<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998 Commission File Number 1-10521
CITY NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-2568550
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
City National Center
400 North Roxbury Drive, Beverly Hills, California 90210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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Number of shares of common stock outstanding at July 31, 1998: 46,503,862
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
Dollars in thousands, except share amounts 1998 1997 1997
- -------------------------------------------- ---------- ------------ --------
<S> <C> <C> <C>
A S S E T S
Cash and due from banks......................... $ 401,092 $ 327,398 $ 295,281
Interest-bearing deposits in other banks........ 255 301 444
Federal funds sold.............................. - 150,000 -
Investment securities (fair value $204,102;
$227,465 and $232,773 at June 30, 1998,
December 31, 1997 and June 30, 1997,
respectively)................................. 202,477 225,934 233,506
Securities available-for-sale (cost $584,607;
$597,910 and $594,601 at June 30, 1998,
December 31, 1997 and June 30, 1997,
respectively)................................. 598,719 607,188 592,935
Trading account securities...................... 48,793 30,279 47,259
Loans........................................... 4,228,226 3,825,224 3,446,452
Less allowance for credit losses................ 135,837 137,761 132,885
------------ -------------- --------------
Net loans..................................... 4,092,389 3,687,463 3,313,567
Premises and equipment, net..................... 51,706 43,402 36,719
Customers' acceptance liability................. 4,519 1,553 4,810
Other real estate............................... 2,195 2,126 10,238
Deferred tax asset.............................. 52,328 58,815 51,463
Goodwill and core deposit intangibles........... 65,888 54,921 62,341
Bank owned life insurance....................... 41,043 - -
Other assets.................................... 66,430 62,652 61,881
------------ -------------- --------------
Total assets $5,627,834 $5,252,032 $4,710,444
------------ -------------- --------------
------------ -------------- --------------
L I A B I L I T I E S
Demand deposits................................. $2,004,952 $2,027,014 $1,589,349
Interest checking deposits...................... 359,232 439,071 356,995
Money market deposits........................... 894,393 773,291 777,986
Savings deposits................................ 161,413 171,100 173,988
Time deposits-under $100,000.................... 197,731 204,744 228,576
Time deposits-$100,000 and over................. 768,534 613,128 530,176
------------ -------------- --------------
Total deposits............................... 4,386,255 4,228,348 3,657,070
Federal funds purchased and securities sold
under repurchase agreements................... 297,736 206,427 248,384
Other short-term borrowings..................... 88,979 212,575 267,931
Subordinated debt............................... 124,030 - -
Long-term debt.................................. 125,000 50,000 9,800
Other liabilities............................... 64,903 44,459 50,234
Acceptances outstanding......................... 4,519 1,553 4,810
------------ -------------- --------------
Total liabilities............................ 5,091,422 4,743,362 4,238,229
------------ -------------- --------------
C O M M I T M E N T S A N D C O N T I N G E N C I E S
SUBSEQUENT EVENTS
S H A R E H O L D E R S' E Q U I T Y
Preferred Stock authorized - 5,000,000 :
none outstanding.............................. - - -
Common Stock-par value-$1.00; authorized -
75,000,000
Issued- 46,885,182; 46,700,891 and 46,700,891
shares at June 30, 1998,
December 31, 1997 and June 30, 1997,
respectively)............................... 46,885 46,701 46,700
Additional paid-in capital...................... 294,423 297,654 299,749
Comprehensive income (loss)..................... 8,362 5,349 (958)
Retained earnings............................... 206,065 173,089 140,654
Treasury shares, at cost - 532,731; 563,928
and 628,249 shares at June 30, 1998,
December 31, 1997 and June 30, 1997,
respectively)................................. (19,323) (14,123) (13,930)
------------ -------------- --------------
Total shareholders' equity................... 536,412 508,670 472,215
------------ -------------- --------------
Total liabilities and shareholders' equity $5,627,834 $5,252,032 $4,710,444
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
-2-
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
In thousands, except per share amounts 1998 1997 1998 1997
- -------------------------------------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C>
I N T E R E S T I N C O M E
Loans............................................ $ 89,631 $ 75,017 $179,705 $145,028
Federal funds sold and securities purchased
under resale agreements........................ 897 271 1,407 583
Investments securities........................... 2,839 3,086 5,924 6,114
Securities available-for-sale.................... 9,315 9,609 18,496 19,126
Trading account.................................. 677 713 1,275 1,152
---------- ---------- ----------- -----------
Total.......................................... 103,359 88,696 206,807 172,003
---------- ---------- ----------- -----------
I N T E R E S T E X P E N S E
Deposits......................................... 21,493 18,032 42,325 34,526
Federal funds purchased and securities sold
under repurchase agreements.................... 4,675 5,186 9,567 10,547
Other short-term borrowings...................... 1,338 1,523 3,337 2,694
Subordinated debt................................ 2,016 - 3,792 -
Other long-term debt............................. 1,565 1,163 2,690 1,672
---------- ---------- ----------- -----------
Total.......................................... 31,087 25,904 61,711 49,439
---------- ---------- ----------- -----------
Net interest income.............................. 72,272 62,792 145,096 122,564
PROVISION FOR CREDIT LOSSES - - - -
---------- ---------- ----------- -----------
Net interest income after provision for credit
losses........................................... 72,272 62,792 145,096 122,564
---------- ---------- ----------- -----------
N O N I N T E R E S T I N C O M E
Service charges on deposit accounts.............. 4,178 3,325 9,210 6,629
Investment services.............................. 3,727 3,093 7,418 6,144
Trust fees....................................... 2,211 2,154 4,453 4,170
International services........................... 2,037 1,841 3,723 3,367
Bank owned life insurance........................ 586 - 1,043 -
Gain on sale of assets........................... 1,645 - 1,658 1,039
Gain (loss) on sale of securities................ 235 (262) 1,209 (539)
Other............................................ 2,727 3,263 4,997 5,229
---------- ---------- ----------- -----------
Total noninterest income....................... 17,346 13,414 33,711 26,039
---------- ---------- ----------- -----------
N O N I N T E R E S T E X P E N S E
Salaries and other employee benefits............. 27,841 24,617 57,583 48,113
Professional..................................... 6,556 4,522 13,871 9,436
Net occupancy of premises........................ 3,404 2,735 5,868 5,097
Data processing.................................. 1,126 2,378 2,329 4,198
Promotion........................................ 2,917 2,000 5,354 3,722
Depreciation..................................... 2,049 1,379 4,079 2,736
Office services.................................. 1,872 1,576 3,983 3,132
Equipment........................................ 501 614 1,009 1,195
Amortization of goodwill and core deposit
intangibles.................................... 1,796 1,820 3,665 3,201
Other operating.................................. 5,041 4,084 9,683 8,442
Other real estate................................ (130) (411) (85) (33)
---------- ---------- ----------- -----------
Total noninterest expense...................... 52,973 45,314 107,339 89,239
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES....................... 36,645 30,892 71,468 59,364
Income taxes..................................... 13,009 11,334 25,363 21,803
---------- ---------- ----------- -----------
NET INCOME....................................... 23,636 19,558 46,105 37,561
---------- ---------- ----------- -----------
Other comprehensive income
Unrealized net gains on securities
available-for-sale........................... 3,401 6,957 4,833 2,051
Income taxes................................... 1,182 2,942 1,820 860
---------- ---------- ----------- -----------
Other comprehensive income....................... 2,219 4,015 3,013 1,191
---------- ---------- ----------- -----------
COMPREHENSIVE INCOME............................. $ 25,855 $ 23,573 $ 49,118 $ 38,752
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET INCOME PER SHARE, BASIC...................... $ 0.51 $ 0.42 $ 0.99 $ 0.82
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET INCOME PER SHARE, DILUTED.................... $ 0.49 $ 0.41 $ 0.95 $ 0.79
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used to compute income per share,
basic.......................................... 46,604 46,098 46,640 46,017
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used to compute income per share,
diluted........................................ 48,517 47,748 48,608 47,678
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Dividends per share.............................. $ 0.14 $ 0.11 $ 0.28 $ 0.22
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
-3-
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
DOLLARS IN THOUSANDS 1998 1997
- -------------------- ----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................... $ 46,105 $ 37,561
Adjustments to net income:
Gain on sales of ORE.......................................... 256 835
Depreciation.................................................. 4,079 2,736
Amortization of goodwill and core deposit intangibles ........ 3,665 3,201
Net increase in trading securities............................ (18,514) (15,130)
Deferred income tax (benefit) expense ........................ (7,970) 13,828
Net increase in other liabilities ............................ 24,286 3,809
Other, net.................................................... 12,881 (5,353)
----------- ------------
Net cash provided by operating activites................... 64,788 41,487
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in short-term investments.......................... 46 10,534
Purchase of securities available-for-sale....................... (237,209) (228,297)
Sales of securities available-for-sale.......................... 208,537 281,712
Maturities of securities available-for-sale..................... 51,911 26,804
Maturities of investment securities............................. 26,667 4,382
Purchase of investment securities............................... (3,040) (41,996)
Purchase of residential mortgage loans.......................... (32,396) (74,681)
Sale of residential mortgage loans.............................. - 47,513
(Loan originations) and principal collections, net.............. (232,135) (236,105)
Proceeds from sales of ORE...................................... 1,478 13,547
Purchase of premises and equipment ............................. (10,059) (7,604)
Net cash from acquisitions...................................... 43,622 42,876
Bank owned life insurance premium paid ......................... (40,000) -
Gain (loss) on sale of securities .............................. 1,209 (539)
Other, net...................................................... 483 9,855
----------- ------------
Net cash used by investing activities...................... (220,886) (151,999)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in federal funds purchased and
securities sold under repurchase agreements.................... (58,691) 12,636
Net decrease in deposits......................................... (47,693) (180,632)
Net increase in short-term borrowings............................ 26,404 119,289
Net increase (decrease) in other long-term debt.................. 75,000 (15,200)
Net proceeds of subordinated debt ............................... 124,004 -
Proceeds from exercise of stock options......................... 8,202 6,949
Stock repurchases................................................ (36,758) (14,720)
Cash dividends paid.............................................. (13,129) (10,173)
Other, net....................................................... 2,453 5,398
----------- ------------
Net cash provided (used) by financing activities............ 79,792 (76,453)
----------- ------------
Net decrease in cash and cash equivalents........................ (76,306) (186,965)
Cash and cash equivalents at beginning of year................... 477,398 482,246
----------- ------------
Cash and cash equivalents at end of period....................... $ 401,092 $ 295,281
----------- ------------
----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................... $ 54,812 $ 48,656
Income taxes................................................. 6,450 8,202
Non-cash investing activities:
Transfer from loans to foreclosed assets .................... 1,867 10,296
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
4
<PAGE>
CITY NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
Dollars in thousands 1998 1997
- -------------------- ---------- -----------
<S> <C> <C>
Common Stock
Balance, beginning of period ................................. $ 46,701 $ 46,303
Stock issued for acquisitions ................................. 131 -
Stock options exercised ....................................... 53 397
---------- ----------
Balance, end of period ........................................ 46,885 46,700
---------- ----------
Additional paid-in capital
Balance, beginning of period ................................. 297,654 275,610
Stock options exercised ....................................... - 4,122
Tax benefit from stock options ................................ 2,454 1,830
Excess of cost of treasury shares reissued
over stock option exercise amounts .......................... (12,592) -
Excess of market value of shares issued
for acquisitions over historical cost ....................... 6,907 18,187
---------- ----------
Balance, end of period ........................................ 294,423 299,749
---------- ----------
Treasury shares
Balance, beginning of period.................................. (14,123) (32,283)
Purchase of shares .......................................... (36,758) (14,720)
Issuance of shares for acquisitions .......................... 10,817 30,643
Issuance of shares for stock options ......................... 20,741 2,430
---------- ----------
Balance, end of period ....................................... (19,323) (13,930)
---------- ----------
Comprehensive income
Balance, beginning of period ................................ 5,349 (2,149)
Unrealized net gains (losses) on securities
available-for-sale net of income taxes ..................... 3,013 1,191
---------- ----------
Balance, end of period ....................................... 8,362 (958)
---------- ----------
Retained earnings
Balance, beginning of period.................................. 173,089 113,266
Net income ................................................... 46,105 37,561
Dividends paid ............................................... (13,129) (10,173)
---------- ----------
Balance, end of period ....................................... 206,065 140,654
---------- ----------
Total shareholders' equity ...................................... $ 536,412 $ 472,215
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
-5-
<PAGE>
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The results of operations reflect the interim adjustments, all of which
are of a normal recurring nature and which, in the opinion of
management, are necessary for a fair presentation of the results for
such interim periods. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
2. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement
establishes accounting and reporting standards for derivative
instruments and for hedging activities. This Statement is effective for
fiscal years beginning after June 15, 1999. Management of the Company
uses interest rate swaps to manage interest rate exposure, which are
accounted for as hedging activities. Therefore, management is in the
process of determining the impact that this statement will have on the
Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). This
Statement standardizes the disclosure requirements for defined benefit
plans and recommends a parallel format for presenting information about
pensions and other postretirement benefits. This Statement is effective
for fiscal years beginning after December 15, 1997. Since the Company
has no defined benefit plans, it has determined that this Statement will
have no significant impact.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires that selected information about those operating segments be
reported in interim financial statements. This statement supersedes
SFAS 14 "Financial Reporting for Segments of a Business Enterprise".
SFAS No. 131 requires that all public enterprises report financial and
descriptive information about its reportable operating segments.
Operating segments are defined as components regularly evaluated by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. This statement is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years should be restated. Management
is in the process of determining the impact, if any, this statement will
have on the Company.
3. Securities held-for-investment are classified as investment securities.
Because the Company has the ability and management has the intent to
hold investment securities until maturity, investment securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts. Trading account securities are stated at market value.
Investments not classified as trading securities nor as investment
securities are classified as securities available-for-sale and recorded
at fair value. Unrealized holding gains or losses for securities
available-for-sale are excluded from net income and are reported as
comprehensive income included as a separate component of shareholders'
equity net of taxes.
4. On January 9, 1998, the Company completed its acquisition of Harbor
Bancorp (HB), a one-bank holding company with six branches, one of which
was subsequently closed. The total purchase price was approximately
$34.5 million. The Company issued approximately 540,000 shares,
primarily from treasury, with an aggregate market value of $17.9 million
and paid the remainder in cash. This acquisition was accounted for
under the purchase method of accounting and resulted in the recording
of goodwill and intangibles of approximately $24.0 million. The results
of HB's operations are included in those reported by the Company
beginning on January 10, 1998.
On February 27, 1998, the Company sold its Wilmington branch, which had
been acquired as part of the acquisition of Ventura County National
Bancorp to Banco Popular, N.A. (California). With the sale the
purchaser received approximately $40 million of deposits.
On May 15, 1998, the Company closed its Magnolia branch, which was
acquired in the Company's acquisition of Riverside National Bank.
6
<PAGE>
5. On January 12, 1998, the Company issued $125 million of 6 3/8%
Subordinated Notes due 2008. The net proceeds from the sale are being used
for general corporate purposes in the ordinary course of its banking
business.
6. For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and overnight federal funds sold.
7. Certain prior periods' data have been reclassified to conform to current
period presentation.
8. On April 29, 1998, the Company reported it had completed its share
repurchase program announced in March 1997 of 1.5 million shares of its
common stock at a total cost of $42.7 million, or an average price of
$28.46 per share. A new share repurchase program of up to 1.0 million
shares of the Company's common stock from time to time in open market
transactions was also announced at the same time. As of July 31, 1998,
the Company had repurchased 476,500 shares under this program at a total
cost of $17.3 million, or an average price of $36.23 per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
City National Corporation (the Corporation) is the holding Company for City
National Bank (the Bank). Because the Bank comprises substantially all of the
business of the Corporation, references to the "Company" in this Item 2 reflect
the consolidated activities of the Corporation and the Bank.
See "Cautionary Statement for Purposes of the 'Safe Harbor' Provision of the
Private Securities Litigation Reform Act of 1995", below in connection with
"forward looking" statements included in the Overview section of Results of
Operations and in the Loan Portfolio section of the Balance Sheet Analysis.
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded consolidated net income of $23.6 million, or $.49 per
diluted common share, in the second quarter of 1998, compared to $19.6 million,
or $.41 per diluted common share, in the second quarter of 1997. Increased net
income was primarily due to $9.5 million higher net interest income, and $3.9
million higher noninterest income, partially offset by $7.7 million in higher
noninterest expense.
Net income for the first six months of 1998 totaled $46.1 million, or $.95 per
diluted common share compared with $37.6 million, or $.79 per diluted common
share in the 1997 period. The six month increase resulted largely from a $22.5
million increase in net interest income and a $7.7 million increase in
noninterest income, partially offset by a $18.1 million increase in noninterest
expense.
Returns on average assets for the second quarter and first half of 1998 were
1.73% and 1.72% respectively compared with 1.67% and 1.66% for the
corresponding periods of 1997. Returns on average equity for the second
quarter and first half of 1998 increased to 17.66% and 17.33% respectively from
16.87% and 16.56% in 1997.
Earnings before the amortization of goodwill and core deposits intangibles (net
of applicable taxes) ("cash" earnings) for the quarter and six months ended
June 30, 1998 were $25.0 million or $.52 per diluted common share and $49.0
million or $1.01 per diluted common share, respectively compared to $20.8
million of $.43 per diluted common share and $39.7 million or $.83 per diluted
common share in the corresponding periods of 1997. On the same basis, the
returns on average assets were 1.85% and 1.84% for the quarter and six months
ended June 30, 1998, respectively compared to 1.80% and 1.77% in the 1997
periods. Cash returns on average common equity were 20.94% and 20.47% for the
quarter and six months ended June 30, 1998, respectively compared to 19.89% and
19.10% for the year ago periods. "Cash" earnings are presented because they
measure the Company's ability to support growth, pay dividends and repurchase
stock. The Company's "cash" earnings per share and other ratios are not
necessarily comparable to similarly titled measures reported by other
companies.
Taxable equivalent net interest income was $74.8 million in the second quarter
of 1998, up 14.7% from the year ago quarter. The increase resulted from the
18.5% increase in average interest earning assets between quarters. The net
interest spread and the net interest margin decreased to 4.33% and 5.95%,
respectively for the second quarter from 4.72% and 6.15%, for comparable period
a year ago. Management expects modest growth in quarterly net interest income
for the remainder of 1998 from second quarter 1998 levels, assuming, among
other things, that interest rates will essentially remain constant but that
loan balances will continue to grow. Actual results may vary if the
assumptions prove to be incorrect.
Average loans increased $765.9 million (22.9%) between second quarters to
$4,111.4 million at June 30, 1998. This increase reflected higher average
commercial, real estate commercial mortgage and residential first mortgage
loans outstanding, up $524.1 million (33.0%), $110.5 million (17.2%) and $105.2
million (11.1%), respectively. The increase in commercial loans resulted from
the Bank's internal loan generation, the acquisition of HB in January 1998 and
purchases of corporate syndicated loans. The increase in real estate mortgage
loans was primarily from the acquisition of HB. The increase in residential
first mortgage loans resulted from the Bank's internal loan generation.
Average construction loans increased $20.0 million (15.9%) from the second
quarter of 1997.
8
<PAGE>
Total average investment and available-for-sale securities decreased by $33.7
million between second quarters due to strong loan demand, which has absorbed
any excess liquidity. Total average deposits increased $623.4 million (17.4%)
between second quarters due primarily to the acquisition of HB as well as
increased deposit levels generated by the Bank's specialty deposit department
and existing branches.
For the first half of 1998, average loans increased $826.9 million (25.6%) and
total average investment and available-for-sale securities decreased $28.7
million (3.4%). Total deposits for the six months ended June 30, 1998
increased $650.7 million (18.7%) compared to the 1997 period. The change in
the six month average balance resulted from the same factors that caused the
change between the second quarter average balances.
The provision for credit losses was zero for the quarters and six months ended
June 30, 1998 and 1997. Loans charged off in the second quarter of 1998 were
$4.1 million, compared to $7.9 million in the second quarter of 1997.
Recoveries were $2.9 million and $3.2 million in the quarters ended June 30,
1998 and 1997, respectively. The allowance for credit losses was 3.21% of
total loans at June 30, 1998 compared to 3.86% at June 30, 1997 and 3.60% at
December 31, 1997. The provision for credit losses is expected to remain at
reduced levels for the remainder of 1998. This assumes that general economic
conditions in Southern California will not deteriorate materially during the
balance of 1998, and if this assumption proves to be inaccurate, an increased
provision for credit losses may be required.
Noninterest income excluding gains and losses on the sale of securities and
assets totaled $15.5 million for the second quarter of 1998, up $1.8 million
(13.1%) from a year earlier. For the six months ended June 30, 1998,
noninterest income excluding gains and losses on sale of securities and assets
totaled $30.8 million, an increase of $5.3 million (20.8%) from last year's
total of $25.5 million. Service charges on deposit accounts increased $0.9
million (25.7%) and $2.6 million (38.9%), respectively, for the quarter and six
months ended June 30, 1998 due primarily to increases in service charge fee
schedules effective during the fourth quarter of 1997 and the acquisition of
HB. Investment services increased $0.6 million (20.5%) and $1.3 million
(20.7%) compared to the same periods a year ago due to new customers and new
investment products offered to customers. During the first quarter of 1998,
the company invested in bank owned life insurance that generated $0.6 million
and $1.0 million in noninterest income in the second quarter and first half of
1998, respectively. Included in all other income in the second quarter of 1997
was a $0.9 million settlement of a lawsuit with a borrower. Noninterest income
is expected to continue to grow during the remainder of 1998.
Noninterest expense totaled $53.0 million in the second quarter of 1998, an
increase of $7.7 million (16.9%) from the second quarter of 1997. For the
first half of 1998 noninterest expense totaled $107.3 million, an increase of
$18.1 million (20.3%) from the first half of 1997. Salaries and other employee
benefits increased $3.2 million (13.1%) and $9.5 million (19.7%) for the
quarter and six months ended June 30, 1998 from the comparable period in 1997,
due primarily to the additional personnel added as a result of the acquisition
of HB, the hiring of additional personnel to pursue other opportunities, and
moving to a more performance based compensation structure. The expense
categories other than staff increased $4.4 million (21.4 %) and $8.6 million
(21.0%) for the quarter and six months ended June 30, 1998 from the comparable
period in 1997. The increase in professional expenses resulted primarily from
higher customer service expense due to increased volumes and higher consulting
fees. Higher promotion expense resulted from the Company's increased
advertising program. Amortization of goodwill and core deposit intangibles for
the second quarter was $1.8 million, unchanged from a year ago, and increased
to $3.7 million for the first six months of 1998 from $3.2 million in the same
period of 1997, reflecting primarily the acquisition of HB. Lower data
processing expense is attributable to savings from the conversion of core
operating systems to a new data processing provider. Other increases are
attributable primarily to the acquisition of HB. Noninterest expense levels
for the remainder of 1998 are expected to be higher than in 1997 reflecting the
growth of the Company and the acquisition of HB.
During the second quarter, efforts continued to address Year 2000 matters in
accordance with the Company's five-phase project plan which covers information
technology as well as embedded systems. As previous reported, the first two
phases of awareness and assessment have been completed. The Company is now
well into the renovation and testing phases. Much of the renovation phase has
been devoted to monitoring the Year 2000 progress of third party vendors and
service providers. There are 32 in-house applications that the Company is
currently responsible for reprogramming, 50% of which have been renovated. As
part of the validation phase, the Company has completed development of its test
lab and has already certified as Year 2000 compliant 40 of its hardware, server
and desktop applications. In the second quarter, approximately $0.5 million
was spent on Year 2000 matters, bringing the six months total expenditures to
approximately $0.7 million. In accordance with the Federal Financial
Institution Examination Council's latest advisories, the Company expects to
complete validation of both internal and external systems by June 30, 1999.
The Company is nearing completion of its contingency planning for each of its
mission critical business functions. It will establish trigger dates by which
each vendor must become Year 2000 compliant or the contingency plan will be
implemented.
The Company's effective tax rate decreased to 35.5% in the second quarter of
1998 from 36.7% in the second quarter of 1997. The Company expects the
effective tax rate for the remainder of 1998 to remain near or slightly above
1998 second quarter levels.
10
<PAGE>
The following table presents the components of net interest income on a fully
taxable equivalent basis for the three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
JUNE 30, 1998 JUNE 30, 1997
--------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets (1)
Loans:
Commercial $2,112,175 $ 46,936 8.91% $1,588,036 $ 36,583 9.24%
Residential first mortgages 1,050,142 19,401 7.41 944,954 18,379 7.80
Real estate - construction 145,739 4,097 11.28 125,739 3,593 11.46
Real estate - commercial mortgage 750,962 18,928 10.11 640,506 15,898 9.96
Installment 52,335 1,416 10.85 46,250 1,321 11.46
---------- -------- ---------- --------
Total loans (2) 4,111,353 90,778 8.86 3,345,485 75,774 9.08
Due from banks-interest bearing 9,368 132 5.65 411 2 1.95
State and municipal investment securities 104,892 1,642 6.28 106,101 1,860 7.03
Taxable investment securities 105,010 1,653 6.31 116,352 1,890 6.52
Securities available for sale 592,467 10,008 6.78 613,588 10,480 6.85
Federal funds sold and securities
purchased under resale agreements 61,203 897 5.88 19,073 271 5.70
Trading account securities 50,802 731 5.77 48,678 801 6.60
---------- -------- ---------- --------
Total earning assets 5,035,095 105,841 8.43 4,249,688 91,078 8.60
-------- --------
Allowance for credit losses (136,407) (136,139)
Cash and due from banks 311,800 346,521
Other nonearning assets 275,745 225,633
---------- ----------
Total assets $5,486,233 $4,685,703
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts $ 387,318 962 1.00 $ 383,216 969 1.01
Money market accounts 860,745 6,573 3.06 800,412 6,034 3.02
Savings deposits 167,468 1,477 3.54 174,019 1,415 3.26
Time deposits - under $100,000 203,770 2,677 5.27 237,541 3,025 5.11
Time deposits - $100,000 and over 746,843 9,804 5.27 508,182 6,589 5.20
---------- -------- ---------- --------
Total interest - bearing deposits 2,366,144 21,493 3.64 2,103,370 18,032 3.44
Federal funds purchased and securities
sold under repurchase agreements 346,605 4,675 5.41 260,892 3,486 5.36
Other borrowings 326,710 4,919 6.04 315,993 4,386 5.57
---------- -------- ---------- --------
Total interest - bearing liabilities 3,039,459 31,087 4.10 2,680,255 25,904 3.88
-------- --------
Noninterest - bearing deposits 1,845,647 1,485,023
Other liabilities 64,191 55,279
Shareholders' equity 536,936 465,146
---------- ----------
Total liabilities and shareholders' equity $5,486,233 $4,685,703
---------- ----------
---------- ----------
Net interest spread 4.33% 4.72%
----- -----
----- -----
Fully taxable equivalent net interest income $ 74,754 $ 65,174
-------- --------
-------- --------
Net interest margin 5.95% 6.15%
----- -----
----- -----
</TABLE>
(1) Includes average nonaccrual loans of $34,641 and $43,820 for 1998 and
1997, respectively.
(2) Loan income includes loan fees of $3,179 and $2,214
for 1998 and 1997, respectively.
11
<PAGE>
The following table presents the components of net interest income on a fully
taxable equivalent basis for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
JUNE 30, 1998 JUNE 30, 1997
--------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
Dollars in thousands BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets (1)
Loans:
Commercial $2,071,038 $ 94,751 9.23% $1,528,747 $ 70,698 9.33%
Residential first mortgages 1,029,031 38,718 7.59 924,204 36,107 7.88
Real estate - construction 149,525 8,220 11.09 117,537 6,682 11.46
Real estate - commercial mortgage 760,515 37,399 9.92 617,117 30,475 9.96
Installment 51,338 2,850 11.19 46,984 2,485 10.67
---------- -------- ---------- --------
Total loans (2) 4,061,447 181,938 9.03 3,234,589 146,447 9.13
Due from banks-interest bearing 4,921 139 5.70 4,051 98 4.88
State and municipal investment securities 105,840 3,514 6.70 102,428 3,584 7.06
Taxable investment securities 110,815 3,529 6.42 114,527 3,715 6.54
Securities available for sale 591,583 20,126 6.86 619,973 20,698 6.73
Federal funds sold and securities
purchased under resale agreements 50,347 1,407 5.64 22,060 583 5.33
Trading account securities 47,108 1,398 5.98 44,251 1,237 5.64
---------- -------- ---------- --------
Total earning assets 4,972,061 212,051 8.60 4,141,879 176,362 8.59
-------- --------
Allowance for credit losses (138,586) (136,390)
Cash and due from banks 312,389 332,578
Other nonearning assets 272,931 218,052
---------- ----------
Total assets $5,418,795 $4,556,119
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts 387,987 1,921 1.00 $ 375,312 1,877 1.01
Money market accounts 846,714 12,737 3.03 788,541 11,789 3.01
Savings deposits 170,623 2,978 3.52 170,530 2,782 3.29
Time deposits - under $100,000 210,546 5,466 5.24 228,182 5,763 5.09
Time deposits - $100,000 and over 734,121 19,223 5.28 478,767 12,315 5.19
---------- -------- ---------- --------
Total interest - bearing deposits 2,349,991 42,325 3.63 2,041,332 34,526 3.41
Federal funds purchased and securities
sold under repurchase agreements 355,232 9,567 5.43 247,129 6,408 5.23
Other borrowings 327,251 9,819 6.05 310,780 8,505 5.52
---------- -------- ---------- --------
Total interest - bearing liabilities 3,032,474 61,711 4.10 2,599,241 49,439 3.84
-------- --------
Noninterest - bearing deposits 1,789,535 1,447,517
Other liabilities 63,251 52,039
Shareholders' equity 533,535 457,322
---------- ----------
Total liabilities and shareholders' equity $5,418,795 $4,556,119
---------- ----------
---------- ----------
Net interest spread 4.50% 4.75%
----- -----
----- -----
Fully taxable equivalent net interest income $150,340 $126,923
-------- --------
-------- --------
Net interest margin 6.10% 6.15%
----- -----
----- -----
</TABLE>
(1) Includes average nonaccrual loans of $35,131 and $43,272 for 1998 and
1997, respectively.
(2) Loan income includes loan fees of $5,698 and $3,976
for 1998 and 1997, respectively.
12
<PAGE>
The following tables set forth the changes in net interest income on a
fully taxable equivalent basis broken down by volume and rates. The change
in interest due to both volume and in rate has been allocated to change
due to volume and rate in proportion to the relationship of the absolute
dollar amounts of the change in each.
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
FOR THE THREE FOR THE THREE
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1998 VS 1997 1997 VS 1996
- -------------------- --------------------------------- ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO NET DUE TO NET
------------------ INCREASE ------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
in other banks $ 120 $ 10 $ 130 $ (262) $ (180) $ (442)
Loans 16,887 (1,883) 15,004 20,357 1,127 21,484
Investment securities (199) (256) (455) 727 45 772
Securities available for sale (364) (108) (472) (748) 999 251
Trading account securities 34 (104) (70) 286 62 348
Federal funds sold and
securities purchased
under resale agreements 617 9 626 (522) 35 (487)
------- ------- ------- ------- ------ -------
Total interest-earning assets 17,095 (2,332) 14,763 19,838 2,088 21,926
------- ------- ------- ------- ------ -------
Interest paid on:
Interest checking 16 (13) 3 179 -- 179
Money market deposits 458 81 539 691 91 782
Savings deposits (94) 146 52 340 49 389
Other time deposits 2,678 189 2,867 3,273 217 3,490
Other borrowings 1,352 370 1,722 1,073 286 1,359
------- ------- ------- ------- ------ -------
Total interest-bearing liabilities 4,410 773 5,183 5,556 643 6,199
------- ------- ------- ------- ------ -------
$12,685 $(3,105) $ 9,580 $14,282 $1,445 $15,727
------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1998 VS 1997 1997 VS 1996
- -------------------- --------------------------------- ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO NET DUE TO NET
------------------ INCREASE ------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
in other banks $ 23 $ 18 $ 41 $ (608) $ (130) $ (738)
Loans 37,109 (1,618) 35,491 37,469 1,077 38,546
Investment securities (2) (254) (256) 2,048 8 2,056
Securities available for sale (964) 393 (571) (2,055) 1,285 (770)
Trading account securities 83 78 161 360 (63) 297
Federal funds sold and
securities purchased
under resale agreements 789 35 824 (1,499) (83) (1,582)
------- ------- ------- ------- ------ -------
Total interest-earning assets 37,038 (1,348) 35,690 35,715 2,094 37,809
------- ------- ------- ------- ------ -------
Interest paid on:
Interest checking 79 (35) 44 256 15 271
Money market deposits 869 78 947 1,001 180 1,181
Savings deposits (36) 232 196 611 138 749
Other time deposits 6,217 395 6,612 5,628 72 5,700
Other borrowings 3,488 986 4,474 2,486 186 2,672
------- ------- ------- ------- ------ -------
Total interest-bearing liabilities 10,617 1,656 12,273 9,982 591 10,573
------- ------- ------- ------- ------ -------
$26,421 $(3,004) $23,417 $25,733 $1,503 $27,236
------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------ -------
</TABLE>
13
<PAGE>
BALANCE SHEET ANALYSIS
SECURITY PORTFOLIO
Comparative period-end security portfolio balances are presented below:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
------------------------ --------------------- ----------------------
DOLLARS IN THOUSANDS COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- -------------------- ---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed $ 94,836 $ 95,233 $ 107,386 $ 107,728 $ 113,177 $ 112,236
State and Municipal 104,475 105,703 107,567 108,756 110,472 110,681
Other debt 3,153 3,153 3,216 3,201 3,331 3,330
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities 202,464 204,089 218,169 219,685 226,980 226,247
Equity 13 13 7,765 7,780 6,526 6,526
----------- ----------- ----------- ----------- ----------- -----------
Total securities $ 202,477 $ 204,102 $ 225,934 $ 227,465 $ 233,506 $ 232,773
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
------------------------ --------------------- ----------------------
DOLLARS IN THOUSANDS COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- -------------------- ---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Gov. and federal agency $ 270,080 $ 272,775 $ 255,552 $ 257,057 $ 281,654 $ 279,870
Mortgage-backed 145,843 147,203 171,439 172,075 158,976 156,241
State and Municipal 2,180 2,185 5,911 5,997 14,971 15,037
Other debt 43,331 45,965 23,928 25,920 14,547 14,860
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities 461,434 468,128 456,830 461,049 470,148 466,008
Marketable equity securities 123,173 130,591 141,080 146,139 124,453 126,927
----------- ----------- ----------- ----------- ----------- -----------
Total securities $ 584,607 $ 598,719 $ 597,910 $ 607,188 $ 594,601 $ 592,935
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The following tables provide the expected remaining maturities and
yields (taxable-equivalent basis) of debt securities within the securities
portfolios as of June 30, 1998.
<TABLE>
<CAPTION>
INVESTMENT DEBT SECURITIES
ONE YEAR OVER 1 YEAR OVER 5 YEARS
OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL
-------------- -------------- -------------- -------------- --------------
DOLLARS IN THOUSANDS AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed $ 2,223 6.97% $ - -% $17,902 6.06% $74,711 6.80% $ 94,836 6.66%
State and Municipal 18,673 6.66 64,825 6.68 17,267 7.07 3,710 6.46 104,475 6.73
Other debt 1,000 6.74 2,153 6.76 - - - - 3,153 6.75
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total debt securities $21,896 6.70% $66,978 6.68% $35,169 6.56% $78,421 6.78% $202,464 6.70%
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Fair value $21,963 $67,797 $35,454 $78,875 $204,089
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE DEBT SECURITIES
ONE YEAR OVER 1 YEAR OVER 5 YEARS
OR LESS THRU 5 YEARS THRU 10 YEARS OVER 10 YEARS TOTAL
-------------- -------------- -------------- -------------- --------------
DOLLARS IN THOUSANDS AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gov. and federal agency $ 5,160 6.00% $208,835 6.14% $58,780 6.04% $ - -% $272,775 6.12%
Mortgage-backed - - - - - - 147,203 6.84 147,203 6.84
State and Municipal - - 2,185 5.92 - - - - 2,185 5.92
Other debt - - - - 17,146 7.71 28,819 8.07 45,965 7.94
------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total debt securities $ 5,160 6.00% $211,020 6.14% $75,926 6.42% $176,022 7.04% $468,128 6.52%
------- -------- ------- -------- --------
------- -------- ------- -------- --------
Amortized cost $ 5,133 $208,682 $75,130 $172,489 $461,434
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
Dividend income included in interest income on securities in the
Consolidated Statement of Income and Comprehensive Income in the second
quarter of 1998 and 1997 were $2.1 million and $2.1 million, respectively and
for the six months of 1998 and 1997 were $4.6 million and $3.9 million,
respectively
14
<PAGE>
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
<TABLE>
<CAPTION>
LOANS
JUNE 30, DECEMBER 31, JUNE 30,
DOLLARS IN THOUSANDS 1998 1997 1997
- ---------------------------- ------------- --------------- -------------
<S> <C> <C> <C>
Commercial $ 2,186,855 $ 1,972,232 $ 1,660,474
Residential first mortgage 1,039,802 980,040 951,616
Real estate - construction 203,936 144,558 125,799
Real estate - mortgage 744,512 686,188 660,877
Installment 53,121 42,206 47,686
--------------- --------------- ---------------
Total loans, gross 4,228,226 3,825,224 3,446,452
Less: Allowance for credit losses (135,837) (137,761) (132,885)
--------------- --------------- ---------------
Total loans, net $ 4,092,389 $ 3,687,463 $ 3,313,567
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
Gross loans at June 30, 1998 amounted to $4,228.2 million, up $781.8
million (22.7%) from June 30, 1997 and up $403.0 million (10.5%) from
December 31, 1997. Approximately $152.2 million of the increase was due to
the acquisition of HB. Also contributing to the $526.4 million increase in
commercial loans from June 30, 1997 were loan originations and the purchase
of syndicated corporate loans. The $88.2 million increase in residential
first mortgage loans from the year ago quarter resulted from the Bank's own
originations. Construction loans also increased by $78.1 million from June
30, 1997 as the Company continued to expand its lending for residential
construction development. The Company expects that the Bank's loan portfolio
will continue to increase from second quarter 1998 levels due primarily to
its own internal loan generation activities.
The following table presents information concerning nonaccrual loans,
ORE, and restructured loans.
<TABLE>
<CAPTION>
NACCRUAL LOANS, ORE AND RESTRUCTURED LOANS
JUNE 30, DECEMBER 31 JUNE 30,
DOLLARS IN THOUSANDS 1998 1997 1997
- --------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial $ 12,578 $ 6,589 $ 22,498
Real estate 20,576 19,243 18,284
Installment - 1,734 -
------------- -------------- -------------
Total 33,154 27,566 40,782
ORE: 2,195 2,126 10,238
------------- -------------- -------------
Total nonaccrual loans and ORE $ 35,349 $ 29,692 $ 51,020
------------- -------------- -------------
------------- -------------- -------------
Restructured loans, accruing $ 2,868 $ 2,813 $ 5,617
------------- -------------- -------------
------------- -------------- -------------
Total non accrual loans as a
percentage of total
loans................................. 0.78 % 0.72 % 1.18 %
Total non accrual loans and ORE as a
percentage of total loans and
ORE................................... 0.84 0.78 1.48
Allowance for credit losses to total loans.. 3.21 3.60 3.86
Allowance for credit losses
to nonaccrual
loans................................. 409.72 499.75 325.84
</TABLE>
15
<PAGE>
The table below summarizes the approximate changes in nonaccrual loans
for the quarters and six months ended June 30, 1998 and June 30, 1997.
<TABLE>
<CAPTION>
CHANGES IN NONACCRUAL LOANS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- ------------------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 36.8 $ 40.7 $ 27.6 $ 41.5
Additions from acquisitions - - 3.1 2.4
Loans placed on nonaccrual 4.4 11.4 24.8 20.5
Charge offs (2.3) (5.8) (7.6) (8.8)
Loans returned to accrual status - (2.5) - (3.1)
Repayments (including interest
applied to principal) (5.7) (3.0) (14.7) (9.1)
Transfer to ORE - - - (2.6)
---------- ---------- ----------- ----------
Balance, end of period $ 33.2 $ 40.8 $ 33.2 $ 40.8
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
At June 30, 1998, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $2.8 million of problem loans
about which the ability of the borrowers to comply with the present loan
repayment terms in the future is questionable.
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding and changes in
the allowance for credit losses for the periods presented:
<TABLE>
<CAPTION>
CHANGES IN ALLOWANCE FOR CREDIT LOSSES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- ------------------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Average amount of loans outstanding $ 4,111.4 $ 3,345.5 $ 4,061.4 $ 3,234.6
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Balance of allowance for credit losses,
beginning of period $ 137.0 $ 137.6 $ 137.8 $ 130.1
Loans charged off:
Commercial 3.8 6.8 11.2 8.2
Real estate 0.3 1.1 0.6 3.5
---------- --------- ----------- -----------
Total loans charged off 4.1 7.9 11.8 11.7
---------- --------- ----------- -----------
Less recoveries of loans previously charged off:
Commercial 2.9 2.1 7.1 6.3
Real estate - 1.1 - 1.2
---------- --------- ----------- -----------
Total recoveries 2.9 3.2 7.1 7.5
---------- --------- ----------- -----------
Net loans charged off (1.2) (4.7) (4.7) (4.2)
Additions to allowance to operating expenses - - - -
Additions to allowance from acquisitions - - 2.7 7.0
---------- --------- ----------- -----------
Balance, end of period $ 135.8 $ 132.9 $ 135.8 $ 132.9
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Ratio of net charge-offs
to average loans 0.03% 0.14% 0.12% 0.13%
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Ratio of allowance for credit losses
to total period end loans 3.21% 3.86%
----------- ------------
----------- ------------
</TABLE>
16
<PAGE>
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for "well capitalized"
institutions and the capital ratios for the Company and the Bank at June 30,
1998, December 31, 1997 and June 30, 1997.
<TABLE>
<CAPTION>
Regulatory
Well Capitalized June 30, December 31, June 30,
Standards 1998 1997 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
City National Corporation
- -------------------------
Tier 1 leverage (1) 4.00 % 8.49 % 9.19 % 9.00 %
Tier I risk-based capital 6.00 10.18 10.99 11.82
Total risk-based capital 10.00 14.19 12.27 13.10
City National Bank
- -------------------------
Tier I leverage 5.00 7.78 7.93 7.72
Tier I risk-based capital 6.00 9.31 9.50 10.20
Total risk-based capital 10.00 13.34 10.78 11.48
</TABLE>
(1) Reflects new standard adopted by the Federal Reserve effective in June of
1998.
On March 17, 1997, the Company announced a program for the repurchase of up
to 1.5 million shares of its common stock, which was completed on April 28,
1998. The Company repurchased these shares at a total cost of $42.7 million
or an average price of $28.46 per share. A new repurchase program of up to
1.0 million shares was announced on April 29, 1998. As of July 31, 1998, the
Company had repurchased 476,500 shares under this program at a total cost of
$17.3 million, or an average price of $36.23 per share. Shares purchased
under the buyback program will be reissued upon the exercise of stock options
and for other general corporate purposes.
On July 29, 1998, the Company declared a regular quarterly dividend of $.14
per share, payable August 13, 1998 to shareholders of record as of August 4,
1998.
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 process 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.
Generally, an asset sensitive gap indicates that net interest income will
improve during a period of rising interest rates. The gap report is based on
the contractual cash flows of all asset and liability balances on the
Company's books. The contractual life of those balances may differ
substantially from their expected lives however. For example, checking
accounts are all subject to immediate withdrawal. Experience suggests that
these accounts will have an average life of several years. Also, certain
loans (such as first mortgages) are subject to prepayment. The
17
<PAGE>
cash flows shown in the gap report are adjusted to reflect these behaviors.
The gap report also shows the effects that interest rate swaps have had on
the repricing profile of the Company.
The use of interest rate swaps to manage interest rate exposure involves the
risk of dealing with counterparties and their ability to meet contractual
terms. These counterparties must receive appropriate credit approval before
the Company enters into an interest rate contract. Notional principal
amounts express the volume of these transactions, although the amounts
potentially subject to credit and market risks are much smaller. At June 30,
1998, almost all of the Company's interest rate swaps were entered into as
hedges against a decrease in interest income generated from prime based loans
if the prime decreased. The Company has not entered into transactions
involving any other interest rate derivative financial instruments, such as
interest rate floors, caps and interest rate futures contracts.
At June 30, 1998, the under-one-year cumulative gap was a $260.0 million
(5.0% of total assets) net asset position compared with a net asset position
of $132 million (3% of total assets) at December 31, 1997. The increase
resulted from the Company's funding of asset growth with equity, subordinate
debt and seasonal rate stable deposits. As of June 30, 1998, the Company has
$610.0 million of notional principal in receive fixed-pay LIBOR interest rate
swaps, of which $430.0 million have maturities greater than one year. The
Company's interest-rate risk-management instruments had a fair value of $2.2
million and $1.7 million and an exposure to credit risk of $2.2 million and
$1.8 million at June 30, 1998 and December 31, 1997, respectively. The
credit exposure represents the cost to replace, on a present value basis and
at current market rates, all profitable contracts outstanding at the end of
the period. The Company's swap agreements require the deposit of collateral
to mitigate the amount of credit risk if certain thresholds are exceeded. No
amounts were required to be deposited by the Company or its counterparties as
of June 30, 1998.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot
be used to evaluate the Company's interest rate sensitivity position. To
supplement traditional gap analysis, the Company uses simulation modeling to
estimate the potential effects of changing interest rates. This process
allows the Company to fully explore the complex relationships within the gap
over time and various interest rate scenarios.
At June 30, 1998, the Company's outstanding foreign exchange contracts
totaled $16.5 million. The Company enters into foreign exchange contracts
with its customers and counterparty banks solely for the purpose of
offsetting or hedging transaction and economic exposures arising out of
commercial transactions. The Company's policies prohibit outright
speculation by the Company and its employees. The Company actively manages
its foreign exchange exposures within prescribed risk limits and controls.
All foreign exchange contracts outstanding at June 30, 1998 had remaining
maturities of six months or less with the exception of $0.9 million which had
remaining maturities ranging between six months and 24 months.
LIQUIDITY MANAGEMENT
The Company continues to manage its liquidity through the combination of core
deposits, federal funds purchased, repurchase agreements, collateralized
borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of
San Francisco, and a portfolio of securities availabie-for-sale. Liquidity
is also provided by maturing investment securities and loans.
Average core deposits and shareholders' equity comprised 72.9% of total funding
in the second quarter of 1998, compared to 75.7% in the second quarter of 1997.
This decrease has required that the Company increase its use of more costly
alternative funding sources. Despite the decrease in percentage of funding
derived from core deposits and shareholders' equity, the Company has not faced
any liquidity constraints.
18
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report which are not historical facts. The
Company cautions readers that the following important factors could affect
the Company's business and cause actual results to differ materially from
those expressed in any forward looking statement made by, or on behalf of,
the Company.
- --Economic conditions. The Company's results are strongly influenced by
general economic conditions in its market area, Southern California, and a
deterioration in these conditions could have a material adverse impact on the
quality of the Bank's loan portfolio and the demand for its products and
services. In particular, changes in economic conditions in the real estate
and entertainment industries may affect the Company's performance.
- --Interest rates. Management anticipates that interest rate levels will
remain generally constant, but there is some risk of Federal Reserve
tightening. 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 policies. The banking industry is subject to extensive federal
and state regulations, and significant new laws or changes in, or repeal of,
existing laws may cause results to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for the Bank, primarily
through open market operations in U.S. Government securities, the discount
rate for member bank borrowing and bank reserve requirements, and a material
change in these conditions would be likely to have an impact on results.
- --Competition. The Bank competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries. Results
may differ if circumstances affecting the nature or level of competitive
change, such as the merger of competing financial institutions or the
acquisition of California institutions by out-of-state companies.
- --Credit quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans. The
Bank has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Bank's credit portfolio, but such policies and procedures
may not prevent unexpected losses that could adversely affect the Company's
results.
- --Other risks. From time to time, the Company details other risks to its
businesses and/or its financial results in its filings with the Securities
and Exchange Commission.
While management believes that its assumptions regarding these and other
factors on which forward looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance
that the results described in such forward looking statements will, in fact,
be achieved.
19
<PAGE>
PART 11. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 22, 1998, the Registrant held its annual meeting of
stockholders. The stockholders elected the three Class II directors
listed in the Registrant's proxy statement. The following table sets
forth the number of votes cast for, or withheld with respect to, each
director nominated for election. Under applicable Delaware law, votes
withheld have the same effect as votes cast against a nominee, and for
this reason the ballot did not offer a separate opportunity to vote
against a nominee.
<TABLE>
<CAPTION>
Name For Withheld
------------------ ------------- ---------------
<S> <C> <C>
Russell Goldsmith 41,525,911 461,675
Barry M. Meyer 41,522,198 465,388
Edward Sanders 41,508,531 479,055
</TABLE>
ITEM 5. OTHER INFORMATION
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: August 13, 1998 /s/ FRANK P. PEKNY
-------------------- -------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 401,092
<INT-BEARING-DEPOSITS> 255
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 48,793
<INVESTMENTS-HELD-FOR-SALE> 598,719
<INVESTMENTS-CARRYING> 202,477
<INVESTMENTS-MARKET> 204,102
<LOANS> 4,228,226
<ALLOWANCE> 135,837
<TOTAL-ASSETS> 5,627,834
<DEPOSITS> 4,386,255
<SHORT-TERM> 386,715
<LIABILITIES-OTHER> 69,422
<LONG-TERM> 249,030
0
0
<COMMON> 46,885
<OTHER-SE> 489,527
<TOTAL-LIABILITIES-AND-EQUITY> 5,627,834
<INTEREST-LOAN> 179,705
<INTEREST-INVEST> 24,420
<INTEREST-OTHER> 2,682
<INTEREST-TOTAL> 206,807
<INTEREST-DEPOSIT> 42,325
<INTEREST-EXPENSE> 61,711
<INTEREST-INCOME-NET> 145,096
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,209
<EXPENSE-OTHER> 107,339
<INCOME-PRETAX> 71,468
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,105
<EPS-PRIMARY> .99
<EPS-DILUTED> .95
<YIELD-ACTUAL> 8.60
<LOANS-NON> 33,154
<LOANS-PAST> 5,999
<LOANS-TROUBLED> 2,868
<LOANS-PROBLEM> 2,841
<ALLOWANCE-OPEN> 140,509<F1>
<CHARGE-OFFS> 11,842
<RECOVERIES> 7,170
<ALLOWANCE-CLOSE> 135,837
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Adjusted for acquisition of Harbor Bank.
</FN>
</TABLE>
