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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, 1997 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.)
CITY NATIONAL CENTER
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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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 par value New York Stock Exchange
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NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
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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 27, 1998:
46,858,109
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 27, 1998: $1,495,778,309
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 1998
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 COMMISSION ON FORM
10-K/A.
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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. Following the completion of the
acquisition of Harbor Bancorp (HB) in January 1998 and the sale of the
Wilmington branch in February 1998, the bank operates twenty three banking
offices in Los Angeles County, five in Orange County, one in San Diego County,
four in Riverside County and four in Ventura County.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp (VCNB), 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 (RNB), 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.
On January 9, 1998, the Company completed its acquisition of HB, a one-bank
holding company with six branches and total assets at December 31, 1997 of
$241.8 million. 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. The
Company closed the Huntington Beach branch of Harbor Bank on January 26, 1998.
On February 27, 1998, the Company sold its Wilmington branch, which was
acquired as part of the acquisition of VCNB, to Banco Popular, N.A.
(California).
The Bank has received regulatory approval from the Office of the Comptroller
of the Currency to close RNB's former Magnolia branch on May 15, 1998.
The Bank primarily serves middle-market companies, professional and business
borrowers and associated individuals with commercial banking and fiduciary needs
and purchases participations in syndicated loans. The Bank provides revolving
lines of credit, term loans, asset based loans, residential first trust deed
mortgages, commercial real estate secured loans, trade facilities, and deposit,
cash management and other business services. The Bank's City National
Investments Division offers personal and employee benefit trust 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. Furthermore, the geographic constraints on portions of the financial
services industry can be expected to erode.
Non-depository institutions can also be expected to increase the extent to
which they act as financial intermediaries.
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MONETARY POLICY
The net income of the Bank is 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 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 5% or more of the voting shares of a bank, or (iii)
merge or consolidate with another bank holding company. In 1996, legislation was
approved to substantially streamline the application process for
well-capitalized and well-managed bank holding companies, and in 1997
regulations were adopted by the bank regulatory authorities to implement such
legislation.
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 and 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
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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 5% or more 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 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 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 is sufficient to fund
fully the dividends, and the prospective rate of net income 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 tying 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 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
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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 a
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.
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 collected 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. Beginning January 1, 1998, the rate was reduced to
approximately 1.26 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-income 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
1997, the OCC assigned the Bank a rating of "Satisfactory," the second highest
of four possible ratings. The CRA regulations governing the Corporation and the
Bank emphasize 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 regulations also require
certain levels of collection and reporting of data regarding certain kinds of
loans.
The OCC's FDICIA regulations incorporate 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, and prohibit compensation deemed excessive.
If the OCC finds that a bank has failed to meet any applicable standard, it may
require the institution to submit an
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acceptable plan to achieve compliance, and if the bank fails to comply, the OCC
must, by order, require it to correct the deficiency.
Banking agencies have also adopted 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 adopted 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.
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, trust 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, 1997, the Corporation had a ratio of total capital
to risk-weighted assets (Total risk-based capital ratio) of 12.27% and a ratio
of Tier 1 capital to risk-weighted assets (Tier 1 risk-based capital ratio) of
10.99%, while the Bank had a total risk-based capital ratio of 10.78% and a Tier
1 risk-based capital ratio of 9.50%.
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, 1997, the Corporation had a Tier 1 leverage
ratio of 9.19%, and the Bank's Tier 1 leverage ratio was 7.93%.
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 as of December 31, 1997
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
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to be classified as well capitalized, adequately capitalized or
undercapitalized, respectively, together with the Bank's ratios which in all
cases exceed the well capitalized minimums.
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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............................ 10.78% 9.50% 7.93%
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%
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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 required to be
classified as undercapitalized, it will be classified as significantly
undercapitalized. In addition, if 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 guarantee of a capital restoration plan for the Bank
would result 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.
YEAR 2000 ISSUES
During 1996 and 1997, the Federal Financial Institutions Examination Council
("FFIEC"), an organization comprised of representatives of the major bank
regulatory agencies, including the Federal
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Reserve Board, the OCC and the FDIC, issued a number of statements relating to
Year 2000 Issues--the risks attributed to the programming codes in many existing
computer systems that may result in inaccurate calculations based on any
two-digit field containing the value "00". For many systems, the two-digit "00"
field will not permit accurate calculations based on current formulas on or
after January 1, 2000 because that date may be read as January 1, 1900. The
potential impact, particularly in the financial services industry, is that
date-sensitive calculations could be based on erroneous data or could cause a
systems failure.
The FFIEC Statement of May 5, 1997 (the "Statement"), as supplemented by the
FFIEC Guidelines of December 17, 1997 (the "Guidelines"), emphasize the need to
make all information processing systems Year 2000 compliant and to identify
specific concerns which should be considered in managing such a conversion
program. Among other things, the Statement and Guidelines: (a) outline the Year
2000 project management process; (b) identify certain external risk issues that
a Year 2000 conversion plan should consider, including reliance on vendors, data
exchange with other firms and Year 2000 compliance by borrowers; and (c)
describe other operational issues that may be relevant to a Year 2000 plan. The
Guidelines also outline the responsibilities of senior management and the board
of directors for addressing Year 2000 problems through active management and
oversight of efforts to ensure that adequate resources and personnel are devoted
to Year 2000 efforts. The Guidelines stress that Year 2000 Issues are an
enterprise-wide challenge, and not solely a technology issue, require management
to provide the board at least quarterly status reports on management's Year 2000
efforts and require development of a project planning process. The Guidelines
also clarify the Statement regarding Year 2000 compliance by an institution's
vendors.
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, 1997, the Bank and its subsidiaries actively
maintained premises composed of 33 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 606
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, 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 almost fully leased.
The major encumbrance on real properties owned directly by the Bank or its
subsidiaries is a deed of trust on the 606 South Olive Street building, securing
Citinational-Buckeye Building Company's note to City National Bank, maturing in
December 1998 on which the unpaid balance at December 31, 1997, was $15,703,786.
Citinational-Buckeye Building Co. is in the process of refinancing the Bank's
mortgage, although there can be no assurance that such refinancing will be
accomplished.
The Bank's subsidiary, Citinational Bancorporation, owned as of December 31,
1997 two buildings located on Olympic Boulevard in downtown Los Angeles, which
are occupied primarily by the Bank's
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support departments and one of which contains a banking office. In addition, as
of December 31, 1997, the Bank owned five other branch properties; the former
main office of Riverside National Bank and two of its branches located in
Riverside, a 9,007 square foot building in Wilmington which was sold on February
27, 1998 and its branch located in Studio City.
The remaining twenty five branch locations throughout Southern California
are leased by the Bank at annual rentals (exclusive of operating charges and
real property taxes) of approximately $7.1 million, with expiration dates
ranging from 1998 to 2009, 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.
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, 1997.
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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:
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<CAPTION>
PRESENT PRINCIPAL OCCUPATION AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
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<S> <C> <C>
Bram Goldsmith..................... 75 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.................. 48 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............... 56 President and Chief Operating Officer, City National Bank, since 1992;
President, City National Corporation, since 1993
Frank P. Pekny..................... 54 Executive Vice President and Treasurer/Chief Financial Officer, City
National Corporation, since 1992. 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
Robert A. Moore.................... 55 Executive Vice President and Manager, Credit Services, City National
Bank, since 1992
Jeffery L. Puchalski............... 42 Executive Vice President and Senior Risk Management Officer, City
National Bank from 1992
Richard H. Sheehan, Jr............. 54 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, 1987 to 1994
Heng W. Chen....................... 45 Controller, City National Corporation since 1995, Assistant Treasurer,
City National Corporation from 1992. Senior Vice President--Finance
and Controller, City National Bank since 1995, Senior Vice President,
Finance, City National Bank from 1988
</TABLE>
10
<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 in set
forth below.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- --------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
1997
March 31....................................................... $ 25.38 $ 20.38 $ 0.11
June 30........................................................ 25.50 20.88 .11
September 30................................................... 32.25 24.25 .11
December 31.................................................... 37.50 28.00 .11
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
</TABLE>
As of February 27, 1998 the closing price of the Corporation's stock on the
New York Stock Exchange was $37.19 per share. As of that date, there were
approximately 2,300 record holders of the Corporation's common stock. On January
28, 1998, the Board of Directors authorized a regular quarterly cash dividend on
its common stock at an increased rate of $.14 per share payable on February 12,
1998.
For a discussion of dividend restrictions on the Corporation's common stock,
see Note 11 (Availability of Funds From Subsidiaries, Restrictions on Cash
Balances; Capital) to the consolidated financial statements on page A-50 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-28,
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS," and is incorporated
herein by reference.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears on pages A-16 through A-19
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS" and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages A-31 through A-56,
and on page A-29 under the captions "1997 QUARTERLY OPERATING RESULTS" and "1996
QUARTERLY OPERATING RESULTS" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
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 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement"), and such information either shall be
(i) deemed to be incorporated herein by reference from that portion of the 1998
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/A.
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 1998 Proxy Statement, and such information
either shall be (i) deemed to be incorporated herein by reference from those
portions of the 1998 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/A.
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 1998
Proxy Statement, and such information either shall be (i) deemed to be
incorporated herein by reference from that portion of the 1998 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/A.
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 1998 Proxy Statement, and such
information either shall be (i) deemed to be incorporated herein by reference
from that portion of the 1998 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/A. Also
see Note 5 (Loans and Allowance for Credit Losses) to the consolidated financial
statements on page A-43 and A-44 of this report.
12
<PAGE>
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-30
Independent Auditors' Report................................................. A-31
Consolidated Balance Sheet at December 31, 1997 and 1996..................... A-32
Consolidated Statement of Income for each of the years in the three-year
period ended December 31, 1997............................................. A-33
Consolidated Statement of Cash Flows for each of the years in the three-year
period ended December 31, 1997............................................. A-34
Consolidated Statement of Changes in Shareholders' Equity for each of the
years in the three-year period ended December 31, 1997..................... A-35
Notes to the Consolidated Financial Statements............................... A-36
</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.
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 from the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.)
3.2 By-Laws, as amended to date (This Exhibit is incorporated by reference from the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.)
4.1 6 3/8% Subordinated Notes Due 2008 in the principal amount of $125 million
4.2 Stockholder Rights Plan (This Exhibit is incorporated by reference from the Registrant's Form
8-A filed on March 12, 1997.)
10.2.2 Employment Agreement made as of March 18, 1998, by and between Bram Goldsmith and City
National Bank, including Sixth Amendment to Split Dollar Life Insurance Agreement Collateral
Assignment Plan between City National Bank and the Goldsmith 1980 Insurance Trust, dated March
18, 1998
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 December 31,
1991 (This Exhibit is incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1991.)
10.3.1 Fifth Amendment to Split Dollar Life Insurance Agreement Collateral Assignment Plan between
City National Bank and the Goldsmith 1980 Insurance Trust, dated May 15, 1995
10.10 City National Corporation 1985 Stock Option Plan, as amended to date (This Exhibit is
incorporated by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.22 Employment Agreement dated as of October 16, 1995, between Russell Goldsmith and City National
Bank (This Exhibit is incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NO.
<S> <C>
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 from 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 from
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.24.1 Amended and Restated Section 2.8 of City National Corporation 1995 Omnibus Plan
10.28 Lease dated September 30, 1996, between Citinational-Buckeye Building Co. and City National
Bank for space until December 31, 2006.
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, 1997, 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 D. GOLDSMITH
-----------------------------------------
Russell D. Goldsmith,
March 18, 1998 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 D. GOLDSMITH
-------------------------------------------
Russell D. Goldsmith Chief Executive Officer and Director March 18, 1998
(Principal Executive Officer)
/s/ FRANK P. PEKNY
------------------------------------------- Executive Vice President and
Frank P. Pekny Treasurer/Chief Financial Officer March 18, 1998
(Principal Financial Officer)
/s/ HENG W. CHEN
-------------------------------------------
Heng W. Chen Controller March 18, 1998
(Principal Accounting Officer)
/s/ BRAM GOLDSMITH
------------------------------------------- Chairman of the Board and Director March 18, 1998
Bram Goldsmith
/s/ GEORGE H. BENTER, JR.
------------------------------------------- President and Director March 18, 1998
George H. Benter, Jr.
/s/ RICHARD L. BLOCH
------------------------------------------- Director March 18, 1998
Richard L. Bloch
------------------------------------------- Director March 18, 1998
Mirion P. Bowers, M.D.
/s/ STUART D. BUCHALTER
------------------------------------------- Director March 18, 1998
Stuart D. Buchalter
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ BURTON S. HORWITCH
------------------------------------------- Director March 18, 1998
Burton S. Horwitch
------------------------------------------- Director March 18, 1998
Barry M. Meyer
/s/ CHARLES E. RICKERSHAUSER, JR.
------------------------------------------- Director March 18, 1998
Charles E. Rickershauser, Jr.
/s/ EDWARD SANDERS
------------------------------------------- Director March 18, 1998
Edward Sanders
/s/ ANDREA L. VAN DE KAMP
------------------------------------------- Director March 18, 1998
Andrea L. Van De Kamp
/s/ KENNETH ZIFFREN
------------------------------------------- Director March 18, 1998
Kenneth Ziffren
</TABLE>
16
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INCREASE
DOLLARS IN THOUSANDS, (DECREASE)
EXCEPT PER SHARE AMOUNTS 1997 1996 AMOUNT
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR
Net income.......................................................... $ 80,133 $ 66,563 $ 13,570
Net income per common share, basic.................................. 1.74 1.52 0.22
Net income per common share, diluted................................ 1.68 1.47 0.21
Dividends, per common share......................................... 0.44 0.36 0.08
AT YEAR END
Assets.............................................................. $ 5,252,032 $ 4,216,496 $ 1,035,536
Deposits............................................................ 4,228,348 3,386,523 841,825
Loans............................................................... 3,825,224 2,839,435 985,789
Securities.......................................................... 833,122 811,092 22,030
Shareholders' equity................................................ 508,670 400,747 107,923
Book value, per common share........................................ 11.03 9.13 1.90
AVERAGE BALANCES
Assets.............................................................. $ 4,703,886 $ 3,821,314 $ 882,572
Deposits............................................................ 3,614,068 2,871,870 742,198
Loans............................................................... 3,387,784 2,539,323 848,461
Securities.......................................................... 829,557 839,564 (10,007)
Shareholders' equity................................................ 472,843 373,491 99,352
SELECTED RATIOS
Return on average assets............................................ 1.70% 1.74% (0.04)%
Return on average shareholders' equity.............................. 16.95 17.82 (0.87)
Tier 1 leverage..................................................... 9.19 9.75 (0.56)
Tier 1 risk-based capital........................................... 10.99 13.26 (2.27)
Total risk-based capital............................................ 12.27 14.55 (2.28)
Dividend payout ratio, per share.................................... 26.19 24.49 1.70
Net interest margin................................................. 6.13 5.87 0.26
Efficiency ratio.................................................... 58.22 58.00 0.22
</TABLE>
A-1
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996 1995 1994 1993
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income................................. $ 357,996 $ 282,123 $ 217,594 $ 181,825 $ 169,792
Interest expense................................ 104,328 82,389 55,331 38,414 41,996
---------- ---------- ---------- ---------- ----------
Net interest income............................. 253,668 199,734 162,263 143,411 127,796
Provision for credit losses..................... -- -- -- 7,535 60,163
Noninterest income (other than gains and losses
on securities transactions)................... 54,466 43,808 35,162 36,180 45,810
Gains (losses) on securities transactions....... (1,048) 187 (596) (3,383) --
Noninterest expense (other than ORE and
consolidation charge)......................... 184,324 144,795 118,684 121,296 129,226
Consolidation charge............................ -- -- -- -- 12,000
ORE income...................................... (2,567) (200) (608) (5,297) (4,489)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
taxes......................................... 125,329 99,134 78,753 52,674 (23,294)
Income taxes (benefit).......................... 45,196 32,571 29,961 15,511 (9,260)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations........ 80,133 66,563 48,792 37,163 (14,034)
Income from discontinued operations............. -- -- -- -- 7,128
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 80,133 $ 66,563 $ 48,792 $ 37,163 $ (6,906)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Income (loss) per share, diluted, from
continuing operations......................... $ 1.68 $ 1.47 $ 1.06 $ 0.81 $ (0.35)
Net income (loss) per share, basic.............. 1.74 1.52 1.08 0.83 (0.17)
Net income (loss) per share, diluted............ 1.68 1.47 1.06 0.81 (0.17)
Cash dividends declared......................... 0.44 0.36 0.26 0.05 --
Book value per share............................ 11.03 9.13 8.19 7.32 6.62
Shares used to compute income (loss) per share,
basic......................................... 46,018 43,888 45,198 44,725 39,580
Shares used to compute income (loss) per share,
diluted....................................... 47,809 45,146 45,886 45,626 39,685
BALANCE SHEET DATA--AT PERIOD END:
Assets.......................................... $5,252,032 $4,216,496 $4,157,551 $3,012,775 $3,100,626
Loans........................................... 3,825,224 2,839,435 2,346,611 1,643,918 1,628,803
Securities...................................... 833,122 811,092 975,407 749,435 904,481
Interest-earning assets......................... 4,838,926 3,844,834 3,784,245 2,716,524 2,838,698
Deposits........................................ 4,228,348 3,386,523 3,248,035 2,417,762 2,526,767
Shareholders' equity............................ 508,670 400,747 366,957 330,721 298,074
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets.......................................... $4,703,886 $3,821,314 $2,849,807 $2,831,471 $2,944,461
Loans........................................... 3,387,784 2,539,323 1,758,671 1,537,997 1,762,663
Securities...................................... 829,557 839,564 705,122 854,823 517,059
Interest-earning assets......................... 4,290,453 3,505,422 2,624,436 2,594,241 2,623,164
Deposits........................................ 3,614,068 2,871,870 2,062,412 2,241,175 2,380,106
Shareholders' equity............................ 472,843 373,491 350,551 313,196 260,649
ASSET QUALITY:
Nonaccrual loans................................ $ 27,566 $ 41,543 $ 48,124 $ 58,801 $ 79,303
ORE............................................. 2,126 15,116 7,439 4,726 2,052
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and ORE................ $ 29,692 $ 56,659 $ 55,563 $ 63,527 $ 81,355
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Assets held for accelerated disposition......... $ -- $ -- $ -- $ -- $ 17,450
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PERFORMANCE RATIOS:
Return on average assets........................ 1.70% 1.74% 1.71% 1.31% (0.23)%
Return on average shareholders' equity.......... 16.95 17.82 13.92 11.87 (2.65)
Net interest spread............................. 4.64 4.47 4.84 4.60 4.12
Net interest margin............................. 6.13 5.87 6.26 5.57 4.92
Average shareholders' equity to average
assets........................................ 10.05 9.77 12.30 11.06 8.85
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans................. 0.72% 1.46% 2.05% 3.58% 4.87%
Nonaccrual loans and ORE to total assets........ 0.57 1.34 1.34 2.11 2.62
Allowance for credit losses to total loans...... 3.60 4.58 5.60 6.41 6.78
Allowance for credit losses to nonaccrual
loans......................................... 499.75 313.14 273.28 179.15 139.34
Net charge offs (recoveries) to average loans... (0.02) 0.06 (0.40) 0.83 4.78
</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 $80.1 million, or $1.68 per diluted common share
in 1997, compared to $66.6 million, or $1.47 per diluted common share in 1996.
Net income per basic share was $1.74 in 1997 compared with $1.52 in 1996. The
increase in net income reflects the growth in the Company's loans and deposits
during 1997 including the impact from the acquisitions of VCNB and RNB in
January 1997. Fully taxable equivalent net interest income in 1997 increased
$57.5 million over 1996 and noninterest income increased $9.4 million compared
with 1996. Partially offsetting these increases were a $37.2 million increase in
noninterest expense, compared with 1996, and a $12.6 million increase in income
tax expense in 1997.
The return on average assets was 1.70% and the return on average common
equity was 16.95%, compared with 1.74% and 17.82%, respectively, in 1996.
Earnings before the amortization of goodwill and core deposit intangibles
(net of applicable taxes) ("cash" earnings) for the year ended December 31, 1997
were $84.1 million, or $1.76 per diluted common share, compared with $67.4
million, or $1.49 per diluted common share for the year ended December 31, 1996.
On the same basis, the return on average assets was 1.80% and the return on
average common equity was 19.53%, compared with 1.77% and 18.35%, respectively,
in 1996. "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.
Average assets increased to $4,703.9 million in 1997 from $3,821.3 million
in 1996, an increase of $882.6 million or 23.1%, largely due to increased loan
demand and the acquisitions of VCNB and RNB. Total average loans increased
$848.5 million or 33.4% between 1996 and 1997 due to strong internal loan
originations of both commercial, residential first trust deed and construction
loans, approximately $315.0 million from the acquisitions of VCNB and RNB and
the purchases of corporate loans. Average core deposits (checking, savings and
money market accounts and time certificates of deposit of less than $100,000)
increased to $3,079.6 million in 1997 from $2,508.2 million in 1996, an increase
of $571.4 million or 22.8% due to the Company's increased marketing efforts in
1997 and approximately $375 million from the acquisitions of VCNB and RNB.
Nonaccrual loans declined to $27.6 million at December 31, 1997, or .72% of
total loans, compared to $41.5 million, or 1.46% a year earlier. ORE totaled
$2.1 million at year end, down from $15.1 million a year earlier.
The allowance for credit losses at December 31, 1997 was $137.8 million or
3.60% of loans outstanding at year end. Net recoveries totaled $.7 million in
1997, compared with net chargeoffs of $1.4 million in 1996.
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 1998. 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. See "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995," below.
A-3
<PAGE>
In the latter part of 1997, the Company completed the conversion of its core
data processing applications to a new data processing provider. Noninterest
expense in 1997 included $6.3 million in expenses related to the conversion and
to buy out the Company's former data processing contract. The Company also spent
over $18.0 million for new personal computers, item processing and
telecommunications equipment and customized software expenditures in connection
with the conversion.
On January 17, 1997, the Company completed its acquisition of 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 the remainder in cash.
VCNB had total assets, loans and deposits of $279.8 million, $176.1 million and
$245.8 million, respectively at December 31, 1996. The acquisition of VCNB
resulted in the recording of goodwill and intangibles of approximately $27.4
million
On January 24, 1997, the Company completed its acquisition of RNB for $41.4
million. The Company issued approximately 1.0 million treasury shares with an
aggregate market value of approximately $20.7 million and paid the remainder in
cash. RNB had total assets, loans and deposits of $252.2 million, $177.0 million
and $224.2 million, respectively, at December 31, 1996. The acquisition of RNB
resulted in the recording of goodwill and intangibles of approximately $27.4
million.
On January 9, 1998, the Company completed its acquisition of HB for $34.5
million. The Company issued approximately 540,000 shares, primarily treasury
shares, with an aggregate market value of $17.9 million and paid the remainder
in cash. HB had total assets, loans and deposits of $241.8 million, $152.8
million and $221.3 million, respectively, at December 31, 1997. The acquisition
of HB is expected to result in the recording of goodwill and intangibles of
approximately $24.0 million. On January 26, 1998, the Company completed the
conversion of Harbor Bancorp's loan and deposit accounts to the Company's data
processing system.
On February 27, 1998, the Company sold its Wilmington branch which was
acquired as part of the acquisition of VCNB to Banco Popular, N.A. (California).
With the sale the purchaser received approximately $40 million of deposits.
The Company paid dividends of $.44 per share of common stock in 1997 and
$.36 per share of common stock in 1996. On January 28, 1998, the Board of
Directors authorized a regular quarterly cash dividend on common stock at an
increased rate of $.14 per share to shareholders of record on February 2, 1998,
payable on February 12, 1998.
On March 17, 1997, the Company announced a program for the repurchase of up
to 1.5 million shares of its common stock. At December 31, 1997, a total of
943,300 shares had been repurchased at a cost of $22.5 million, of which 563,928
shares remained in treasury at year-end. In January 1998, these shares were
reissued to cover the exercise of stock options and the majority of the stock
consideration for the HB acquisition. The Company will continue with its
previously announced repurchase program.
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.
On January 12, 1998, the Company's wholly owned subsidiary, City National
Bank, issued $125 million of 6 3/8% Subordinated Notes, due in 2008, in a
private offering. Proceeds, which qualify as Tier II capital, will be used for
general corporate purposes.
A-4
<PAGE>
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
INCREASE INCREASE YEAR ENDED DECEMBER
YEAR (DECREASE) YEAR (DECREASE) 31,
DOLLARS IN THOUSANDS, ENDED -------------------- ENDED ---------------------- --------------------
EXCEPT PER SHARE AMOUNTS 1997 AMOUNT % 1996 AMOUNT % 1995 1994
- ---------------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income(1)...................... $ 367,505 $ 79,456 28 $ 288,049 $ 68,423 31 $ 219,626 $ 182,960
Interest expense........................ 104,328 21,939 27 82,389 27,058 49 55,331 38,414
--------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income..................... 263,177 57,517 28 205,660 41,365 25 164,295 144,546
Provision for credit losses............. -- -- -- -- -- -- -- 7,535
Noninterest income...................... 54,466 10,658 24 43,808 8,646 25 35,162 36,180
Gain (loss) on securities
transactions.......................... (1,048) (1,235) (660) 187 783 131 (596) (3,383)
Noninterest expense:
Staff expense......................... 97,634 20,623 27 77,011 11,636 18 65,375 64,396
Amortization of goodwill and core
deposit intangibles................. 5,619 4,097 269 1,522 1,522 -- -- --
Other expense......................... 81,071 14,809 22 66,262 12,953 24 53,309 56,900
Consolidation charge.................. -- -- -- -- -- -- -- --
ORE income............................ (2,567) (2,367) (1,184) (200) 408 67 (608) (5,297)
--------- --------- --------- --------- ----------- --------- --------- ---------
Total............................... 181,757 37,162 26 144,595 26,519 22 118,076 115,999
--------- --------- --------- --------- ----------- --------- --------- ---------
Income (loss) before income taxes....... 134,838 29,778 28 105,060 24,275 30 80,785 53,809
Income taxes (benefit).................. 45,196 12,625 39 32,571 2,610 9 29,961 15,511
Less adjustments(1)..................... 9,509 3,583 60 5,926 3,894 192 2,032 1,135
--------- --------- --------- --------- ----------- --------- --------- ---------
Income (loss) from continuing
operations............................ 80,133 13,570 20 66,563 17,771 36 48,792 37,163
Income from discontinued operations..... -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income (loss)................... $ 80,133 $ 13,570 20 $ 66,563 $ 17,771 36 $ 48,792 $ 37,163
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income (loss) per share,
diluted........................... $ 1.68 $ 0.21 14 $ 1.47 $ 0.41 39 $ 1.06 $ 0.81
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS 1993
- ---------------------------------------- ---------
<S> <C>
Interest income(1)...................... $ 171,134
Interest expense........................ 41,996
---------
Net interest income..................... 129,138
Provision for credit losses............. 60,163
Noninterest income...................... 45,810
Gain (loss) on securities
transactions.......................... --
Noninterest expense:
Staff expense......................... 69,783
Amortization of goodwill and core
deposit intangibles................. --
Other expense......................... 59,443
Consolidation charge.................. 12,000
ORE income............................ (4,489)
---------
Total............................... 136,737
---------
Income (loss) before income taxes....... (21,952)
Income taxes (benefit).................. (9,260)
Less adjustments(1)..................... 1,342
---------
Income (loss) from continuing
operations............................ (14,034)
Income from discontinued operations..... 7,128
---------
Net income (loss)................... $ (6,906)
---------
---------
Net income (loss) per share,
diluted........................... $ (0.17)
---------
---------
</TABLE>
- ---------
(1) Includes amounts to convert nontaxable income to a fully taxable equivalent
basis.
OPERATIONS SUMMARY ANALYSIS
NET INTEREST INCOME
1997 COMPARED WITH 1996
Taxable equivalent net interest income totaled $263.2 million in 1997, up
$57.5 million, or 28.0%, from 1996. The increase from 1996 to 1997 was due to a
$785.0 million, or 22.4% increase in average total earning assets and an
increase in the net interest margin to 6.13% from 5.87%.
Average loans increased to $3,387.8 million in 1997 from $2,539.3 million in
1996, an increase of $848.5 million or 33.4%. The majority of this increase
reflects higher average commercial loans outstanding, up $500.0 million or
44.5%. This increase resulted from the Bank's increased marketing efforts,
including the formation of several specialized industry teams in 1997, the
acquisitions of VCNB and RNB and purchases of corporate loans. Average
residential first mortgage loans increased $158.7 million or 20.3% due to
continued strong internal loan originations, primarily of fixed rate mortgages.
The Company purchased $74.7 million in single family mortgages during 1997,
which was substantially less than mortgage loan repayments and prepayments from
purchased mortgages. Due to continued strong originations, the Company does not
expect to purchase any significant amounts of residential mortgages during 1998.
Average construction loans increased $39.4 million or 44.5% due to the Bank's
emphasis in this area. Average real estate mortgage loans increased $138.1
million or 27.1% primarily due to the impact of the acquisitions of VCNB and
RNB. Average loan balances are expected to increase in 1998, resulting from
continued loan growth and the acquisition of HB. See "Cautionary Statement for
Purposes of the `Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
A-5
<PAGE>
Average total investment and available-for-sale securities decreased $10.0
million or 1.2% between 1996 and 1997 as a result of the redeployment of the
proceeds from securities maturities and sales to fund the growth in loans.
Average noninterest-bearing deposits increased to $1,522.7 million in 1997
from $1,193.0 million in 1996, an increase of $329.7 million or 27.6%, while
average interest-bearing core deposits increased to $1,556.9 million in 1997
from $1,315.3 million in 1996, an increase of $241.6 million or 18.4%. Average
time deposits of $100,000 or more increased $170.8 million or 47.0% between 1996
and 1997. These increases resulted from the Bank's increased marketing efforts
as well as from the acquisitions of VCNB and RNB.
RATIOS TO AVERAGE ASSETS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest income(1)............................................... 5.59% 5.38% 5.76% 5.10% 4.39%
Noninterest income................................................... 1.14 1.15 1.21 1.16 1.56
Less provision for credit losses..................................... -- -- -- 0.27 2.04
Less noninterest expense:
Staff expense........................................................ 2.08 2.02 2.29 2.27 2.37
Other expense........................................................ 1.72 1.73 1.87 2.01 2.02
Amortization of goodwill and core deposit intangibles................ 0.12 0.04 -- -- --
Consolidation charge................................................. -- -- -- -- 0.41
ORE expense (income)................................................. (0.05) (0.01) (0.02) (0.19) (0.15)
--------- --------- --------- --------- ---------
Total............................................................ 3.87 3.78 4.14 4.09 4.65
--------- --------- --------- --------- ---------
Income (loss) before income taxes(1)................................. 2.86 2.75 2.83 1.90 (0.74)
--------- --------- --------- --------- ---------
Net income (loss) from continuing operations......................... 1.70 1.74 1.71 1.31 (0.47)
Net income from discontinued operations.............................. -- -- -- -- 0.24
--------- --------- --------- --------- ---------
Net income (loss).................................................... 1.70% 1.74% 1.71% 1.31% (0.23)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent basis.
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 to $2,539.3 million in 1996 from $1,758.7 million in
1995, 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 corporate commercial loans. Average real estate mortgage loans
increased $86.1 million or 20.3% due to the impact of the acquisition of First
Los Angeles Bank (First LA) on December 31, 1995.
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.
A-6
<PAGE>
The following table shows the change in net interest income broken down
between volume and rate. 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.
CHANGE IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1997 VS 1996 1996 VS 1995
----------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: NET DUE TO: NET
DOLLARS IN THOUSANDS-FULLY ---------------------- INCREASE ---------------------- INCREASE
TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
- --------------------------------------------- ----------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits in other banks... $ (1,112) $ (249) $ (1,361) $ 1,060 $ (23) $ 1,037
Loans...................................... 77,116 3,618 80,734 70,457 (13,881) 56,576
Taxable securities......................... 59 167 226 (24,710) 4,458 (20,252)
State and municipal securities............. 3,362 (23) 3,339 2,381 (37) 2,344
Securities available for sale.............. (3,893) 1,874 (2,019) 32,222 100 32,322
Trading account securities................. 636 162 798 (44) (109) (153)
Federal funds sold and securities purchased
under resale
agreements............................... (2,255) (6) (2,261) (2,930) (521) (3,451)
----------- --------- ----------- ---------- ---------- ----------
Total interest-earning assets............ 73,913 5,543 79,456 78,436 (10,013) 68,423
----------- --------- ----------- ---------- ---------- ----------
Interest paid on:
Interest checking.......................... 513 239 752 431 (144) 287
Money market deposits...................... 2,114 292 2,406 3,891 806 4,697
Savings deposits........................... 1,238 13 1,251 1,405 1,481 2,886
Other time deposits........................ 13,400 724 14,124 14,483 364 14,847
Other borrowings........................... 2,289 1,117 3,406 6,391 (2,050) 4,341
----------- --------- ----------- ---------- ---------- ----------
Total interest-bearing liabilities....... 19,554 2,385 21,939 26,601 457 27,058
----------- --------- ----------- ---------- ---------- ----------
$ 54,359 $ 3,158 $ 57,517 $ 51,835 $ (10,470) $ 41,365
----------- --------- ----------- ---------- ---------- ----------
----------- --------- ----------- ---------- ---------- ----------
</TABLE>
A-7
<PAGE>
The following table shows average balances and interest rates for the last
five years.
NET INTEREST INCOME SUMMARY
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
DOLLARS IN THOUSANDS BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE
- ---------------------------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets(2)
Loans:
Commercial.............................. $1,623,851 $ 150,528 9.27% $1,123,819 $ 101,039 8.99%
Residential first mortgage.............. 942,381 73,199 7.77 783,648 62,293 7.95
Real estate-construction................ 127,867 15,004 11.73 88,498 10,295 11.63
Real estate-commercial mortgage......... 647,658 63,662 9.83 509,565 49,452 9.70
Installment............................. 46,027 5,035 10.94 33,793 3,615 10.70
--------- ----------- ----------- --------- ----------- -----------
Total loans(3)........................ 3,387,784 307,428 9.07 2,539,323 226,694 8.93
Due from banks-interest bearing........... 2,238 100 4.47 25,989 1,461 5.62
State and municipal investment
securities.............................. 105,325 7,400 7.03 57,461 4,061 7.07
Taxable investment securities............. 117,874 7,683 6.52 116,970 7,457 6.38
Securities available for sale............. 606,358 40,822 6.73 665,133 42,841 6.44
Federal funds sold and securities
purchased under resale agreements....... 23,485 1,301 5.54 64,230 3,562 5.55
Trading account securities................ 47,389 2,771 5.85 36,316 1,973 5.43
--------- ----------- ----------- --------- ----------- -----------
Total earning assets.................. 4,290,453 367,505 8.57 3,505,422 288,049 8.22
----------- ----------- ----------- -----------
Allowance for credit losses................. (136,587) (129,788)
Cash and due from banks..................... 327,013 284,331
Other nonearning assets..................... 223,007 161,349
--------- ---------
Total assets.......................... $4,703,886 $3,821,314
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts................ $ 366,997 3,677 1.00 $ 316,146 2,925 0.93
Money market accounts..................... 797,902 23,995 3.01 726,942 21,589 2.97
Savings deposits.......................... 169,030 5,701 3.37 132,591 4,450 3.36
Time deposits--under $100,000............. 222,972 11,414 5.12 139,572 7,196 5.16
Time deposits--$100,000 and over.......... 534,431 28,502 5.33 363,659 18,596 5.11
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing deposits....... 2,091,332 73,289 3.50 1,678,910 54,756 3.26
Federal funds purchased and securities
sold under repurchase agreements........ 222,617 11,731 5.27 253,853 12,835 5.06
Other borrowings.......................... 338,930 19,308 5.70 265,638 14,798 5.57
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing liabilities.... 2,652,879 104,328 3.93 2,198,401 82,389 3.75
----------- ----------- ----------- -----------
Noninterest-bearing deposits................ 1,522,736 1,192,960
Other liabilities........................... 55,428 56,462
Shareholders' equity........................ 472,843 373,491
--------- ---------
Total liabilities and shareholders'
equity.............................. $4,703,886 $3,821,314
--------- ---------
--------- ---------
Net interest spread......................... 4.64 4.47
Fully taxable equivalent net interest income
and margin................................ $ 263,177 6.13% $ 205,660 5.87%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $37,879, $45,813, $46,931, $69,164 and
$131,381 for 1997, 1996, 1995, 1994 and 1993, respectively.
(3) Loan income includes loan fees of $8,857, $7,492, $6,850, $6,835 and $5,304
for 1997, 1996, 1995, 1994 and 1993, respectively.
A-8
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------- ----------------------------------- -----------------------------------
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>
$ 874,875 $ 88,629 10.13% $ 865,672 $ 74,893 8.65% $1,007,343 $ 75,155 7.46%
375,932 29,454 7.83 68,768 4,541 6.60 3,089 186 6.02
49,160 6,168 12.55 17,947 1,853 10.32 70,783 5,023 7.10
423,462 42,297 9.99 545,724 45,474 8.33 629,188 46,294 7.36
35,242 3,570 10.13 39,886 3,959 9.93 52,260 5,234 10.02
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,758,671 170,118 9.67 1,537,997 130,720 8.50 1,762,663 131,892 7.48
7,151 424 5.93 655 17 2.60 835 30 3.59
23,793 1,717 7.22 17,799 1,320 7.42 1,905 176 9.24
516,495 27,709 5.36 697,421 34,070 4.89 499,484 26,973 5.40
164,834 10,519 6.38 139,603 8,301 5.95 15,670 1,448 9.24
116,387 7,013 6.03 173,451 7,264 4.19 307,078 9,357 3.05
37,105 2,126 5.73 27,315 1,268 4.64 35,529 1,258 3.54
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
2,624,436 219,626 8.37 2,594,241 182,960 7.05 2,623,164 171,134 6.52
----------- ----------- ----------- ----------- ----------- -----------
(110,570) (113,100) (129,873)
239,032 249,768 272,610
96,909 100,562 178,560
--------- --------- ---------
$2,849,807 $2,831,471 $2,944,461
--------- --------- ---------
--------- --------- ---------
$ 268,593 2,638 0.98 $ 285,983 2,758 0.96 $ 283,871 3,379 1.19
595,467 16,892 2.84 719,203 16,212 2.25 767,121 17,858 2.33
79,391 1,564 1.97 95,097 1,869 1.97 103,161 2,255 2.19
80,341 3,826 4.76 88,195 3,226 3.66 108,135 4,063 3.76
140,020 7,119 5.08 145,463 4,958 3.41 203,176 6,419 3.16
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,163,812 32,039 2.75 1,333,941 29,023 2.18 1,465,464 33,974 2.32
287,015 16,404 5.72 215,130 8,552 3.98 265,082 7,499 2.83
114,865 6,888 6.00 20,348 839 4.12 16,147 523 3.24
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,565,692 55,331 3.53 1,569,419 38,414 2.45 1,746,693 41,996 2.40
----------- ----------- ----------- ----------- ----------- -----------
898,600 907,234 914,642
34,964 41,622 22,477
350,551 313,196 260,649
--------- --------- ---------
$2,849,807 $2,831,471 $2,944,461
--------- --------- ---------
--------- --------- ---------
4.84 4.60 4.12
$ 164,295 6.26% $ 144,546 5.57% $ 129,138 4.92%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</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 ultimately 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 1997, 1996 and 1995, the Company did not record a provision for credit
losses. In 1997 and 1995, net recoveries totaled $.7 million and $7.1 million,
respectively, compared with net chargeoffs in 1996 of $1.4 million. The Company
did not record a provision for credit losses for the last three years because of
the combination of low net charge offs, a change in the risk profile of the loan
portfolio, 25.6% of which now consists of residential first mortgages, the
continued reduction in problem loans, and the improvement of the Southern
California economy. Based on its review of the loan portfolio, management
anticipates that a provision for credit losses for 1998 may not be required.
However, credit quality will be influenced by underlying trends in the economic
cycle, particularly in Southern California, and 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 1997 totaled $53.4 million, up $9.4 million or 21.4%
from 1996 which was also up $9.4 million or 27.2% from 1995. 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 1997 AMOUNT % 1996 AMOUNT % 1995
- -------------------------------------------------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts............... $ 14.3 $ 3.5 32.4 $ 10.8 $ 2.7 33.3 $ 8.1
Investment services income........................ 13.2 1.7 14.8 11.5 2.7 30.7 8.8
Trust fees........................................ 8.3 1.1 15.3 7.2 0.7 10.8 6.5
International fee income.......................... 7.3 2.1 40.4 5.2 1.3 33.3 3.9
Gain on sale of assets............................ 1.6 0.5 45.5 1.1 1.1 NM --
Gain (loss) on sale of securities................. (1.0) (1.2) NM 0.2 0.8 (133.3) (0.6)
All other income.................................. 9.7 1.7 21.3 8.0 0.1 1.3 7.9
--------- ----- --------- --------- ----- --------- ---------
Total..................................... $ 53.4 $ 9.4 21.4 $ 44.0 $ 9.4 27.2 $ 34.6
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
</TABLE>
Service charges on deposit accounts increased $3.5 million, or 32.4%,
compared to a 33.3% increase in 1996. The increase in 1997 is the result of the
acquisitions of VCNB and RNB and strong growth in deposits as well as higher
service charge levels. The increase in 1996 is the result of the acquisition of
First LA and strong growth in deposits. Service charges on deposit accounts are
expected to increase in 1998 primarily as a result of the acquisition of HB.
Investment services income, which includes fees, commissions and markups on
securities transactions with customers, and fees on money market mutual funds,
increased in 1997, compared to 1996, by $1.7 million or 14.8% primarily due to
new investment products offered to customers, an increase in new
A-10
<PAGE>
customers and higher fees. Trust fees increased $1.1 million or 15.3% from 1996
to 1997 and increased $.7 million or 10.8% from 1995 to 1996 due to increased
number of new customers. The increase in investment services income and trust
fees from 1995 to 1996 was also attributable to the same factors discussed
above. At December 31, 1997 the Company had $7.6 billion of assets under custody
or management, including $1.5 billion in money market funds, under custody or
management in its Trust and Investment Services Division, compared to $6.9
billion at December 31, 1996. Investment services income and trust fees are
expected to increase in 1998 as a result of additional marketing personnel and a
continued emphasis on developing and marketing new products in these areas.
International fee income increased $2.1 million or 40.4% from 1996 to 1997
and $1.3 million or 33.3% from 1995 to 1996 due to the hiring of several
experienced foreign exchange traders and the expansion of international
activities. All other income categories increased $1.7 million or 21.3% from
1996 to 1997 due to higher volumes and a $.9 million settlement of a lawsuit
with a borrower in the second quarter of 1997. International income is expected
to increase in 1998, although at a slower rate than in past years. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
Securities losses in 1997 totaled $1.0 million compared to gains of $.2
million in 1996 and losses of $.6 million in 1995, respectively.
NONINTEREST EXPENSE
Noninterest expense, before ORE income, totaled $184.3 million in 1997, up
$39.5 million or 27.3% from 1996 which was up $26.1 million or 22.0% from 1995.
Noninterest expense in 1997 and 1996 included $6.3 million and $1.0 million,
respectively, in expenses related to data processing conversions and to buy out
the Company's former data processing contract. Noninterest expense in 1997 also
included approximately $4.6 million in support and overhead expenses related to
the separate data processing, loan support and customer service operations of
VCNB and RNB prior to the conversion and integration of these functions into the
Company as well as for one time costs, i.e. new check printing, etc. of $1.6
million. A breakdown of noninterest expense by category is reflected below.
ANALYSIS OF CHANGES IN NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------------- ----------------------
DOLLARS IN MILLIONS 1997 AMOUNT % 1996 AMOUNT % 1995
- ----------------------------------------------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits................. $ 97.6 $ 20.6 26.8 $ 77.0 $ 11.6 17.7 $ 65.4
--------- ----- --------- --------- ----- --------- ---------
All other:
Professional............................... 21.5 7.8 56.9 13.7 4.9 55.7 8.8
Net occupancy of premises.................. 10.7 1.7 18.9 9.0 1.1 13.9 7.9
Data processing............................ 9.0 0.3 4.5 8.7 1.2 16.0 7.5
Promotion.................................. 8.0 2.4 42.9 5.6 1.2 27.3 4.4
Depreciation............................... 6.1 1.0 19.6 5.1 1.0 24.4 4.1
Office supplies............................ 7.3 2.5 52.1 4.8 0.8 20.0 4.0
FDIC insurance............................. 0.4 0.4 NM -- (2.5) (100.0) 2.5
Amortization of goodwill and core deposit
intangibles.............................. 5.6 4.1 273.3 1.5 1.5 NM --
Equipment.................................. 2.5 0.3 13.6 2.2 (0.1) (4.3) 2.3
Lender liability settlement................ (2.5) (5.9) NM 3.4 3.4 NM --
Other operating............................ 18.1 4.3 31.2 13.8 2.0 16.9 11.8
--------- ----- --------- --------- ----- --------- ---------
86.7 18.9 27.9 67.8 14.5 27.2 53.3
--------- ----- --------- --------- ----- --------- ---------
ORE income..................................... (2.6) (2.4) NM (0.2) 0.4 (66.7) (0.6)
--------- ----- --------- --------- ----- --------- ---------
Total.................................. $ 181.7 $ 37.1 25.7 $ 144.6 $ 26.5 22.4 $ 118.1
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
</TABLE>
A-11
<PAGE>
Staff expense increased 26.8% in 1997 compared to a 17.7% increase in 1996.
The increase in 1997 is the result of the additional personnel that joined the
Bank as a result of the acquisitions of VCNB and RNB, the hiring of new
personnel in the Bank's expansion efforts and higher costs associated with
performance incentives and contributions to the Profit Sharing Plan. The
increase in 1996 is due to the acquisition of First LA and the hiring of new
personnel. On a full-time equivalent basis, staff levels have increased to
approximately 1,570 at December 31, 1997 from 1,320 at December 31, 1996. Staff
levels are expected to increase in 1998 as a result of the completion of the
acquisition of HB in January 1998 and current hiring plans. See "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
Excluding ORE income, the remaining expense categories increased $18.9
million, or 27.9%, between 1996 and 1997. The increase in professional expense
resulted primarily from $3.1 million in consulting and other professional fees
attributed to the conversion to the new data processing system which was
completed in the latter part of 1997. The increase in promotion expense resulted
from the Company's expanded advertising program. The increase in depreciation
expense resulted from the Company's expenditures during 1997 totaling $17.7
million for new PC's, item processing and telecommunications equipment as well
as the major remodeling of City National Center, the Company's headquarters
building. The increase in office expense resulted from higher office supplies
and telecommunications expenses due to the increased number of personnel and
branches, primarily resulting from the acquisitions of VCNB and RNB. In March
1997, the Company reached agreements with its insurance carriers regarding a
lender liability lawsuit which it settled with a former bank customer in the
fourth quarter of 1996. The insurance reimbursements of $2.5 million have been
credited to other noninterest expense and offset most of the $3.4 million lender
liability charge recorded in the fourth quarter of 1996. Amortization of
goodwill and core deposit intangibles increased $4.1 million due to the
acquisitions of VCNB and RNB. The remaining other increases resulted from the
acquisitions of VCNB and RNB, including $1.7 million in acquisition related
charges in 1997 compared to $.7 million in 1996, higher operating losses and
other factors. Due to the acquisition of HB, most categories of noninterest
expense are expected to increase in 1998 above the 1997 levels, adjusted for the
nonrecurring expenses in 1997 discussed above. See "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
Between 1995 and 1996, the remaining expense categories, excluding ORE
income, increased $14.5 million, or 27.2%, due to higher professional expenses
for consulting and other professional services, increases in occupancy, data
processing, depreciation and office expense and amortization of core deposit
intangibles expense of $1.5 million 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.
The Company was sufficiently concerned in 1996 and early 1997 about issues
associated with the programming code in existing computer systems as the
millenium (Year 2000) approaches, that in February 1997, the Company terminated
its data processing agreement for facilities managed service utilizing the
Bank's developed core processing systems with ALLTEL Information Services, Inc.
This agreement had been scheduled to expire on December 31, 2000.
Later in 1997, the Company signed a seven year agreement, calling for annual
minimum payments of $1.2 million, adjusted for inflation, with a new third party
provider, Marshall & Ilsley Corporation. This company is among the largest bank
data processing servicers in the U.S. and one who had the capability of being
Year 2000 compliant. In addition, the Company is utilizing both internal and
external resources to identify, correct, reprogram or replace, and test all
other systems for Year 2000 compliance. It is also completing the process of
determining whether major credit customers and suppliers are aware of the Year
2000 implications on their businesses and are taking appropriate steps to be in
compliance.
The FFIEC Statement (see Supervision and Regulation--YEAR 2000 ISSUES,
above) required the Company to complete, by September 30, 1997, a risk
assessment which, among other things, identified all
A-12
<PAGE>
information and environmental systems required to be renovated or modified to
become Year 2000 compliant and an evaluation of all third-party service or
software providers to determine their Year 2000 compliance. In part, because of
the effort expanded in converting the core data processing systems and certain
other applications during 1997, these matters were not completed at September
30, 1997 as urged by the Statement. The Company anticipates they will complete
the risk assessment phase of the entire Year 2000 project by March 31, 1998.
Marshall & Ilsley Corporation and the Company expect to be fully Year 2000
compliant by December 31, 1998. The Company expects to spend approximately $3.5
million in capital and operating costs in this effort during 1998. The Company
expects that its normal data processing expense for 1998 will decrease from 1997
levels. See "Cautionary Statement for Purpose of the 'Safe Harbor' Provisions of
the Private Securities Litigation Reform Act of 1995", below.
ORE operations resulted in net income of $2.6 million, $.2 million and $.6
million in 1997, 1996 and 1995, respectively. The $2.6 million income from ORE
activities in 1997 was primarily due to the sale of residential lots located in
Los Angeles in the fourth quarter of 1997.
INCOME TAXES
The 1997 effective tax rate was 36.1% compared to 32.9% in 1996 and 38.0% in
1995. The effective rates differed from the applicable statutory federal tax
rate due to various factors including state taxes, tax exempt income,
amortization of nondeductible goodwill and recognition of previously unrecorded
deferred tax benefits.
The Company recognized $5.0 million and $.9 million in previously unrecorded
California deferred tax benefits in 1996 and 1995, 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 effective tax rate for 1998 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, the dividends received deduction for
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-13
<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 but there is some risk of accelerating
inflation leading to 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 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 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, 1997, the Company's and the Bank's Tier 1 capital, which is
comprised of common shareholders' equity as modified by certain regulatory
adjustments, amounted to $448.0 million and
A-14
<PAGE>
$381.6 million, respectively. At December 31, 1996, the Company's and the Bank's
Tier 1 capital amounted to $385.3 million and $322.0 million, respectively. The
increase from December 31, 1996 resulted from the retention of 1997 earnings,
the issuance of shares for the acquisitions of VCNB and RNB and 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,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
REGULATORY DECEMBER 31
WELL CAPITALIZED -------------------------------
STANDARDS 1997 1996 1995
----------------- --------- --------- ---------
<S> <C> <C> <C> <C>
CITY NATIONAL CORPORATION
Tier 1 leverage.............................................. 5.00% 9.19% 9.75% 11.17%
Tier 1 risk-based capital.................................... 6.00 10.99 13.26 13.60
Total risk-based capital..................................... 10.00 12.27 14.55 14.91
CITY NATIONAL BANK
Tier 1 leverage.............................................. 5.00 7.93 8.22 10.40
Tier 1 risk-based capital.................................... 6.00 9.50 11.24 12.64
Total risk-based capital..................................... 10.00 10.78 12.53 13.95
</TABLE>
The Company paid dividends of $.44 per share of common stock in 1997 and
$.36 per share of common stock in 1996. On January 28, 1998, the Board of
Directors authorized a regular quarterly cash dividend on common stock at an
increased rate of $.14 per share to shareholders of record on February 2, 1998,
payable on February 12, 1998.
On March 17, 1997, the Company announced a program for the repurchase of up
to 1.5 million shares of its common stock. At December 31, 1997, a total of
943,300 shares had been repurchased at a cost of $22.5 million, of which 563,928
shares remain in treasury at year-end. In January 1998, these shares were
reissued to cover the exercise of stock options and the majority of the stock
consideration for the HB acquisition.
On January 12, 1998, the Company's wholly owned subsidiary, City National
Bank, issued $125 million of 6 3/8% Subordinated Notes, due in 2008. On a
proforma basis, issuance of the Subordinated Notes would have increased the
Company's and the Bank's total risk-based capital at December 31, 1997 to 15.33%
and 13.90%, respectively.
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 76% and 75% of funding for
average total assets in 1997 and 1996, 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, on average, totaled $222.6 million
and $253.9 million in 1997 and 1996, respectively. Additionally, the Bank
increased its funding from other borrowings, primarily Federal Home Loan Bank
advances, to $338.9 million on average in 1997 from $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
A-15
<PAGE>
cost. The aggregate of these assets averaged $70.9 million during 1997, down
$29.7 million, or 29.5% 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 $607.2 million at December 31, 1997. In addition, the unpledged
portion of investment securities at December 31, 1997 totaled $66.5 million and
would be available as collateral for borrowing. Maturing loans also provide
liquidity, and $1,613.0 million of the Bank's loans are scheduled to mature in
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 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.
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 these balances may differ substantially from
their expected lives however. For example, checking accounts are all subject to
immediate withdrawal. Experience suggests that these accounts will have an
average life of several years. Also, certain loans (such as first mortgages) are
subject to prepayment. The cash flows 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 table on page A-19 shows the Company's interest rate gap position as of
December 31, 1997 and 1996. Rate sensitive assets exceed liabilities by $382
million over the first year of the cash flow horizon. The gap is the result of
the Company's natural composition of assets and liabilities, which include loans
tied to the prime and checking account deposits. This gap is reduced by interest
rate swaps. The Company has $425 million of notional principal in receive
fixed-pay LIBOR interest rate swaps, of which $250 million have maturities
greater than one year. The one year cumulative hedged gap is $132 million, or
about three percent of total assets. From December 31, 1996 to December 31,
1997, the Company's one year cumulative hedged gap increased from $58 million to
$132 million as a result of the Company's growth in assets being partially
funded by an increase in capital.
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.
The following table presents in tabular form information about the Company's
financial instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and related average
A-16
<PAGE>
interest rates by expected maturity dates and fair values as of December 31,
1997. Expected maturities of assets are contractual maturities. Interest-bearing
demand and savings deposits are included in the earliest maturity category, even
though withdrawal of these balances is not contractually required and may not
actually occur during that period. Average interest rates on variable rate
instruments are based upon the Company's interest rate forecast. Actual
maturities of interest-sensitive assets and liabilities could vary substantially
from expectations if different assumptions are used or if actual experience
differs from the assumptions used.
INTEREST-SENSITIVE FINANCIAL INSTRUMENT MATURITIES
<TABLE>
<CAPTION>
FAIR
(DOLLARS IN MILLIONS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE
- ---------------------------------- --------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Investment securities............. $ 13.4 $ 22.0 $ 19.4 $ 16.6 $ 14.4 $ 140.1 $ 225.9 $ 227.5
Average interest rate........... 6.92% 6.92% 6.55% 6.29% 6.72% 6.67% 6.65%
Loans
Commercial...................... 1,275.5 97.1 95.9 154.1 105.7 243.9 1,972.2 1,923.7
Average interest rate......... 7.84% 8.41% 8.09% 8.06% 8.41% 8.65% 8.03%
Real estate construction
loans........................... 101.4 31.9 11.0 -- -- 0.3 144.6 141.1
Average interest rate......... 9.64% 9.46% 9.46% 0.0% 0.0% 9.41% 9.56%
Real estate mortgage loans...... 222.1 73.5 70.7 61.6 75.7 182.6 686.2 658.7
Average interest rate......... 9.33% 9.17% 9.09% 8.79% 9.24% 8.83% 9.06%
Residential first mortgage
loans........................... 6.3 3.1 0.2 0.2 27.2 943.0 980.0 981.6
Average interest rate......... 8.05% 7.81% 7.82% 7.67% 7.60% 7.54% 7.77%
Installment loans............... 7.7 4.3 6.9 6.9 5.5 10.9 42.2 42.2
Average interest rate......... 9.67% 9.68% 9.72% 9.66% 9.65% 9.32% 9.62%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
assets...................... $ 1,626.4 $ 231.9 $ 204.1 $ 239.4 $ 228.5 $ 1,520.8 $ 4,051.1 $ 3,974.8
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
INTEREST-SENSITIVE LIABILITIES:
Deposits
Interest checking............... $ 439.1 $ $ $ $ $ $ 439.1 $ 439.1
Average interest rate......... 1.0% 1.0%
Savings......................... 171.1 171.1 171.1
Average interest rate......... 3.4% 3.4%
Money market.................... 773.3 773.3 773.3
Average interest rate......... 3.0% 3.0%
Time............................ 761.6 23.2 22.1 6.0 4.7 0.2 817.8 818.3
Average interest rate......... 5.31% 5.72% 5.63% 5.64% 5.93% 6.09% 5.33%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
liabilities $ 2,145.1 $ 23.2 $ 22.1 $ 6.0 $ 4.7 $ 0.2 $ 2,201.3 $ 2,201.8
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
</TABLE>
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 risk are much smaller. At December 31, 1997, 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.
A-17
<PAGE>
The table below shows the notional amounts of the Company's interest rate
swap maturities and average rates at December 31, 1997:
INTEREST RATE SWAP MATURITIES AND AVERAGE RATES
<TABLE>
<CAPTION>
FAIR
NOTIONAL AMOUNTS IN MILLIONS 1998 1999 2000 TOTAL VALUE
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Receive-fixed rate (hedge loans)
Notional amount................................................ $ 175.0 $ 125.0 $ 125.0 $ 425.0 $ 1.7(1)
Weighted average rate received................................. 5.81% 6.07% 6.29% 6.03%
Weighted average rate paid..................................... 5.94% 5.81% 5.81% 5.87%
</TABLE>
- ---------
(1) Estimated net gain to settle derivative contracts as of respective period
ends.
At December 31, 1997, the Company's outstanding foreign exchange contracts
totaled $10.7 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 December 31, 1997 had remaining maturities of six
months or less, with the exception of $1.5 million which had remaining
maturities ranging between six months and 24 months.
A-18
<PAGE>
INTEREST RATE GAP POSITION
<TABLE>
<CAPTION>
SUBJECT TO OVER 10
IMMEDIATE REMAINDER OF YEARS > 1 YEARS > 6 YEARS &
DOLLARS IN MILLIONS REPRICING 1ST QUARTER FIRST YEAR THROUGH 5 THROUGH 10 NON-STATED TOTAL
- ------------------------------ ----------- ----------- ------------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
ASSETS
Investments................. $ 181.6 $ 85.5 $ 112.6 $ 515.8 $ 57.5 $ 60.7 $ 1,013.7
Net Loans................... 1,518.7 612.6 384.7 718.9 314.9 137.7 3,687.5
Non Earning Assets.......... 227.3 7.7 34.1 281.7 -- 550.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Assets.............. 1,927.6 705.8 531.4 1,516.4 372.4 198.4 5,252.0
----------- ----------- ------ ----------- ------ ------------- ---------
LIABILITIES
Checking Accounts........... 1,027.0 -- -- 1,000.0 -- -- 2,027.0
Other Core Deposits......... 566.2 62.0 118.5 841.4 0.1 -- 1,588.2
CDs over $100M & Other
Time...................... -- 406.7 183.6 22.7 0.1 -- 613.1
----------- ----------- ------ ----------- ------ ------------- ---------
Total Deposits.............. 1,593.2 468.7 302.1 1,864.1 0.2 -- 4,228.3
Total Borrowed Funds........ 259.2 150.0 9.8 50.0 -- -- 469.0
Other Liabilities........... -- -- -- 46.0 -- -- 46.0
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities........... 1,852.4 618.7 311.9 1,960.1 0.2 -- 4,743.3
Total Capital............... -- -- -- -- -- 508.7 508.7
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities and
Capital................. 1,852.4 618.7 311.9 1,960.1 0.2 508.7 5,252.0
----------- ----------- ------ ----------- ------ ------------- ---------
Gap........................... $ 75.2 $ 87.1 $ 219.5 $ (443.7) $ 372.2 $ (310.3) $ --
----------- ----------- ------ ----------- ------ ------------- ---------
----------- ----------- ------ ----------- ------ ------------- ---------
Cumulative Gap................ $ 75.2 $ 162.3 $ 381.8 $ (61.9) $ 310.3 $ --
Interest Rate Swaps........... (425.0) 50.0 125.0 250.0 -- --
----------- ----------- ------ ----------- ------ -------------
Hedged Gap.................... $ (349.8) $ 137.1 $ 344.5 $ (193.7) $ 372.2 $ (310.3)
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap......... $ (349.8) $ (212.7) $ 131.8 $ (61.9) $ 310.3 $ --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap as a %
of Total Assets............. (7)% (4)% 3% (1)% 6% --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
DECEMBER 31, 1996
ASSETS
Investments................. $ 183.2 $ 47.7 $ 64.1 $ 556.5 $ 73.5 $ 80.4 $ 1,005.4
Net Loans................... 853.5 264.7 517.2 758.9 259.4 55.6 2,709.3
Non Earning Assets.......... 234.7 8.4 24.9 233.8 -- -- 501.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Assets.............. 1,271.4 320.8 606.2 1,549.2 332.9 136.0 4,216.5
----------- ----------- ------ ----------- ------ ------------- ---------
LIABILITIES
Checking Accounts........... 637.1 -- -- 1,005.5 -- -- 1,642.6
Other Core Deposits......... 429.9 30.3 101.8 820.3 0.7 -- 1,383.0
CDs over $100M & Other
Time...................... -- 179.5 169.0 12.4 -- -- 360.9
----------- ----------- ------ ----------- ------ ------------- ---------
Total Deposits.............. 1,067.0 209.8 270.8 1,838.2 0.7 -- 3,386.5
Total Borrowed Funds........ 293.2 50.0 25.0 9.8 -- -- 378.0
Other Liabilities........... -- -- -- 51.2 -- -- 51.2
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities........... 1,360.2 259.8 295.8 1,899.2 0.7 -- 3,815.7
Total Capital............... -- -- -- -- -- 400.8 400.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities and
Capital................. 1,360.2 259.8 295.8 1,899.2 0.7 400.8 4,216.5
----------- ----------- ------ ----------- ------ ------------- ---------
Gap........................... $ (88.8) $ 61.0 $ 310.4 $ (350.0) $ 332.2 $ (264.8) $ --
----------- ----------- ------ ----------- ------ ------------- ---------
----------- ----------- ------ ----------- ------ ------------- ---------
Cumulative Gap................ $ (88.8) $ (27.8) $ 282.6 $ (67.4) $ 264.8 $ --
Interest Rate Swaps........... (325.0) -- 100.0 225.0 -- --
----------- ----------- ------ ----------- ------ -------------
Hedged Gap.................... $ (413.8) $ 61.0 $ 410.4 $ (125.0) $ 332.2 $ (264.8)
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap......... $ (413.8) $ (352.8) $ 57.6 $ (67.4) $ 264.8 $ --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap as a %
of Total Assets............. (10)% (8)% 1% (2)% 6% --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
</TABLE>
A-19
<PAGE>
SECURITIES
The Company classifies its securities as investment, available-for-sale or
trading. Those 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.
INVESTMENT SECURITIES
Investment securities at December 31, 1997 were up $30.7 million or 15.7%
from 1996. This increase was due primarily to the purchase of state and
municipal securities during 1997. The average duration of total investment
securities was 2.7 years at December 31, 1997 compared to 2.6 years at the end
of 1996.
The following table shows the maturities of investment securities at
December 31, 1997.
<TABLE>
<CAPTION>
ONE YEAR OR LESS OVER 1 YEAR THRU 5 YEARS OVER 5 YEARS THRU 10
YEARS OVER 10 YEARS
------------------------- ------------------------- ------------------------- -------------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ----------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities........... $ -- -- % $ 3,366 7.30% $ 21,033 5.88% $ 82,987 6.72%
State and municipal
securities........... 12,373 6.85 67,892 6.61 22,289 7.11 5,013 6.86
Other securities(2).... 1,010 7.73 1,205 7.62 1,000 6.74 7,766 5.99
----------- --- ----------- --- ----------- --- ----------- ---
Total.......... $ 13,383 6.92% $ 72,463 6.66% $ 44,322 6.52% $ 95,766 6.67%
----------- --- ----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- --- ----------- ---
Fair value..... $ 13,419 $ 73,290 $ 44,692 $ 96,064
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
TOTAL 1997 TOTAL 1996 TOTAL 1995
----------------------- ----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ----------------------- --------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities........... $ 107,386 6.57% $ 97,638 6.45% $ 80,935 6.14%
State and municipal
securities........... 107,567 6.75 88,445 6.72 19,833 7.61
Other securities(2).... 10,981 6.40 9,146 6.49 9,238 6.00
--------- --- --------- --- --------- ---
Total.......... $ 225,934 6.65% $ 195,229 6.57% $ 110,006 6.39%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
Fair value..... $ 227,465 $ 194,655 $ 110,524
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
AVAILABLE-FOR-SALE SECURITIES
At December 31, 1997, securities available-for-sale totaled $607.2 million,
a decrease of $8.7 million or 1.4% from December 31, 1996. This decrease was due
to the redeployment of proceeds generated from the maturities and sales of
available-for-sale securities to fund the growth in loans. The average duration
of total available-for-sale securities at December 31, 1997 was 2.8 years
compared with 2.1 years at December 31, 1996.
The following table shows the maturities of available-for-sale securities at
December 31, 1997.
<TABLE>
<CAPTION>
ONE YEAR OR LESS OVER 1 YEAR THRU 5 OVER 5 YEARS THRU 10
YEARS YEARS OVER 10 YEARS
------------------------- ----------------------- ------------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------- ----------- ------------ --------- ------------ ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
securities.......... $ 9,953 5.00% $ 239,610 6.38% $ 7,494 5.88% $ -- -- %
Mortgage-backed
securities.......... -- -- -- -- -- -- 172,075 6.66
State and municipal
securities.......... -- -- 4,911 6.61 1,086 7.14 -- --
Other securities(2)... 31,164 10.69 58,836 9.79 -- -- 82,059 7.60
----------- ----- --------- --- ----------- --- --------- ---
Total......... $ 41,117 9.31% $ 303,357 7.05% $ 8,580 6.04% $ 254,134 6.96%
----------- ----- --------- --- ----------- --- --------- ---
----------- ----- --------- --- ----------- --- --------- ---
Amortized
Cost........ $ 40,777 $ 299,159 $ 8,586 $ 249,388
----------- --------- ----------- ---------
----------- --------- ----------- ---------
<CAPTION>
TOTAL 1997 TOTAL 1996 TOTAL 1995
----------------------- ----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------- --------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
securities.......... $ 257,057 6.31% $ 372,316 5.69% $ 587,950 5.31%
Mortgage-backed
securities.......... 172,075 6.66 127,936 6.28 212,704 6.46
State and municipal
securities.......... 5,997 6.71 14,067 6.76 17,386 7.86
Other securities(2)... 172,059 8.91 101,544 10.74 47,361 8.58
--------- --- --------- ----- --------- ---
Total......... $ 607,188 7.15% $ 615,863 6.67% $ 865,401 5.82%
--------- --- --------- ----- --------- ---
--------- --- --------- ----- --------- ---
Amortized
Cost........ $ 597,910 $ 619,580 $ 862,276
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities, except preferred stock, are reported in the "over ten
years" category
A-20
<PAGE>
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 although corporate loans, which comprise
approximately 9% of the total loan portfolio at December 31, 1997, are primarily
to borrowers located out of state. The Bank has no foreign loans.
LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial(1).............................. $ 1,972,232 $ 1,334,577 $ 1,080,125 $ 906,417 $ 944,459
Residential first mortgage................. 980,040 882,573 593,546 212,595 6,586
Real estate--construction.................. 144,558 92,322 81,318 31,201 11,699
Real estate--commercial mortgage........... 686,188 499,377 553,095 457,030 620,574
Installment................................ 42,206 30,586 38,527 36,675 45,485
------------ ------------ ------------ ------------ ------------
Total loans................................ $ 3,825,224 $ 2,839,435 $ 2,346,611 $ 1,643,918 $ 1,628,803
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
- ---------
(1) Commercial includes 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, 1997 were $3,825.2 million, up $985.8 million or
34.7% from the previous year-end.
Reflecting increases in loan demand and in the purchasing of participations
in corporate loans, commercial loans accounted for almost two thirds of the
increase. Commercial loans increased $637.7 million or 47.8% during 1997 and
represented 51.6% of the Company's total loan portfolio at December 31, 1997.
Residential first mortgage loans, which comprised 25.6% of total loans at
December 31, 1997, continued a five-year growth trend, increasing $97.5 million
to $980.0 million or 11% at December 31, 1997. At December 31, 1997, 64% of the
portfolio was originated internally and the balance was purchased from third
parties. The Company expects continued runoff of the purchased residential first
mortgage loan portfolio in 1998. See "Cautionary Statement for Purposes of the
'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995", above.
Commercial mortgage real estate loans, representing 17.9% of the December
31, 1997 loan portfolio, increased $186.8 million or 37.4% during the year to
$686.2 million at December 31, 1997. The increase is primarily attributable to
loan portfolios acquired in the VCNB and RNB acquisitions.
At December 31, 1997, 53.2% of commercial loans, 36.4% of real estate loans
and 14.2% of installment loans outstanding were floating interest rate loans.
Floating rate loans comprised 44.8% of the total loan portfolio at December 31,
1997 and 50.6% at December 31, 1996. Total loans at December 31, 1997 were
comprised of 42.2% due in one year or less, 21.7% due in 1-5 years and 36.1% 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.
A-21
<PAGE>
LOAN MATURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------
RESIDENTIAL REAL ESTATE--
FIRST REAL ESTATE-- COMMERCIAL
DOLLARS IN THOUSANDS COMMERCIAL MORTGAGE CONSTRUCTION MORTGAGE INSTALLMENT TOTAL
- -------------------------------------------- ------------ ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate maturities of loan balances due:
In one year or less
Interest rates--floating................ $ 704,892 $ 156 $ 78,358 $ 130,432 $ 187 $ 914,025
Interest rates--fixed................... 570,500 6,188 23,072 91,673 7,561 698,994
After one year but within five years
Interest rates--floating................ 243,160 890 42,848 162,145 1,456 450,499
Interest rates--fixed................... 209,756 29,818 -- 119,304 22,104 380,982
After five years
Interest rates--floating................ 101,409 192,545 -- 52,036 4,371 350,361
Interest rates--fixed................... 142,515 750,443 280 130,598 6,527 1,030,363
------------ ----------- ------------- ------------- ----------- ------------
Total loans......................... $ 1,972,232 $ 980,040 $ 144,558 $ 686,188 $ 42,206 $ 3,825,224
------------ ----------- ------------- ------------- ----------- ------------
------------ ----------- ------------- ------------- ----------- ------------
</TABLE>
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.
Following is a breakdown of construction loans by collateral type.
Construction loans collateralized by industrial property represented $42.7
million of the increase of $52.2 million from December 31, 1996 to December 31,
1997.
REAL ESTATE CONSTRUCTION LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Industrial................................................................................. $ 54,628 $ 11,913
Office building............................................................................ 8,712 3,642
Shopping centers........................................................................... 15,314 18,866
1-4 family (includes land)................................................................. 34,304 32,915
Condo/apartment............................................................................ 10,189 10,878
Other...................................................................................... 21,411 14,108
---------- ---------
Total.............................................................................. $ 144,558 $ 92,322
---------- ---------
---------- ---------
</TABLE>
A-22
<PAGE>
At year-end 1997, commercial real estate mortgage loans totaled $686.2
million, or 17.9% of total loans, compared with 17.6% and 23.6% at year-end 1996
and 1995, respectively. The increase in commercial real estate mortgage loans
from 1996 to 1997 was due to the acquisitions of VCNB and RNB and was
concentrated in the industrial and condo/apartment categories. The Company has
not actively sought new originations of commercial real estate mortgage loans
for the last several years. Following is a breakdown of commercial real estate
mortgage loans by type.
COMMERCIAL REAL ESTATE MORTGAGE LOANS BY TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Industrial................................................................................ $ 225,921 $ 109,205
Office building........................................................................... 88,973 67,207
Shopping centers.......................................................................... 70,816 41,842
1-4 family................................................................................ 9,186 8,261
Condo/apartment........................................................................... 95,485 55,544
Land, nonresidential...................................................................... 7,270 14,128
Churches/religious........................................................................ 10,560 18,588
Equity lines of credit.................................................................... 42,249 28,052
Other..................................................................................... 135,728 156,550
---------- ----------
Total............................................................................. $ 686,188 $ 499,377
---------- ----------
---------- ----------
</TABLE>
A-23
<PAGE>
RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning nonaccrual loans, ORE,
accruing loans which are contractually past due 90 days or more as to interest
or principal payments and still accruing, and restructured loans:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ----------------------------------------------------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate mortgage........................................... $ 19,243 $ 25,661 $ 39,536 $ 35,534 $ 51,523
Commercial..................................................... 6,589 15,882 8,316 23,267 27,780
Installment.................................................... 1,734 -- 272 -- --
--------- --------- --------- --------- ----------
Total.................................................... 27,566 41,543 48,124 58,801 79,303
ORE.............................................................. 2,126 15,116 7,439 4,726 2,052
--------- --------- --------- --------- ----------
Total nonaccrual loans and ORE................................... $ 29,692 $ 56,659 $ 55,563 $ 63,527 $ 81,355
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Total nonaccrual loans as a percentage of total loans............ 0.72% 1.46% 2.05% 3.58% 4.87%
Total nonaccrual loans and ORE as a percentage of total loans and
ORE............................................................ 0.78 1.98 2.36 3.85 4.99
Allowance for credit losses to total loans....................... 3.60 4.58 5.60 6.41 6.78
Allowance for credit losses to nonaccrual loans.................. 499.75 313.14 273.28 179.15 139.34
Assets held for accelerated disposition.......................... $ -- $ -- $ -- $ -- $ 17,450
Loans past due 90 days or more on accrual status:
Real estate mortgage........................................... $ 13,370 $ 4,076 $ 3,816 $ 2,830 $ 17,412
Commercial..................................................... 9,226 8,076 2,623 1,068 11,382
Installment.................................................... 3,596 292 58 404 155
--------- --------- --------- --------- ----------
Total.................................................... $ 26,192 $ 12,444 $ 6,497 $ 4,302 $ 28,949
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Restructured loans:
On accrual status.............................................. $ 2,813 $ 2,569 $ 5,483 $ 2,061 $ 958
On nonaccrual status........................................... 1,286 -- 1,707 7,043 --
--------- --------- --------- --------- ----------
Total.................................................... $ 4,099 $ 2,569 $ 7,190 $ 9,104 $ 958
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
A-24
<PAGE>
The table below summarizes the approximate changes in nonaccrual loans for
the years ended December 31, 1997 and 1996.
CHANGES IN NONACCRUAL LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
DOLLARS IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Balance, beginning of the year................................................................ $ 41,543 $ 48,124
Loans placed on nonaccrual.................................................................... 32,930 44,353
Loans acquired: RNB........................................................................... 1,337 --
Loans acquired: VCNB.......................................................................... 1,101 --
Charge offs................................................................................... (12,788) (13,608)
Loans returned to accrual status.............................................................. (9,798) (11,034)
Repayments (including interest applied to principal).......................................... (23,598) (14,995)
Transfers to ORE.............................................................................. (3,161) (11,297)
--------- ----------
Balance, end of year.......................................................................... $ 27,566 $ 41,543
--------- ----------
--------- ----------
</TABLE>
The additional interest income that would/(would not) have been recorded
from nonaccrual loans, if the loans had not been on nonaccrual status was $(.1)
million, $2.1 million and $4.6 million for the years ended December 31, 1997,
1996 and 1995, 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 $5.5 million, $4.1 million and $2.7 million for the
years ended December 31, 1997, 1996, and 1995, respectively, from collection of
interest related to nonaccrual loans. Interest income not recognized on
nonaccrual loans reduced the net interest margin by 0, 6, and 17 basis points
for the years ended December 31, 1997, 1996, and 1995, respectively.
Bank policy requires that a loan 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, 1997, in addition to loans disclosed above as past due,
nonaccrual or restructured, management also identified $23.8 million of loans
about which the ability of the borrowers to comply with the present loan payment
terms in the future is questionable. However, the inability of the borrowers to
comply with repayment terms was not sufficiently probable to place the loan on
nonaccrual status. This amount was determined based on analysis of information
known to management about the borrower's financial condition and current and
expected economic conditions. 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. Estimated potential losses from these potential problem loans
have been provided for in determining the allowance for credit losses.
At December 31, 1997, the allowance for credit losses was 3.60% of gross
loans compared to 4.58% at December 31, 1996. The allowance at December 31, 1997
was equal to 499.8% of total nonaccrual loans, up from 313.1% at December 31,
1996.
A-25
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding during the year and
changes in the allowance for credit losses for the five-year period 1993 to
1997.
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- --------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding.... $3,387,784 $2,539,323 $1,758,671 $1,537,997 $1,762,663
--------- --------- --------- --------- ---------
Balance of allowance for credit losses,
beginning of year.................... $ 130,089 $ 131,514 $ 105,343 $ 110,499 $ 136,095
--------- --------- --------- --------- ---------
Loans charged off:
Commercial loans..................... (14,651) (14,647) (11,124) (22,038) (56,012)
Real estate loans--construction...... -- -- -- -- (13,949)
Real estate loans--commercial
mortgage........................... (4,275) (5,338) (5,869) (26,354) (42,546)
Residential first mortgage........... (474) (253) -- -- --
Installment loans.................... (112) (104) (48) (128) (621)
--------- --------- --------- --------- ---------
Total loans charged off............ (19,512) (20,342) (17,041) (48,520) (113,128)
--------- --------- --------- --------- ---------
Recoveries of loans previously charged
off:
Commercial loans..................... 11,098 13,325 22,045 34,163 27,842
Real estate loans--construction...... -- -- -- 161 20
Real estate loans--commercial
mortgage........................... 8,894 5,313 1,862 758 767
Residential first mortgage........... 58 -- -- -- --
Installment loans.................... 118 279 228 747 215
--------- --------- --------- --------- ---------
Total recoveries................... 20,168 18,917 24,135 35,829 28,844
--------- --------- --------- --------- ---------
Net loans (charged off) recovered...... 656 (1,425) 7,094 (12,691) (84,284)
Additions to allowance charged to
operating expense.................... -- -- -- 7,535 60,163
Acquisition of First LA................ -- -- 19,077 -- --
Acquisition of VCNB.................... 4,637 -- -- -- --
Acquisition of RNB..................... 2,379 -- -- -- --
Other(1)............................... -- -- -- -- (1,475)
--------- --------- --------- --------- ---------
Balance, end of year................... $ 137,761 $ 130,089 $ 131,514 $ 105,343 $ 110,499
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net (charge offs) recoveries
to average loans..................... 0.02% (0.06)% 0.40% (0.83)% (4.78)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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-26
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
ALLOWANCE AMOUNT PERCENT OF LOANS TO TOTAL LOANS
----------------------------------------------------- ------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993 1997 1996 1995 1994
- ------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial..................... $ 91,914 $ 75,754 $ 37,778 $ 55,179 $ 53,110 51% 47% 46% 55%
Real estate-construction....... 3,357 2,405 4,550 2,341 1,410 4 3 3 2
Real estate-commercial
mortgage..................... 27,378 37,748 77,730 43,745 55,020 18 18 24 28
Residential first mortgage..... 14,750 13,283 10,705 3,200 100 26 31 25 13
Installment.................... 362 899 751 878 859 1 1 2 2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total.................. $ 137,761 $ 130,089 $ 131,514 $ 105,343 $ 110,499 100% 100% 100% 100%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DOLLARS IN THOUSANDS 1993
- ------------------------------- ---------
<S> <C>
Commercial..................... 58%
Real estate-construction....... 1
Real estate-commercial
mortgage..................... 38
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 1997, an increased portion of the allowance
for credit losses was allocated to the commercial loan category.
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 expected realizable value 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, 1997 and 1996, the Company had identified impaired loans
with recorded investments of $16.6 million and $33.3 million, respectively.
Allowances of $.5 million and $.5 million on loans with outstanding balances of
$3.0 million and $3.3 million, respectively, at December 31, 1997 and 1996,
respectively, representing the difference between the value of the collateral
supporting the loans and their outstanding balance are 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 $2.1 million at year end 1997 compared to $15.1
million a year ago due to sale of existing properties and a significant
reduction in the amount of new foreclosures. The Company's policy is to record
these properties at estimated fair value, net of 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-27
<PAGE>
DEPOSITS
The maturity distribution of time deposits of $100,000 or more at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
PUBLIC TIME CERTIFICATES
DOLLARS IN THOUSANDS DEPOSITS OF DEPOSIT TOTAL
- ---------------------------------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Under 3 months.............................................................. $ 54,845 $ 220,745 $ 275,590
4 to 12 months.............................................................. 14,100 174,664 188,764
1 to 5 years................................................................ 3,004 116,756 119,760
Over 5 years................................................................ 3,316 25,698 29,014
----------- ----------- ----------
Total............................................................... $ 75,265 $ 537,863 $ 613,128
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
At December 31, 1997 and 1996, the aggregate amount of deposits by foreign
depositors in domestic offices totaled $31.8 million and $30.2 million,
respectively, the majority of which was interest bearing. The Bank had brokered
deposits of $21.7 million and $18.4 million, at December 31, 1997 and 1996,
respectively.
SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings and weighted average
rates.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------ ------------------------------------ ----------------------
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......... $ 206,427 $ 222,617 5.27% $ 194,549 $ 253,853 5.06% $ 258,353 $ 287,015
Other short-term borrowings..... 212,575 315,886 5.21 148,642 232,379 5.52 195,100 104,480
<CAPTION>
DOLLARS IN THOUSANDS AVERAGE RATE
- -------------------------------- ------------
<S> <C>
Federal funds purchased and
securities sold under
repurchase agreements......... 5.72%
Other short-term borrowings..... 5.58
</TABLE>
- ---------
A-28
<PAGE>
The following table summarizes quarterly operating results for 1997 and
1996.
1997 QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
- ----------------------------------------------- ---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
From loans................................. $ 70,011 $ 75,017 $ 78,651 $ 80,378 $ 304,057
From investments........................... 13,296 13,679 13,544 13,420 53,939
---------- ---------- ------------- ------------ -----------
83,307 88,696 92,195 93,798 357,996
Interest expense............................... (23,535) (25,904) (27,612) (27,277) (104,328)
---------- ---------- ------------- ------------ -----------
Net interest income............................ 59,772 62,792 64,583 66,521 253,668
Provision for credit losses.................... -- -- -- -- --
---------- ---------- ------------- ------------ -----------
Net interest income after provision for credit
losses....................................... 59,772 62,792 64,583 66,521 253,668
Noninterest income............................. 12,902 13,676 13,272 14,616 54,466
Gain (loss) on sale of securities.............. (277) (262) (224) (285) (1,048)
Noninterest expense............................ (43,547) (45,725) (45,744) (49,308) (184,324)
ORE (expense) income........................... (378) 411 797 1,737 2,567
---------- ---------- ------------- ------------ -----------
Income before taxes............................ 28,472 30,892 32,684 33,281 125,329
Income taxes................................... (10,469) (11,334) (11,790) (11,603) (45,196)
---------- ---------- ------------- ------------ -----------
Net income..................................... $ 18,003 $ 19,558 $ 20,894 $ 21,678 $ 80,133
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, basic.................... $ 0.39 $ 0.42 $ 0.45 $ 0.47 $ 1.74(1)
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, diluted.................. $ 0.38 $ 0.41 $ 0.44 $ 0.45 $ 1.68
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
(1) Due to rounding quarterly per share amounts do not add up to total
1996 QUARTERLY OPERATING RESULTS
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 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, basic.................... $ 0.36 $ 0.37 $ 0.41 $ 0.38 $ 1.52
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, diluted.................. $ 0.35 $ 0.36 $ 0.39 $ 0.37 $ 1.47
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
</TABLE>
A-29
<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-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of
City National Corporation:
We have audited the accompanying consolidated balance sheets of City
National Corporation and subsidiaries as of December 31, 1997 and 1996 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,
1997. 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 assurance 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, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 15, 1998
A-31
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................. $ 327,398 $ 331,046
Federal funds sold.................................................................. 150,000 151,200
Interest--bearing deposits in other banks........................................... 301 10,978
Investment securities (fair value $227,465 in 1997 and $194,655 in 1996)............ 225,934 195,229
Securities available-for-sale (cost $597,910 in 1997 and $619,580 in 1996).......... 607,188 615,863
Trading account securities.......................................................... 30,279 32,129
Loans............................................................................... 3,825,224 2,839,435
Less allowance for credit losses.................................................... 137,761 130,089
------------ ------------
Net loans......................................................................... 3,687,463 2,709,346
Leveraged leases.................................................................... 5,471 6,147
Premises and equipment, net......................................................... 43,402 24,196
Customers' acceptance liability..................................................... 1,553 2,339
Other real estate................................................................... 2,126 15,116
Deferred tax asset.................................................................. 58,815 65,291
Goodwill and core deposit intangibles............................................... 54,921 10,083
Other assets........................................................................ 57,181 47,533
------------ ------------
Total assets...................................................................... $ 5,252,032 $ 4,216,496
------------ ------------
------------ ------------
LIABILITIES
Demand deposits..................................................................... $ 2,027,014 $ 1,642,558
Interest checking deposits.......................................................... 439,071 386,211
Money market deposits............................................................... 773,291 714,127
Savings deposits.................................................................... 171,100 136,691
Time deposits--under $100,000....................................................... 204,744 146,076
Time deposits--$100,000 and over.................................................... 613,128 360,860
------------ ------------
Total deposits....................................................................... 4,228,348 3,386,523
Federal funds purchased and securities sold under repurchase agreements............. 206,427 194,549
Other short-term borrowings......................................................... 212,575 148,642
Long-term debt...................................................................... 50,000 34,800
Other liabilities................................................................... 44,459 48,896
Acceptances outstanding............................................................. 1,553 2,339
------------ ------------
Total liabilities................................................................. 4,743,362 3,815,749
------------ ------------
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-- 46,700,891 shares in
1997 and 46,302,782 shares in 1996................................................ 46,701 46,303
Additional paid-in capital.......................................................... 297,654 275,610
Unrealized gain (loss) on available-for-sale securities............................. 5,349 (2,149)
Retained earnings................................................................... 173,089 113,266
Treasury shares, at cost--563,928 shares in 1997 and 2,394,600 shares in 1996....... (14,123) (32,283)
------------ ------------
Total shareholders' equity........................................................ 508,670 400,747
------------ ------------
Total liabilities and shareholders' equity........................................ $ 5,252,032 $ 4,216,496
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-32
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...................................................... $ 304,057 $ 224,702 $ 168,862
Interest on federal funds sold and securities purchased under resale
agreements.................................................................... 1,301 3,562 7,013
Interest on investments securities:
U. S. Treasury and federal agency securities.................................. 7,023 6,829 25,853
Municipal securities.......................................................... 4,753 2,607 1,091
Other securities.............................................................. 758 2,089 2,280
Interest on securities available-for-sale....................................... 37,539 40,485 10,480
Interest on trading account..................................................... 2,565 1,849 2,015
--------- --------- ---------
Total....................................................................... 357,996 282,123 217,594
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits............................................................ 73,289 54,756 32,039
Interest on federal funds purchased and securities sold under repurchase
agreements.................................................................... 11,731 12,835 16,404
Interest on other short-term borrowings......................................... 16,470 12,835 5,829
Interest on long-term debt...................................................... 2,838 1,963 1,059
--------- --------- ---------
Total....................................................................... 104,328 82,389 55,331
--------- --------- ---------
Net interest income............................................................. 253,668 199,734 162,263
Provision for credit losses..................................................... -- -- --
--------- --------- ---------
Net interest income after provision for credit losses........................... 253,668 199,734 162,263
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts............................................. 14,321 10,798 8,073
Investment services............................................................. 13,221 11,453 8,779
Trust fees...................................................................... 8,304 7,176 6,496
International services.......................................................... 7,271 5,181 3,939
Gain (loss) on sale of assets................................................... 1,604 1,124 (83)
Gain (loss) on sale of securities............................................... (1,048) 187 (596)
All other income................................................................ 9,745 8,076 7,958
--------- --------- ---------
Total....................................................................... 53,418 43,995 34,566
--------- --------- ---------
NONINTEREST EXPENSE
Salaries and other employee benefits............................................ 97,634 77,011 65,375
Professional.................................................................... 21,509 13,698 8,836
Net occupancy of premises....................................................... 10,659 8,976 7,923
Data processing................................................................. 9,052 8,659 7,476
Promotion....................................................................... 7,972 5,563 4,419
Depreciation.................................................................... 6,144 5,143 4,120
Office supplies................................................................. 7,286 4,828 3,955
FDIC insurance.................................................................. 419 2 2,486
Equipment....................................................................... 2,460 2,249 2,272
Amortization of goodwill and core deposit intangibles........................... 5,619 1,522 --
Other operating................................................................. 15,570 17,144 11,822
ORE income...................................................................... (2,567) (200) (608)
--------- --------- ---------
Total....................................................................... 181,757 144,595 118,076
--------- --------- ---------
INCOME BEFORE INCOME TAXES...................................................... 125,329 99,134 78,753
Income tax expense.............................................................. 45,196 32,571 29,961
--------- --------- ---------
NET INCOME...................................................................... $ 80,133 $ 66,563 $ 48,792
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, BASIC..................................................... $ 1.74 $ 1.52 $ 1.08
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, DILUTED................................................... $ 1.68 $ 1.47 $ 1.06
--------- --------- ---------
--------- --------- ---------
Shares used to compute income per share, basic.................................. 46,018 43,888 45,198
--------- --------- ---------
--------- --------- ---------
Shares used to compute income per share, diluted................................ 47,809 45,146 45,886
--------- --------- ---------
--------- --------- ---------
Dividends per share............................................................. $ 0.44 $ 0.36 $ 0.26
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-33
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $ 80,133 $ 66,563 $ 48,792
Adjustments to net income:
Writedowns on ORE.............................................................. -- 229 96
Gain on sales of ORE........................................................... (3,730) (325) (1,055)
Depreciation................................................................... 6,144 5,143 4,120
Amortization of goodwill and core deposit intangibles.......................... 5,619 1,522 --
Net (increase) decrease in trading securities.................................. 1,850 (2,401) (4,197)
Deferred income tax expense (benefit).......................................... 4,288 (8,996) (9,310)
Prepaid income taxes........................................................... -- (4,932) --
Net increase in other liabilities (assets)..................................... 16,446 (24,699) (6,277)
Other, net..................................................................... (16,475) 24,965 9,280
--------- --------- ---------
Net cash provided by operating activities.................................. 94,275 57,069 41,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in short-term investments................................ 10,677 69,718 (80,022)
Purchase of securities available-for-sale........................................ (322,392) (418,339) (184,905)
Sales of securities available-for-sale........................................... 340,762 327,456 150,861
Maturities of securities available-for-sale...................................... 58,089 328,644 9,552
Maturities of investment securities.............................................. 15,993 34,819 181,615
Purchase of investment securities................................................ (46,147) (123,706) (32,951)
Purchase of residential mortgage loans........................................... (74,681) (250,726) (178,084)
Sale of residential mortgage loans............................................... 47,513 62,717 --
(Loan originations) and principal collections, net............................... (634,616) (340,802) (206,580)
Proceeds from sales of ORE....................................................... 26,473 5,730 6,489
Proceeds from sale of leveraged leases........................................... -- 1,824 329
Purchase of premises and equipment............................................... (17,695) (1,444) (5,828)
Net cash from acquisitions....................................................... 42,876 -- 95,624
Other, net....................................................................... 908 32,493 23,516
--------- --------- ---------
Net cash used by investing activities...................................... (552,240) (271,616) (220,384)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements.......................................................... 11,878 (63,804) 83,633
Net increase in deposits......................................................... 390,646 138,488 33,717
Net increase (decrease) in short-term borrowings................................. 54,133 (46,458) 145,000
Proceeds from issuance of long-term debt......................................... 50,000 9,800 25,000
Repayment of long-term debt...................................................... (25,000) -- --
Proceeds from exercise of stock options.......................................... 11,365 7,847 3,131
Stock repurchases................................................................ (22,503) (22,384) (9,899)
Cash dividends paid.............................................................. (20,310) (15,815) (11,755)
Other, net....................................................................... 2,908 (2,421) 5,967
--------- --------- ---------
Net cash provided by financing activities.................................. 453,117 5,253 274,794
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. (4,848) (209,294) 95,859
Cash and cash equivalents at beginning of year................................... 482,246 691,540 595,681
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 477,398 $ 482,246 $ 691,540
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................... $ 103,392 $ 82,535 $ 53,198
Income taxes................................................................. 38,502 31,750 36,248
Non-cash investing activities:
Transfer from loans to foreclosed assets..................................... 11,885 15,608 2,465
Transfers from investment securities to securities available for sale........ -- -- 402,304
</TABLE>
See accompanying Notes to Consolidated Financial Statements
A-34
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES TOTAL
SHARES COMMON PAID-IN AVAILABLE- RETAINED TREASURY SHAREHOLDERS'
DOLLARS IN THOUSANDS ISSUED STOCK CAPITAL FOR-SALE EARNINGS STOCK EQUITY
- --------------------------------------- --------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income............................. -- -- -- -- 80,133 -- 80,133
Stock options exercised................ 398,109 398 5,004 -- -- -- 5,402
Tax benefit from stock options......... -- -- 2,908 -- -- -- 2,908
Cash dividends......................... -- -- -- -- (20,310) -- (20,310)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- 7,498 -- -- 7,498
Repurchased shares, net................ -- -- -- -- -- (22,503) (22,503)
Issuance of treasury shares for
acquisitions......................... -- -- 18,187 -- -- 30,643 48,830
Issuance of treasury shares for stock
options.............................. -- -- (4,055) -- -- 10,020 5,965
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1997............ 46,700,891 $ 46,701 $ 297,654 $ 5,349 $ 173,089 $ (14,123) $ 508,670
--------- ----------- ----------- ------------- ----------- ----------- -------------
--------- ----------- ----------- ------------- ----------- ----------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
A-35
<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
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.
City National Corporation and subsidiaries (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. 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 net income 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. Interest income is accrued as earned. Net
deferred fees are accreted into interest income using the interest method. 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 and
the accretion of deferred loan fees is ceased. 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 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
A-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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 tax expense (benefit) for the year.
NET INCOME PER SHARE
Beginning with year end 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which,
required the disclosure of two new earnings per share calculations, "basic
earnings per share" and, if applicable, "diluted earnings per share." Earnings
per
A-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
share for comparative years have been restated for SFAS No. 128. Basic earnings
per share is based on the weighted average shares of common stock, which were
calculated as 46,018,000, 43,888,000 and 45,198,000 for 1997, 1996 and 1995,
respectively. Diluted earnings per share gives effect to all dilutive potential
common shares that were outstanding during part or all of the year and were
calculated as 47,809,000, 45,146,000 and 45,886,000, respectively.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and overnight 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 financial statements.
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 the accrual method, 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 instrument.
STOCK OPTION PLAN
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Pro forma net
income and pro forma net income per share disclosures for employee stock option
grants are based on recognition as expense, over the vesting period, of the fair
value on the date of grant of all stock-based awards made in 1995 and subsequent
years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that
A-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from nonowner
sources. Comprehensive income will thus represent the sum of net income and
comprehensive income, although SFAS 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated balance of
other comprehensive income is required to be displayed separately from retained
earnings and additional paid in capital in the statement of financial condition.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. At this time the Company has determined that
this Statement will have no significant impact on its financial position or
results of operations for 1998.
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.
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. At this time the Company has determined that this
Statement will have no significant impact on it since it has no defined benefit
plans.
NOTE 2. ACQUISITIONS
On January 9, 1998, the Company completed its acquisition of Harbor Bancorp
for $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. The acquisition of Harbor Bancorp is expected to result in
the recording of goodwill and intangibles of approximately $24.0 million under
the purchase method of accounting.
On January 24, 1997, the Company completed its acquisition of Riverside
National Bank (RNB). 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. The acquisition
of RNB was accounted for under the purchase method of accounting and resulted in
the recording of goodwill and intangibles of approximately $27.4 million. At
December 31, 1997, the remaining unamortized balance was approximately $25.0
million. The results of RNB's operations are included in those reported by the
Company beginning on January 25, 1997.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp (VCNB). 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. The
acquisition of VCNB was accounted for under the purchase method of accounting
and resulted in the recording of goodwill and intangibles of approximately $27.4
million. At December 31, 1997, the remaining unamortized balance was
approximately $25.0 million. The results of VCNB's operations are included in
those reported by the Company beginning on January 18, 1997.
A-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 31, 1995, the Bank acquired all of the outstanding stock of
First Los Angeles Bank (First LA) for $85 million in cash in a transaction that
has been accounted for as a purchase. 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 $7.9 million
related to the First LA acquisition. At December 31, 1997, the remaining
unamortized balance was $5.0 million. The recording of First LA's assets and
liabilities at fair value did not result in any goodwill. The results of First
LA's operations are included in those reported by the Company beginning on
January 1, 1996.
The following table presents an unaudited pro forma combined summary of
operations of the Company, VCNB and RNB (collectively, the Acquired Banks) for
the years ended December 31, 1997 and 1996. The unaudited pro forma combined
summary of operations is presented as if the mergers had been effective January
1, 1996. This information combines the historical results of the Company and the
Acquired Banks 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 the Acquired Banks. 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.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Interest income........................................................................... $ 360,164 $ 318,768
Interest expense.......................................................................... 104,999 94,100
---------- ----------
Net interest income............................................................... 255,165 224,668
Provision for credit losses............................................................... -- 75
---------- ----------
Net interest income after provision for credit losses............................. 255,165 224,593
Noninterest income........................................................................ 53,758 48,832
Noninterest expense....................................................................... 186,388 175,411
---------- ----------
Income before income taxes................................................................ 122,535 98,014
Income taxes.............................................................................. 44,336 32,709
---------- ----------
Net income........................................................................ $ 78,199 $ 65,305
---------- ----------
---------- ----------
Net income per share, basic....................................................... $ 1.69 $ 1.41
---------- ----------
---------- ----------
Net income per share, diluted..................................................... $ 1.63 $ 1.38
---------- ----------
---------- ----------
</TABLE>
The unaudited pro forma combined net income per share were calculated based
on the pro forma combined net income and the pro forma average common shares and
share equivalents outstanding during the years presented.
A-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
DOLLARS IN THOUSANDS VALUE GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
Mortgage-backed securities................................... $ 107,386 $ 693 $ 351 $ 107,728
State and municipal securities............................... 107,567 1,370 181 108,756
Other securities............................................. 10,981 -- -- 10,981
---------- ----------- ----------- ----------
Total.................................................... $ 225,934 $ 2,063 $ 532 $ 227,465
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 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
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The carrying value and estimated fair values of investment securities at
December 31, 1997 by contractual maturity, are shown below:
<TABLE>
<CAPTION>
OVER 1 YEAR OVER 5 YEARS THRU 10 OVER 10
ONE YEAR OR LESS THRU 5 YEARS YEARS 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........ $ -- --% $ 3,366 7.30% $ 21,033 5.88% $ 82,987
State and municipal securities.... 12,373 6.85 67,892 6.61 22,289 7.11 5,013
Other securities(2)............... 1,010 7.73 1,205 7.62 1,000 6.74 7,766
--------- --- ----------- --- ----------- --- -----------
Total........................... $ 13,383 6.92% $ 72,463 6.66% $ 44,322 6.52% $ 95,766
--------- --- ----------- --- ----------- --- -----------
--------- --- ----------- --- ----------- --- -----------
Fair value...................... $ 13,419 $ 73,290 $ 44,692 $ 96,064
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
<CAPTION>
TOTAL 1997 TOTAL 1996
----------------------- -----------------------
DOLLARS IN THOUSANDS YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------------------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities........ 6.72% $ 107,386 6.57% $ 97,638 6.45%
State and municipal securities.... 6.86 107,567 6.75 88,445 6.72
Other securities(2)............... 5.99 10,981 6.40 9,146 6.49
--- --------- --- --------- ---
Total........................... 6.67% $ 225,934 6.65% $ 195,229 6.57%
--- --------- --- --------- ---
--- --------- --- --------- ---
Fair value...................... $ 227,465 $ 194,655
--------- ---------
--------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
Investment securities totaling $159.2 million were pledged to secure trust
funds, public deposits, or for other purposes permitted by law at December 31,
1997.
A-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Government and federal agency securities................ $ 255,552 $ 2,105 $ 600 $ 257,057
Mortgage-backed securities................................... 171,439 1,247 611 172,075
State and municipal securities............................... 5,911 86 -- 5,997
Other securities............................................. 165,008 7,309 258 172,059
---------- ----------- ----------- ----------
Total.................................................... $ 597,910 $ 10,747 $ 1,469 $ 607,188
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 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
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
Gross realized gains and losses related to the available for sale portfolios
were $638,000 and $1,686,000, respectively, for the year ended December 31,
1997, $2,784,000 and $2,597,000, respectively, for the year ended December 31,
1996 and $1,287,000 and $1,883,000, respectively, for the year ended December
31, 1995.
The estimated fair value and amortized cost of securities available-for-sale
at December 31, 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ONE YEAR OVER 1 YEAR OVER 5 YEARS OVER
OR LESS THRU 5 YEARS THRU 10 YEARS 10 YEARS
------------------------- ----------------------- ------------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- -------------------------- ----------- ------------ --------- ------------ ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
securities.............. $ 9,953 5.00% $ 239,610 6.38% $ 7,494 5.88% $ -- -- %
Mortgage-backed
securities.............. -- -- -- -- -- -- 172,075 6.66
State and municipal
securities.............. -- -- 4,911 6.61 1,086 7.14 -- --
Other securities(2)....... 31,164 10.69 58,836 9.79 -- -- 82,059 7.60
----------- ----- --------- --- ----------- --- --------- ---
Total................... $ 41,117 9.31% $ 303,357 7.05% $ 8,580 6.04% $ 254,134 6.96%
----------- ----- --------- --- ----------- --- --------- ---
----------- ----- --------- --- ----------- --- --------- ---
Amortized Cost.......... $ 40,777 $ 299,159 $ 8,586 $ 249,388
----------- --------- ----------- ---------
----------- --------- ----------- ---------
<CAPTION>
TOTAL 1997 TOTAL 1996
----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1)
- -------------------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agency
securities.............. $ 257,057 6.31% $ 372,316 5.69%
Mortgage-backed
securities.............. 172,075 6.66 127,936 6.28
State and municipal
securities.............. 5,997 6.71 14,067 6.76
Other securities(2)....... 172,059 8.91 101,544 10.74
--------- --- --------- -----
Total................... $ 607,188 7.15% $ 615,863 6.67%
--------- --- --------- -----
--------- --- --------- -----
Amortized Cost.......... $ 597,910 $ 619,580
--------- ---------
--------- ---------
</TABLE>
- ---------
(1) Fully taxable equivalent.
(2) Equity securities, except preferred stock, are reported in the "over ten
years" category
Available-for-sale securities totaling $309.9 million were pledged to secure
trust funds, public deposits, or for other purposes required or permitted by law
at December 31, 1997.
A-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Commercial............................................................................ $ 1,972,232 $ 1,334,577
Residential first mortgage............................................................ 980,040 882,573
Real estate construction.............................................................. 144,558 92,322
Real estate mortgage.................................................................. 686,188 499,377
Installment........................................................................... 42,206 30,586
------------ ------------
Total loans (net of unearned income and fees of $4,310 and $5,364).................. $ 3,825,224 $ 2,839,435
------------ ------------
------------ ------------
</TABLE>
At December 31, 1997 and 1996, the Company had identified impaired loans
with recorded investments of $16.6 million and $33.3 million, respectively.
Allowances of $.5 million and $.5 million on loans with outstanding balances of
$3.0 million and $3.3 million, respectively, at December 31, 1997 and 1996,
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 1997 and 1996, the average balance of impaired
loans was $21.2 million and $36.2 million, respectively. During 1997, 1996 and
1995, no interest income was recognized on impaired loans until the book
balances of these loans were paid off.
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 $16.8 million and $16.1 million
at December 31, 1997 and 1996, respectively. During 1997, new loans made totaled
$1.1 million and repayments totaled $.4 million. Interest income recognized on
these loans amounted to $1.4 million, $1.4 million and $1.5 million during 1997,
1996 and 1995, respectively. At December 31, 1997, none of these loans were on
nonaccrual status. Based on analysis of information presently known to
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 $26.2
million, $12.4 million and $6.5 million at December 31, 1997, 1996 and 1995,
respectively. Restructured loans totaled $4.1 million, $2.6 million, and $7.2
million at December 31, 1997, 1996 and 1995, respectively.
The following is a summary of activity in the allowance for credit losses:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance, January 1........................................................... $ 130,089 $ 131,514 $ 105,343
Provision charged to expense................................................. -- -- --
Allowance of acquired institutions........................................... 7,016 -- 19,077
Charge offs.................................................................. (19,512) (20,342) (17,041)
Recoveries................................................................... 20,168 18,917 24,135
---------- ---------- ----------
Net (charge offs) recoveries................................................. 656 (1,425) 7,094
---------- ---------- ----------
Balance, December 31......................................................... $ 137,761 $ 130,089 $ 131,514
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of non-performing loans and related interest
foregone (received):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Nonaccrual loans................................................................. $ 27,566 $ 41,543 $ 48,124
--------- --------- ---------
--------- --------- ---------
Contractual interest due......................................................... $ 5,364 $ 6,262 $ 7,232
Interest recognized.............................................................. 5,490 4,135 2,663
--------- --------- ---------
Net interest foregone (received)............................................. $ (126) $ 2,127 $ 4,569
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Contractual interest due............................................................. $ 3,709 $ 4,425 $ 5,821
Interest recognized.................................................................. 1,782 491 847
--------- --------- ---------
Net interest foregone............................................................ $ 1,927 $ 3,934 $ 4,974
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has pledged all of its eligible residential first mortgages to
the Federal Home Loan Bank of San Francisco under that institution's blanket
lien program.
NOTE 6. 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, 1997
Premises, including land of $5,182........................................ $ 50,270 $ 26,532 $ 23,738
Furniture, fixtures and equipment......................................... 47,311 27,647 19,664
--------- ------------ ---------
Total................................................................. $ 97,581 $ 54,179 $ 43,402
--------- ------------ ---------
--------- ------------ ---------
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
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
Depreciation and amortization expense was $6.1 million in 1997, $5.1 million
in 1996 and $4.1 million in 1995. Net rental payments on operating leases
included in net occupancy of premises in the Consolidated Statement of Income
were $7.1 million in 1997, $6.4 million in 1996, and $5.4 million in 1995.
A-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The future net minimum rental commitments were as follows at December 31,
1997:
<TABLE>
<CAPTION>
NET MINIMUM RENTAL
DOLLARS IN THOUSANDS COMMITMENTS
- ---------------------------------------------------------------------------------------------- ------------------
<S> <C>
1998.......................................................................................... $ 12,264
1999.......................................................................................... 11,832
2000.......................................................................................... 10,021
2001.......................................................................................... 8,206
2002.......................................................................................... 7,260
Thereafter.................................................................................... 18,966
-------
Total....................................................................................... $ 68,549
-------
-------
</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, $1.1 million and $.9 million during 1997, 1996 and 1995,
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, 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 from the
Acquired Banks. Lease obligations assumed from the Acquired Banks 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. At
December 31, 1997, the Company is contractually entitled to receive minimum
future rentals of $8.5 million under noncancellable sub-leases.
NOTE 7. 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>
1997
Federal...................................................................... $ 30,684 $ 2,988 $ 33,672
State........................................................................ 10,224 1,300 11,524
--------- --------- ---------
Total.................................................................... $ 40,908 $ 4,288 $ 45,196
--------- --------- ---------
--------- --------- ---------
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-45
<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,
1997 and 1996 are presented below.
NET DEFERRED TAX ASSETS
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses........................................................ $ 47,282 $ 45,518
Net operating loss carryforwards................................................... 17,064 18,775
Accrued expenses................................................................... 3,189 2,897
State income taxes................................................................. 13,851 15,277
Unrealized losses on available for sale securities................................. -- 1,568
Purchase accounting fair value adjustment.......................................... 5,397 4,254
Other.............................................................................. 1,934 1,085
--------- ----------
Total gross deferred tax assets................................................ 88,717 89,374
Valuation allowance................................................................ (8,248) (11,557)
--------- ----------
80,469 77,817
--------- ----------
Deferred tax liabilities:
Leveraged leases................................................................... 4,461 5,014
Core deposit and other intangibles................................................. 8,232 3,577
Installment sales.................................................................. 1,264 1,614
Unrealized gains on available for sale securities.................................. 3,929 --
Deferred loan origination costs.................................................... 1,348 936
Loan fees.......................................................................... 1,117 830
Other.............................................................................. 1,303 555
--------- ----------
Total gross deferred tax liabilities........................................... 21,654 12,526
--------- ----------
Net deferred tax assets.................................................................... $ 58,815 $ 65,291
--------- ----------
--------- ----------
</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)
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate (benefit)............................................................. 35.0% 35.0% 35.0%
Net state income tax (benefit)....................................................... 6.0 6.4 6.6
Tax exempt income.................................................................... (4.4) (3.6) (1.5)
Tax credits.......................................................................... (0.8) (1.1) (1.0)
Reduction in valuation allowances.................................................... -- (4.3) (0.7)
Amortization of goodwill............................................................. 0.5 -- --
All other--net....................................................................... (0.2) 0.5 (0.4)
--------- --------- ---------
Effective tax provision.............................................................. 36.1% 32.9% 38.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax benefit of deductible temporary differences and net operating loss
carry forwards are recorded as an asset to the extent that management assesses
the utilization of such temporary differences and carry forwards to be "more
likely than not." The realization of tax benefits of deductible temporary
differences and carry forwards depends on whether the Company has sufficient
taxable income within the
A-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carry back and carry forward period permitted by the 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
principally 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 net income reported in 1997 in its evaluation of those
deferred tax assets that it believes to be more likely than not to be realized.
At December 31, 1997, the Company's valuation allowance totaled $8.2
million, of which $5.4 million resulted from the net operating loss carry
forwards of First LA. First LA's federal net operating loss carry forwards total
$48.7 million, of which $23.5 million will expire in 2009 and $25.2 million will
expire in 2010. First LA's California net operating loss carry forwards total
$27.8 million, of which $6.5 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 $5.4 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 8. 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 profit
sharing contribution requirement is based on a percentage of annual operating
income. For 1997, 1996 and 1995, the Company recorded total contributions
expense of $6.7 million, $5.6 million and $4.1 million, respectively.
Employees may contribute up to 15% of their pretax salary, but not more than
the maximum allowed under IRS regulations. In 1997, the Bank matched 50% of the
first six percent of covered compensation. Through December 31, 1996, the Bank
matched 10% of the first four percent of covered compensation contributed using
forfeitures and cash. For 1997, 1996, and 1995 the Bank's matching contribution
included in the total contribution above was $1,318,000, $40,000 and $63,000,
respectively.
The Company does not provide for any post retirement employee benefits
beyond the profit sharing retirement plan.
NOTE 9. STOCK OPTION PLANS
Under the 1995 Omnibus Plan (the 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.
A-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $9.09, $4.51 and $4.39 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997--expected dividend yield of 2.00%, volatility of 33.8%,
risk-free interest rate of 6.49% and an expected life of 7.5 years;
1996--expected dividend yield of 1.64%, volatility of 35.0%, risk-free interest
rate of 6.01%, and an expected life of 7.5 years; 1995--expected dividend yield
of 1.87%, volatility of 35.0%, 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 the Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income, as reported.......................................................... $ 80,133 $ 66,563 $ 48,792
Pro forma net income............................................................. 77,840 65,140 47,824
Net income per share, basic, as reported......................................... $ 1.74 $ 1.52 $ 1.08
Proforma net income per share, basic............................................. 1.69 1.48 1.06
Net income per share, diluted, as reported....................................... 1.68 1.47 1.06
Proforma net income per share, diluted........................................... 1.63 1.44 1.04
</TABLE>
Pro forma net income reflects only options granted in 1997, 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 and were all exercisable at December 31, 1997. These options
are included in the following tables.
The following is a summary of the transactions under the stock option plans
described above:
STOCK OPTION PLANS:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES IN THOUSANDS SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
- ---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1.... 3,687 $ 12.06 4,120 $ 11.76 4,251 $ 11.56
Granted........................... 751 24.48 603 13.65 1,056 12.47
Converted for acquisitions........ 176 8.99 -- -- -- --
Exercised......................... (858) 13.05 (749) 10.48 (361) 8.68
Canceled or expired............... (67) 14.79 (287) 16.14 (826) 16.33
----- ------ ----- ------ ----- ------
Options outstanding, December
31.............................. 3,689 $ 14.57 3,687 $ 12.06 4,120 $ 11.76
----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------
Exercisable....................... 2,283 2,424 2,696
----- ----- -----
----- ----- -----
</TABLE>
During 1997 the Company issued 460,000 treasury shares for exercises of
stock options.
A-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The information concerning currently outstanding and exercisable options at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING OUTSTANDING NUMBER EXERCISE
SHARES IN THOUSANDS OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Options issued at prices less than $11.00 per
share............................................ 1,055 5.82 $ 7.43 1,045 $ 7.44
Options issued at prices between $11.00 and $12.99
per share........................................ 697 6.20 11.53 435 11.59
Options issued at prices between $13.00 and $19.99
per share........................................ 1,052 7.03 14.35 652 14.71
Options issued at prices between $20.00 and
$32.00........................................... 885 7.98 24.13 151 21.79
----- -----
3,689 2,283
----- -----
----- -----
</TABLE>
At December 31, 1997, nonstatutory and incentive stock options covering
615,557 and 1,667,032 shares, respectively, of the Company's common stock were
exercisable under the plans. At December 31, 1997, 1,477,480 shares were
available for future grants.
In addition to the above, the Corporation's 1995 Omnibus Plan provides for
the automatic annual grant, on the date of the Annual Meeting of Stockholders,
of a discounted stock option (which is not Incentive Stock Option) to each
non-employee director, including members of the Compensation and Directors
Nominating Committee to purchase 500 shares of the Corporation's Common Stock
("Director Stock Options"). The exercise price of Director Stock Options is
$1.00 per share, payable in cash or cash equivalents, by surrender of the
Corporation's Common Stock held by the director for at least a year before
exercise, or any combination of the two. Director Stock Options vest 6 months
after the date of issuance or upon the termination of the holder's directorship
(other than for cause), whichever is earlier, and expire 10 years after the date
of grant. Such options fully vest six months after grant. During 1997 and 1996,
options to purchase 4,000 and 1,904 shares respectively, were granted to
directors of the Company.
NOTE 10. BORROWED FUNDS
The following is a summary of borrowed funds of the Company excluding
federal funds purchased and securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
DOLLARS IN THOUSANDS 1997 1996
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Other short-term borrowings:
Term federal funds purchased........................................................ $ 50,000 $ --
Guaranteed investment contract...................................................... 9,800 --
Treasury, tax and loan note......................................................... 52,775 98,642
Federal Home Loan Bank advances..................................................... 100,000 50,000
--------- ---------
Total........................................................................... $ 212,575 $ 148,642
--------- ---------
--------- ---------
Long-term debt:
Guaranteed investment contract...................................................... $ -- $ 9,800
Federal Home Loan Bank advances..................................................... 50,000 25,000
--------- ---------
Total........................................................................... $ 50,000 $ 34,800
--------- ---------
--------- ---------
</TABLE>
Short term borrowings consist of funds with remaining maturities of one year
or less, and long-term debt consists of borrowings with remaining maturities of
greater than one year. The maximum amount of other short-term borrowings at any
month end was $267.9 million, $206.6 million and $160.0 million in 1997, 1996,
and 1995, respectively.
A-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The maximum amount of securities sold under agreements to repurchase
outstanding at any month end was $127.5 million, $141.3 million and $207.7
million, in 1997, 1996 and 1995, respectively. The average amount of securities
sold under agreement to repurchase was $53.4 million, $95.2 million and $106.5
million during 1997, 1996 and 1995, respectively.
The long term debt is comprised of $50.0 million of Federal Home Loan Bank
(FHLB) advances; $25.0 million maturing on November 18, 2002, but putable
beginning on November 19, 1999 and any time thereafter, with a fixed interest
rate of 5.58% and $25.0 million maturing on December 16, 2002 with a fixed
interest rate of 5.99%.
The Bank had $464.5 million and $455.0 million of unused borrowing capacity
from the FHLB at December 31, 1997 and 1996, respectively.
On January 12, 1998, the Bank issued $125.0 million of 6 3/8% Subordinated
Notes, due in 2008, in a private offering. These Subordinated Notes qualify as
Tier II capital.
NOTE 11. AVAILABILITY OF FUNDS FROM SUBSIDIARIES; RESTRICTIONS ON CASH BALANCES;
CAPITAL
The Company is authorized to issue 5,000,000 shares of Preferred Stock. The
Board of Directors has the authority to issue the preferred stock in one or more
series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preferences and
sinking fund terms.
Historically, the majority of the funds for the payment of dividends by the
Company have been obtained from the Bank. Under federal banking law, dividends
declared by national banks in any calendar year may not, without the approval of
the Office of the Comptroller of the Currency (OCC), exceed net profits (as
defined), for that year combined with its retained net income for the preceding
two calendar years. At December 31, 1997, the Bank could have declared dividends
of $53.0 million without the approval of regulators.
Federal banking law also prohibits the Corporation from borrowing from the
Bank on less than a fully secured basis. At December 31, 1997 and 1996, the
Corporation had borrowed from the Bank $45.0 million and $27.5 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 use by the Bank or the Company. During 1997 and 1996,
reserve balances averaged approximately $45.4 million and $68.7 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 also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
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, 1997, the Company and the Bank meet all capital adequacy
requirements to which it is subject.
A-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the most recent notification from the OCC
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 following 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, 1997:
Total capital
(to risk weighted assets)............................... $500.0 12.27% $326.0 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 448.0 10.99% 163.0 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 448.0 9.19% 195.0 GREATER THAN OR EQUAL TO 4.0%
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%
</TABLE>
A-51
<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, 1997:
Total capital
(to risk weighted assets)............................... $432.9 10.78% $321.4 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 381.6 9.50% 160.5 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 381.6 7.93% 192.4 GREATER THAN OR EQUAL TO 4.0%
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%
</TABLE>
NOTE 12. 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 statement of
financial condition.
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.
A-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had outstanding loan commitments aggregating $1,947.8 million
and $854.1 million in December 31, 1997 and 1996, respectively. In addition, the
Company had $140.3 million and $81.5 million outstanding in bankers acceptances
and letters of credit of which $115.5 million and $79.1 million relate to
standby letters of credit at December 31, 1997 and 1996, 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 the 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 on the Corporation.
NOTE 13. 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, 1997 and 1996.
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 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.
A-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 counter parties. The Company
does not make fixed-rate loan commitments. The fair value of letters of
guarantee 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 counter parties 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 financial instruments of the company are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
DOLLARS IN MILLIONS AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks..................................... $ 327.7 $ 327.7 $ 342.0 $ 342.0
Federal funds sold and securities purchased under resale
agreements................................................ 150.0 150.0 151.2 151.2
Investment securities....................................... 225.9 227.5 195.2 194.7
Securities available for sale............................... 607.2 607.2 615.9 615.9
Trading account assets...................................... 30.3 30.3 32.1 32.1
Loans, net of allowance for credit losses................... 3,687.5 3,747.3 2,709.3 2,714.5
Financial Liabilities:
Deposits.................................................... 4,228.3 4,228.8 3,386.5 3,385.4
Federal funds purchased and securities sold under resale
agreements................................................ 206.4 206.4 194.5 194.5
Other short-term borrowings................................. 212.6 212.6 148.6 148.6
Long-term debt.............................................. 50.0 50.0 34.8 34.8
Commitments to extend credit................................ (9.1) (9.1) (5.7) (5.7)
Derivative contracts........................................ 425.0(1) 1.7(2) 325.0(1) (0.4)(2)
</TABLE>
- ---------
(1) Notional Amount
(2) Estimated net gains (losses) to settle derivative contracts as of respective
period ends
A-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------
Cash...................................................................................... $ 6,075 $ 23,776
Securities available-for-sale............................................................. 104,108 67,533
Other assets.............................................................................. 515 1,156
Investment in City National Bank.......................................................... 440,380 336,632
Investment in nonbank subsidiary.......................................................... 4,440 --
---------- ----------
Total assets.......................................................................... $ 555,518 $ 429,097
---------- ----------
---------- ----------
LIABILITIES
- ------------------------------------------------------------------------------------------
Notes payable to City National Bank....................................................... $ 45,000 $ 27,500
Other liabilities......................................................................... 1,848 850
---------- ----------
Total liabilities..................................................................... 46,848 28,350
Shareholders' Equity...................................................................... 508,670 400,747
---------- ----------
Total liabilities and shareholders' equity............................................ $ 555,518 $ 429,097
---------- ----------
---------- ----------
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Income
Dividends from Bank.......................................................... $ 46,792 $ 63,891 $ 24,066
Interest and dividend income................................................. 6,318 4,313 2,081
Gain on sale of securities................................................... (339) 407 972
--------- --------- ---------
Total income............................................................. 52,771 68,611 27,119
--------- --------- ---------
Interest on notes payable to Bank................................................ 2,555 1,720 803
Other expenses................................................................... 411 463 341
--------- --------- ---------
Total expenses........................................................... 2,966 2,183 1,144
--------- --------- ---------
Income before taxes and equity in undistributed income of Bank................... 49,805 66,428 25,975
Income taxes (benefit)........................................................... (462) 22 112
--------- --------- ---------
Income before equity in undistributed income of Bank............................. 50,267 66,406 25,863
Equity in undistributed income of Bank........................................... 29,866 157 22,929
--------- --------- ---------
Net income....................................................................... $ 80,133 $ 66,563 $ 48,792
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 80,133 $ 66,563 $ 48,792
Adjustments to net income:
Equity in undistributed income of Bank.................................. (29,866) (157) (22,929)
Other, net.............................................................. 1,009 (363) (115)
---------- ---------- ----------
Net cash provided by operating activities............................. 51,276 66,043 25,748
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in short-term investments......................... -- 9,400 (8,925)
Maturities of investment securities....................................... -- -- 500
Maturities of securities available for sale............................... 22,423 2,000 1,500
Purchase of securities available-for-sale................................. (61,560) (39,096) (21,188)
Sales of securities available for sale.................................... 5,813 4,731 2,380
Other, net................................................................ -- (172) (750)
---------- ---------- ----------
Net cash used in investing activities................................. (33,324) (23,137) (26,483)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment in subsidiaries................................................ (24,582) -- --
Cash dividends paid....................................................... (20,310) (15,815) (11,755)
Borrowings from City National Bank........................................ 17,500 7,800 19,700
Net issuance of treasury shares........................................... (22,503) (22,384) (9,899)
Stock options exercised................................................... 11,365 7,847 3,131
Other, net................................................................ 2,877 1,773 1,003
---------- ---------- ----------
Net cash provided by (used in) financing activities................... (35,653) (20,779) 2,180
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... (17,701) 22,127 1,445
Cash and cash equivalents at beginning of year................................ 23,776 1,649 204
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 6,075 $ 23,776 $ 1,649
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The following table presents the notional amount and fair value of
interest-rate risk-management instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
NOTIONAL FAIR NOTIONAL FAIR
DOLLARS IN MILLIONS AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Receive-fixed/pay variable.................................................... $ 425.0 $ 1.7 $ 325.0 $ (.4)
</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 $1.8 million and $.4 million at December 31, 1997 and
1996, 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 thresholds are
exceeded. No amounts were required to be deposited by the Company or its
counterparties as of December 31, 1997.
A-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $.8 million and $.3 million in net
interest income in 1997 and 1996, respectively, and had no effect on net
interest income in 1995.
A-56
<PAGE>
REGISTERED REGISTERED
CITY NATIONAL BANK
No. R-1 6-3/8% SUBORDINATED CUSIP 177902 AA 1
NOTE DUE 2008
This Note is a Global Note within the meaning of the Issuing and Paying
Agency Agreement hereinafter referred to and is registered in the name of the
Depositary or a nominee thereof. This Note may not be exchanged in whole or
in part for a Note registered, and no transfer of this Note in whole or in
part may be registered, in the name of any person other than such Depositary
or a nominee thereof, except in the limited circumstances described in the
Issuing and Paying Agency Agreement.
Unless this Note is presented by an authorized representative of The
Depositary Trust Company (55 Water Street, New York, New York) to the issuer
or its agent for registration of transfer, exchange or payment, and any
security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of The Depositary Trust Company and
any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the
registered owner hereof, Cede & Co., has an interest herein.
This Note must be issued and held in minimum denominations of $250,000 and is
not exchangeable for Notes in smaller denominations.
THE OBLIGATION EVIDENCED BY THIS NOTE IS UNSECURED AND IS SUBORDINATED AND
JUNIOR IN RIGHT OF PAYMENT TO THE BANK'S OBLIGATIONS TO ITS DEPOSITORS AND TO
THE BANK'S OTHER OBLIGATIONS TO ITS GENERAL AND SECURED CREDITORS AND IS
INELIGIBLE AS COLLATERAL TO SECURE A LOAN FROM THE BANK. THIS NOTE IS NOT A
SAVINGS ACCOUNT OR A DEPOSIT OF ANY BANK AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
PRINCIPAL AMOUNT: $125,000,000
ISSUE DATE: January 12, 1998
MATURITY DATE: January 15, 2008
INTEREST RATE: 6-3/8% per annum
COMPUTATION PERIOD: from January 12, 1998
INTEREST PAYMENT DATE(S): each January 15 and July 15, commencing July 15, 1998
REGULAR RECORD DATE(S): each January 1 and July 1
1
<PAGE>
CITY NATIONAL BANK, a national banking association duly organized and
existing under the laws of the United States of America (herein called the
"Bank", which term includes any successor thereof), for value received,
hereby promises to pay to CEDE & CO., as nominee for The Depository Trust
Company, or registered assigns, the principal amount specified above on the
maturity date specified above (the "Maturity Date") and to pay interest
thereon (computed on the basis of a 360-day year of twelve 30-day months)
from and including the Issue Date specified above (the "Issue Date") or from
and including the most recent Interest Payment Date to which interest on this
Note (or any predecessor Note) has been paid or duly provided for to but
excluding the next succeeding Interest Payment Date, on the Interest Payment
Dates specified above in each year (each an "Interest Payment Date") and on
the Maturity Date, semiannually in arrears at the rate per annum equal to the
Interest Rate specified above (the "Interest Rate"), until the principal
hereof is paid or duly made available for payment. The interest so payable,
and punctually paid or duly provided for, on any Interest Payment Date will
be paid to the person in whose name this Note (or one or more predecessor
Notes) is registered at the close of business on the Regular Record Date
specified above (the "Regular Record Date") next preceding such Interest
Payment Date; PROVIDED, HOWEVER, that interest payable on the Maturity Date
will be payable to the person to whom principal shall be payable; and
PROVIDED, FURTHER, that the first payment of interest shall be payable on the
second Interest Payment Date following the Issue Date to the person in whose
name this Note (or one or more predecessor Notes) is registered at the close
of business on the Regular Record Date immediately preceding such Interest
Payment Date.
If any Interest Payment Date specified on the face hereof or the
Maturity Date would otherwise be a day which is not a Market Day, with
respect to this Note, the payment of principal or interest may be made on the
next succeeding Market Day with the same force and effect as if made on the
due date therefor, and no interest shall accrue from such Interest Payment
Date or Maturity Date, as the case may be, to such next succeeding Market Day.
No interest shall accrue on any amount of principal of or interest on
this Note after the due date therefor, PROVIDED that, to the extent permitted
by applicable law, interest shall accrue on any amount of principal or
interest not paid or duly provided for on the date due, from and including
the date due, to but excluding the date paid, at the Interest Rate.
No interest shall accrue on this Note after the Maturity Date.
Payment of the principal of and interest on this Note will be made on
each Interest Payment Date by the Issuing and Paying Agent (as defined on the
reverse hereof), in U.S. dollars in immediately available funds to the
Depositary or its nominee; PROVIDED, HOWEVER, that payment of the principal
of and interest on this Note due on the Maturity Date will be made in U.S.
dollars in immediately available funds at the office of the Issuing and
Paying Agent at 2 Broadway, New York, New York 10004, if this Note is
presented to the Issuing and Paying Agent in time for the Issuing and Paying
Agent to make such payments in such funds in accordance with its normal
procedures.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
-2-
<PAGE>
This Note and the obligations of the Bank evidenced hereby shall be
governed by and construed in accordance with the laws of the State of New
York and, where applicable, the laws of the United States of America.
Unless the certificate of authentication hereon has been executed by the
Issuing and Paying Agent referred to on the reverse hereof by manual
signature, this Note shall not be entitled to any benefit under the Issuing
and Paying Agency Agreement or be valid or obligatory for any purpose.
-3-
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this instrument to be duly
executed and countersigned as of the date set forth below.
Dated: January 12, 1998
--------------------
CITY NATIONAL BANK
By /s/ FRANK P. PEKNY
---------------------------------
Authorized Signature
Attest:
RICHARD SHEEHAN, JR.
- ---------------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in
the within-mentioned Issuing and Paying
Agency Agreement
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY,
as Issuing and Paying Agent
By [Illegible]
-------------------------------------
Authorized Signature
-4-
<PAGE>
[Form of Reverse of Note]
This Note is one of a duly authorized issue of notes of the Bank (the
"Notes") issued under the Issuing and Paying Agency Agreement, dated as of
January 7, 1998 (the "Issuing and Paying Agency Agreement"), between the Bank
and Continental Stock Transfer & Trust Company, as Issuing and Paying Agent
(herein called the "Issuing and Paying Agent", which term includes any
successor issuing and paying agent under the Issuing and Paying Agency
Agreement) and reference is hereby made to the Issuing and Paying Agency
Agreement for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Bank and the Issuing and Paying Agent
and of the terms upon which the Notes are, and are to be, authenticated and
delivered. Except as otherwise provided in the Issuing and Paying Agency
Agreement, the Notes will be issued only as fully-registered Global Notes,
without coupons, in denominations of $250,000 and integral multiples of
$1,000 in excess thereof.
THIS NOTE IS A DIRECT, UNSECURED GENERAL OBLIGATION OF THE BANK. THE
OBLIGATION EVIDENCED BY THIS NOTE IS SUBORDINATED AND JUNIOR IN RIGHT OF
PAYMENT TO THE BANK'S OBLIGATIONS TO ITS DEPOSITORS AND TO THE BANK'S OTHER
OBLIGATIONS TO ITS GENERAL AND SECURED CREDITORS AND IS INELIGIBLE AS
COLLATERAL TO SECURE A LOAN FROM THE BANK. THIS NOTE IS NOT A SAVINGS ACCOUNT
OR A DEPOSIT OF ANY BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
The Holder of this Note, by its acceptance hereof, agrees that the
indebtedness of the Bank evidenced by this Note, including the principal and
interest hereon, is unsecured and subordinate and junior in right of payment
to the Bank's obligations to its depositors, its obligations under banker's
acceptances and letters of credit, and its obligations to its other creditors
(including any obligations to any Federal Reserve Bank and the Federal
Deposit Insurance Corporation), whether outstanding at the time this Note is
issued or thereafter incurred (except any obligations which by their express
terms rank on a parity with or junior to this Note). In the event of any
insolvency proceedings, receivership, conservatorship, reorganization,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings or any liquidation or winding up of or relating to the Bank,
whether voluntary or involuntary, all such obligations (except obligations
which rank on a parity with or junior to this Note) shall be entitled to be
paid in full before any payment shall be made on account of the principal of
or interest on this Note. In the event of any such proceeding, after payment
in full of all sums owing with respect to such prior obligations, the Holder
of this Note, together with the holders of any obligations of the Bank
ranking on a parity with this Note, shall be entitled to be paid pro rata
from the remaining assets of the Bank the unpaid principal of, and the unpaid
interest on, this Note or such other obligations before any payment or other
distribution, whether in cash, property, or otherwise, shall be made on
account of any capital stock or any obligations of the Bank ranking junior to
this Note.
This Note contains no limitation on the amount of senior debt, deposits
or other obligations that rank senior to this Note that may be hereafter
incurred or assumed by the Bank.
-1-
<PAGE>
For purposes of this Note, an "Event of Default" shall occur if the Bank
shall consent to the appointment of a conservator, receiver, liquidator,
trustee or other similar official in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Bank or of or relating to all or substantially all of its property; or a
decree or order of a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator, receiver,
liquidator, trustee or other similar official in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered against
the Bank and such decree or order shall have remained in force undischarged
or unstayed for a period of 60 consecutive days; or the Bank shall file a
petition to take advantage of any applicable insolvency or reorganization
statute.
If an Event of Default with respect to this Note shall occur and be
continuing, the Holder of this Note may (i) declare the principal of this
Note due and payable, and/or (ii) institute a judicial proceeding for the
enforcement of the terms of this Note, including the collection of all sums
due and unpaid hereunder, prosecute such proceeding to judgment for final
decree and enforce the same against the Bank and collect moneys adjudged or
decreed to be payable in the manner provided by law out of the property of
the Bank and/or (iii) take such other action at law or in equity as may
appear necessary or desirable to collect and enforce this Note. Any Event of
Default with respect to this Note may be waived by the Holder. The Bank
agrees that it will promptly give notice in writing of the occurence of any
Event of Default to the Issuing and Paying Agent. Notwithstanding the
foregoing, this Note may not be paid by the Bank pursuant to any declaration
referred to in clause (i) of the first sentence of this paragraph without the
prior approval of the Office of the Comptroller of the Currency (the "OCC")
unless the Bank shall remain and "eligible bank", as defined in 12 C.F.R.
Section 5.3(g) (or any successor regulation thereto), after such payment. If
such approval of the OCC shall be required upon the occurrence of any such
Event of Default, the Bank will make application therefor to the OCC promptly
after receiving notice of any such declaration from the holder hereof.
The Bank may not consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an
entirety to any person, unless (a) the surviving entity in such consolidation
or merger, or the person that acquires by conveyance, transfer or lease the
properties and assets of the Bank substantially as an entirety shall be a
bank, corporation or partnership organized and validly existing under the
laws of the United States of America, any State thereof or the District of
Columbia, and shall expressly assume, by a supplement to this Note, the due
and punctual payment of the principal of and interest on this Note, and the
performance or observance of every provision of this Note on the part of the
Bank to be performed or observed, and (b) immediately after giving effect to
such transaction, no Event of Default, and no event which, with giving of
notice or the lapse of time or both, would become an Event of Default, shall
have occurred and be continuing.
All notices to the Bank under this Note shall be in writing or addressed
to the Bank at 400 North Roxbury Drive, 5th Floor, Beverly Hills, California
90210, Attention: General Counsel, or to such other address as the Bank may
notify the Holder.
-2-
<PAGE>
All terms used in this Note which are defined in the Issuing and Paying
Agency Agreement shall have the meanings assigned to them in the Issuing and
Paying Agency Agreement.
-3-
<PAGE>
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian
------------ -------------
(Custodian) (Minor)
Under Uniform Gifts to Minors Act ( )
------------------
(State)
Additional abbreviations may also be used though not in the above list.
-4-
<PAGE>
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
--------------------------------------------------------------
(PLEASE INSERT SOCIAL SECURITY IDENTIFYING NUMBER OF ASSIGNEE)
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting
and appointing_________________________________ attorney to transfer said
Note on the books of the Bank, with full power of substitution in the
premises.
Dated: Signature:
------------------------------- ---------------------------
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
within instrument in every particular,
without alteration or enlargement or
any change whatever.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the 18th day of March, 1998 by and
between BRAM GOLDSMITH ("Goldsmith"), on the one hand, and CITY NATIONAL
CORPORATION, a Delaware corporation ("CNC") and CITY NATIONAL BANK, a National
Banking Association ("CNB"). CNC and CNB being sometimes referred to
collectively herein as "CNB" and "CNC".
1. EMPLOYMENT. CNC hereby employs Goldsmith, and Goldsmith hereby
accepts employment, under the terms and conditions hereafter set forth.
2. DUTIES. Goldsmith shall be employed as the Chairman of the Board of
CNC and as an untitled officer of CNB, and his duties shall be consistent with
such office and position. Substantially all of Goldsmith's duties shall be
performed in Los Angeles and Beverly Hills, California and unless mutually
agreed upon by Goldsmith and CNC, Goldsmith shall be headquartered in Beverly
Hills, California.
3. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall be deemed to commence on May 15, 1998
and shall terminate three (3) years thereafter.
4. ANNUAL COMPENSATION. In addition to fringe benefits and reimbursement
of expenses consistent with Goldsmith's duties and position, CNC shall pay
Goldsmith as annual compensation,
- 1 -
<PAGE>
payable in equal semimonthly payments, the sum of Five Hundred Forty Thousand
Dollars ($540,000) during the term hereof.
5. INCENTIVE BONUS. Goldsmith shall be paid an annual incentive bonus,
provided however, that the amount of such incentive bonus for any year in terms
of a percentage of Goldsmith's then annual salary shall be no less than the mean
between the high and low percentages of annual salary paid as a bonus to any
other member of CNC's or CNB's Strategy & Planning Committee. For the purpose
of determining the amount of bonus to be paid Goldsmith for any calendar year,
his then annual salary shall be an amount equal to twenty-four times the
semimonthly salary paid to Goldsmith (exclusive of any incentive bonus) for the
calendar year in question.
6. LIFE INSURANCE. CNB has previously provided Goldsmith with a whole
life insurance policy on the joint lives of Goldsmith and Mrs. Elaine Goldsmith
in an insured amount of Seven Million Dollars ($7,000,000.) Such life insurance
policy is owned by the Goldsmith 1980 Life Insurance Trust ("Trust"). Such life
insurance policy or the proceeds thereof, and possession of the policy and all
rights therein, including the right to designate the beneficiary, shall be
vested completely in the Trust; provided however, that CNB shall be entitled to
receive from the proceeds of such policy a sum equal to the aggregate amount of
premiums, without interest, paid by CNB on account of such policy pursuant to
the terms of the Split Dollar Life Insurance Agreement, as amended, and
Collateral Assignment of Policy attached hereto marked Exhibit A.
- 2 -
<PAGE>
7. EXTENT OF SERVICE. Goldsmith shall devote his time, attention and
energies to the business of CNC and CNB and shall not, during the term of this
Agreement, be engaged in any other activity which will interfere with the
performance of his duties hereunder. Time expended by Goldsmith on
philanthropic activities and in connection with real estate investments shall be
deemed not to interfere with the performance of his duties hereunder; provided
however, that during the term thereof, Goldsmith shall not become an active
participant (as opposed to a passive investor or consultant) in any real estate
investment or venture in which he does not presently have a direct or indirect
interest.
8. TERMINATION OF EMPLOYMENT.
(a) TERMINATION BY CNC FOR GOOD CAUSE. CNC may terminate the
employment of Goldsmith for "good cause" by written notice to Goldsmith. For
purposes of this Agreement, "good cause" shall mean only (i) conviction of a
crime directly related to his employment hereunder, (ii) conviction of a felony
involving moral turpitude, (iii) willful and gross mismanagement of the business
and affairs for CNC or CNB, or (iv) breach of any material provision of this
Agreement. In the event the employment of Goldsmith is terminated pursuant to
this subparagraph 8(a), CNC shall have no further liability to Goldsmith other
than for compensation accrued but not yet paid.
In the event CNC contends that it has good cause to terminate
Goldsmith pursuant to clause (iii) or (iv) of this subparagraph 8(a), CNC shall
provide Goldsmith with written
- 3 -
<PAGE>
notice specifying in reasonable detail the services or matters which it
contends Goldsmith has not been adequately performing, or the material
provisions of this Agreement of which Goldsmith is in violation, why CNC has
good cause to terminate this Agreement, and what Goldsmith should do to
adequately perform his obligations hereunder. If within thirty (30) days of
receipt of the notice Goldsmith performs the required services or modifies
his performance to correct the matters complained of, Goldsmith's breach will
be deemed cured, and Goldsmith's employment shall not be terminated.
However, if the nature of the service not performed by Goldsmith or the
matters complained of are such that more than thirty (30) days are reasonably
required to perform the required service or to correct the matters complained
of, then his breach will be deem cured if he commences to perform such
service or to correct such matters within the (30) day period and thereafter
diligently prosecutes such performance or correction to completion. If
Goldsmith does not perform the required services or modify his performance to
correct the matter complained of within the thirty (30) day period or the
extension thereof, CNC shall have the right to terminate this Agreement at
the end of the thirty (30) day period or extension thereof. It is understood
that Goldsmith's performance hereunder shall not be deemed unsatisfactory
solely on the basis of any economic performance of CNC because this
performance will depend in part on a variety of factors over which Goldsmith
has little control.
(b) TERMINATION BY CNC WITHOUT GOOD CAUSE. CNC may terminate the
employment of Goldsmith without "good cause" (as
- 4 -
<PAGE>
defined in subparagraph 8(a) above) at any time by written notice to
Goldsmith. In the event the employment of Goldsmith is terminated pursuant to
this subparagraph 8(b), CNC shall continue to be obligated to pay to and
compensate Goldsmith pursuant to paragraphs 4 and 5 of this Agreement for the
full term of this Agreement. Goldsmith shall have no duty to mitigate and
CNC shall have no right to offset any other compensation paid to Goldsmith
during the applicable time period.
(c) TERMINATION BY DEATH OR DISABILITY. CNC may terminate the
employment of Goldsmith by written notice to Goldsmith if, during the term of
this Agreement, Goldsmith shall become incapable of fulfilling his obligations
hereunder because of injury or physical or mental illness which shall exist or
may reasonably be anticipated to exist for a period of twelve (12) months
consecutive months or for an aggregate of twelve (12) months during any
twenty-four (24) month period. The death of Goldsmith during the term of this
Agreement shall likewise operate to terminate the Agreement, except that
Goldsmith's base salary shall continue in effect and be paid to his wife, if she
is then living, and if she is not then living, to his Revocable Living Trust for
a period equal to the lesser of two years or the remaining term of this
Agreement. In the event the employment of Goldsmith is terminated by CNC
pursuant to this subparagraph 8(c) because of injury, physical or mental
illness, CNC shall continue to be obligated to pay Goldsmith while he is alive
his base salary and Incentive Bonus which Goldsmith would otherwise have been
entitled to receive pursuant to Paragraph 5 to the same
- 5 -
<PAGE>
extent and in the same manner as if Goldsmith had remained employed by CNC for
the full term of this Agreement less any amount Goldsmith receives in lieu of
salary while he is alive during the term of this Agreement from private or
government insurance programs, exclusive of reimbursement of medical costs.
(d) OPTIONAL TERMINATION BY GOLDSMITH. Goldsmith shall have the
right, at any time following a "Change of Control" (as that term is defined in
the Agreement between Goldsmith and CNC dated as of March 31, 1997, a copy of
which is attached hereto marked Exhibit "B" and incorporated by reference
herein) (the "Change of Control Agreement"), to declare the Change of Control
Agreement in effect, from which time forward, except for rights pursuant to this
Agreement vested in Goldsmith, his spouse, designees, successors or
representatives prior to the Effective Date, as that term is defined in the
Change of Control Agreement (which rights will remain in full force and effect),
from and after the Effective Date, in the event of inconsistencies or conflicts
between this Agreement and the Change of Control Agreement, the terms of the
Change of Control Agreement will govern.
9. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement and the
agreements referred to in the Exhibits attached hereto constitute the entire
agreement between the parties pertaining to the subject matter contained
therein and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties, except for those contained
in the Change of Control Agreement. No supplement, modification or amendment
of this
- 6 -
<PAGE>
Agreement shall be binding unless executed in writing by both parties. No
waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar, nor
shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
10. SEPARABILITY CLAUSE. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof.
11. BENEFIT. Except as herein and otherwise specifically provided,
this Agreement shall be binding upon and inure to the benefit of the
parties, their personal representatives, heirs, administrators, executors,
successors, and permitted assigns.
12. NOTICES. Any notice, request, or other communication required to
be given pursuant to the provisions of this Agreement shall be in writing
and shall be deemed to be duly given if delivered in person or mailed by
registered or certified United States mail, postage prepaid, and mailed to
the parties at the following addresses:
CITY NATIONAL CORPORATION BRAM GOLDSMITH
------------------------- --------------
City National Corporation Mr. Bram Goldsmith
400 No. Roxbury Drive City National Corporation
Beverly Hills, CA 90210 400 No. Roxbury Drive
Attn: Richard H. Sheehan, Jr. Beverly Hills, CA 90210
The parties hereto may change the above addresses from time to time by
giving notice thereof to each other in conformity with this Paragraph 12.
- 7 -
<PAGE>
13. NON-COMPETITION. Goldsmith agrees not to compete with CNC in any
form whatsoever. Without limiting the generality of the foregoing, Goldsmith
covenants and agrees with CNC that Goldsmith shall not, during or after the
term of this Agreement, disclose to anyone any confidential information
concerning the business or operations of CNC which Goldsmith may acquire in
the course of or incident to the performance of his duties hereunder,
including, without limitation, processes, customer lists, business or trade
secrets, or methods or techniques used by CNC in its business or operations.
Goldsmith covenants and agrees that he shall not, during the term of
this Agreement, directly or indirectly (whether for compensation or
otherwise), alone or as an agent, principal, partner, shareholder or in any
other capacity, own, manage, operate, join, control or participate in the
ownership, management, operation or control of or furnish any capital to
or be connected in any manner with or provide any services for any business,
operation or entity which competes with the business or operations of CNC.
14. CONSTRUCTION. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. CAPTIONS. The paragraph headings and captions contained herein
are for reference purposes and convenience only and shall not be in any way
affect the meaning or interpretation of this Agreement.
- 8 -
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. AMENDMENTS. This Agreement shall not be modified, amended, or in
any way altered except by an instrument in writing and signed by both of the
parties hereto.
18. MANDATORY ARBITRATION. At the request of Goldsmith or City
National Corporation, any dispute, claim, controversy of any kind (whether in
contract or tort, statutory or common law, legal or equitable) now existing
or hereafter arising out of, pertaining to or in connection with this
Agreement and/or any renewals, extensions, or amendments thereto, shall be
resolved through final and binding arbitration conducted at a location
determined by the arbitrator in Los Angeles or Beverly Hills, California,
and administered by the American Arbitration Association ("AAA") in
accordance with the Federal Arbitration Act, 9 U.S.C. SECTION 1, ET SEQ,
and the then existing Commercial Arbitration Rules of the AAA. Judgment
upon any award rendered by the arbitrator(s) may be entered in any State
or Federal courts having jurisdiction thereof.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written at Beverly Hills, California.
CITY NATIONAL CORPORATION
By: /RHS/
---------------------------
Richard H. Sheehan, Jr.,
Senior Vice President
/BG/
------------------------------
BRAM GOLDSMITH
- 10 -
<PAGE>
SIXTH AMENDMENT TO SPLIT DOLLAR LIFE INSURANCE AGREEMENT
COLLATERAL ASSIGNMENT PLAN
This Amendment relates to that certain Split Dollar Life Insurance
Agreement made as of the 13th day of June, 1980 between CITY NATIONAL BANK and
THE GOLDSMITH 1980 INSURANCE TRUST (the "Agreement") and shall hereby amend
paragraph 7 thereof to provide that the Agreement shall terminate on May 15,
2001.
Except as amended by the foregoing, the Agreement shall remain in full
force and effect and without any other change.
This Agreement is made and agreed to as of this 18th day of March, 1998.
THE GOLDSMITH 1980 INSURANCE TRUST CITY NATIONAL BANK
By By
-------------------------------- -----------------------
BRUCE LEIGH GOLDSMITH
Trustee Its
-----------------------
By
--------------------------------
RUSSELL DAVID GOLDSMITH
Trustee
CITY NATIONAL BANK
By
--------------------------------
Trustee
EXHIBIT "A"
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT by and between City National Corporation, a Delaware corporation
(the "Company") and Bram Goldsmith (the "Executive"), dated as of the 31st day
of March, 1997.
The Board of Directors of the Company (the "Board"), has determined that
it is in the best interest of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined below) of the Company. The Board believes it is imperative to
diminish the inevitable distraction of the Executive by virtue of the
personal uncertainties and risks created by a pending or threatened Change of
Control and to encourage the Executive's full attention and dedication to the
Company currently and in the event of any threatened or pending Change of
Control, and to provide the Executive with compensation and benefits
arrangements upon a Change of Control which ensure that the compensation and
benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Company to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the
first date during the Change of Control Period (as defined in Section 1(b)) on
which a Change of Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and
if the Executive's employment with the Company is terminated prior to the
date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was at
the request of a third party who has taken steps reasonably calculated to
effect a Change of Control or (ii) otherwise arose in connection with or
anticipation of a Change of Control, then for all purposes of this Agreement
the "Effective Date" shall mean the date immediately prior to the date of
such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the second anniversary of the date hereof; provided,
however that commencing on the date one year after the hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate two years from such Renewal Date, unless at least 60 days prior to
the Renewal Date the Company shall give notice to the Executive that the Change
of Control Period shall not be so extended.
EXHIBIT "B"
<PAGE>
2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) or the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% of more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, (iv) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2, or (v) any
acquisition by the Goldsmith family or any trust or partnership for the benefit
of any member of the Goldsmith family; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company of all or
substantially all of the Company's assets either directly or through one or more
2
<PAGE>
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the
Executive in its employ, and the executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the second anniversary of
such date (the "Employment Period").
4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Effective Date and (B)
the Executive's services shall be performed at the location where the Executive
was employed immediately preceding the Effective Date or any office or location
less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.
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It is expressly understood and agreed that to the extent that any such
activities have been conducted by the Executive prior to the Effective Date, the
continued conduct of such activities (or the conduct of activities similar in
nature and scope thereto) subsequent to the Effective Date shall not thereafter
be deemed to interfere with the performance of the Executive's responsibilities
to the Company.
(b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) ANNUAL BONUS. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Company's annual incentive plans for the
last three full fiscal years prior to the Effective Date (annualized in the
event that the Executive was not employed by the Company for the whole of
such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall
be paid no later that the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS.
During the Employment Period, the Executive shall be entitled to participate in
all incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executive of the Company and its affiliated
companies, but in no event shall such plans, practice, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at
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any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(iv) WELFARE BENEFIT PLANS. During the employment Period,
the Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company and
its affiliated companies (including, without limitation, medical,
prescription, dental, disability, employee life, group life, accidental death
and travel accident insurance plans and programs) to the extent applicable
generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with benefits which are less favorable, in the
aggregate, than the most favorable of such plans, practices, policies and
programs in effect for the Executive at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
the other peer executive of the Company and its affiliated companies.
(v) EXPENSES. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
(vi) FRINGE BENEFITS. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without
limitation, tax and financial planning services, payment of club dues, and if
applicable, automobile allowance and/or use of an automobile and payment of
related expenses, in a accordance with the most favorable plans, practices,
programs and policies of the Company and its affiliated companies in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and it's affiliated companies.
(vii) OFFICE AND SUPPORT STAFF. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its affiliated companies at any
time during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
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(viii) VACATION. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable
plans, policies, programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect with generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY.
The Executive's employment shall terminate automatically upon the Executive's
death during the Employment Period. If the Company determines in good faith
that the Disability of the Executive has occurred during the Employment Period
(pursuant to the definition of Disability set forth below), it may give to the
Executive written notice in accordance with Section 12(b) of this Agreement of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall mean the absence of the Executive
from the Executive's duties with the Company on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected by
the Company of its insurers and acceptable to the Executive or the Executive's
legal representative.
(b) CAUSE. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one
of its affiliated (other than any such failure resulting from
incapacity due to physical or mental illness), after a written demand
for substantial performance is delivered to the Executive by the Board
or the Chief Executive Officer of the Company which specifically
identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the
Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive
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in bad faith or without reasonable belief that the Executive's action or
omission was in the best interest of the Company. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by the Board or
upon the instructions of the Chief Executive Officer or a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The cessation of
employment of the Executive shall not be deemed to be for Cause unless and until
there shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the Board),
finding that, in good faith opinion of the Board, the Executive is guilty of the
conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirement), authority, duties or responsibilities as contemplated by
Section 4(a) of this Agreement, or any other action by the Company which results
in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than in isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a) (i) (B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the Effective
Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
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For purposes of this Section 5 (c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in the Agreement
to the Contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for
Cause, or by the Executive for Good Reason, shall be communicated by Notice
of Termination to the other party hereto given in accordance with Section
12(b) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated and (iii) if the Date of Termination (as
defined below) is other than the date of receipt of such notice, specifies
that termination date (which date shall be not more than thirty days after
the giving of such notice). The failure by the Executive or the Company to
set forth in the notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the
Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the
Employment Period, the Company shall terminate the Executive's employment other
than for cause or Disability or the Executive shall terminate employment for
Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (2) the product
of (x) the higher of
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(i) the Recent Annual Bonus and (ii) the Annual Bonus paid or payable, including
any bonus or portion thereof which has been earned but deferred (and annualized
for any fiscal year consisting of less than twelve full months or during which
the Executive was employed for less than twelve full months), for the most
recently completed fiscal year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in clauses (1),
(2), and (3) shall be hereinafter referred to as the "Accrued Obligations");
and
B. the amount equal to the product of (1) three and (2) the sum
of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus;
and
C. an amount equal to the contributions to the Executive's
account in the Company's Profit Sharing Plan which the Executive would
receive if the Executive's employment continued for three years after the
Date of Termination assuming for this purpose that all such contributions are
fully vested, and, and assuming that the Company's contribution to the Profit
Sharing Plan in each such year is in an amount equal to the greatest amount
contributed by the Company in any of the three years ending prior to the
Effective Date.
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would
have been provided to them in accordance with the plans, programs, practices
and policies described in Section 4 (b) (iv) of the Agreement if the
Executive's employment has not been terminated or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies and their
families, provided, however, that if the Executive becomes reemployed with
another employer and is eligible to receive medical or other welfare benefits
under another employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility.
(iii) the Company shall, as its sole expense as incurred, provide the
Executive with out placement services the scope and provider of which shall be
selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be
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paid or provided or which the Executive is eligible to receive under any plan,
program, policy or practice or contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits").
(b) DEATH. If the Executive's employment is terminated by reason
of the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for payment of Accrued
Obligations and the timely payment or provision of Other Benefits. Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6 (b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive,
benefits at lest equal to the most favorable benefits provided by the Company
and affiliated companies to the estates and beneficiaries of peer executives
of the Company and such affiliated companies under such plans, programs,
practices and policies relating to death benefits, if any, as in effect with
respect to other peer executives and their beneficiaries at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive's estate and/or the Executive's beneficiaries, as
in effect on the date of Executive's death with respect to other peer
executive of the Company and its affiliated companies and their beneficiaries.
(c) DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision
of Other Benefits. Accrued Obligations shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination. With respect to
the provision of Other Benefits, the term Other Benefits as utilized in this
Section 6(c) shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at least
equal to the most favorable of those generally provided by the Company and
its affiliated companies to disabled executives and/or their families in
accordance with such plans, programs, practices and policies relating to
disability, if any, as in effect generally with respect to other peer
executives and their families at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any time thereafter
generally with respect to other peer executives of the Company and its
affiliated companies and their families.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's
employment shall be terminated for Cause during the Employment Period, this
Agreement shall terminate without further obligations to the Executive other
than the obligation to pay
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to the Executive (x) his Annual Base Salary through the Date of Termination, (y)
the amount of any compensation previously deferred by the Executive, and (z)
Other Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations and the timely
payment or provision of Other Benefits. In such case, timely payment or
provision of Other Benefits. In such case, all Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
12(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice
or program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract
or agreement except as explicitly modified by this Agreement.
8. FULL SETTLEMENT. The Company's obligation to make the payment
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against
the Executive or others. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this
Agreement and such amounts shall not be reduced whether or not the Executive
obtains other employment. The Company agrees to pay as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus
in each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986,
as amended (the "Code").
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any
payment or distribution by the Company to or for the benefit of the Executive
(whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or
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otherwise, but determined without regard to any additional payments required
under this Section 9) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the
foregoing provisions of this Section 9(a), if it shall be determined that the
Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed
110% of the greatest amount (the "Reduced Amount") that could be paid to the
Executive such that the receipt of Payments would not give rise to any Excise
Tax, then no Gross-Up Payment shall be made to the Executive and the Payments,
in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made
by KPMG Peat Marwick or such other certified public accounting firm as may be
designated by the Executive (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within
15 business days of the receipt of notice from the Executive that there has
been a Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, the Executive
shall appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment,
as determined pursuant to this Section 9, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Company to or for the benefit of the Executive.
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(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it desires to contest
such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provide, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest
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or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and further
provided that any extension of the stature of limitations relating to payment
of taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder
and the Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9 (c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject the
Company's complying with the requirements of Section 9 (c) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
the Executive of an amount advanced by the Company pursuant to Section 9 (c),
a determination is made that the Executive shall not be entitled to any
refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Executive or representative of the
Executive in violation of this Agreement). After termination of the
Executive's employment with the Company, the Executive shall not, without the
prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any information, knowledge or data
to anyone other than the Company and those designated by it. In no event
shall an asserted violation of the provisions of this Section 10 constitute a
basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement.
11. SUCCESSORS. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by
the Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representative.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
14
<PAGE>
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. MISCELLANEOUS. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or effect.
This Agreement may not be amended or modified otherwise than by a written
agreement executed by the parties hereto or their respective successors and
legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
IF TO THE EXECUTIVE: Bram Goldsmith
400 North Roxbury Drive
Beverly Hills, CA 90210
IF TO THE COMPANY: City National Bank
400 North Roxbury Drive
Beverly Hills, CA 90210
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or uneforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good
Reason pursuant to Section 5 (c)
15
<PAGE>
(i) - (v) of this Agreement, shall not be deemed to be a waiver of such
provision or right or any other provision or right of the Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which
case the Executive shall have no further rights under this Agreement. From
and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/Bram Goldsmith
--------------------------------
Bram Goldsmith
CITY NATIONAL CORPORATION
By /s/Richard H. Sheehan, Jr.
-----------------------------
Richard H. Sheehan, Jr.
Senior Vice President and Secretary
16
<PAGE>
EXHIBIT B
AMENDED AND RESTATED SECTION 2.8
OF
CITY NATIONAL CORPORATION 1995 OMNIBUS PLAN
2.8 SPECIAL REQUIREMENTS FOR DIRECTOR STOCK OPTIONS.
(a) ELIGIBILITY. All directors of the Company who are not employees of
the Company shall be eligible to receive Director Stock Options, as set forth
in this Section 2.8. Notwithstanding the foregoing, any director who is, or
who during the preceding calendar year was, a member of the Committee or any
committee administering any other stock option, stock appreciation, stock
bonus or other stock plan of the Company or any Subsidiary will not be
eligible to receive Director Stock Options hereunder if, in the opinion of
counsel for the Company, the receipt of Director Stock Options will cause
such director to be a "disinterested person" with respect to the Plan or any
other stock option, stock appreciation, stock bonus or other stock plan of
the Company or any subsidiary pursuant to Rule 16b-3 of the Securities and
Exchange Commission, or will otherwise disqualify the Plan or any other such
Plan from compliance with said rule.
(b) GRANT OF DIRECTOR OPTIONS. Every eligible director will receive
five hundred (500) Director Stock Options on the date of each annual meeting
of shareholders. Director Stock Options shall be granted automatically to each
such eligible director on the business day following such annual meeting of
stockholders, without further action of the Committee or the Board.
(c) STOCK OPTION PRICE. The purchase price of the stock pursuant to a
Director Stock Option shall be $1.00 per share.
(d) OTHER TERMS OF DIRECTOR STOCK OPTIONS. Each Director Stock Option
shall become exercisable six (6) months after the date of grant. Unless
otherwise determined by the Committee, if the holder of Director Stock
Options ceases to serve as a director of the Company for any reason other
than for cause, the Director Stock Options shall expire at the end of their
fixed term, or three months after the date of such termination, and until
then shall be exercisable in full, regardless of any vesting schedule
otherwise applicable. Except as set forth in this Section 2.8, all terms and
provisions of the Director Stock Options shall be as set forth in the Plan
with respect to options which are not Director Stock Options.
<PAGE>
OFFICE BUILDING LEASE
THIS LEASE, made and executed as of the 30th day of SEPTEMBER, 1996,
between CITINATIONAL-BUCKEYE BUILDING CO., a California limited partnership,
9100 Wilshire Boulevard, Suite 404, Beverly Hills, California 90212,
hereinafter designated the LANDLORD, and CITY NATIONAL BANK, A NATIONAL
BANKING ASSOCIATION, 400 NORTH ROXBURY DRIVE, BEVERLY HILLS, CALIFORNIA
90210, hereinafter designated the TENANT, consists of the following
agreements:
1. DEMISED PREMISES. USE AND TERM. EARLY OCCUPANCY. For and in
consideration of the covenants hereinafter mentioned, the Landlord leases to
the Tenant and the Tenant hereby leases from the Landlord the premises
consisting of Suite No. 100 located on the Ground Floor and the entire 2nd,
3rd, 6th, 9th and 20th Floors (as per attached plans, marked Exhibit "A") in
the CITY NATIONAL BANK BUILDING, 606 South Olive Street, City of Los Angeles,
California, 90014 to be used by said Tenant as and for ADMINISTRATIVE OFFICES
FOR A BANK or for general office purposes and for no other purpose, for the
term of TEN (10) YEARS, commencing on the 1ST day of JANUARY 1997, and ending
on the 31ST day of DECEMBER 2006. Landlord agrees that it shall not lease any
other Premises in the Building to any other bank or savings and loan
association for use as a home office bank or branch bank serving the general
public without the prior consent of Tenant, which consent shall not be
unreasonably withheld. Landlord agrees that it shall not lease any other
Premises on the Ground Floor of the Building to any other bank or savings and
loan association for use as a home office bank or branch bank serving the
general public.
On September 29, 1996, Landlord completed the construction and build-out
of the 6th Floor premises in accordance with Tenant's plans and
specifications, and Tenant accepted and moved into the premises prior to the
scheduled commencement date of this Lease on September 30, 1996. Landlord and
Tenant agree that Tenant's occupancy from September 30, 1996 through December
31, 1996 and thereafter for the full ten (10) year Lease Term through
December 31, 2006, is under the terms and conditions of the Lease.
On November 15, 1996, Landlord completed the construction and build-out
of the 3rd Floor premises in accordance with Tenant's plans and
specifications, and Tenant accepted and moved into the premises prior to the
scheduled commencement date of this Lease on November 16, 1996. Landlord and
Tenant agree that Tenant's occupancy from November 16, 1996 through December
31, 1996, and thereafter for the full ten (10) year Lease Term through
December 31, 2006 is under the terms and conditions of this Lease.
2. RENT. The Tenant agrees to pay to the Landlord as rent for said
leased premises, monthly installments, as follows:
<TABLE>
<CAPTION>
<S> <C>
From September 30, 1996 through November 15, 1996 $13,712.00 per month
From November 16, 1996 through December 31, 1996 $25,683.00 per month
From January 1, 1997 through December 31, 2001 $80,456.00 per month
From January 1, 2002 through December 31, 2006 $88,526.00 per month
</TABLE>
Each installment shall be payable in advance on the 1st day of each and every
calendar month during the term hereof, commencing on September 30, 1996, in
lawful money of the United States of America, which the Tenant agrees to pay
to Landlord without deduction or offset, prior notice or demand, at the
office of the building or such place as the LANDLORD may designate. Said rent
is subject to increases as provide in Articles 20, 36 and as otherwise
hereinafter provided. In the event the actual commencement date of this lease
should fall on other than the 1st day of a calendar month, then the rental
for the first and last month of the lease term will be prorated on a calendar
month basis. Parking charges are payable as additional rent.
3. SUBLEASE AND ASSIGNMENT. Neither Tenant, nor Tenant's legal
representatives or successors shall mortgage, encumber, assign or transfer
this lease or sublease, or use or occupy or permit the demised premises or
any part thereof to be used or occupied by others, without the prior written
consent of Landlord in each instance, which consent shall not be unreasonably
withheld or delayed in accordance with the express terms and conditions of
this Article. Any such mortgage, encumbrance, sublease or assignment or
permission without such consent shall be voidable, at the option of Landlord
and, at the option of Landlord, shall terminate this lease. If the demised
premises or any part thereof be occupied by any party other than Tenant,
without Landlord's consent, Landlord may at its option, collect rent from the
occupant, and apply the net amount collected to the rent herein reserved but
no such occupancy or collection shall be deemed a waiver of the conditions of
this Article or the acceptance of the occupant as Assignee or Subtenant or a
release of Tenant from the further performance by Tenant of the obligations
on the part of Tenant under this lease.
No sublease or assignment may become effective unless and until Tenant
has given Landlord at least thirty (30) days prior written notice of such
proposed bonafide sublease or assignment, such notice to be received by
Landlord at least thirty (30) days prior to the proposed commencement date of
such proposed sublease or assignment. Said notice shall state and include
the following: the name of the proposed transferee; the status of the
proposed transferee either as, an individual, partnership, corporation or the
like; the present business address of the proposed transferee; a present
financial statement of the proposed transferee; the stated use or purpose and
business to be conducted under the proposed sublease or assignment; the
proposed commencement and termination date of such proposed sublease or
assignment: and whether all or portion of the leased premises is proposed to
be subleased under such proposed sublease.
Tenant may sublease or assign all or a portion of the demised premises
only upon the obtaining of Landlord's written consent and subject to the
following express conditions: A. That Tenant does not sublease or assign to
more than a reasonable number of transferees which number shall be subject to
Landlord's approval; B. That each transferee shall be subject to the prior
written approval of Landlord which approval shall not be unreasonably
withheld, conditioned or delayed, but without limiting the generality of the
foregoing, it shall be reasonable for Landlord to deny such approval if: (1)
The use to be made of the demised premises by the proposed transferee is (a)
not generally consistent with the character and nature of all other tenancies
in the Building or with Landlord's leasing policy, or (b) a use which
conflicts with any so called "exclusive" then in favor of another tenant of
the Building or of any of Landlord's other Buildings which are in the same
complex as the Building, or (c) any use which is the same as that stated in
any percentage lease to another tenant of the Building or any of Landlord's
other Buildings which are in the same complex as the Building or (d) a use
which would be prohibited by any other portion of
<PAGE>
this lease (including but not limited to any rules and regulations then in
effect): or (2) The character, moral stability, reputation and financial
responsibility of the proposed transferee is not reasonably satisfactory to
Landlord or in any event not at least equal to those which were possessed by
Tenant as of the date of execution of this lease; C. That in no event shall
the term of such sublease or assignment be for a longer period than the
unexpired term of this lease; D. That each sublease or assignment shall
expressly provide that it is subject and subordinate to this lease; E. That
Tenant shall pay to Landlord, Landlord's then standard processing fee, which
as of the date of execution of this Lease is currently the sum of $1,000,000;
F. That the proposed transferee shall execute an agreement on Landlord's then
standard form pursuant to which it shall agree to perform faithfully and be
bound by all of the terms, covenants, conditions, provisions and agreements
of this lease for the period covered by the sublease or assignment to the
extent of the space subleased; G. That an executed duplicate original of each
sublease or assignment and assumption agreement in a form acceptable to
Landlord, together with all sums due, shall be delivered to Landlord within
five (5) days after the execution thereof and any such sublease or assignment
shall not be binding upon Landlord until the delivery of the foregoing to
Landlord and the execution and delivery of Landlord's consent thereto and; H.
That Landlord shall have the right upon written demand to require the
transferee to pay the rent under the sublease or assignment directly to the
Landlord and/or to require Tenant to pay to Landlord a sum equal to (i) fifty
per cent (50%) of any rent or other consideration paid to Tenant by any
transferee which is in excess of the rent then being paid by Tenant to
Landlord (to the extent of, and as apportionable to space sought to be
subleased) pursuant to the terms of this lease, after reduction for the
reasonable and necessary direct costs actually incurred by Tenant to obtain
the sublease or assignment, such as e.g., any brokerage fee and remodeling
costs, but with no reduction for any indirect costs, such as e.g., rent and
expenses paid by Tenant while the space sought to be subleased or assigned is
vacant, and (ii) fifty per cent (50%) of any other profit or gain realized by
Tenant from any such subleasing. All sums payable hereunder by Tenant shall
be paid to landlord as additional rent immediately upon receipt thereof by
Tenant. Any such rent, profit, gain or other consideration, or sum equal to
same, as set forth herein, not so paid to Landlord as herein required, shall
be and is deemed to be held and retained by Tenant in trust for the sole
benefit of Landlord, and, whether actually held or retained by Tenant or not,
shall be and is deemed to be held and retained by Tenant in trust for the
sole benefit of Landlord, and whether actually held or retained by Tenant or
not, shall be chargeable to Tenant and payable to Landlord upon demand. Any
failure or refusal by Tenant to pay Landlord same shall constitute a default
and material breach of the terms, covenants and conditions of this lease
subjecting Tenant to all the rights and remedies of Landlord under this lease
and applicable law.
The consent by Landlord to a sublease or assignment shall not in any way
be construed to relieve Tenant or the transferee from obtaining the express
consent in writing of Landlord to any further transfer. Any further transfer
shall require the written consent of Tenant and any previous transferee
except that Tenant and any transferee hereunder expressly waive their right
to consent to any further transfer of the premises on their behalf by
Landlord. The consent by Landlord to a sublease or assignment shall not in
any way be construed to release Tenant from any liability whether past,
present or future under this lease or to release Tenant from any liability
under this lease because of Landlord's failure to give notice of default
under or in respect to any of the terms, covenants, conditions, provisions or
agreements of this lease. Notwithstanding the consent of Landlord to an
assignment or sublease, Tenant shall remain liable for payment of all bills
rendered by Landlord for the rent and other charges incurred by the
transferee for services and materials supplied to the demised premises. If
Tenant is a corporation which, under the then current guidelines published by
the Commissioner or Corporations of the State of California, is not deemed a
public corporation, or if Tenant is an unincorporated association or a
partnership, the transfer, assignment, or hypothecation of any stock or
interest in such corporation, association or partnership in excess of
twenty-five (25%) percent shall be deemed a proposed transfer within the
meaning of this Article, including the requirement of obtaining Landlord's
prior written consent. LANDLORD HEREBY CONSENTS TO THE ASSIGNMENT,
SUBLETTING, OR TRANSFER OF THIS LEASE BY TENANT TO ANY CORPORATION RESULTING
FROM A CONSOLIDATION, OR TO THE SURVIVING CORPORATION IN CASE OF A MERGER, TO
WHICH CONSOLIDATION OR MERGER TENANT SHALL BE A PARTY, OR TO ANY BANK
ACQUIRING ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF TENANT, OR TO ANY
CORPORATION RESULTING FROM A REORGANIZATION OF TENANT.
4. EXPIRATION. If Tenant shall hold-over after the expiration of the
lease term with the written consent of Landlord, such holding shall be
construed to be a tenancy only month-to-to-month, but otherwise in accordance
with the terms and conditions hereof insofar as they are applicable, but
Tenant shall pay the rate Landlord is then offering to prospective tenants
for the herein demised premises for such further time as Tenant may hold the
same; but nothing in this Article shall be construed as consent by Landlord
to the occupancy or possession of the demised premises by Tenant after the
expiration of the term hereof. If Tenant holds over after the termination of
this lease without express written consent of the Landlord, Tenant shall pay
to Landlord rent at the rate landlord is then offering to prospective tenants
for the herein demised premises (but in no event less than two times the
monthly rental which was payable for the last month of the lease term), plus
sums payable under Article 20 and other sums payable as rent under this lease
for the period during which Tenant retains possession of the premises.
Nothing herein shall be construed as a waiver of any of the Landlord's rights
or remedies to recover possession of the demised premises. Tenant shall be
liable to Landlord for any and all reasonably related damages suffered by
Landlord including but not limited to any damages to the demised premises and
any lost rentals, profits or leases suffered because of Tenant's holdover of
the premises without the written consent of the Landlord. This lease shall
terminate on the date set forth without the necessity of notice from either
party.
6. AUTOMOBILE PARKING. A. INVITEE PARKING. Automobile parking subject to
availability, shall be extended to Tenant's invitees, in common with the
invitees of other tenants, at reasonable parking rates and upon other
conditions established by Landlord from time to time in the parking area
where designated by Landlord. During the first five (5) years of the initial
Lease Term, Landlord shall issue transient parking validations to Tenant
allowing its retail banking customers and invitees to park on a transient
basis at 80% of the then current posted validation rate. As of the date of
execution of this Lease, the current posted validation rate is $2.40 for each
20 minutes or portion thereof. After the first five (5) years, Tenant shall
pay the full amount of the then current
<PAGE>
posted validation rate for transient parking validations. Landlord reserves
the sole right and option as to whether or not an attendant will be furnished
for such automobile parking area or areas. If no attendant is furnished,
Landlord will provide suitable designation of the parking area to Tenant.
This right to park will be solely for the accommodation of the Tenant and
Tenant expressly agrees that Landlord assumes no responsibility of any kind
whatsoever in reference to such automobile parking areas or the use thereof
by the Tenant, its employees or invitees.
B. EMPLOYEE PARKING. Commencing January 1, 1997 and on the 1st day of
each month thereafter, Landlord will issue Tenant monthly parking permits for
one hundred (100) automobiles at a discounted rate of $95.00 per car per
month. Tenant shall pay Landlord in advance on the 1st day of each and every
calendar month during the Term hereof, commencing on January 1, 1997, in
lawful money of the United States of America, the lump sum of $9,500.00 per
month as additional Rent for said parking permits, without deduction or
offset for any reason including whether the entire amount of authorized
automobiles is being parked at any time, and without prior notice or demand;
provided that the aforesaid lump sum rental rate of $9,500.00 per month is
subject to increase by an additional $500.00 on the 1st day of January of
each year during the Lease Term (so that during the tenth year of the Lease
Term Tenant shall be paying at the rate of $140.00 per authorized
automobile); provided further that in no event shall Tenant be required
pay at a rate per authorized automobile in excess of Landlord's posted
parking rate at any time during the Lease Term. Parking for any additional
automobiles in excess of the authorized one hundred shall be subject to the
availability of space and paid for at the Landlord's posted parking rate.
C. GENERAL. All parking shall be on a non-reserved, self-park basis in a
combination of single and tandem spaces in accordance with the procedures and
directives of Landlord's parking operator as issued from time to time to
ensure the efficient and economical operation of the parking garage facility.
Parking shall be in common with other tenants and invitees during normal
building business hours, in the parking area inside the City National Bank
Building or within a reasonable distance from said building. The location for
such parking may be as designated by the Landlord from time to time, but the
Tenant shall not be entitled to have any specific parking stall or stalls
designated for the Tenant's exclusive use. All parking shall be pursuant to
the terms and conditions of the Supplementary Parking Agreement, attached
hereto as Exhibit "B" and incorporated herein by this reference as if set
forth in full. Timely payment of the consideration herein provided shall
expressly be a condition precedent to the Tenant's continuing right to
exercise the parking rights under this License.
7. ALTERATIONS-FIXTURES. The demised premises shall not be altered,
repaired or changed without the written consent of Landlord first had and
obtained, except that Tenant shall have the right to perform non-structural,
cosmetic remodeling improvements of the Premises which does not affect the
Building systems (as hereinafter defined) or substantially alter the layout
of the Premises up to a total expenditure which does not exceed the sum of
$15,000.00 for any or all of such improvements within any twelve (12) month
period, without Landlord's prior written consent. All such alterations,
improvements or changes shall be at the sole cost of Tenant, and Tenant shall
hold Landlord and the demised premises harmless and free from any lien or
claim therefore and all other liability, claims and demands arising out of
any work done or material supplied to the demised premises at the instance of
Tenant, and from all actions, suits and costs of suit by any person to
enforce any such lien or claim of lien, liability, claims or demands,
together with the costs of suit and attorney's fees incurred by Landlord in
connecting therewith. Tenant shall cause any mechanic's lien or other lien
filed against the demised premises or the building of which the demised
premises are a part to be released and removed within ten (10) days of such
filling either by the satisfaction of such lien or by the posting of a bond.
Landlord may impose, as a condition of such consent, such requirements as
Landlord in its sole and reasonable discretion may deem reasonable and
desirable, including, but not limited to, the requirement that Tenant utilize
for such purposes only contractors, materials, mechanics and materialmen
approved by Landlord, and the requirement that Tenant shall furnish Landlord
with a Completion Bond prior to the commencement of any work, Tenant shall
construct such improvements, alterations or repairs in conformance with any
and all applicable rules and regulations of any Federal, State, County or
Municipal code or ordinance. In any event, Landlord's contractor shall
perform all mechanical, electrical, plumbing, air conditioning, permanent
partition and ceiling tile work (hereinabove referred to as the "Building
systems"). Tenant agrees to give Landlord written notice of the commencement
date of any alterations, improvements or repairs to be made in, to or upon
the premises not later than fifteen (15) days prior to the commencement of
any such work, in order to give Landlord time to post notices of
non-responsibility. In the event any construction, alteration, decorating or
repair work (including any engineering or architectural services or
consultants employed by Landlord relative to tenant's alterations or
improvements) is performed by Landlord's contractor, the charges for such
work shall include an administrative fee for Landlord's administration of the
work in the amount of 20% of the contract sum(s) on each project administered
by Landlord at a cost of $10,000.00 or less, and 15% of the contract sum(s)
on each project administered by Landlord costing more than $10,000.00. All
charges for work performed by a Landlord's contractor shall be deemed
additional rent under this lease, payable in advance prior to commencement of
construction. All such alterations, repairs, additions or improvements
(including any alterations, repairs, additions or improvements installed
during Tenant's prior occupancy of the demised premises pursuant to any
previous lease, sublease or otherwise, and including but not limited to the
bank vault, vault door and pedestrian escalator installed between Suite 100
and the 2nd Floor Premises), shall, unless otherwise provided by written
agreement, become the property of Landlord and shall remain upon and be
surrendered with the premises upon the expiration of this lease or any sooner
termination thereof; provided that upon expiration or termination of this
Lease, Landlord shall have the right and option by written notice to Tenant
to require Tenant at its sole cost to remove any of the alterations, repairs,
additions or improvements installed by or for Tenant and repair any damage to
the Premises occasioned by such installation or removal and restore the
Premises to original condition, normal wear and tear excepted.
At the expiration of the term of this lease and provided that Tenant is not
in default hereunder, all Tenant's free-standing personal property not
attached to the demised premises may be removed by Tenant, at Tenant's sole
expense, provided, however, Tenant shall pay for any damages caused to the
demised premises by the removal of said items, so that after the removal of
said items, the demised premises will be in the same condition as at the time
prior to the said installations, if any, reasonable wear and tear excepted.
In any event, at the sole option of Landlord, Tenant at its expense, must
remove said items and repair any damage to the premises occasioned by said
installation and/or removal and restore the premises to original condition. If
Tenant shall fail to complete such removal or restoration and repair such
damage, Landlord may do so and charge the reasonable cost thereof to Tenant,
which sum shall be deemed additional rent hereunder and shall be due and
payable from Tenant to Landlord within ten (10) days after Landlord has
rendered to Tenant a written statement therefor. Any improvements, equipment
or personal property not removed by Tenant from the premises upon the end of
the term shall be conclusively presumed to have been abandoned by Tenant, and
the cost of removal, storage and/or sale of same shall be deemed additional
rent hereunder, payable from Tenant to Landlord in the same manner as
provided above with respect to restoration charges. Any tenant improvements
for which an allowance is given by Landlord to Tenant and all carpeting
and/or window coverings installed in the premises shall become part of the
realty and become the property of Landlord and remain in the demised premises
upon expiration or sooner termination of the lease or Tenant's vacating or
abandonment of the demised premises.
THE PROVISIONS OF ARTICLES 28 AND 39 ARE INCORPORATED HEREIN BY THIS
REFERENCE AS IF SET FORTH IN FULL.
8. ETHICS. If Tenant is a member of any profession, he agrees to abide by
the Code of Ethics of the association recognized as representing that
particular profession in the County of Los Angeles, State of California.
3
<PAGE>
9. UTILITIES. Landlord agrees to supply for standard desk-furnished
business offices, during the usual building business hours on business days,
reasonable amounts of domestic water for drinking purposes, heat,
air-conditioning, and electric current for lighting purposes and power for a
reasonable number of fractional horsepower office machines, together with
Landlord's standard janitorial services five times each week, Saturdays,
Sundays and recognized legal holidays excepted. Landlord shall not supply any
janitorial services or cleaning for any plumbing fixtures located in the
demised premises. Tenant shall have the obligation and responsibility for
cleaning and maintaining any such plumbing fixtures. LANDLORD SHALL PROVIDE
THE SAME SERVICES, MAINTENANCE AND REPAIRS FOR THE DEMISED PREMISES AT
LANDLORD'S COST AS LANDLORD PROVIDES TO THE OTHER OFFICE SPACE TENANTS IN THE
BUILDING (AS DISTINGUISHED FROM GROUND-FLOOR TENANTS).
Tenant will not, without the written consent of Landlord, use any office
equipment in the premises using current in excess of 110 volts, or which will
in any way generate heat or increase the amount of electricity, water or
air-conditioning usually furnished or supplied for use of the premises as
general office space; nor connect any apparatus or device for the purposes of
using electric current except through existing electrical outlets or for the
use of water except with existing water pipes in the premises. If Tenant
requires water or electric current in excess of that usually furnished or
supplied for use of the premises as general office space, Tenant shall first
procure the consent of Landlord, which Landlord may refuse, to the use
thereof and Landlord may cause a water meter or electric current meter to be
installed in the premises, to measure the amount of water and electric
current consumed for any such other use. The cost of any such meters and of
installation, maintenance and repair thereof shall be paid for by Tenant and
Tenant agrees to pay Landlord promptly upon demand therefor by Landlord for
all such water and electric current consumed as shown by said meters, at the
rates charged for such services by the City of Los Angeles or the local
public utility, as the case may be, for furnishing the same, plus any
additional expense incurred in keeping account of the water and electric
current so consumed.
In the event Tenant utilizes or consumes utilities or services after
usual building business hours or in amounts which are appreciably in excess
of those utilized or consumed by the average office tenants in the building,
Tenant shall reimburse Landlord, as additional rent, upon receipt of demand
therefor, the cost of such excess consumption. In the event Tenant utilizes
heating, air conditioning or fan service after normal building business
hours, Tenant shall reimburse Landlord its then current building standard
rate for such services. As of the date of execution of this Lease, Landlord's
current building standard rates for these services are: for heat or air
conditioning -- $175.00 per hour; for fan service -- $75.00 per hour.
Landlord agrees to supply, for any storage areas leased hereunder,
during usual building business hours on business days, reasonable amounts of
electric current for lighting purposes only. Landlord shall have no
obligation to supply to storage areas, water, heat, air-conditioning or
electric current for any purposes other than lighting.
The normal building business hours are from 6:00 A.M. to 6:00 P.M.,
Monday through Friday, recognized legal holidays excepted. At any time during
the term of this lease, normal building business hours for the furnishing of
any utilities or services to the Building may be curtailed by Landlord
without abatement of rent, due to any Energy or Natural Resource Conservation
Act now or hereinafter enacted or the directive of any Energy or Natural
Resource Agency or any other similar or dissimilar statute or directive of
any federal, state or other governmental, or quasi-governmental agency, or
public utility, or any other entity vested with the power to regulate
utilities or services.
10. NOTICES. All notices to be given hereunder by Landlord to Tenant
shall be in writing and may be served either personally or by depositing the
same in the United States mail, postage prepaid, either by ordinary,
registered or certified mail, and addressed to Tenant at 400 NORTH ROXBURY
DRIVE, BEVERLY HILLS, CALIFORNIA 90210, WITH A COPY ADDRESSED TO THE
ATTENTION OF THE SENIOR VICE-PRESIDENT -- CORPORATE PREMISES, AT THE SAME
ADDRESS. Said notice shall be deemed effective upon deposit in any public
depository of the United States mail. If there be more than one Tenant, then
notice to any of them shall constitute notice to all and notice from any of
them shall constitute notice from all. If Tenant be a corporation, then such
service upon any employee shall constitute service upon the corporation and
in this regard Tenant specifically waives any rights as to methods of service
as set out in Sections 1161 and 1162 of the California Code of Civil
Procedure. Tenant hereby waives all other methods of notice prescribed by the
Codes of California.
Any notice desired to be served on Landlord by Tenant must be sent by
prepaid United States registered or certified mail to Landlord at 9100
Wilshire Boulevard, Suite 404, Beverly Hills, California 90212, or at such
other place as Landlord may from time to time designate in writing.
11. INSURANCE. Tenant shall, at its sole expense, procure and maintain
comprehensive public liability insurance naming Landlord as an additional
insured for the demised premises during the term of this lease in minimum
amounts of $1,000,000.00 combined single limit. Tenant shall furnish Landlord
with evidence of such insurance, in a form satisfactory to Landlord, which
shall provide that the coverage shall not be canceled or reduced without ten
(10) days prior written notice to Landlord. THE PARTIES TO THIS LEASE SHALL
EACH PROCURE AN APPROPRIATE CLAUSE IN, OR AN ENDORSEMENT ON, ANY POLICY OF
FIRE OR EXTENDED COVERAGE INSURANCE COVERING THE PREMISES AND THE BUILDING OF
WHICH THE PREMISES ARE A PART, AND THE IMPROVEMENTS, FURNITURE, FIXTURES, AND
EQUIPMENT LOCATED IN OR ON THE PREMISES, PURSUANT TO WHICH THE INSURANCE
COMPANIES WAIVE SUBROGATION OR CONSENT TO A WAIVER OF RIGHT OF RECOVERY, AND
HAVING OBTAINED SUCH CLAUSES OR ENDORSEMENTS OF WAIVER OR SUBROGATION OR
CONSENT TO A WAIVER OF RIGHT OF RECOVERY, EACH PARTY HEREBY AGREES THAT IT
SHALL NOT MAKE ANY CLAIM AGAINST OR SEEK TO RECOVER FROM THE OTHER FOR ANY
LOSS OR DAMAGE TO ITS PROPERTY, OR THE PROPERTY OF OTHERS, INCLUDING
CONSEQUENTIAL LOSS OR DAMAGE RESULTING FROM FIRE OR OTHER HAZARDS COVERED BY
SUCH FIRE AND EXTENDED COVERAGE INSURANCE INCLUDING NEGLIGENT ACTS.
12. RIGHTS OF LANDLORD. Landlord reserves the following rights: (a) upon
prior notice to Tenant, to change the address and/or name of the building
without liability to Tenant; (b) to designate all sources furnishing sign
painting or lettering, ice, bottled water and toilet supplies used on the
premises; (c) constantly to have pass keys to the premises; (d) to grant
anyone the exclusive right to conduct any particular business or undertaking
in the building in which the demised premises are situated; (e) to enter the
demised premises at any time whether or not Tenant is present to admit
Landlord for inspections, repairs, alterations or additions to the premises
or the building in which the premises are situated for window cleaning and
janitorial services, to exhibit the premises to others, to affix and display
"For Rent" signs, and for any purpose whatsoever related to the safety,
protection, preservation or improvement of the premises, the said building,
or Landlord's interest, without being deemed guilty of an eviction or
disturbance of Tenant's use and possession, and without being liable in any
manner to Tenant on account thereof; (f) at any time, and from time to time,
whether at the instance of Landlord or pursuant to governmental requirements,
at the Landlord's expense, to make repairs, alterations, additions,
improvements or decorating, whether structural or otherwise, in or to the
building, or any part thereof, including the demised premises. Without
limiting the generality of the foregoing rights, Landlord shall specifically
have the right to remove, alter, improve or rebuild the lobby and all other
public and rentable areas of the building as the same are presently or shall
hereafter be constituted, or any part or parts thereof. Landlord shall not be
liable to Tenant for any expense, injury, loss or damage resulting from any
work so done in or about the demised premises or the building or any adjacent
or nearby buildings, land, street or alley, all claims against the Landlord
for any and all such liability being hereby expressly released by Tenant,
unless caused by Landlord's or its agents negligence or willful misconduct.
In connection with making repairs, alterations, decorating, additions or
improvements under the terms of this Article, Landlord shall have the right
to access through the demised premises, as well as the right to take into and
upon and through said premises or any other part of the building all material
that may be required to make such repairs, alterations, decorating, additions
or improvements, as well as the right in the course of such work to close
entrances, doors, corridors, elevators, or other building facilities, or
temporarily to abate the operation of such facilities, without being deemed
or held guilty of an eviction of Tenant and without liability for damages to
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Tenant's property, business or person and without liability to Tenant by
reason of interference with the business of Tenant or inconvenience or
annoyance to Tenant or the customers of Tenant. The rent reserved herein
shall in no way abate while said repairs, alterations, decorating, additions
or improvement are being made, and Tenant shall not be entitled to maintain
any set-off or counter-claim for damages of any kind against Landlord by
reason thereof, all such claims being hereby expressly released by Tenant.
However, all such work shall be done in such manner as to cause Tenant the
least inconvenience practicable. Landlord reserves and shall have the right
to enter upon the demised premises for the purpose of posting and maintaining
such notices on the premises as may be necessary to protect Landlord against
mechanic's, materialmen's or other liens and any other notices that may be
proper and necessary.
13. DESTRUCTION-FIRE OR OTHER CAUSE. If said building shall be totally
destroyed, this lease shall thereupon terminate. If said building or demised
premises shall be damaged by fire, earthquake, or any other cause without
fault or neglect of Tenant, so that the leased premises become untenantable,
then, if the leased premises cannot be made tenantable within one hundred
twenty (120) working days from the date of such damage, this lease may be
terminated by Landlord in the event the leased premises cannot be made
tenantable within one hundred eighty (180) days, this lease may be terminated
by either party. In any case where the leased premises are rendered partially
and permanently untenantable by fire, earthquake, or other cause without the
fault or neglect of Tenant, the monthly rental shall be adjusted in the
proportion that the rental value of the untenantable portion of the demised
premises bears to the rental value of the whole thereof. In any case, where
the leased premises are rendered partially but only temporarily untenantable
by the aforementioned causes, there shall be no abatement of rental.
14. RIGHT OF REPOSSESSION. If, in compliance with any law, or ordinance
now or hereafter enacted, or if required to comply with the directions or
requirements of any public officer, board or commission, it becomes necessary
for Landlord to acquire permanently all or any portion of the demised
premises, Landlord or its assigns shall have the right to repossess the
demised premises, or any portion thereof, at any time upon thirty days'
written notice to Tenant, and when said space shall have been so permanently
repossessed, Landlord shall, in lieu of any and all claims for damages, allow
Tenant a credit on Tenant's rent in the proportion that the rental value of
the space taken bears to the rental value of the whole of the demised
premises; provided, however, that if the space taken is of such an amount or
size as to make the remaining space unusable to Tenant, then Landlord, upon
thirty (30) days' written notice from Tenant, will endeavor, if available, to
furnish Tenant with comparable space elsewhere in the building and to place
Tenant in such new space, and this lease and each and all of the terms,
covenants and conditions thereof shall thereupon remain in full force and
effect and be deemed applicable to such new space; provided, however, that if
Landlord shall be unable to provide Tenant with such other space, then this
lease shall thereupon cease and terminate. No exercise by Landlord of any
right herein reserved shall entitle Tenant to damages for any injury or
inconvenience occasioned thereby, nor shall Tenant by reason thereof be
entitled to any abatement in rent (except as above set forth in case of
taking of space permanently.)
15. EMINENT DOMAIN. Should Landlord, at any time during the continuance
in force of this lease, be deprived of the building in which the demised
premises are situated, or any part thereof, or any part of the land on which
the building or appurtenances are situated, by condemnation or eminent domain
proceedings, this lease shall terminate, at Landlord's option, on the date
when Landlord is actually deprived of possession of said land or building, or
some part thereof, and thereupon the parties hereto shall be released from
all further obligations hereunder. Should Tenant, at any time during the
continuance in force of this lease, be deprived of the demised premises or
any substantial part thereof preventing Tenant from using the remainder of
the Premises for the purposes intended under this Lease, by condemnation or
eminent domain proceedings, this lease shall terminate, at Tenant's option,
on the date when Tenant is actually deprived of possession of the Premises,
or said substantial part thereof, and thereupon the parties hereto shall be
released from all further obligations hereunder. Upon the termination of this
Lease as aforesaid, Landlord shall thereupon repay to Tenant any rental
theretofore paid by Tenant and unearned at the date of such termination.
Tenant shall not be entitled to any compensation, allowance, claim or offset
of any kind against the Landlord, as damages or otherwise, by reason of such
condemnation or eminent domain proceedings or by reason of being deprived of
the demised premises or the termination of this lease, and said Tenant does
hereby waive, renounce and quit-claim to Landlord any right in any to any
award, judgment, payment or compensation which shall or may be made or given
because of the taking of said premises, or any portion thereof, by virtue of
any such condemnation or eminent domain proceedings, whether received in any
such action or in settlement or compromise thereof by Landlord, except that
Tenant shall have the right to file a separate claim to recover the value of
its personal property in the eminent domain proceedings.
16. USE OF BUILDING. Tenant shall not be allowed to use the name of the
building in which the demised premises are located, or words to that effect,
in connection with any business carried on in said premises (except as
Tenant's address) without written consent of Landlord. Tenant shall not
engage in any advertising whatsoever, which in any way shall adversely affect
the character of the building of which the demised premises are a part.
TENANT FURTHER COVENANTS AND AGREES NOT TO SUFFER OR PERMIT SAID PREMISES, OR
ANY PART THEREOF TO BE USED IN ANY MANNER THAT WILL INJURE OR IMPAIR THE
STRUCTURAL STRENGTH OF SAID BUILDING, AND NOT TO SUFFER OR PERMIT TO BE
INSTALLED IN SAID PREMISES, ANY MACHINERY OR APPARATUS, THE WEIGHT OR
VIBRATION OF WHICH WILL TEND TO INJURE OR IMPAIR THE STRUCTURAL STRENGTH OF
SAID BUILDING.
17. SUCCESSORS. Subject to the aforementioned restrictions on
assignment of this lease on the part of Tenant, the words "Landlord" and
"Tenant" as used herein include, apply to, and bind and benefit the heirs,
executors, administrators, assigns and successors of Landlord and Tenant. In
the event of any change of name, Tenant agrees to furnish Landlord with a
change of business or corporate name with appropriate supporting
documentation.
18. CO-TENANTS. All persons comprising Tenant, together with all
assignees and Subtenants, should Landlord elect to treat said assignees and
Subtenants as Tenants, are to be held and hereby agree to be held jointly and
severally responsible for the payment of rent and the faithful performance of
all the terms, covenants and conditions of this lease. Landlord shall have
the right to proceed against any person liable under this lease without the
necessity of first proceeding against any other person and without first
pursuing any other remedy. Payment or refund by Landlord to any person who is
one of the Tenants hereunder of any sums, including but not limited to the
security deposit due under this lease, shall constitute payment or refund to
any persons comprising Tenant.
19. NON-LIABILITY OF LANDLORD. Except in the event of Landlord's
negligence or willful misconduct, Landlord shall not be liable to Tenant, or
to any other person or persons whomsoever, and Tenant hereby waives any and
all claims for any damages to the leased premises or for or on account of any
loss, damage, theft, injury to any person or property in or about said
premises, or the building of which the demised premises are a part, or the
approaches
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or entrances thereto, or on the streets, sidewalks, parking areas or
corridors thereof, caused or occasioned by said premises being out of repair,
by defects in said building or said premises or equipment contained therein,
including, but not limited to, any security system located in or about the
demised premises whether or not installed by Landlord, or by the failure to
keep the same in good order and repair, or by fire, gas, water, electricity,
failure or malfunction of the air-conditioning, or by the breaking,
overflowing or leaking of roofs, pipes, or walls of said building, or for any
other damage or injury caused by any acts or events whatsoever beyond the
control of Landlord, including, but not limited to, the acts and omissions of
other Tenants and invitees of the building. Landlord shall not be liable and
Tenant hereby waives all claims for damages that may be caused by Landlord in
re-entering and taking possession of the premises as herein provided.
20. INCREASE OF TAXES AND OPERATING COSTS. Tenant shall pay all taxes
assessed during the term of this lease against Tenant's personal property and
trade fixtures and against tenant improvements which exceed the building
standard tenant improvements whether installed by Landlord or by Tenant, or
in Tenant's possession in, upon or about the demised premises. Tenant shall
also pay gross receipts tax or any excise or other taxes or licenses on or
measured by or allocable to the rent payable hereunder (whether charged to
Landlord or to Tenant, or to either or both of them, and whether or not now
customary or within the contemplation of the parties hereto). In the event
any such taxes or licenses shall be or have been imposed against the Landlord
or the real property of which the demised premises forms a part, then the
amount of such taxes shall be paid by Tenant, as additional rent upon demand
for payment by Landlord. Said sum shall be payable in advance in equal
monthly installments based upon Landlord's estimate of the total amount due.
Said estimated monthly payments shall be adjusted annually to the actual tax
or license due by payment by Tenant or credit by Landlord of any difference.
If, (a) in any property tax fiscal year during the term of this lease
Taxes shall be increased above the Taxes for the base fiscal year, and/or (b)
if in any calendar year during the term of this lease Operating Costs shall
be increased above those in effect during the base year, both as hereinafter
defined, Tenant shall pay to Landlord, upon receipt of a statement therefor
and in the manner hereinafter set forth, as additional rent, 24.82% of the
amount of such increase in Taxes and 24.82% of the amount of increase in
Operating Costs.
A. DEFINITION. (1) "Taxes" shall mean taxes and assessments upon
or with respect to the building of which the demises premises forms a part,
ancillary parking facilities servicing the building, and land upon which they
are located including but not limited to drive-ways, landscaped areas and
courtyard entrance areas (in this Article collectively referred to as the
"land and/or improvements"), imposed by Federal, State or local governments.
If, because of any change in the method of taxation of real estate, any tax
or assessment is imposed upon Landlord or upon the owner of the land and/or
improvements, or upon or with respect to the land and/or improvements or the
rents or income therefrom, in substitution of or in lieu of any tax or
assessment which would otherwise be a real estate tax, such other tax or
assessment shall be deemed to be a real estate tax. In case there shall be a
reduction of the assessed valuation on the land and/or improvements for any
fiscal year which affects the taxes in any year for which a rent adjustment
shall have been made, the rent adjustment shall be recalculated on the basis
of the revised assessed valuation and Landlord will credit against the rent
next becoming due from Tenant such sums as may be due to Tenant by reason of
the recalculation, less the expenses and costs incurred in effecting such
reduction, including but not limited to attorneys fees, Property Tax
Consultants fee, and other professional fees provided that such rent
adjustment shall not reduce the rent payable hereunder below the basic
monthly rent payable as set forth in Article 2 of this lease. DURING THE
FIRST FIVE (5) YEARS OF THE LEASE TERM, "TAXES" SHALL NOT INCLUDE ANY INCREASE
IN PROPERTY TAXES RESULTING FROM ANY TRANSFER OR CONVEYANCE OF THE REALTY OF
WHICH THE DEMISED PREMISES FORMS A PART OR FROM ANY TRANSFER OR CONVEYANCE OF
ANY OWNERSHIP INTEREST IN ANY ENTITY OWNING SAID REALTY OR ANY PART THEREOF.
DURING THE LAST FIVE (5) YEARS OF THE LEASE TERM, "Taxes" shall include any
property taxes resulting from any transfer or conveyance of the realty of
which the demised premises forms a part or from any transfer or conveyance of
any ownership interest in any entity owning said realty or any part thereof,
EVEN IF SAID TRANSFER OR CONVEYANCE OCCURS DURING THE FIRST FIVE (5) YEARS OF
THE LEASE TERM. (2) "Operating Costs" shall mean (a) wage and labor costs
applicable to persons engaged in the management, operations, maintenance,
overhaul, improvement or repair of the land and/or improvements, whether said
persons be employed by Landlord or by an independent contractor, with whom
Landlord shall have contracted or may contract for such services. It is
hereby understood that any increase or decrease in the hours of employment or
the number of paid holidays, or vacation days, social security taxes,
unemployment insurance taxes and the costs, if any, of providing disability,
hospitalization, medical welfare, pension, retirement or other employee
benefits imposed by law or by any collective bargaining agreement, or any
voluntary employee benefit plans, applicable with respect to such employees,
shall correspondingly affect the wage and labor costs; and (b) cost of
utilities, fuel, supplies, all insurance, service contracts, improvements
(excluding the interior of tenant spaces) of or on the land and/or
improvements, amortized over the useful life of such improvements in
accordance with generally accepted accounting principles; and (c) such other
items as are customarily included in the cost of managing (including but not
limited to management fees), operating (including but not limited to ground
rent), maintaining (including but not limited to cleaning and janitorial
services), overhauling, improving and repairing the land and/or improvements
in accordance with generally accepted accounting or management principles or
practices.
Notwithstanding anything to the contrary in the definition of 'Operating
Costs,' Operating Costs shall not include the following:
(i) Any ground lease rental (but rental and other access fees on the
access tunnel to the Pershing Square Garage are included in operating costs);
(ii) Capital expenditures required by Landlord's failure to comply with
laws enacted on or before the date the Building's Temporary Certificate of
Occupancy is validly issued;
(iii) Costs incurred by Landlord with respect to goods and services
(including utilities sold and supplied to tenants and occupants of the
Building) to the extent that Landlord is entitled to reimbursement for such
costs;
(iv) Costs incurred by Landlord for the repair of damage to the Building
to the extent that Landlord is reimbursed by insurance proceeds;
(v) Costs, including permit, license and inspection costs, incurred with
respect to the installation of tenant improvements made for new tenants in
the Building or incurred in renovating or otherwise improving, decorating,
painting or redecorating vacant suites for tenants or other occupants of the
Building;
(vi) Depreciation and amortization (except as otherwise provided herein
to be includable in operating expenses);
(vii) Leasing commissions, attorneys' fees, and other costs and expenses
incurred in connection with negotiations or disputes with present or
prospective tenants or other occupants of the Building;
(viii) Wages incurred in connection with the operation of the parking
structure;
(ix) Costs of a capital nature, including without limitation, costs
incurred by Landlord for alterations which are considered capital
improvements, (but capital repairs and capital replacements, and capital
equipment and capital tools purchased by Landlord to enable Landlord to
supply services Landlord might otherwise contract for with a third party,
shall be included in operating expenses in accordance with generally accepted
accounting principles, consistently applied);
(x) Expenses in connection with services or other benefits which are not
provided to Tenant or for which Tenant is charged for directly or which are
selectively provided to another tenant or occupant of the Building;
(xi) Interest, points and fees on debt or amortization on any mortgage
or mortgages encumbering the Building or the land on which the Building
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is located;
(xii) Expenses and costs not normally, in accordance with generally
accepting accounting principles, included in Operating Costs by landlords of
first-class institutional office Buildings;
(xiii) Advertising and promotional expenditures;
(xiv) Any bad debt loss, rent loss, or reserves for bad debts or rent
loss;
The following shall also be excluded from the taxes and operating costs:
Federal and State income taxes imposed on Landlord's net income and any and
all costs of any expenses to procure tenants for the building, including but
not limited to brokerage commissions, legal fees, and remodeling costs of
suites. (3) "Base Year" shall mean (a) for computation of Tax increases, the
fiscal tax year ended June 30th, 1997, and (b) for computation of Operating
Cost increases, the calendar year 1997. (4) "Subsequent Year" shall mean each
and every tax or calendar year, as the case may be, following the base year
falling wholly or partly within the term of this lease.
B. STATEMENTS FOR TENANT. On or about the lst day of April, in
each and every Subsequent Year, and within ninety (90) days after the
expiration or earlier termination of the term of this lease, Landlord will
furnish to Tenant a comparative statement which shall show a comparison of
all pertinent costs, either actual or estimated, and information applicable
to the Taxes in the Base Year and in the current tax year and applicable to
Operating Costs in the Base Year and in the calendar year preceding the year
in which the comparative statement is submitted, and the amount, if any, of
the increase in Taxes and Operating Costs and the amount thereof to be paid
by Tenant. In the event that the Building is not at least ninety-five percent
(95%) occupied during any Base Year or Subsequent Year, then the costs for
such year, either actual or estimated, shall be adjusted and increased to
reflect what expenses would have been, had such occupancy been ninety-five
percent (95%) during such entire year. The failure of Landlord to furnish a
comparative statement for any year in accordance with this Paragraph B shall
be without prejudice to the right of Landlord to furnish comparative
statements in subsequent years. In the event that Landlord shall for any
reason, be unable to furnish a comparative statement on or about April lst of
any year, or within ninety (90) days after the expiration or earlier
termination of this lease, Landlord may furnish such statement as soon
thereafter as practicable, with the same force and effect as a comparative
statement would have had, if delivered as aforesaid.
C. PAYMENT OF INCREASE IN RENT. (1) The payment of any additional
rent on account of Taxes and Operating Cost increases, pursuant to the
provisions of this Article 20 shall be made as follows: On the first day of
the month following the furnishing of a comparative statement, Tenant shall
pay to landlord as additional rent (a) a sum equal to 1/12th of Tenant's
share of tax increase multiplied by the number of months then elapsed from
the date commencing with the lst day of the current fiscal tax year up to the
date of the comparative statement (less any payments made in advance under
the last previous comparative statement submitted, if any), plus (b) a sum
equal to 1/12th of Tenant's share of Operating Costs increase multiplied by
the number of months then elapsed from the date commencing with the first day
of the preceding calendar year up to the date of the comparative statement
(less any payments made in advance under the last previous comparative
statement submitted, if any), plus (c) in advance, 1/12th of such share of
both Tax and Operating Cost increases with respect to the then current month,
and each month thereafter as additional rent until a different comparative
statement shall be submitted as above provided. (2) When the next comparative
statement is submitted by Landlord to Tenant, in the event that such
comparative statement shall show an increase in Taxes and/or Operating Costs
which shall be different from the increase paid or which was to be paid in
advance under the last previous comparative statement, then the additional
rent that had been or was to be paid in advance on account of Taxes and
Operating Cost increases, shall be increased or decreased accordingly. (3)
The additional rent due to Landlord or any credit due to Tenant, as disclosed
by the comparative statement furnished Tenant, shall be paid or credited
within Ten (10) days after the furnishing of such comparative statement. (4)
In the Event Tenant should dispute any cost items in any comparative
statement furnished by Landlord pursuant to this Article, Landlord and Tenant
specifically agree that provided Tenant is not otherwise in default in the
payment of the basic monthly rent under this lease and Tenant first deposits
with Landlord the total sum in dispute hereunder, the cost items in dispute
shall be submitted to an independent Certified Public Accountant engaged by
Landlord and reasonably approved by Tenant, for audit and verification of the
cost items disputed, and the finding and determination of said independent
Certified Public Accountant, shall be deemed conclusively correct, final and
binding between parties hereto without further remedy or recourse to legal
proceedings. In the event such audit discloses that the aggregate of the true
amount of such cost items as verified is within three per cent (3%) of the
aggregate items disputed, Tenant shall pay the cost of such audit, which
shall be in accordance with the reasonable charges generally prevailing for
such work. Sums payable under this Article are deemed independent additional
rental and are payable in addition to the rental specified in Article 2 of
this lease, any guaranteed minimum monthly rental, and any percentage rental
payable under this lease.
D. ARBITRATION. Provided Tenant is not otherwise in default in
the payment of the basic monthly rent under this lease, the interpretation,
construction, performance, or breach of this Article 20, may be settled by
arbitration pursuant to the rules and regulations of the American Arbitration
Association. Either party requesting arbitration under this Article 20 shall
make a demand on the other party by registered or certified mail with a copy
to the American Arbitration Association. It is a condition precedent to
Tenant's right to arbitration that Tenant first deposit with Landlord the
total amount of the sum in dispute. The arbitration shall take place as
noticed by the American Arbitration Association regardless of whether one of
the parties fails or refuses to participate. In no event shall any sum
payable hereunder be withheld by Tenant pending completion of such
arbitration.
21. GENDER. In this lease, whenever the context so requires, the
masculine gender herein used shall include the feminine or neuter and the
singular number shall include the plural. The captions set forth in the
various Articles of this lease am for identification and convenience only and
am not intended to, and shall not be deemed to limit or expand the contents
of the respective Article. If Tenant is a corporation, Tenant agrees to
provide Landlord, upon execution of this lease by Tenant, with a notarized
copy of a corporate resolution authorizing the Tenant corporation to execute
this lease and any appurtenant documents.
22. SUBORDINATION. Tenant expressly agrees that, at the sole option of
Landlord, this lease shall be either subject and subordinate, or paramount,
to all ground or underlying leases, mortgages, Deeds of Trust, or any other
encumbrances now placed or which may be placed in the future upon the real
property of which the demised premises are a part by the owners thereof, and
to all renewals, modifications, replacements or extensions thereof. And
Tenant further agrees that, whenever requested to do so by Landlord, Tenant
will execute, sign and deliver any documents required to effectuate such
subordination or superiority. Tenant shall upon request from Landlord,
execute and deliver to Landlord any certificate or other instrument stating
the date this lease will terminate, the date to which rent has been paid,
that this lease is in full force and effect without modification, and that
Tenant has no rights of deduction or offset hereunder or, if this lease has
been modified or if Tenant claims a deduction or offset hereunder, stating
the effect of such modification and/or the claimed deduction or offset.
Tenant hereby irrevocably constitutes and appoints Landlord as Tenants'
attorney in fact to execute (and to deliver to any third party) any documents
required to effect such subordination or superiority and nay such certificate
or instrument for and on behalf of Tenant, if Tenant shall have failed to do
so within ten (10) days after request therefore by Landlord, and in such
event Landlord shall be conclusively deemed not in
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default under this lease. Any right, either expressed or implied, to quiet
enjoyment of the premises which Tenant may have under this lease shall be
subject to any subordination of this lease under this Article.
Notwithstanding anything to the contrary in the foregoing, Lanldord
agrees that it shall reasonably cooperate with and assist Tenant in Tenant's
obtaining a lender's standard form Non-Disturbance Agreement by requesting
such an agreement from the lender on behalf of Tenant. Any and all costs and
expenses incurred in obtaining a Non-Disturbance Agreement shall be Tenant's
sole responsibility, including but not limited to any fees or costs imposed
by the lender and any and all attorneys' fees incurred by Tenant or Landlord.
Any negotiations or modifications of lender's standard form Non-Disturbance
Agreement shall be Tenant's sole responsibility.
23. DELAY IN OCCUPANCY. Tenant, agrees that, in the event Landlord does
not deliver to Tenant timely possession of the demised premises at the
commencement of the term, due to failure of a previous tenant to promptly
vacate the premises, or due to delays of Landlord or its contractor in
completing the remodeling of the premises, or due to any other delays,
Landlord shall not be liable for any damage caused thereby; nor shall this
lease be void or voidable if possession is given to Tenant within one hundred
twenty (120) days after the date set for commencement of this lease, but in
no event shall Tenant be liable for rent until such time as Landlord offers
to deliver possession of said premises to Tenant. However, the term hereof
shall NOT be extended by such delay. If Tenant, with Landlord's consent,
takes possession of the demised premises prior to the commencement of this
lease, then Tenant shall be subject to all the covenants and conditions
hereof and shall pay rent for the period ending with the commencement of said
term at the monthly rate prescribed for the first month of the said term. In
the event that the delay in delivering to Tenant possession of said premises
at the commencement of said term is caused by Tenant, rentals shall
nevertheless commence on the date set out in this lease for the commencement
of the term of this lease.
24. CONDITIONS OF COVENANTS. Each and all of the provisions of this
lease are conditions precedent to be faithfully and fully performed and
observed by Tenant to entitle Tenant to obtain and continue in possession of
the premises hereunder; said conditions are also covenants on the part of
Tenant and time of performance of each is of essence of this agreement.
25. ATTORNEYS' FEES. If any action or actions be commenced for the
breach of any covenants or conditions of this lease, or for any rent, or any
other action arising out of this lease, or for the possession of said
premises, or if arbitration of Article 20 is requested by either party
hereto, or if Landlord necessarily intervenes in or becomes a party, or is
made a party to, any action or actions accruing out of this lease in order to
protect is rights, then losing party will pay to prevailing party a
reasonable attorney's fee in such action or actions, which fee shall be fixed
by the court in such action. As a further inducement to Landlord to make this
lease and in consideration thereof, Landlord and Tenant covenant and agree
that in any action or proceeding arising out of, under or by virtue of this
lease, Landlord and Tenant do hereby waive trial by jury.
26. BUILDING RULES. Tenant covenants that Tenant, together with all
persons entering and/or occupying the demised premises shall keep and perform
each and all of the rules and regulations of the building hereinafter set
forth which are hereby referred to and made a part hereof. Landlord shall
have the right to amend said rules and to make other and different reasonable
rules and regulations as in Landlord's reasonable judgment may from time to
time be necessary for the management, safety, care and cleanliness of the
premises, and for the preservation of good order therein, as well as for the
convenience of other occupants and tenants therein. Such rules and
regulations may reasonably limit, restrict and regulate the privileges of
tenants in the said building, and all such rules and regulations so made by
Landlord, after notice thereof to Tenant, shall be binding upon Tenant and
become conditions of Tenant's tenancy and covenants on the part of and to be
performed by Tenant. Violation of any such rules and regulations may be
deemed a breach of this lease by Tenant. Landlord shall not be responsible to
Tenant or to any other person for the non-observance or violation of the
rules and regulations by any other tenant or person.
27. WAIVER. No modification, alteration or waiver of any term, covenant
or condition of this lease shall be valid unless in writing subscribed by the
Landlord or by any officer of Landlord authorized in writing. No waiver of a
breach of any covenant or condition shall be valid unless in writing
subscribed by the Landlord or by any officer of Landlord authorized in
writing. No waiver of a breach of any covenant or condition shall be
construed to be a waiver of any succeeding breach. No act, delay or omission
done, suffered or permitted by landlord shall be deemed to exhaust or impair
any right, remedy or power of Landlord hereunder. Landlord shall have the
right to accept any rental payment tendered by Tenant for lesser amounts than
the full rental due without waiver of the balance due from Tenant, and in
this regard Landlord shall have the right to deposit any checks tendered by
Tenant regardless of any restrictive notations or endorsements placed thereon
by Tenant or set forth in any accompanying transmittal without waiver of the
balance due Landlord. Landlord's acceptance of the keys to the premises shall
not constitute a surrender or termination of this lease. A surrender or
termination of this lease can only be effected by way of written agreement
between the parties. This agreement contains the entire contract between the
parties hereto, and there are no oral or other agreements between Tenant and
Landlord with regard to this lease, except those expressly set out herein,
and no representative or officer of Landlord has any power to change, modify
or make any other terms or representations whatsoever than those herein set
forth. Tenant hereby waives the provisions of Sections 1932, 1941, 1942 and
subdivision (4) of Section 1933 of the Civil Code of the State of California
and any and all other statutes or laws permitting a tenant to make repairs at
the expense of the landlord or to terminate a lease by reason of the
condition of the premises or any part thereof. Should any part, clause,
provision or condition of this lease be held to be void, invalid or
inoperative, such invalidity shall not affect any other clause, provision or
condition hereof, but the remainder of this lease shall be effective as
through such invalid clause, provision or condition had not been included
herein.
28. COVENANT BY TENANT. HAZARDOUS MATERIALS. Tenant covenants to hold
Landlord free and harmless from all loss or damage resulting from Tenant's
violation of any term or provision of this lease, including but not limited
to attorney fees and court costs.
Tenant further covenants to hold Landlord free and harmless from the
use, misuse or neglect of said premises or appurtenances and expressly
waives, in favor of Landlord, all claims arising out of any alleged defective
or unsafe condition thereof, unless the same was caused by the negligence or
willful misconduct of Landlord.
Tenant agrees to pay for all damages which may be caused to Landlord or
the building in which the demised premises are situated or to any tenant or
occupant thereof by any act or failure to act of Tenant or any of Tenant's
invitees, contractors, agents, guests, visitors or employees, and Tenant
further agrees not to use or suffer to be used the demised premises in any
manner which will increase the present rate of premium for insurance on said
building, or cause a cancellation of any insurance policy relating to said
building (Landlord acknowledges that Tenant's existing banking operations do
not violate this restriction on the use of the Premises), or keep or suffer
to be kept therein any gasoline, distillate, petroleum, hazardous substances
or explosive products. Tenant agrees during the entire term to take good care
of the demised premises and to keep the interior thereof in good order,
repair and condition, natural deterioration with careful use and injury by
fire, the elements and acts of God excepted.
Tenant and Landlord hereby represent and warrant that no real estate
broker nor any other person other than Landlord, its agents and employees,
has been involved in the securing and negotiation of this lease, nor is any
broker or any other person entitled to any commission, finder's fee, nor any
other
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payment as a result of Tenant's execution of this lease.
Tenant shall not use, generate, manufacture, produce, store, treat or
dispose of on, under or about the Leased Premises or the Building, or any
part thereof, any pesticides, fungicides, solvents, herbicides, flammable
explosives, asbestos, radioactive materials, hazardous wastes, toxic
substances or related injurious materials, whether injurious by themselves or
in combination with other materials (collectively, "Hazardous Materials"). As
used in this Paragraph 7.C, Hazardous Materials shall include but not be
limited to substances defined as "hazardous substances", "hazardous
materials", or "toxic substances" in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq.; the Resource Conservation and Recovery Act; 42 U.S.C.
Section 6901 et seq.; and those substances defined as "hazardous wastes" in
Section 25117 of the California Health & Safety Code or as "hazardous
substances in section 20316 of the California Health and Safety Code; and in
the regulations adopted and publications promulgated pursuant to said laws.
California Health and Safety Code Section 25359.7 (b) requires any tenant of
real property who knows, or has reasonable cause to believe, that any release
of a hazardous substance has come to be located in, on or beneath such real
property to give written notice of such condition to the owner thereof.
Tenant shall comply with requirements of Section 25359.7 (b) and any
successor statute thereto and with all other statutes, laws, ordinances,
rules, regulations and orders of governmental authorities with respect to
hazardous substances.
Tenant shall indemnify, defend (by counsel reasonably acceptable to
Landlord), protect, and hold Landlord, and each of Landlord's partners,
employees, agents, attorneys, successors and assigns, free and harmless from
and against any and all claims, liabilities, penalties, forfeitures, losses
or expenses (including attorneys' fees) or death of or injury to any person
or damage to any property whatsoever, arising from or caused in whole or in
part, directly or indirectly by (a) Tenant's possession in, on, under or
about the Leased Premises or discharge in or from the Leased Premises of any
Hazardous Materials or Tenant's use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of Hazardous
Materials to, in, on, under, about or from the Leased premises or the
Building, or (b) Tenant's failure to comply with any Federal, State, County,
Municipal, local or other law, rule, ordinance and regulation now or
hereafter in effect relating to the industrial hygiene, environmental
protection, use, analysis, generation, manufacture, purchase, transportation,
storage and disposal of hazardous, toxic, contaminated, polluting and
radioactive matter, substances and wastes. Tenant's obligations hereunder
shall include, without limitation, and whether foreseeable or unforeseeable,
all costs of any required or necessary repair, cleanup, detoxification or
decontamination of the Leased Premises or the Building, and the preparation
and implementation of any closure, remedial action or other required plans in
connection therewith, and shall survive the expiration or earlier termination
of this Lease. For purposes of the release and indemnity provisions hereof,
any acts or omissions of Tenant, or by employees, agents, assignees,
contractors or subcontractors of Tenant or others acting for or on behalf of
Tenant (whether or not they are negligent, intentional, willful or unlawful)
shall be strictly attributable to Tenant.
29. DEFAULT. A. It shall, at Landlord's option, be deemed a breach of
this lease if (1) Tenant defaults (a) in the making of any payment of money
pursuant to this lease, or (b) in fulfilling any other term, covenant,
condition, provision, or agreement of this lease if said default under this
Article 29 continues to exist at the expiration of THIRTY (30) days after
notice thereof given by Landlord to Tenant, or (2) (Intentionally deleted.
Any references to this subparagraph 2 in this Lease shall be deemed to refer
to subparagraph (3) which follows); (3) Tenant shall cease to occupy or
conduct business in Suite 100 and/or the Second Floor Premises during
customary banking hours, or if Tenant shall remove substantially all of
Tenant's furniture or furnishings therefrom, or (4) Tenant shall fail to move
into or take possession of demised premises within fifteen (15) days after
Landlord offers the premises for occupancy or (5) any execution or attachment
shall be issued against Tenant or any of Tenant's property or (6) the demised
premises shall be taken or occupied or attempted to be taken or occupied by
someone other than Tenant or (7) Tenant shall default with respect to any
other lease between (a) Landlord and Tenant, or (b) any parent company or
subsidiary company or affiliate or agent of Landlord or Tenant or (8) Tenant
assigns or otherwise transfers substantially all of the assets used in
connection with the business conducted in demised premises.
B. In the event that Landlord elects, pursuant to paragraph A of this
Article, to declare a breach of this lease, then Landlord shall have the
right to give Tenant FIFTEEN (15) days notice of intention to end the
term of this lease and thereupon, at the expiration of said FIFTEEN
(15) days, the term of this lease shall expire as fully and completely as if
that day were the day herein definitely fixed for the expiration of the term
hereof and Tenant shall then quit and surrender the demised premises to
Landlord, but Tenant shall remain liable as hereinafter provided. If Tenant
fails to so quit and surrender the demised premises as aforesaid, Landlord
shall have the right, without notice to re-enter demised premises and
dispossess Tenant and the legal representatives of Tenant and all other
occupants of demised premises by unlawful detainer or other summary
proceedings, or otherwise, and remove their effects and regain possession of
demised premises (but Landlord shall not be obligated to effect such removal).
C. In the event of any breach of this lease by Tenant (and regardless
of whether or not Tenant has abandoned the demised premises), this lease
shall not terminate unless Landlord, at Landlord's option, elects at any time
when Tenant is in breach of this lease to terminate Tenant's right to
possession as provided in Paragraph B and of this Article or, at Landlord's
further option, by the giving of any notice (including but not limited to any
notice preliminary or prerequisite to the bringing of legal proceedings in
unlawful detainer) terminating Tenant's right to possession. For so long as
this lease so continues in effect, Landlord may enforce all of Landlord's
rights and remedies under this lease, including the right to recover all rent
as it becomes due hereunder. For the purposes of this Paragraph C, the
following shall not constitute termination of Landlord's right to possession;
(1) acts of maintenance or preservation or efforts to relet demised premises,
or (2) the appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under this lease.
D. In the event of termination of this lease or termination of
Tenant's right to possession (as the result of Tenant's breach of this lease
or pursuant to Article 30 (Bankruptcy), landlord shall have the right: (1) To
remove any and all persons and property from demised premises pursuant to
such rights and remedies as the laws of the State of California shall then
provide or permit, but Landlord shall not be obligated to effect such
removal. Such property may, at Landlord's option, be stored or otherwise
dealt with as such laws may then provide or permit, including but not limited
to the right of Landlord to store the same, or any part thereof, in a
warehouse or elsewhere at the expense and risk of and for the account of
Tenant. (2) To recover from Tenant damages which shall include but not be
limited to: (a) The worth, at the time of award, of the unpaid rent
(including but not limited to increases in rent pursuant to Article 20 even
if determined at a later date) which have been earned at the time of
termination; (b) The worth, at the time of award, by which the unpaid rent
(including but not limited to increases in rent pursuant to Article 20 even
if determined at a later date) which would have been earned after termination
until the time of award exceeds the amount of such rental loss that the
Tenant proves could have been reasonably avoided; (c) The worth, at the time
of award, of the amount by which the unpaid rent (including but not limited
to increases in rent pursuant to Article 20 even if determined at a later
date) for the balance of the term after the time of award exceeds the amount
of such rental loss that Tenant proves could have been reasonably avoided for
the same period; and (d) Such reasonable expenses as Landlord may incur for
legal actions, attorney's fees, court costs, for reletting (including but not
limited to advertising), brokerage fees, for putting demised premises in good
order, condition and repair, for preparing the same for reletting (including
but not limited to any remodeling, renovations or alterations of the
premises), and for keeping demised premises in good order, condition and
repair (before and after Landlord has prepared the same for reletting), and
all reasonable costs (including but not limited to attorneys' and receivers'
fees) incurred in connection with the appointment of and performance by any
receiver and any other amount necessary to compensate Landlord for all the
detriment approximately caused by Tenant's failure to perform these
obligations under the lease or which in the ordinary course of things would
be likely to result therefrom. The "worth of at the time or award" shall
include interest at the maximum legal rate. (3) To enforce, to the extent
permitted by the laws of the State of California then in force
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and effect, any other rights or remedies set forth in this lease or otherwise
applicable hereto by operation of law or contract.
E. In the event of a breach by Tenant of any of the terms, covenants,
conditions, provisions or agreements of this lease Landlord shall
additionally have the right of injunction. Mention in this lease of any
particular remedy shall not preclude Landlord from any other remedy, at law
or in equity.
F. Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future law in the event of Tenant's being
evicted or dispossessed or any cause, or in the event of Landlord's obtaining
possession of demised premises, by reason of the violation by Tenant of any
of the terms, covenants, conditions, provisions or agreements of this lease,
or otherwise.
G. Any amount due to Landlord not paid when due shall bear interest at
the maximum rate then allowable by law from the date due. On any amounts not
paid within twenty-five (25) days from the date due, Tenant shall pay
Landlord a late charge of five (5%) per month for Landlord's administrative
expenses, plus the amount of legal costs and attorney's fees incurred by
Landlord prior to trial, for the collection of such delinquent rent. Landlord
shall have the right to apply the first monies received from Tenant to late
charges and interest. Payment of such interest and late charges shall not
excuse or cure any default by Tenant under this lease. Interest shall not be
payable on late charges.
30. BANKRUPTCY. If, at any time during the term of this lease, in any
judicial action proceeding in any court against Tenant, a receiver or other
officer or agent abe appointed to take charge of said premises or the
business conducted therein and shall be in possession thereof, or if this
lease or the interest or estate created thereby vest in any other person or
persons by operation of law or otherwise, except by consent of Landlord, or
in the event of any action taken by or against Tenant under the federal
bankruptcy laws or other applicable statutes of the United States, or any
state, or if Tenant shall make an assignment for the benefit of creditors, or
if an attachment or execution is levied upon Tenant's property or interest
under this lease which is not satisfied or released within thirty (30) days
thereafter, the occurrence of any such event shall be deemed to be a breach
of this lease by Tenant, and Landlord shall have the rights herein provided
in the event of any such breach, including the right, at Landlord's option,
to terminate this lease immediately and enter said premises and remove all
persons and property therefrom. Notwithstanding the foregoing, in the event
Tenant is ever subjected to the jurisdiction of the Federal Deposit Insurance
Corporation or any other federal or state banking authority and pursuant
thereto Tenant or such authority continues to pay the rent pursuant ot this
Lease, then this Lease shall not terminate pursuant to the provisions of this
Article so long as the rental and other provisions of this Lease are
performed.
31. ACCEPTANCE. Tenant agrees that, upon substantial completion of said
premises and/or upon Landlord's offer to deliver the same for occupancy by
Tenant, Tenant will accept said premises and take possession thereof. The
entry of the Tenant into the possession of the demised premises shall be
conclusive acknowledgement on Tenant's part of Tenant's acceptance of the
premises and that they are in good and tenantable condition, except as to
latent defects not apparent by reasonable visual inspection and reasonable
punchlist items. At the expiration or sooner termination of this Lease,
Tenant shall deliver the demised premises to Landlord, clean and in a state
of repair in which said premise existed at the commencement of the term
hereof with tenant improvements accepted by Landlord under the provisions of
Article 7, reasonable wear and tear excepted. There are no representations or
warranties of Landlord as to the condition or state of repair of the premises
except as expressly stated in this lease. Tenant's failure to accept the
premises upon Landlord's offer of delivery shall in no way postpone the
commencement of this lease or Tenant's obligation to pay rental hereunder.
32. COMPLIANCE. Tenant shall, at Tenant's expense, comply with all laws,
rules, orders, ordinances, regulations and requirements or municipal, state
and federal governments, boards and authorities relative to the Tenant's
occupancy of the demised premises or to the business to be conducted therein.
Landlord shall, at Landlord's expense, comply with all laws, rules, orders,
ordinances, regulations and requirements or municipal, state and federal
governments, boards and authorities (herein collectively referred to as the
"requirements and authorities") relative to the leasing and general
operations of the Building, exclusive of the requirements and authorities
relative to each and all of the tenant's occupancies of premises within the
Building or to the business's conducted by such tenants. Tenant will keep the
said premises in a clean and orderly condition and in accordance with all
laws and ordinances and the direction of all public officers, and, as far as
reasonably possible, shall keep all immoral and disreputable persons out of
said premises to the end that the reputation of the demised premises and the
said building as a first class office building may be preserved. No trade,
occupation, game or business shall be conducted upon said premises which
shall be unlawful or of unethical character. The demised premises shall not
be used for cooking (except only for incidental microwave cooking of
employees lunch and snacks in a non-public area of the Premises), lodging,
sleeping or for immoral purposes and no objectionable noise, vibration or
odor shall be permitted to escape from said premises. Tenant shall not
install nor maintain vending machines on the demised premises without
Landlord's prior written permission, nor engage in any activity which
violates landlord's Certificate of Occupancy relating thereto.
33. CALIFORNIA LAW. The provisions of this lease shall be construed and
interpreted in accordance with the laws of the State of California. The
language in all parts of this lease shall be construed in all cases according
to its fair meaning and not strictly for or against either Landlord or
Tenant. This lease shall be deemed to be jointly prepared by both of the
parties hereto, and any ambiguities or uncertainties herein shall not be
construed for or against either of the parties hereto.
34. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in
this lease, insofar as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner, or owners, at
the time in question, of the fee or the ground lease on the demised premises
and in the event of any transfer of the title to such Proprietary interest,
the Landlord named herein (and in case of any subsequent transfers or
conveyances, the then Grantor), their employees and agents shall be
automatically freed and relieved from and after the date of such transfer or
conveyance of all personal liability with respect to the performance of any
covenants or obligations on the part of Landlord contained in this lease
thereafter to be performed; provided, that any funds in the hands of such
Landlord or the then Grantor at the time of such transfer in which Tenant has
an interest shall be turned over to the Grantee, and any amount then due and
payable to Tenant by Landlord or the then Grantor under any provision of this
lease shall be paid to Tenant, it being intended hereby that the covenants
and obligations contained in this lease on the part of Landlord shall, subject
as aforesaid, be binding upon Landlord, its successors and assigns only
during and in respect to their successive periods of ownership. Any liability
that arises from Landlord's negligence during its period of ownership and
that remains unsatisfied at the expiration of said period of ownership, shall
survive the expiration of the period of ownership.
35. FORCE MAJEURE. Any act of the Landlord or Tenant required by this
lease to be done within a specified time (except for the payment of rent and
other sums deemed rent) shall be subject to excusable delays. The term
"excusable delays" shall be deemed to mean any delays caused by or due to
fire, the elements of nature, casualties, strikes, lockouts or other labor
troubles, governmental regulations, shortages of material, or supplies, or
any cause, whether similar or dissimilar to the foregoing beyond the control
of the performing party which affects the performance of that party. Neither
party shall be liable to the other, in damages or otherwise for any such
excusable delays. Landlord shall not be deemed in default hereunder, for any
failure, suspension, stoppage or interruption of any public utility services,
air conditioning or elevator service, caused by repairs, replacements, riots,
strikes, labor disputes, fire explosion, earthquake, floods, rain storms, war,
insurrection failure of any public utility to furnish service for any reason
whatsoever (including, but not limited to any rationing or reduction in
service due to any Energy or Natural Resource Conservation Act or Agency, or
any Environmental Protection Act or Agency,
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or any other similar or dissimilar act, statute, ordinance, regulation or
directive of any federal, state, county, municipality, or any other
governmental or quasi-governmental agency, or of any public utility or any
other public or private agency or entity vested with the power to curtail
service as a means of conserving or controlling the consumption of water,
gas, electricity or any other utility, or any other energy or energy product,
or natural resource, or any product or service), act of God, accidents or any
other similar or dissimilar causes beyond the reasonable control of Landlord;
nor shall such failure or reduction constitute an eviction. There shall be no
abatements of rent by reason of any such failure or reduction.
36. TAXES, ASSESSMENTS AND OTHER CHARGES. In addition to rental,
operating cost increases and any charges for utilities or services payable
under this lease, Landlord may at any time during the term of this agreement
increase the service or utilities charges payable as additional rent to
reflect any and all expenses costs (including but not limited to costs to
secure any alternate source of utilities, energy, products or service),
improvements, taxes, assessments, charges, subcharges or penalties which
Landlord is subject to or required to make after the execution date of this
lease pursuant to any Energy or Natural Resource Conservation Act or Agency,
or any Environmental Protection Act or Agency, or any other similar or
dissimilar act, statute, ordinance, regulation or directive of any federal,
state, county, municipality, or any other governmental or quasi-governmental
agency, or any public utility of any other public or private agency or entity
vested with the power to impose taxes, assessments, charges, surcharges or
penalties as a means of conserving or controlling the consumption of water,
gas, electricity or any other utility, or any other energy or energy product,
or natural resource, or any product or service, whether or not such taxes,
assessments, charges, surcharges or penalties are based upon or applied
(either directly or indirectly) to any utility, product or service charge.
Such increase to Tenant shall be based upon a proportion of the sum due as
determined by Landlord, to be reasonably applicable to Tenant and shall be
due and payable within ten (10) days after billing by Landlord. In any event,
Tenant shall pay all such taxes, assessments, expenses, charges, or surcharges
that are imposed directly against Tenant.
Tenant shall pay Tenant's Percentage Share (as specified in Article 20)
of any special assessment levied upon the building, improvements or real
property upon which the demised premises are located by the Los Angeles Rapid
Transit District (or any other governmental entity having the authority to
impose such assessment) (the "Metrorail Assessment"). Tenant shall pay
Tenant's Percentage Share of the Metrorail Assessment in equal monthly
installments as the same are billed by Landlord to Tenant. Landlord may
require that the final installment be due and payable on the first day of the
month in which the Metrorail Assessment is due. Tenant's obligation requires
Tenant to pay Tenant's Percentage Share of the entire Metrorail Assessment
for each calendar year of the Term and is not limited to Tenant's Percentage
Share of any annual increases made, from time to time, to the Metrorail
Assessment. If the bill for the Metrorail Assessment specifies that it
applies to a given period of time, Tenant's obligations shall be amortized to
the extent the Term of this Lease does not include all such period.
Tenant shall pay Tenant's Percentage Share (as specified in Article 20)
of any special assessment, tax, levy, surcharge or fee levied upon the
building, improvements or Real Property by the City or County of Los Angeles
in connection with the development, improvement or beautification of Pershing
Square or the area immediately adjacent thereto (the "Pershing Square
Assessment"). Tenant's obligation requires Tenant to pay Tenant's Percentage
Share of the entire Pershing Square Assessment for each calendar year of the
Term and is not limited to Tenant's Percentage Share of any annual increases
made, from time to time, to the Pershing Square Assessment. If the bill for
the Pershing Square Assessment specifies that it applies to a given period of
time, Tenant's obligations shall be amortized to the extent the Term of this
Lease does not include all such period.
37.
38. CONDITION OF THE PREMISES. Tenant agrees that the demised premises
are being leased in an "as is" condition and Landlord is not obligated to
perform any work of any kind to prepare the premises for Tenant's occupancy,
except that upon the written request of Tenant AT ANY ONE TIME FOR EACH FLOOR
DURING THE LEASE TERM, LANDLORD AT ITS COST AND EXPENSE SHALL REPAINT ALL
PAINTED SURFACES AND RECARPET ALL CARPETED SURFACES IN THE PREMISES LOCATED
ON THE LST, 2ND, 9TH AND 20TH FLOORS WITH LANDLORD'S BUILDING STANDARD CARPET
AND PAINT IN THE SAME OR SIMILAR COLORS. ALL ADDITIONAL WORK AND ANY
OVER-STANDARD MATERIALS SHALL BE FURNISHED AND/OR PAID FOR AS AN EXTRA BY
TENANT AND SHALL BE PERFORMED BY LANDLORD OR IN ACCORDANCE WITH THE
PROVISIONS OF ARTICLE 7 OF THIS LEASE. To the extent possible, Landlord shall
endeavor to perform the aforesaid work outside Tenant's business hours, in
the evenings and on weekends.
The area of the leased premises is based upon the rentable area, which
includes Tenant's proportionate share of the public elevator lobby, toilet
rooms, corridors and other public areas on the floor on which the demised
premises are located. A Lease of a full floor includes the entire public area
on the floor.
11
<PAGE>
39. FIRE PROOFING AND INSULATING MATERIALS. ABATEMENT. Tenant
acknowledges that certain fire-proofing and insulating materials used in the
construction of the Building contain asbestos and other hazardous substances
(collectively "asbestos"). If any governmental entity promulgates or revises
a statute, ordinance, code, rule or regulation, or imposes mandatory or
voluntary controls or guidelines with respect to such asbestos-containing
materials or if Landlord otherwise so elects, Landlord may, in its sole and
reasonable discretion, comply with such mandatory or voluntary controls or
guidelines, or elect to make such alterations or remove such
asbestos-containing materials. Such compliance or the making of alterations,
and the removal of all or a portion of such asbestos containing materials,
whether in the Premises or elsewhere in the Building, shall not, in any event
constitute a breach by Landlord of any provision of this Lease, relieve
Tenant of the obligation to pay any Rent due under this Lease, constitute or
be construed as a constructive or other eviction of Tenant, or constitute or
be construed as a breach of Tenant's quiet enjoyment. In accordance with
Proposition 65 (Assembly Bill No. 3713) and the regulations promulgated
thereunder (California Health and Safety Code Sections 25249.6 et. seq.)
which require that persons subject to "environmental exposure" to certain
designated chemicals, such as asbestos, receive warning, you are advised that:
WARNING: THE BUILDING CONTAINS ASBESTOS
A CHEMICAL KNOWN TO THE STATE OF
CALIFORNIA TO CAUSE CANCER.
Tenant also acknowledges that Landlord has promulgated building
regulations and procedures governing the manner in which Tenant may undertake
alterations, addition, modifications and improvements to the Premises in
those areas where asbestos-containing materials may be located, and such
regulations and procedures may be modified, amended or supplemented from time
to time. Prior to undertaking ANY physical work in or around the Premises,
Tenant shall notify Landlord in writing, of the exact nature and location of
the proposed work and shall promptly supply such additional information
regarding the proposed work as Landlord shall request. After receipt of
Tenant's notice, Landlord shall, to the extent appropriate, supply Tenant
with the Building regulations and procedures for working in areas where there
is a risk of coming into contact with asbestos-containing materials. Tenant
shall, at Tenant's sole cost and expense, strictly comply with all such
Building regulations and procedures established by Landlord and with all
applicable governmental statutes, ordinances, codes, rules, regulations,
restrictions and guidelines (herein "governmental controls"). Landlord shall
have the right (but not the duty or obligation at all times to monitor the
work for compliance with the Building regulations and procedures and
governmental controls. If Landlord determines that any of the Building
regulations or procedures or governmental controls are not being strictly
complied with, Landlord may immediately require the cessation of all work
being performed in or around the Premises until such time as Landlord is
satisfied that the applicable regulations, procedures and governmental
controls will be observed. Landlord's monitoring of any work in or around the
Premises shall not be deemed a certification by Landlord of compliance with
any applicable governmental control or of the building regulations and
procedures or a waiver by Landlord of its right to require strict compliance
by Tenant with such Building regulations and procedures and governmental
controls, nor shall such monitoring relieve Tenant from any of its
responsibilities and liabilities relating to such work.
40. ABATEMENT OF FIREPROOFING AND INSULATING MATERIALS. Landlord and
Tenant shall cooperate with and accommodate one another in the performance of
the following abatement work by Landlord during the term of this Lease:
A. 2ND FLOOR ABATEMENT. At any time during the Term of this Lease,
Landlord shall have the right (but not the obligation) upon sixty (60) days
prior written notice to Tenant to abate any asbestos containing materials
located in the 2nd Floor Premises. The abatement work shall be performed at
night and on weekends under the supervision of a certified industrial
hygienist, either (at the option of Landlord) (a) in segments in individual
sections of the Premises as they are vacated, or (b) in the entire Premises.
If required by Landlord, Tenant shall temporarily relocate its employees to
unoccupied portions of the 3rd Floor Premises and/or other available areas of
Tenant's Premises and/or other unoccupied areas in the Building for which
Landlord will not charge any additional rent. Landlord shall pay the
reasonable costs of relocating Tenant's furniture to the temporary space and
back to the 2nd Floor Premises. Whether performed in segments or in the
entire Premises, the work shall be performed in a manner which will interfere
with Tenant's banking operations to the least extent reasonably possible, in
order to permit Tenant's banking staff to generally perform their duties
during normal business hours during the period of the abatement of the 2nd
Floor Premises. In either case, the areas of abatement will be sealed by
plastic barriers or other means as required, and the plastic barriers,
scaffolding and other accoutrements necessary for protection or inconvenient
to remove during the course of the work shall remain continuously in place
throughout the course of the work. Tenant shall continue to pay rent on the
entire 2nd Floor Premises throughout the period of the abatement work.
B. SUITE 100 ABATEMENT. At any time during the Term of this Lease,
Landlord shall have the right (but not the obligation) upon sixty (60) days
prior written notice to Tenant to abate any asbestos containing materials
located Suite 100 on the lst Floor. The abatement work shall be performed at
night and on weekends under the supervision of a certified industrial
hygienist in a manner which will interfere with Tenant's banking operations
to the least extent reasonably possible, in order to permit Tenant's branch
bank to generally remain open during normal business hours during the period
of the abatement. The areas of abatement will be sealed by plastic barriers
or other means as required. Plastic barriers, scaffolding and other
accoutrements necessary for protection or inconvenient to remove during the
course of the work shall remain continuously in place throughout the course of
the work. Tenant shall continue to pay rent on the entire lst Floor Premises
throughout the period of the abatement work.
41. BUILDING IDENTITY SIGN. During the Term of this Lease and any
extensions thereof, Tenant shall have the exclusive right to maintain the
existing signs on the top of the Building exterior identifying the name of
the Building as "City National Bank Building". Tenant shall be responsible
for all expenses relating to the operation and maintenance of the signs,
including but not limited to utilities, cleaning, repairs, permits,
insurance, taxes and for any damage to the Building occasioned by the signs.
Upon the expiration or termination of this Lease or of these sign rights,
Landlord shall have the right and option, exercisable by written notice to
tenant, to (a) require Tenant at its sole cost to remove the signs and repair
any damage to the Building occasioned by such installation or removal and
restore the Premises to original condition, or (b) leave the signs in place
and surrender them to the Landlord as Landlord's property under the terms of
this Lease, provided that Landlord shall thereupon modify said signs to no
longer read "City National Bank".
42. OPTION TO TERMINATE. Landlord hereby grants to Tenant a one-time
option to terminate this Lease on the 30th day of June 2004, but only upon
the following terms and conditions.
A. That Tenant is not in material default under any of the terms,
covenants and conditions of this Lease on the part of Tenant to be performed
both at the time of the exercise of the option and on the termination date.
B. That Tenant give Landlord twelve (12) months' prior written notice
of Tenant's election to exercise the option, such notice to be actually
received by Landlord at least twelve (12) months prior to date the option is
to take effect.
C. That Tenant pay to Landlord with the aforesaid notice the sum of
Three Hundred Eighty-Nine Thousand and No/100 Dollars ($389,000.00) as
12
<PAGE>
consideration for this Lease termination.
D. That Tenant and all persons claiming under or through Tenant vacate
the demised premises not later than the termination date and return the
premises to Landlord in good condition, normal wear and tear excepted.
E. That all leasehold improvements which are Landlord's property under
this Lease remain in the premises as part of the realty as provided in
Article 7 and other provisions of this Lease. Tenant shall remove any
alterations or improvements required to be removed by Tenant under the terms
of this Lease and restore the premises as required not later than the
termination date.
F. That this option shall be self-operating and that, once exercised
by Tenant no further documentation by the parties hereto shall be necessary
in order to terminate this Lease.
G. That time is expressly made of the essence of this option.
43. OPTION TO EXTEND TERM. Landlord hereby grants to Tenant the right to
extend the term of this Lease for an additional five (5) year period
commencing upon the expiration of the initial ten (10) year term on December
31, 2006, but nevertheless, only upon the following terms and conditions:
A. That Tenant is not in material default under any of the terms,
covenants and conditions of this Lease on the part of Tenant to be performed
both at the time of the exercise of such option and at the commencement of
the extended term.
B. That Tenant give Landlord twelve (12) months' prior written notice
of Tenant's election to exercise such option, such notice to be actually
received by Landlord at least twelve (12) months prior to date the option is
to take effect.
C. That Tenant shall pay as rent during the extended term the fair
market rental value which is deemed to be the rental rate then being offered
to prospective tenants for new leases as of the date of the commencement of
the extended term for comparable premises in the City National Bank Building,
or if no comparable premises in the Building are on the market at that time,
the rate for comparable premises in comparable office Buildings in the
downtown Los Angeles area, provided that in no event shall the rent for the
extended term be less than the herein rental rate paid by Tenant for the
premises for the last month of the initial ten (10) year term of this Lease.
The determination of such fair market rental value shall take into
consideration all the elements which are generally and usually considered in
the real estate industry to establish a fair market rental value for
comparable premises, including but not limited to the size and location of
the premises, the quality and extent of the improvements existing in the
premises, operating cost and tax increases, cost of living and other rental
adjustments, the location of the premises in the Building, the floor height
of the premises and other economic factors generally allowed a tenant in such
market for comparable premises, such as a free rent allowance, provided that
the determination of fair market rental value shall not include any
imputation of monetary value to fair market rental factors not a constituent
part of the extension option, such as, for example, a reduction of rental for
a brokerage commission where Landlord has no obligation to pay such
commission, or a reduction for a relocation allowance, or a tenant
improvement allowance based on unimproved or raw space. In any event the fair
market rental value of the premises shall be determined by employing sound
business judgment and generally accepted appraisal practices, and shall be
established in accordance with Landlord's then standard leasing practices for
premises based upon the rentable area. Escalations under Article 20 for the
taxes and operating expenses, and the Metrorail and Pershing Square Benefit
Assessments, and any charges under other provisions of this Lease, shall be
passed through to Tenant in addition to the base monthly rental.
In no event shall the rent for the extended term be less than the herein
rental rate paid by Tenant for the premises for the last month of the initial
ten (10) year term of this Lease.
D. If the parties agree on the rent for the extended term, they shall
immediately execute an amendment to this Lease stating the rent for the
extended term. If the parties are unable to agree on the rent for the
extended term then within ninety (90) days prior to the commencement of the
extended term, each party, at its cost and by giving notice to the other
party, shall appoint a real estate appraiser with at least five (5) years
full-time commercial appraisal experience in the area in which the Premises
are located to appraise and set the rent for the extended term based upon the
foregoing formula. If a party does not appoint an appraiser within ten (10)
days after the other party has given notice of the name of its appraiser, the
single appraiser appointed shall be the sole appraiser and shall set the rent
for the extended term. If the two (2) appraisers are appointed by the parties
as stated in this paragraph, they shall meet promptly and attempt to set the
rent for the extended term. If they are unable to agree within 30 days after
the second appraiser has been appointed, they shall elect a third appraiser
meeting the qualifications stated in this Paragraph within ten (10) days
after the last day of the thirty (30) day period given the two appraisers to
set the rent. Each of the parties shall bear one-half (1/2) of the cost of
appointing a third appraiser and of paying the third appraiser's fee. The
third appraiser, however selected, shall be a person who has not previously
acted in any capacity for either party. Within thirty (30) days after
selection of the third appraiser, a majority of the appraisers shall set the
rent for the extended term. If the majority of the appraisers are unable to
set the rent within the stipulated period of time, the two (2) appraisals
that are closest in amount shall be added together and their total divided by
two (2); the resulting quotient shall be the fair market rental value for the
premises.
E. That Tenant shall execute an Addendum confirming the extension of
the Term of this Lease and the rental, provided that this option shall be
self-operating and that, once exercised by Tenant no further documentation by
the parties hereto shall be necessary in order to extend the Term of this
Lease.
F. That time is expressly made of the essence of this option.
13
<PAGE>
This lease consists of FORTY-THREE (43) Articles consecutively numbered.
RULES AND REGULATIONS OF THE BUILDING REFERRED TO HEREIN WHICH CONSTITUTE A
PART OF THIS LEASE
1. The sidewalks, entrances, lobby, garage, elevators, stairways and
public corridors shall be used only as a means of ingress and egress and
shall remain unobstructed at all times. The entrance and exit doors of all
suites are to be kept closed at all times, except as required for orderly
passage to and from a suite. Loitering or congregating in any part of the
building or obstruction of any means of ingress or egress shall not be
permitted. Doors and windows shall not be covered or obstructed except that
Landlord shall have the right to require Tenant to keep the drapes closed at
all times.
2. Plumbing fixtures shall not be used for any purposes other than
those for which they were constructed, and no rubbish, newspapers, trash or
other substances of any kind shall be thrown into them. Walls, floors and
ceilings shall not be defaced in any way, and no one shall be permitted to
mark, drive nail, screw or drill into, paint, or In any way mar any building
surface, except that pictures, certificates, licenses and similar items
normally used in Tenant's business may be carefully attached to the walls of
the demised premises by Tenant in a manner to be prescribed by Landlord. Upon
removal of such items by Tenant, any damage to the walls or other surfaces,
except minor nail holes, shall be repaired by Tenant.
3. No awning, shade, sign, advertisement or notice shall be inscribed,
painted, displayed or affixed on, in or to any window or door or any other
part of the outside or inside of the building or the demised premises. No
window displays or other public displays shall be permitted, without the
prior written consent of Landlord. Tenant shall not solicit other tenants in
the building. Drapes may be installed by tenants provided they are of such
color, material, construction and installation as may be prescribed by
landlord. All tenant identification on public corridor doors will be
installed by Landlord for Tenant, but the cost shall be paid by Tenant. No
lettering or signs other than the name of the Tenant will be permitted on
public corridor doors, with the size and type of letters to be prescribed by
Landlord. The bulletin board or directory of the building will be provided
exclusively for the display of the name and location of Tenant only, and
Landlord reserves the right to exclude all other names therefrom and to
assess its Building Standard charge for each and every name other than the
name of Tenant which Tenant may desire to be placed upon such bulletin board
and to which Landlord may consent. All requests for listing of Tenants on the
Directory of Building Tenants must be submitted to the office of the building
in writing. Landlord reserves the right to approve all listing requests.
4. Electric wiring of every kind and telephone outlets shall be
installed in a manner as will be prescribed by Landlord. The location of
convenience outlets, electric light outlets, power outlets and telephone
outlets shall be approved by Landlord, but the cost of installation thereof
shall be borne by Tenant.
5. The weight, size and position of all safes and other unusually
heavy objects used or placed in the building shall be prescribed by Landlord
and shall, in all cases, stand on metal plates of such size as shall be
prescribed by Landlord. The repair of any damage done to the building or
property therein by putting in or taking out or maintaining such safes or
other unusually heavy objects shall be paid for by Tenant.
6. All freight, furniture, fixtures and other personal property shall
only be moved into, within and out of the building at times designated by and
under the super vision of Landlord and in accordance with such regulations as
may be posted in the office of the building. In no event will Landlord be
responsible for any loss or damage to such freight, furniture, fixtures or
personal property from any cause.
7. No improper noises, vibrations or odors will be permitted in the
building, nor shall any person be permitted to interfere in any way with
tenants or those having business with them. No person will be permitted to
bring or keep within the building any animal, bird or bicycle. No person
shall throw trash, refuse, cigarettes or other substances of any kind any
place within or out of the building, except in the refuse containers provided
therefor. No person shall be employed by Tenant to do janitor work in any
part of said building without the written consent of Landlord. Landlord
reserves the right to exclude or expel from the building any person who, in
the judgment of Landlord, is intoxicated or under the influence of liquor or
drugs or who shall in any manner do any act in violation of the rules and
regulations of said building.
8. The storage of goods, wares or merchandise on the premises will not
be permitted except in areas specifically designated by Landlord for storage.
No auction, public or private, will be permitted in the premises. Articles of
unusual size or weight and articles which exceed the design floor weight of
the building are not permitted in the building, unless permitted by Landlord
in writing.
9. The requirements of Tenant will be attended only upon application
at the office of the building. Landlord's employees shall not perform any
work or do anything outside of their regular duties unless under special
instruction from the office of the building, and no such employee shall admit
any person (Tenant or otherwise) to any office without specific instructions
from the office of the building.
10. All keys shall be obtained from Landlord, and all keys shall be
returned to Landlord upon termination of this lease. Tenant shall not change
the locks or install other locks on the doors.
11. Any Tenant using the premises after regular business hours or on
non-business days shall lock any entrance doors to the building used by
Tenant immediately after entering or leaving the building. Tenant, his
employees, agents or associates, or other persons entering or leaving the
building when it is so locked may be required to sign the building register
when so doing, and any watchman in charge may refuse to admit Tenant or any
of Tenant's employees, agents or associates, or any other person to the
building while it is so locked without a pass previously arranged or other
satisfactory identification showing such person's right to access to the
building at such time. However, Landlord assumes no responsibility whatsoever
in connection therewith and shall not be liable for any damage resulting from
any error in regard to any such pass or identification or from the admission
of or refusal to admit, any person to said building.
12. Tenant shall be deemed to have read these rules and to have agreed
to abide by them as a condition to his occupancy of the space herein leased.
THIS LEASE AGREEMENT WILL NOT BECOME EFFECTIVE OR A BINDING AGREEMENT BETWEEN
THE PARTIES UNTIL IT HAS BEEN COUNTERSIGNED BY CITINATIONAL-BUCKEYE BUILDING
CO. AND A COPY EXECUTED BY ALL THE PARTIES HERETO HAS BEEN RETURNED TO THE
TENANT.
LANDLORD: TENANT:
CITINATIONAL-BUCKEYE BUILDING CO., CITY NATIONAL BANK,
a California limited partnership a national banking association
By: OLIVE-SIXTH BUCKEYE CO., General Partner
By:
---------------------------
Title :
-----------------------
By:
------------------------------------
George Konheim, General Partner
14
<PAGE>
EXHIBIT A
[CHARTS OF FINAL FLOOR PLANS FOR CITY NATIONAL BANK. FLOORS 1, 2, 3, 6, 9, 10]
<PAGE>
SUPPLEMENTARY PARKING AGREEMENT
THIS PARKING AGREEMENT IS made as of September 30, 1996, between CITINATIONAL
BUCKEYE BUILDING CO., hereinafter designated the Landlord, and CITY NATIONAL
BANK, a national banking association, hereinafter designated the Tenant, as a
supplement to Article 6 of Tenant's Lease of Premises in the City National
Bank Building, of the same date, to which this Supplementary Parking Agreement
is attached.
1. DESIGNATED AUTOMOBILES. Only specifically designated automobiles
shall be entitled to the use of the parking rights herein granted. Such
automobiles shall be designated by the Tenant to the Landlord and shall be
clearly identified with parking identification stickers furnished by the
Landlord or by other suitable means specified by the Landlord. It is
expressly understood that only such specifically designated and identified
automobiles shall be entitled to park pursuant to this agreement and that the
said identification stickers shall not be transferable from the designated
automobile(s) to any other automobile. Any automobile parked in the parking
area without such identification sticker may be towed away at the expense of
the owner, as provided by the applicable city or county ordinance.
2. OPERATIONS. The rights herein granted are personal to the Tenant
only and are not assignable or transferable in any manner whatsoever without
Landlord's written consent first had and obtained. It is expressly understood
that Tenant shall not have the right to allow any other person to exercise
the rights herein granted, even though the Tenant is not himself exercising
such right on a particular day or during any particular period of time.
Landlord expressly reserves the option as to whether or not an attendant
will be furnished for the automobile parking area or areas. If no attendant
is furnished, the Landlord will provide suitable designation of the parking
area to be utilized by Tenant.
3. NON-LIABILITY. Except for Landlord's negligence as herein set
forth, Landlord shall not be liable, and Tenant hereby waives any and all
claims for personal injury and property damage of any kind, including but not
limited to theft, fire damage, collision damage, vandalism and damage of any
kind to any automobile of Tenant or its agents or employees while entering,
leaving or parked under this agreement at any time either during normal
building business hours or otherwise. Further, under no circumstances shall
Landlord be liable, and Tenant hereby waives any and all claims for theft,
vandalism or damage of any kind to any equipment installed in any automobile
including but not limited to stereos, radios, tape decks, compact disc
players, CB radios and television sets, nor for any packages, clothing,
briefcases (and the contents thereof or any other articles left in any
automobile, whether in the passenger compartment, the trunk, the glove
compartment or elsewhere. Landlord shall only have limited and specific
responsibility for any injuries or damages caused by the negligence of
Landlord, its agents and employees while acting within the scope of their
employment under this agreement.
Landlord shall not be liable to Tenant, in damages or otherwise, nor
shall the Landlord be deemed in default hereunder because of the Tenant's
inability to park the automobile(s) as hereinabove contemplated, due to force
majeure, strikes, lockouts or other labor troubles, riots, war, insurrection,
failure of any public utility to furnish service, accidents, insufficient
vacant parking area, or any other similar or dissimilar causes beyond the
control of the Landlord. There shall be no reduction or abatement of the
consideration payable hereunder by reason of any such failure or occurrence.
There shall be no abatement of consideration for vacations or holidays.
4. RULES AND REGULATIONS. Landlord shall have the right to promulgate,
and from time to time amend, such non-discriminatory and reasonable rules and
regulations as, in the sole judgment of the Landlord, are necessary for the
efficient operation of the parking areas, limiting, restricting and
regulating the parking privileges herein granted, and all such rules and
regulations so made by the Landlord, after notice thereof to the Tenant, shall
be binding upon the Tenant and become conditions precedent to the Tenant's
right to exercise the parking rights herein granted. Violation of any such
rules and regulations shall be deemed a material breach by Tenant of this
agreement.
5. RIGHT APPURTENANT. Tenant and Landlord previously hereto, or
concurrently herewith, have also entered into an Office Building Lease,
whereby Landlord demised to Tenant certain office space in the building
served by the aforesaid parking area or areas and the execution of this
License constitutes the exercise of a right appurtenant to said Office
Building Lease. It is expressly a condition precedent to Tenant's right to
exercise the parking rights herein granted that Tenant be not in default
under the aforesaid Office Building Lease and any default by Tenant's under
said Office Building Lease shall constitute a default under this Agreement
precluding Tenant's rights to park hereunder until such default be cured.
Any extension (or termination) of said Lease shall ipso facto extend (or
terminate) this Agreement.
6. LANDLORD'S PARKING OPERATOR. Landlord may assign its interest under
agreement to the parking operator with whom Landlord has contracted for the
operation and management of the aforesaid parking area or areas. Upon such
assignment, the parking operator shall have all the rights and duties or
Landlord hereunder, including, but not limited to, the right to enforce the
terms, covenants and conditions of this agreement and to receive payment of
the consideration provided herein.
<PAGE>
7. ATTORNEY'S FEES. In the event it becomes necessary for either party
to file any action or actions for the enforcement of any of the terms,
covenants or conditions of this agreement, or if either party necessarily
intervenes in, or becomes a party, or is made a party to any action or
actions accruing out of this agreement in order to protect its rights, then
losing party will pay to prevailing party a reasonable attorney's fee in such
action or actions, which fee shall be fixed by the court in such action.
Executed at Los Angeles, California on the date first above written.
Landlord: Tenant:
CITINATIONAL-BUCKEYE BUILDING CO., CITY NATIONAL BANK
a California limited partnership a national banking association
BY: OLIVE-SIXTH BUCKEYE CO.,
General Partner
By: ________________________________ By:_____________________________
George Konheim, General Partner
Title:__________________________
2
<PAGE>
EXHIBIT 10.3.1
FIFTH AMENDMENT TO SPLIT DOLLAR LIFE INSURANCE AGREEMENT
COLLATERAL ASSIGNMENT PLAN
This Amendment relates to that certain Split Dollar Life Insurance
Agreement made as of the 13th day of June, 1980 between CITY NATIONAL BANK
and THE GOLDSMITH 1980 INSURANCE TRUST (the "Agreement") and shall hereby
amend paragraph 7 thereof to provide that the Agreement shall terminate on
May 15, 1998.
Except as amended by the foregoing, the Agreement shall remain in full
force and effect and without any other change.
The Agreement is made and agreed to as of this 15th day of May, 1995.
THE GOLDSMITH 1980 INSURANCE TRUST CITY NATIONAL BANK
By /s/ BRUCE LEIGH GOLDSMITH By /s/ RICHARD SHEEHAN, JR.
---------------------------------- -----------------------------
Bruce Leigh Goldsmith
Trustee Its Senior Vice President
----------------------------
By /s/ RUSSELL DAVID GOLDSMITH
----------------------------------
Russell David Goldsmith
Trustee
CITY NATIONAL BANK
By /s/ GREG CUSTER
----------------------------------
Greg Custer, Assistant Trust Officer
Trustee
<PAGE>
Parent and Subsidiaries EXHIBIT 21
City National Corporation
City National Financial Services, Inc. (99.56%)
City National Bank
RNB Trust Deed Services, Inc.
Inland Data Services, Inc.
Citinational Bancorporation
City National Mortgage Company
City National Corporation is a corporation organized under the laws of the
State of Delaware. City National Bank Financial Services, Inc. is a
corporation organized under the laws of the State of California and is 99.56%
owned by City National Corporation with the remaining .46% owned by City
National Bank. 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, RNB Trust Deed
Services, Inc., and Inland Data Services, Inc. The consolidated financial
statements in the Registrant's Annual Report to Shareholders include
Registrant, Bank, City National Financial Services, Inc., Citinational
Bancorporation, City National Mortgage Company, RNB Trust Deed Services, Inc.
and Inland Data Services, Inc.
<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 15, 1998, relating to the consolidated
balance sheets of City National Corporation and subsidiaries as of December 31,
1997 and 1996 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, 1997, which report appears in the December 31, 1997 Annual Report
on Form 10-K of City National Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 327,398
<INT-BEARING-DEPOSITS> 301
<FED-FUNDS-SOLD> 150,000
<TRADING-ASSETS> 30,279
<INVESTMENTS-HELD-FOR-SALE> 607,188
<INVESTMENTS-CARRYING> 225,934
<INVESTMENTS-MARKET> 227,465
<LOANS> 3,825,224
<ALLOWANCE> 137,761
<TOTAL-ASSETS> 5,252,032
<DEPOSITS> 4,228,348
<SHORT-TERM> 419,002
<LIABILITIES-OTHER> 46,012
<LONG-TERM> 50,000
0
0
<COMMON> 46,701
<OTHER-SE> 461,969
<TOTAL-LIABILITIES-AND-EQUITY> 5,252,032
<INTEREST-LOAN> 304,057
<INTEREST-INVEST> 50,073
<INTEREST-OTHER> 3,866
<INTEREST-TOTAL> 357,996
<INTEREST-DEPOSIT> 73,289
<INTEREST-EXPENSE> 104,328
<INTEREST-INCOME-NET> 238,668
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (1,048)
<EXPENSE-OTHER> 181,757
<INCOME-PRETAX> 125,329
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,133
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 8.75
<LOANS-NON> 27,566
<LOANS-PAST> 26,192
<LOANS-TROUBLED> 2,813
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 137,105<F1>
<CHARGE-OFFS> 19,512
<RECOVERIES> 20,168
<ALLOWANCE-CLOSE> 137,761
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Adjusted for acquisition of Ventura, Frontier, and Riverside National Bank.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 331,046 302,901 339,813 245,706
<INT-BEARING-DEPOSITS> 10,978 30,701 30,709 30,206
<FED-FUNDS-SOLD> 151,200 160,000 25,000 80,000
<TRADING-ASSETS> 32,129 32,363 26,798 23,026
<INVESTMENTS-HELD-FOR-SALE> 615,863 666,367 655,818 666,960
<INVESTMENTS-CARRYING> 195,229 169,998 193,669 186,722
<INVESTMENTS-MARKET> 194,655 168,143 191,294 184,926
<LOANS> 2,839,435 2,373,914 2,547,725 2,674,242
<ALLOWANCE> 130,089 128,911 127,294 128,589
<TOTAL-ASSETS> 4,216,496 3,767,941 3,857,884 3,946,555
<DEPOSITS> 0 2,870,874 2,850,999 2,940,169
<SHORT-TERM> 343,191 449,839 554,543 531,683
<LIABILITIES-OTHER> 51,235 55,650 49,484 54,520
<LONG-TERM> 34,800 34,800 34,800 34,800
0 0 0 0
0 0 0 0
<COMMON> 46,303 45,818 45,927 46,094
<OTHER-SE> 354,444 310,960 322,121 339,289
<TOTAL-LIABILITIES-AND-EQUITY> 4,216,496 3,767,941 3,857,884 3,946,555
<INTEREST-LOAN> 224,702 53,223 107,049 165,029
<INTEREST-INVEST> 52,010 13,221 26,033 39,238
<INTEREST-OTHER> 5,411 1,877 3,008 4,359
<INTEREST-TOTAL> 282,123 68,321 136,090 208,626
<INTEREST-DEPOSIT> 54,756 13,433 26,625 40,409
<INTEREST-EXPENSE> 82,389 19,161 38,866 61,212
<INTEREST-INCOME-NET> 199,734 49,160 97,224 147,414
<LOAN-LOSSES> 0 0 0 0
<SECURITIES-GAINS> 187 742 292 322
<EXPENSE-OTHER> 144,595 36,161 69,995 104,647
<INCOME-PRETAX> 99,134 24,386 48,571 75,462
<INCOME-PRE-EXTRAORDINARY> 99,134 24,386 48,571 75,462
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 66,563 15,852 31,868 49,668
<EPS-PRIMARY> 1.52 0.36 0.73 1.14
<EPS-DILUTED> 1.47 0.35 0.71 1.10
<YIELD-ACTUAL> 8.22 8.30 8.25 8.23
<LOANS-NON> 41,543 52,650 46,852 42,616
<LOANS-PAST> 12,444 24,621 13,258 20,847
<LOANS-TROUBLED> 2,569 4,960 3,146 2,964
<LOANS-PROBLEM> 0 6,000 0 0
<ALLOWANCE-OPEN> 131,514 131,513 131,513 131,513
<CHARGE-OFFS> 20,342 5,486 13,243 17,085
<RECOVERIES> 18,917 2,884 9,024 14,161
<ALLOWANCE-CLOSE> 130,089 128,911 127,294 128,589
<ALLOWANCE-DOMESTIC> 130,089 128,911 127,294 128,589
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 268,911 295,281 355,207
<INT-BEARING-DEPOSITS> 1,160 444 309
<FED-FUNDS-SOLD> 60,000 0 150,000
<TRADING-ASSETS> 39,639 47,259 23,988
<INVESTMENTS-HELD-FOR-SALE> 602,631 592,935 586,751
<INVESTMENTS-CARRYING> 214,820 233,506 228,452
<INVESTMENTS-MARKET> 212,117 232,773 229,444
<LOANS> 3,302,001 3,446,452 3,530,122
<ALLOWANCE> 137,614 132,885 137,850
<TOTAL-ASSETS> 4,583,645 4,710,444 4,974,659
<DEPOSITS> 3,639,997 3,657,070 3,814,177
<SHORT-TERM> 392,470 516,315 606,660
<LIABILITIES-OTHER> 51,103 55,044 57,122
<LONG-TERM> 34,800 9,800 9,800
0 0 0
0 0 0
<COMMON> 46,695 46,700 46,701
<OTHER-SE> 418,580 425,515 440,199
<TOTAL-LIABILITIES-AND-EQUITY> 4,583,365 4,710,444 4,974,659
<INTEREST-LOAN> 70,011 145,028 223,679
<INTEREST-INVEST> 12,545 25,240 37,780
<INTEREST-OTHER> 751 1,735 2,739
<INTEREST-TOTAL> 83,307 172,003 264,198
<INTEREST-DEPOSIT> 16,494 34,526 53,607
<INTEREST-EXPENSE> 23,535 49,439 77,051
<INTEREST-INCOME-NET> 59,772 122,564 187,147
<LOAN-LOSSES> 0 0 0
<SECURITIES-GAINS> (277) (539) (763)
<EXPENSE-OTHER> 43,925 89,239 134,186
<INCOME-PRETAX> 28,472 59,364 92,048
<INCOME-PRE-EXTRAORDINARY> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 18,003 37,561 58,455
<EPS-PRIMARY> .39 81 1.26
<EPS-DILUTED> .38 .79 1.23
<YIELD-ACTUAL> 8.47 8.55 8.60
<LOANS-NON> 40,675 40,782 31,037
<LOANS-PAST> 17,718 19,856 19,723
<LOANS-TROUBLED> 5,744 5,617 4,165
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 137,105<F1> 137,105<F1> 137,105<F1>
<CHARGE-OFFS> 3,756 11,661 15,073
<RECOVERIES> 4,265 7,441 15,818
<ALLOWANCE-CLOSE> 137,614 132,885 137,850
<ALLOWANCE-DOMESTIC> 137,614 0 137,850
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
<FN>
<F1>ADJUSTED FOR ACQUISITION OF VENTURA, FRONTIER AND RIVERSIDE BANKS
</FN>
</TABLE>
