funds,
public deposits, or for other purposes required or permitted by law.
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of the major categories of loans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
DOLLARS IN THOUSANDS 1996 1995
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Commercial loans...................................................................... $ 1,334,577 $ 1,080,125
Real estate construction loans........................................................ 92,322 81,318
Real estate mortgage loans............................................................ 499,377 553,095
Residential first mortgage loans...................................................... 882,573 593,546
Installment loans..................................................................... 30,586 38,527
------------ ------------
Total loans (net of unearned income and fees of $5,364 and $5,067).................. $ 2,839,435 $ 2,346,611
------------ ------------
------------ ------------
</TABLE>
At December 31, 1996 and 1995, the Company had identified impaired loans
with recorded investments of $33.3 million and $28.2 million, respectively.
Allowances of $.5 million and $1.4 million on loans with outstanding balances of
$3.3 million and $6.7 million at December 31, 1996 and 1995, respectively,
representing the differences between the value of the collateral supporting the
loans and their outstanding balances, is included in the allowance for credit
losses. For 1996 and 1995, the average balance of impaired loans was $36.2
million and $29.9 million, respectively. During 1996 and 1995, no interest
income was recognized on impaired loans.
In the normal course of business, the Bank has loans to officers and
directors as well as loans to companies and individuals affiliated with or
guaranteed by officers and directors of the Company and the Bank. These loans
were made in the ordinary course of business at rates and terms no more
favorable than those offered to other customers with a similar credit standing.
The aggregate dollar amounts of these loans were $16.1 million and $16.4 million
at December 31, 1996 and 1995, respectively. During 1996 there were no advances
and repayments totaled $.3 million. Interest income recognized on these loans
amounted to $1.4 million, $1.5 million and $1.5 million during 1996, 1995 and
1994, respectively. At December 31, 1996, none of these loans were on nonaccrual
status. Based on analysis of information presently known to
A-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
management about the loans to officers and Directors and their affiliates,
management believes all have the ability to comply with the present loan
repayment terms.
Loans past due 90 days or more and still accruing interest totaled $12.4
million, $6.5 million and $4.3 million at December 31, 1996, 1995 and 1994,
respectively. Restructured loans totaled $2.6 million, $7.2 million, and $9.1
million at December 31, 1996, 1995 and 1994, respectively.
The following is a summary of activity in the allowance for credit losses:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995 1994
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance, January 1........................................................... $ 131,514 $ 105,343 $ 110,499
Provision charged to expense................................................. -- -- 7,535
Acquisition of First LA...................................................... -- 19,077 --
Charge offs.................................................................. (20,342) (17,041) (48,520)
Recoveries................................................................... 18,917 24,135 35,829
---------- ---------- ----------
Net (charge offs) recoveries................................................. (1,425) 7,094 (12,691)
---------- ---------- ----------
Balance, December 31......................................................... $ 130,089 $ 131,514 $ 105,343
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following is a summary of non-performing loans and related interest
foregone:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
Nonaccrual loans................................................................. $ 41,543 $ 48,124 $ 58,801
--------- --------- ---------
--------- --------- ---------
Contractual interest due......................................................... 6,262 7,232 8,286
Interest recognized.............................................................. 4,135 2,663 3,489
--------- --------- ---------
Net interest foregone.................................................... $ 2,127 $ 4,569 $ 4,797
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a summary of foregone interest on nonaccrual loans at
December 31. The summary does not include interest foregone on loans on
nonaccrual status that were either charged off prior to year end, or restored to
accrual status prior to year end or transferred to ORE prior to year end.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------------------------- --------- --------- ---------
Contractual interest due............................................................. $ 4,425 $ 5,821 $ 6,810
Interest recognized.................................................................. 491 847 1,136
--------- --------- ---------
Net interest foregone........................................................ $ 3,934 $ 4,974 $ 5,674
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. NET INVESTMENT IN LEVERAGED LEASES
The following is a summary of the net investment in leveraged leases:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Net rental receivables....................................................................... $ 6,133 $ 7,250
Estimated residual values (ranging from 5% to 20% of original asset cost).................... 2,204 3,257
Less: deferred income........................................................................ (2,190) (2,107)
--------- ---------
Investment in leveraged leases........................................................... 6,147 8,400
Less: deferred taxes arising from leveraged leases........................................... (5,878) (6,476)
--------- ---------
Net investment in leveraged leases................................................... $ 269 $ 1,924
--------- ---------
--------- ---------
</TABLE>
The Bank is the lessor of transportation and other equipment under leveraged
lease agreements expiring in various years extending to the year 2006. The
equity investment represents between 27% and 38% of the purchase price; the
remaining amount was furnished by third-party financing in the form of
nonrecourse long-term debt and is secured by the property. For federal income
tax purposes, the Bank, as an equity participant, is entitled to allowable
investment tax credits, deductions for depreciation of asset cost, and related
debt service costs, based on its share of the investment.
NOTE 7. PREMISES AND EQUIPMENT
The following is a summary of data for the major categories of premises and
equipment:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND CARRYING
DOLLARS IN THOUSANDS COST AMORTIZATION VALUE
- ------------------------------------------------------------------------------ --------- ------------ ---------
<S> <C> <C> <C>
DECEMBER 31, 1996
Premises, including land of $2,548........................................ $ 35,025 $ 21,606 $ 13,419
Furniture, fixtures and equipment......................................... 35,012 24,235 10,777
--------- ------------ ---------
Total................................................................. $ 70,037 $ 45,841 $ 24,196
--------- ------------ ---------
--------- ------------ ---------
DECEMBER 31, 1995
Premises, including land of $2,548........................................ $ 35,835 $ 19,998 $ 15,837
Furniture, fixtures and equipment......................................... 28,863 21,093 7,770
--------- ------------ ---------
Total................................................................. $ 64,698 $ 41,091 $ 23,607
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
Depreciation and amortization expense was $5.1 million in 1996, $4.1 million
in 1995 and $4.1 million in 1994. Net rental payments on operating leases
included in net occupancy of premises in the Consolidated Statement of Income
were $6.4 million in 1996, $5.4 million in 1995, and $7.6 million in 1994.
A-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The future net minimum rental commitments were as follows at December 31,
1996:
<TABLE>
<CAPTION>
NET MINIMUM RENTAL
DOLLARS IN THOUSANDS COMMITMENTS
- ---------------------------------------------------------------------------------------------- ------------------
<S> <C>
1997.......................................................................................... $ 9,936
1998.......................................................................................... 9,313
1999.......................................................................................... 8,862
2000.......................................................................................... 7,095
2001.......................................................................................... 5,316
2002 - 2006................................................................................... 14,890
2007 - 2011................................................................................... 276
After 2011.................................................................................... 2,291
-------
Total....................................................................................... $ 57,979
-------
-------
</TABLE>
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions and escalation clauses. The Bank paid
$1.1 million, $.9 million and $.9 million during 1996, 1995 and 1994,
respectively, for rent and operating expense pass throughs to a real estate
partnership in which the Bank owns a 32% interest, and Mr. Bram Goldsmith,
Chairman and Chief Executive Officer, indirectly owns a 14% interest.
The rental commitment amounts in the table above reflects the contractual
obligations of the Company under all leases including those assumed in the
acquisition of First LA. Lease obligations assumed from First LA have been
adjusted to current market values through purchase accounting adjustments. The
allowance thus created will be accreted over the terms of the leases and reduce
the total expense recognized by the Company in its operating expenses. In
addition, at December 31, 1996, the Company had a balance of $4.0 million
remaining in its branch consolidation reserve established in 1993. This amount
represents the present value of amounts estimated by management required to
settle lease obligations through early termination or payment of the remaining
contractual obligations.
NOTE 8. INCOME TAXES
Income tax (benefit) in the Consolidated Statement of Income includes the
following amounts:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS CURRENT DEFERRED TOTAL
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
1996
Federal...................................................................... $ 31,399 $ (3,639) $ 27,760
State........................................................................ 10,168 (5,357) 4,811
--------- --------- ---------
Total.................................................................... $ 41,567 $ (8,996) $ 32,571
--------- --------- ---------
--------- --------- ---------
1995
Federal...................................................................... $ 31,829 $ (9,020) $ 22,809
State........................................................................ 7,442 (290) 7,152
--------- --------- ---------
Total.................................................................... $ 39,271 $ (9,310) $ 29,961
--------- --------- ---------
--------- --------- ---------
1994
Federal...................................................................... $ 22,761 $ (4,200) $ 18,561
State........................................................................ 800 (3,850) (3,050)
--------- --------- ---------
Total.................................................................... $ 23,561 $ (8,050) $ 15,511
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.
NET DEFERRED TAX ASSETS
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1996 1995
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses....................................................... $ 45,518 $ 45,041
Net operating loss carryforward................................................... 18,775 18,444
Accrued expenses.................................................................. 2,897 7,773
State income taxes................................................................ 15,277 18,884
Unrealized losses on available for sale securities................................ 1,568 --
Purchase accounting fair value adjustment......................................... 4,254 4,673
Other............................................................................. 1,085 494
---------- ----------
Total gross deferred tax assets............................................... 89,374 95,309
Valuation allowance............................................................... (11,557) (19,787)
---------- ----------
77,817 75,522
Deferred tax liabilities:
Leveraged leases.................................................................. 5,014 6,476
Core deposit intangibles.......................................................... 3,577
Installment sales................................................................. 1,614 1,978
Unrealized gains on available for sale securities................................. -- 1,170
Deferred loan origination costs................................................... 936 410
Loan fees......................................................................... 830 753
Other............................................................................. 555 315
---------- ----------
Total gross deferred tax liabilities.......................................... 12,526 11,102
---------- ----------
Net deferred tax assets................................................................... $ 65,291 $ 64,420
---------- ----------
---------- ----------
</TABLE>
Income taxes resulted in effective tax rates that differ from the statutory
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
% OF PRETAX INCOME (LOSS)
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate (benefit)............................................................ 35.0% 35.0% 35.0%
Net state income tax (benefit)...................................................... 6.4 6.6 6.9
Tax exempt income................................................................... (3.6) (1.5) (1.5)
Tax credits......................................................................... (1.1) (1.0) --
Reduction in valuation allowances................................................... (4.3) (0.7) (11.0)
All other--net...................................................................... 0.5 (0.4) --
--- --- -----
Effective tax provision (benefit)................................................... 32.9% 38.0% 29.4%
--- --- -----
--- --- -----
</TABLE>
SFAS No. 109 requires that the tax benefit of deductible temporary
differences and net operating loss carryforwards be recorded as an asset to the
extent that management assesses the utilization of such temporary differences
and carryforwards to be "more likely than not." In accordance with SFAS No. 109,
the realization of tax benefits of deductible temporary differences and
carryforwards depends on whether the Company has sufficient taxable income
within the carry back and carry forward period permitted by the
A-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
tax law to allow for utilization of the deductible amounts. As of any period
end, the amount of deferred tax asset that is considered realizable could be
reduced if estimates of future taxable income are reduced.
As of January 1, 1996, the Company had a $19.8 million valuation allowance,
of which $8.7 million related to net California deductible temporary differences
of $76.0 million. California law does not permit carry backs and requires a 50%
reduction of tax losses that are carried forward. In 1996, the Company reduced
the valuation allowance by $6.0 million as part of the Company's periodic
reevaluation of deferred tax assets which it believes are more likely than not
to be realized in future tax returns. The Company considered, among other
factors, the record earnings reported in 1996 in its evaluation of those
deferred tax assets that it believes to be more likely than not to be realized.
At December 31, 1996, the Company's valuation allowance totaled $11.6
million, of which $7.1 million resulted from the net operating loss carry
forwards of First LA. First LA's federal net operating loss carryforwards total
$53.6 million , of which $2.7 million will expire in 2008, $25.7 million will
expire in 2009 and $25.2 million will expire in 2010. First LA's California net
operating loss carryforwards total $32.7 million, of which $3.7 million will
expire in 1997, $7.7 million will expire in 1998, $10.1 million will expire in
1999 and $11.2 million will expire in 2000. Future reversals, if any, of the
$7.1 million valuation allowances resulting from the acquisition of First LA
will reduce core deposit intangibles since there was no goodwill resulting from
the acquisition of First LA.
NOTE 9. RETIREMENT PLAN
The Company has a profit sharing retirement plan with an IRS Section 401 (K)
feature covering all employees with at least one year of continuous service.
Contributions are made on an annual basis into a trust fund and are allocated to
the participants based on their salaries and length of service. The contribution
requirement is based on a percentage of annual operating income. For 1996, 1995
and 1994, the Company recorded contributions expense of $5.6 million, $4.1
million and $3.3 million, respectively.
Employees may contribute up to 15% of their pretax salary, but not more than
the maximum allowed under IRS regulations. Through December 31, 1996, the
Company matched 10% of the first four percent of covered compensation
contributed using forfeitures and cash. For 1996, 1995, and 1994 the Company's
matching contribution was $40,000, $63,000 and $140,000, respectively.
The Company does not provide for any post retirement employee benefits
beyond the profit sharing retirement plan.
NOTE 10. STOCK OPTION PLANS
Under the 1995 Omnibus Plan, 3,000,000 shares of the Company's common stock
were reserved for grant of stock options. The Corporation's 1983 Stock Option
Plan and 1985 Stock Option Plan have expired but options granted thereunder
remain outstanding. Grants to employees will be at prices at least equal to the
market price of the Company's stock on the effective date of the grant. In each
succeeding year following the date of grant, 25% of the options become
exercisable. After ten years from grant, all unexercised options will expire.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.51 and $4.39 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1996--expected dividend yield 1.64%, risk-free interest rate of 6.01%, and an
expected life of 7.5 years; 1995--expected dividend yield 1.87%, risk-free
interest rate of 6.86%, and an expected life of 7.5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company
A-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net income, as reported..................................................................... $ 66,563 $ 48,792
Pro forma net income........................................................................ 65,140 47,824
Earnings per share, as reported............................................................. $ 1.47 $ 1.06
Proforma earnings per share................................................................. 1.44 1.04
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of generally four years and compensation cost for options granted prior
to January 1, 1995 is not considered.
The Corporation, on October 16, 1995 (in connection with an employment
agreement), granted to Mr. Russell Goldsmith, Chief Executive Officer, a
nonstatutory stock option for 350,000 shares of the Company's common stock at
the market price at the date of the grant, $13.38. The options are exercisable
one-third upon grant, one-third at the end of the first year of such employment
contract, and the final one-third at the end of the second year of the
employment contract. At December 31, 1996, stock options covering 233,345 shares
were exercisable.
The following is a summary of the transactions under the stock option plans
described above:
STOCK OPTION PLANS:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- --------------------------
NUMBER(1) NUMBER(1) NUMBER(1)
OF SHARES OPTION PRICE OF SHARES OPTION PRICE OF SHARES OPTION PRICE
----------- -------------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January
1.......................... 4,120 $ 5.05-23.75 4,251 $ 5.05-23.75 4,888 $ 5.05-23.75
Granted...................... 603 13.25-17.75 1,056 10.25-13.75 21 8.38-10.88
Exercised.................... (749) 6.31-15.57 (361) 6.31-12.65 (165) 5.97-8.72
Cancelled.................... (287) 6.31-21.79 (826) 6.31-23.75 (493) 6.31-23.75
----- -------------- ----- -------------- ----- -------------
Options outstanding, December
31......................... 3,687 $ 5.05-23.75 4,120 $ 5.05-23.75 4,251 $ 5.05-23.75
----- -------------- ----- -------------- ----- -------------
----- -------------- ----- -------------- ----- -------------
Exercisable.................. 2,424 2,696 3,176
----- ----- -----
----- ----- -----
</TABLE>
- ---------
(1) In thousands
At December 31, 1996, nonstatutory and incentive stock options covering
548,367 and 1,875,354 shares, respectively, of the Company's common stock were
exercisable under the plans. At December 31, 1996, 2,393,921 shares were
available for future grants.
The Company also grants annually to each Director stock options with a value
of $3,000 at an exercise price of $1 per share. Such options fully vest six
months after grant. During 1996 and 1995, options to purchase 1,904 and 2,926
shares respectively, were granted to directors.
NOTE 11. BORROWED FUNDS
The following is a summary of borrowed funds of the Company excluding
federal funds purchased and securities sold under agreements to repurchase.
A-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
DOLLARS IN THOUSANDS 1996 1995
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Other short-term borrowings:
Term federal funds purchased...................................................... $ -- $ 100,000
Treasury, tax and loan note....................................................... 98,642 30,100
Federal Home Loan Bank advance.................................................... 50,000 65,000
---------- ----------
Total......................................................................... $ 148,642 $ 195,100
---------- ----------
---------- ----------
Long-term debt:
Federal Home Loan Bank advance.................................................... $ 25,000 $ 25,000
Guaranteed Investment Contract.................................................... 9,800 --
---------- ----------
Total......................................................................... $ 34,800 $ 25,000
---------- ----------
---------- ----------
</TABLE>
Short term borrowings consist of funds with original maturities of one year
or less, and long-term debt consists of borrowings with original maturities of
greater than one year. The maximum amount of other short-term borrowings at any
month end was $206.6 million, $195.1 million and $50.0 million in 1996, 1995,
and 1994, respectively.
The long term debt is comprised of $25.0 million of Federal Home Loan Bank
advances maturing on May 8, 1997 with a fixed interest rate of 6.50% and a $9.8
million guaranteed investment contract maturing January 1, 1998 with a fixed
interest rate of 5.30%.
NOTE 12. AVAILABILITY OF FUNDS FROM SUBSIDIARIES; RESTRICTIONS ON CASH BALANCES;
CAPITAL
Historically, the majority of the funds for the payment of dividends by the
Company have been obtained from its subsidiary, City National Bank. Under
federal banking law, dividends declared by national banks in any calendar year
may not, without the approval of the OCC, exceed net profits (as defined), for
that year combined with its retained net profits for the preceding two calendar
years. At December 31, 1996, the Bank could have declared dividends of $59.9
million without the approval of regulators.
Federal banking law also prohibits the Corporation from borrowing from its
bank subsidiaries on less than a fully secured basis. At December 31, 1996 and
1995, the Corporation had borrowed from the Bank $27.5 million and $19.7
million, respectively, all of which was appropriately secured in compliance with
regulatory requirements.
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances. Cash balances maintained to meet reserve requirements
are not available for us by the Bank or the Company. During 1996 and 1995,
reserve balances averaged approximately $68.7 million and $62.6 million,
respectively.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company and Bank's assets, liabilities and certain
off-balance-sheet items as calculated under the regulatory accounting practices.
The Company's and the Bank's capital amounts and classification are alos subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
A-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined). Management believes, as of
December 31, 1996, that the Company and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Company's actual amounts and ratios are presented in the table:
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets)............................... $422.7 14.55% $232.5 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 385.3 13.26% 116.2 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 385.3 9.75% 158.0 GREATER THAN OR EQUAL TO 4.0%
As of December 31, 1995:
Total capital
(to risk weighted assets)............................... $377.4 14.91% $202.5 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 344.2 13.60% 101.2 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 344.2 11.17% 123.3 GREATER THAN OR EQUAL TO 4.0%
</TABLE>
A-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank's actual amounts and ratios are presented in the table:
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets)............................... $359.0 12.53% $229.2 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 322.0 11.24% 114.6 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 322.0 8.22% 156.6 GREATER THAN OR EQUAL TO 4.0%
As of December 31, 1995:
Total capital
(to risk weighted assets)............................... $351.7 13.95% $201.7 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 318.7 12.64% 100.8 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 318.7 10.40% 122.6 GREATER THAN OR EQUAL TO 4.0%
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit, letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount reflected in the consolidated balance sheet.
Exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit, letters of credit
and financial guarantees written, is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company had outstanding loan commitments aggregating $854.1 million and
$821.3 million in December 31, 1996 and 1995, respectively. In addition, the
Company had $81.5 million and $90.1 million
A-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding in bankers acceptances and letters of credit of which $79.1 million
and $65.3 million relate to standby letters of credit at December 31, 1996 and
1995, respectively. Substantially all of the Company's loan commitments are on a
variable rate basis and are comprised of real estate and commercial loan
commitments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in he contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis.
The Corporation or its subsidiaries are defendants in various pending
lawsuits claiming substantial amounts. Based upon present knowledge, management
and in-house counsel are of the opinion that the final outcome of such lawsuits
will not have a material adverse effect upon the financial position of the
Corporation. In December 1996, the Company settled a lender liability lawsuit
and recorded a pretax charge of $3.4 million against operations.
Under the Bank's contract with ALLTEL Information Services, Inc. (formerly
Systematics Inc.), the minimum annual purchases for data processing services was
$5.5 million in 1996. This obligation will continue until December 31, 2000 and
will increase annually at 80% of the increase in the Consumer Price Index.
Billings to the Bank by ALLTEL Information Services, Inc. amounted to $7.2
million, $6.0 million and $6.2 million for 1996, 1995 and 1994, respectively.
NOTE 14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES AND TRADING ACCOUNT ASSETS
For securities held as investments or available for sale, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. For
trading account securities, fair values are based on quoted market prices or
dealer quotes.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using dealer
quotes, adjusted for differences in loan characteristics. The fair value of
other types of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. In establishing the credit
risk component of the fair value calculations for loans, the Company concluded
that the allowance for credit losses represented a reasonable estimate of the
credit risk component of the fair value of loans at December 31, 1996 and 1995.
DEPOSIT LIABILITIES
The fair value of demand and interest checking deposits, savings deposits,
and certain money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity
A-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
LONG-TERM DEBT
The fair value of long term debt was estimated by discounting the future
payments at current interest rates.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. The fair
value of guarantees and letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
DERIVATIVES
The fair value of exchange traded derivatives is based on quoted market
prices or dealer quotes. The fair value of non-exchange traded derivatives
consists of net unrealized gains or losses, accrued interest receivable or
payable and any premiums paid or received.
The estimated fair values of the financial instruments of the Company are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- --------------- --------------- ---------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........................... $ 342,024 $ 342,024 $ 420,433 $ 420,433
Federal funds sold and securities purchased under
resale agreements............................... 151,200 151,200 351,803 351,803
Investment securities............................. 195,229 194,655 110,006 110,524
Securities available for sale..................... 615,863 615,863 865,401 865,401
Trading account assets............................ 32,129 32,129 29,728 29,728
Loans, net of allowance for credit losses......... 2,709,346 2,714,532 2,215,097 2,220,583
Financial liabilities:
Deposits.......................................... 3,386,523 3,385,377 3,248,035 3,248,918
Federal funds purchased and securities sold under
repurchase agreements........................... 194,549 194,549 258,353 258,353
Other short-term borrowings....................... 148,642 148,642 195,100 195,100
Long-term debt.................................... 34,800 34,814 25,000 25,475
Commitments to extend credit...................... (5,674) (5,674) (3,607) (3,607)
Derivative contracts.............................. 325,000(1) (363)(2) 25,000(1) 215(2)
</TABLE>
- ---------
(1) Notional amount
(2) Estimated net gains (losses) to settle derivative contracts as of respective
period ends.
A-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
A S S E T S :
- ------------------------------------------------------------------------------------------
Cash...................................................................................... $ 23,776 $ 1,649
Short-term investments.................................................................... -- 9,400
Securities available-for-sale............................................................. 67,533 34,514
Other assets.............................................................................. 1,156 425
Investment in City National Bank.......................................................... 336,632 340,669
---------- ----------
Total assets.......................................................................... $ 429,097 $ 386,657
---------- ----------
---------- ----------
L I A B I L I T I E S :
- ------------------------------------------------------------------------------------------
Notes payable to Bank..................................................................... $ 27,500 $ 19,700
Other liabilities......................................................................... 850 --
---------- ----------
Total liabilities..................................................................... 28,350 19,700
Total shareholders' equity........................................................ 400,747 366,957
---------- ----------
Total liabilities and shareholders' equity........................................ $ 429,097 $ 386,657
---------- ----------
---------- ----------
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1996 1995 1994
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Income:
Dividends from Bank.......................................................... $ 63,891 $ 24,066 $ --
Interest and dividend income................................................. 4,313 2,081 854
Gain on sale of securities................................................... 407 972 --
--------- --------- ---------
Total income............................................................. 68,611 27,119 854
Interest on note payable to Bank................................................. 1,720 803 --
Other expenses................................................................... 463 341 361
--------- --------- ---------
Total expenses........................................................... 2,183 1,144 361
--------- --------- ---------
Income before tax and equity in undistributed income of Bank..................... 66,428 25,975 493
Income taxes..................................................................... 22 112 121
--------- --------- ---------
Income before equity in undistributed income of Bank............................. 66,406 25,863 372
Equity in undistributed income of Bank........................................... 157 22,929 36,791
--------- --------- ---------
Net income....................................................................... $ 66,563 $ 48,792 $ 37,163
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------
Operating Activities:
Net income.................................................................. $ 66,563 $ 48,792 $ 37,163
Adjustments to net income:
Equity in undistributed (income) of Bank................................ (157) (22,929) (36,791)
Other, net.............................................................. (363) (115) 185
---------- ---------- ----------
Net cash provided by operating activities............................. 66,043 25,748 557
---------- ---------- ----------
Investing Activities:
Capital contributed to Bank............................................... -- -- --
Net decrease (increase) in short-term investments......................... 9,400 (8,925) 5,025
Maturities of investment securities....................................... -- 500 2,000
Maturities of securities available for sale............................... 2,000 1,500 --
Purchase of securities available-for-sale................................. (39,096) (21,188) (6,711)
Sales of securities available-for-sale.................................... 4,731 2,380 310
Other, net................................................................ (172) (750) (112)
---------- ---------- ----------
Net cash provided by (used in) investing activities................... (23,137) (26,483) 512
---------- ---------- ----------
Financing Activities:
Cash dividends paid....................................................... (15,815) (11,755) (2,258)
Borrowings from Bank...................................................... 7,800 19,700 --
Purchase of treasury shares............................................... (22,384) (9,899) --
Stock options exercised................................................... 7,847 3,131 1,147
Other, net................................................................ 1,773 1,003 189
---------- ---------- ----------
Net cash provided by (used in) financing activities................... (20,779) 2,180 (922)
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... 22,127 1,445 147
Cash and cash equivalents at beginning of year................................ 1,649 204 57
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 23,776 $ 1,649 $ 204
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
The following table presents the notional amount and fair value of
interest-rate risk-management instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
NOTIONAL FAIR NOTIONAL FAIR
(DOLLARS IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Receive-fixed/pay variable.................................................... $ 325.0 $ (.4) $ 25.0 $ .2
</TABLE>
Interest-rate swap agreements involve the exchange of fixed- and
variable-rate interest payments based upon a notional principal amount and
maturity date. The Company's interest-rate risk-management instruments had an
exposure to credit risk of $.4 million and $.2 million at December 31, 1996 and
1995, respectively. The credit exposure represents the cost to replace, on a
present value basis and at current market rates, all profitable contracts
outstanding at year end. The Company's swaps agreements require the deposit of
collateral to mitigate the amount of credit risk if certain threshholds are
exceeded. No amounts were required to be deposited by the Company or its
counterparties as of December 31, 1996.
The periodic net settlement of interest-rate risk-management instruments is
recorded as an adjustment to net interest income. These interest-rate
risk-management instruments generated $.3 million in net interest income in 1996
and had no effect on net interest income in 1995.
A-52
<PAGE>
EXHIBIT 21
Parent and Subsidairies
CITY NATIONAL CORPORATION
CITY NATIONAL BANK
CITY NATIONAL CITINATIONAL CITY NATIONAL CITY NATIONAL
FINANCIAL SERVICES, BANCORPORATION MORTGAGE PROPERTIES
INC. COMPANY INC.
City National Corporation is a corporation organized under the laws of
the State of Delaware. City National Bank is a national banking association
organized under the laws of the United States of America. Each of the other
above-named subsidiaries is a corporation organized under the laws of the
State of California. Registrant owns 100% of the outstanding capital stock
of City National Bank ("Bank"). The Bank owns 100% of the outstanding common
stock of Citinational Bancorporation, City National Mortgage Company, City
National Properties, Inc. and City National Financial Services. The
consolidated financial statements in the Registrant's Annual Report to
Shareholders include Registrant, Bank, City National Financial Services,
Inc., Citinational Bancorporation, City National Properties, Inc. and City
National Mortage Company.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
City National Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-32543, 33-38029, 33-60668 and 333-01993) on Form S-8 of City National
Corporation of our report dated January 24, 1997, relating to the
consolidated balance sheets of City National Corporation and subsidiaries as
of December 31, 1996 and 1995 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the
December 31, 1996 Annual Report on Form 10-K of City National Corporation.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 331,046
<INT-BEARING-DEPOSITS> 10,978
<FED-FUNDS-SOLD> 151,200
<TRADING-ASSETS> 32,129
<INVESTMENTS-HELD-FOR-SALE> 615,863
<INVESTMENTS-CARRYING> 195,229
<INVESTMENTS-MARKET> 194,655
<LOANS> 2,839,435
<ALLOWANCE> 130,089
<TOTAL-ASSETS> 4,216,496
<DEPOSITS> 3,386,523
<SHORT-TERM> 343,191
<LIABILITIES-OTHER> 51,235
<LONG-TERM> 34,800
0
0
<COMMON> 46,303
<OTHER-SE> 354,444
<TOTAL-LIABILITIES-AND-EQUITY> 4,216,496
<INTEREST-LOAN> 224,702
<INTEREST-INVEST> 52,010
<INTEREST-OTHER> 5,411
<INTEREST-TOTAL> 282,123
<INTEREST-DEPOSIT> 54,756
<INTEREST-EXPENSE> 82,389
<INTEREST-INCOME-NET> 199,734
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 187
<EXPENSE-OTHER> 144,595
<INCOME-PRETAX> 99,134
<INCOME-PRE-EXTRAORDINARY> 99,134
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,563
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 8.22
<LOANS-NON> 41,543
<LOANS-PAST> 12,444
<LOANS-TROUBLED> 2,569
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 131,514
<CHARGE-OFFS> 20,342
<RECOVERIES> 18,917
<ALLOWANCE-CLOSE> 130,089
<ALLOWANCE-DOMESTIC> 130,089
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
