<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1999 Commission File Number 1-10521
CITY NATIONAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2568550
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
City National Center
400 North Roxbury Drive, Beverly Hills, California 90210
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 888-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
------- --------
Number of shares of common stock outstanding at October 31, 1999: 45,403,936
<PAGE>
PART 1 - FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1999 1998 1998
- ------------------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks ................................................... $ 307,549 $ 285,843 $ 326,313
Federal funds sold ........................................................ 60,000 405,000 122,000
Investment securities (fair value $195,844 at September 30, 1998) ......... -- -- 192,771
Securities available-for-sale (cost $1,090,607; $990,152 and $715,707
at September 30, 1999, December 31, 1998 and September 30, 1998,
respectively) ......................................................... 1,060,431 1,012,526 734,391
Trading account securities ................................................ 55,082 35,015 49,055
Loans ..................................................................... 5,171,924 4,530,427 4,343,796
Less allowance for credit losses .......................................... 139,015 135,339 135,486
------------- ------------ -------------
Net loans .......................................................... 5,032,909 4,395,088 4,208,310
Premises and equipment, net ............................................ 62,674 55,766 52,659
Customers' acceptance liability ........................................ 2,779 1,759 2,101
Deferred tax asset ..................................................... 59,968 45,738 43,005
Goodwill and core deposit intangibles .................................. 130,152 73,706 63,867
Bank owned life insurance .............................................. 49,367 42,545 41,989
Affordable housing investments ......................................... 45,769 13,262 11,748
Other assets ........................................................... 68,936 61,533 59,099
------------- ------------ -------------
Total assets ....................................................... $ 6,935,616 $ 6,427,781 $ 5,907,308
============= ============ =============
LIABILITIES
Demand deposits ........................................................ $ 2,296,288 $ 2,382,724 $ 2,016,327
Interest checking deposits ............................................. 419,888 452,249 351,817
Money market deposits .................................................. 1,014,675 927,651 926,592
Savings deposits ....................................................... 218,335 183,353 170,338
Time deposits-under $100,000 ........................................... 254,537 187,710 190,580
Time deposits-$100,000 and over ........................................ 1,107,014 753,715 793,018
------------- ------------ -------------
Total deposits ..................................................... 5,310,737 4,887,402 4,448,672
Federal funds purchased and securities sold under repurchase
agreements.............................................................. 347,498 276,311 459,466
Other short-term borrowings ............................................ 341,725 317,001 77,059
Subordinated debt ...................................................... 123,405 123,265 123,217
Long-term debt ......................................................... 180,000 200,000 200,000
Other liabilities ...................................................... 69,084 60,240 55,160
Acceptances outstanding ................................................ 2,779 1,759 2,101
------------- ------------ -------------
Total liabilities .................................................. 6,375,228 5,865,978 5,365,675
------------- ------------ -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock authorized - 5,000,000 : none outstanding ................... -- -- --
Common Stock-par value-$1.00; authorized - 75,000,000;
issued - 46,885,182...................................................... 46,885 46,885 46,885
Additional paid-in capital .................................................. 276,979 287,363 289,508
Accumulated other comprehensive income (loss) ............................... (17,398) 12,901 10,772
Retained earnings ........................................................... 300,744 243,275 224,932
Treasury shares, at cost - 1,467,816; 877,945 and 896,907 shares at
September 30, 1999, December 31, 1998 and September 30, 1998,
respectively ........................................................... (46,822) (28,621) (30,464)
------------- ------------ -------------
Total shareholders' equity .............................................. 560,388 561,803 541,633
------------- ------------ -------------
Total liabilities and shareholders' equity .............................. $ 6,935,616 $ 6,427,781 $ 5,907,308
============= ============ =============
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
2
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1999 1998
- -------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ...................................................................... $ 101,835 $ 93,490 $ 289,502 $ 273,195
Securities ................................................................. 16,094 12,576 47,967 36,857
Trading account securities ................................................. 788 1,024 2,126 2,438
Federal funds sold and securities purchased under resale agreements ........ 432 420 1,416 1,827
--------- --------- --------- ---------
Total interest income .................................................. 119,149 107,510 341,011 314,317
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits ................................................................... 23,588 22,786 64,412 65,111
Federal funds purchased and securities sold under repurchase agreements .... 7,003 5,713 20,952 15,280
Other short-term borrowings ................................................ 2,770 690 5,488 4,027
Subordinated debt .......................................................... 1,707 2,081 5,712 5,873
Other long-term debt ....................................................... 2,779 2,559 9,353 5,249
--------- --------- --------- ---------
Total interest expense ................................................. 37,847 33,829 105,917 95,540
--------- --------- --------- ---------
Net interest income ........................................................ 81,302 73,681 235,094 218,777
Provision for credit losses ................................................ -- -- -- --
--------- --------- --------- ---------
Net interest income after provision for credit losses ...................... 81,302 73,681 235,094 218,777
--------- --------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts ........................................ 4,531 3,821 12,696 13,031
Investment services ........................................................ 5,474 4,482 14,413 11,900
Trust fees ................................................................. 4,442 2,282 13,307 6,735
International services ..................................................... 2,479 2,206 6,865 5,929
Bank owned life insurance .................................................. 574 546 1,654 1,589
Gain on sale of assets ..................................................... 545 223 1,724 1,881
Gain on sale of securities ................................................. 1,570 1,120 4,015 2,329
Other ...................................................................... 3,550 2,118 9,323 7,115
--------- --------- --------- ---------
Total noninterest income ............................................... 23,165 16,798 63,997 50,509
--------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries and other employee benefits ....................................... 34,191 29,489 99,017 87,072
Professional ............................................................... 5,107 4,886 14,818 16,560
Net occupancy of premises .................................................. 4,753 3,843 12,725 10,178
Information services ....................................................... 3,204 2,082 8,663 6,780
Marketing and advertising .................................................. 2,428 1,784 7,573 7,138
Depreciation ............................................................... 3,005 2,290 8,154 6,369
Office services ............................................................ 2,118 1,703 5,983 5,686
Equipment .................................................................. 422 607 1,546 1,616
Amortization of goodwill and core deposit intangibles ...................... 2,286 1,737 6,257 5,119
Acquisition integration .................................................... 1,083 9 1,109 409
Other operating ............................................................ 3,039 2,601 9,438 11,528
Other real estate income ................................................... (267) (172) (179) (257)
--------- --------- --------- ---------
Total noninterest expense .............................................. 61,369 50,859 175,104 158,198
--------- --------- --------- ---------
Income before income taxes ................................................. 43,098 39,620 123,987 111,088
Income taxes ............................................................... 15,015 14,231 43,797 39,594
--------- --------- --------- ---------
NET INCOME ................................................................. 28,083 25,389 80,190 71,494
--------- --------- --------- ---------
Other comprehensive income
Unrealized gains (loss) on securities available-for-sale ............... (9,253) 5,693 (49,312) 11,735
Reclassification adjustment for gains (losses) included in
noninterest income ................................................. (2,204) (1,120) (3,239) (2,329)
Income taxes (benefits) ................................................ (4,852) 2,163 (22,252) 3,983
--------- --------- --------- ---------
Other comprehensive income (loss) .......................................... (6,605) 2,410 (30,299) 5,423
--------- --------- --------- ---------
Comprehensive income ....................................................... $ 21,478 $ 27,799 $ 49,891 $ 76,917
========= ========= ========= =========
Net income per share, basic ............................................... $ 0.61 $ 0.55 $ 1.75 $ 1.54
========= ========= ========= =========
Net income per share, diluted ............................................. $ 0.60 $ 0.53 $ 1.70 $ 1.48
========= ========= ========= =========
Shares used to compute income per share, basic ............................. 45,664 46,230 45,767 46,504
========= ========= ========= =========
Shares used to compute income per share, diluted ........................... 46,690 47,842 47,049 48,352
========= ========= ========= =========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
3
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
DOLLARS IN THOUSANDS 1999 1998
- -------------------- --------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 80,190 $ 71,494
Adjustments to net income:
Gain on sales of ORE ....................................... 179 446
Depreciation ............................................... 8,154 6,369
Amortization of goodwill and core deposit intangibles ...... 6,257 5,119
Net increase in trading securities ......................... (20,067) (18,475)
Deferred income tax (benefit) .............................. (11,250) 16,695
Gain on sale of securities ................................. 4,015 2,329
Net increase in other (assets) liabilities ................. (35,852) 56
Other, net ................................................. 24,691 8,286
--------- ---------
Net cash provided by operating activities ............... 56,317 92,319
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale ....................... (306,541) (397,941)
Sales of securities available-for-sale .......................... 203,738 225,649
Maturities of securities available-for-sale ..................... 81,509 64,334
Maturities of investment securities ............................. -- 37,217
Purchase of investment securities ............................... -- (3,971)
Purchase of residential mortgage loans .......................... (47,714) (32,396)
Sale of residential mortgage loans .............................. 41,357 --
(Loan originations) and principal collections, net .............. (392,709) (351,441)
Proceeds from sales of ORE ...................................... 1,897 2,062
Purchase of premises and equipment .............................. (12,846) (13,302)
Net cash from acquisitions ...................................... 18,905 43,622
Bank owned life insurance premium paid .......................... (11) (40,399)
Other, net ...................................................... 542 668
--------- ---------
Net cash used by investing activities ...................... (411,873) (465,898)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in federal funds purchased and securities sold
under repurchase agreements ................................ (138,813) (71,961)
Net increase in deposits ........................................ 7,657 14,724
Net increase in short-term borrowings ........................... 234,724 189,484
Net (decrease) increase in other long-term debt ................ (20,000) 150,000
Net proceeds of subordinated debt ............................... -- 124,055
Proceeds from exercise of stock options ......................... 7,136 10,416
Stock repurchases ............................................... (37,932) (55,711)
Cash dividends paid ............................................. (22,721) (19,651)
Other, net ...................................................... 2,211 3,138
--------- ---------
Net cash provided by financing activities .................. 32,262 344,494
--------- ---------
Net decrease in cash and cash equivalents ....................... (323,294) (29,085)
Cash and cash equivalents at beginning of year .................. 690,843 477,398
--------- ---------
Cash and cash equivalents at end of period ...................... $ 367,549 $ 448,313
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................... $ 105,472 $ 90,294
Income taxes ........................................... 30,050 24,450
Non-cash investing activities:
Transfer from loans to foreclosed assets ............... 1,331 2,445
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
4
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
DOLLARS IN THOUSANDS 1999 1998
- -------------------- --------- ---------
<S> <C> <C>
Common Stock
Balance, beginning of period ................................. $ 46,885 $ 46,701
Stock issued for acquisitions ................................ -- 131
Stock options exercised ...................................... -- 53
--------- ---------
Balance, end of period ....................................... 46,885 46,885
--------- ---------
Additional paid-in capital
Balance, beginning of period ................................. 287,363 297,654
Tax benefit from stock options ............................... 2,211 3,137
Excess of cost of treasury shares reissued
over stock option exercise amounts ...................... (12,595) (18,190)
Excess of market value of shares issued
for acquisitions over historical cost ................... -- 6,907
--------- ---------
Balance, end of period ....................................... 276,979 289,508
--------- ---------
Accumulated other comprehensive income
Balance, beginning of period ................................. 12,901 5,349
Other comprehensive (loss) income net of income taxes/benefits (30,299) 5,423
--------- ---------
Balance, end of period ....................................... (17,398) 10,772
--------- ---------
Retained earnings
Balance, beginning of period ................................. 243,275 173,089
Net income ................................................... 80,190 71,494
Dividends paid ............................................... (22,721) (19,651)
--------- ---------
Balance, end of period ....................................... 300,744 224,932
--------- ---------
Treasury shares
Balance, beginning of period ................................. (28,621) (14,123)
Purchase of shares ........................................... (37,932) (55,711)
Issuance of shares for acquisitions .......................... -- 10,817
Issuance of shares for stock options ......................... 19,731 28,553
--------- ---------
Balance, end of period ....................................... (46,822) (30,464)
--------- ---------
Total shareholders' equity ......................................... $560,388 $541,633
========= =========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
5
<PAGE>
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The results of operations reflect the interim adjustments, all of which are
of a normal recurring nature and which, in the opinion of management, are
necessary for a fair presentation of the results for such interim periods.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
2. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. This Statement is effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No.133" (SFAS 137), which extended the
effective date to fiscal years beginning after June 15, 2000. The Company
uses interest rate swaps to manage interest rate exposure, which are
accounted for as hedging activities and does not believe that the
implementation will have a significant impact on the Company's financial
position, net income or net comprehensive income.
3. Trading account securities are stated at market value. Investments not
classified as trading securities are classified as securities
available-for-sale and recorded at fair value. Unrealized holding gains or
losses for securities available-for-sale are excluded from net income and
are reported as comprehensive income included as a separate component of
shareholders' equity net of taxes.
4. Certain prior periods' data have been reclassified to conform to current
period presentation.
5. Under the Company's current one million-share common stock buyback program,
which was announced on July 29, 1999, a total of 248,400 shares were
repurchased during the third quarter of 1999 at a cost of $8.2 million. As
of October 31, 1999, a total of 280,800 shares were repurchased under this
program at a cost of $9.3 million. Shares purchased under the buyback
program will be reissued for the acquisition of The Pacific Bank, upon the
exercise of stock options and for other general corporate purposes.
6. On August 27, 1999 the Company completed its acquisition of American
Pacific State Bank (APSB). The total price was $90.4 million in an all cash
transaction. This acquisition was accounted for under the purchase method
of accounting and resulted in the recording of goodwill and core deposit
intangibles of $65.7 million. Included in goodwill as purchase price
adjustments were $1.2 million of accrued severance costs, $0.5 million of
paid transaction-related expenses and $1.5 million of exit costs of which
$0.25 million remain unpaid as of September 30, 1999. The results of APSB's
operations are included in those reported by the Company beginning on
August 28, 1999.
7. On September 10, 1999, the Bank closed its Fountain Valley branch, a
location that was acquired in the Company's acquisition of Harbor Bancorp
in 1998.
8. On September 22, 1999, the Company announced the signing of a definitive
agreement for the acquisition of the $728.0 million-asset The Pacific Bank
in an approximately 50 percent common stock, 50 percent cash transaction
valued at $153.0 million. The Pacific Bank's shareholders will receive
either cash, City National Corporation common stock or a combination
thereof valued at $29.00 per share, subject to certain adjustments. Subject
to satisfying the conditions of closing including receiving all required
regulatory and shareholders approvals, the transaction is expected to
close in the first quarter of 2000.
9. Payments were made in the first half of 1999 for $0.3 million of purchase
price adjustments recorded as part of the acquisition of North American
Trust Company in 1998. Reserves for excess space of $0.5 million still
exist to be used over the remaining 6.5 years of a lease.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
City National Corporation (the Corporation) is the holding Company for City
National Bank (the Bank). Because the Bank comprises substantially all of the
business of the Corporation, references to the "Company" in this Item 2 reflect
the consolidated activities of the Corporation and the Bank.
See "Cautionary Statement for Purposes of the `Safe Harbor' Provision of the
Private Securities Litigation Reform Act of 1995", on page 18 in connection with
"forward looking" statements included in the Overview section of Results of
Operations and in the Loan Portfolio section of the Balance Sheet Analysis.
The Company regularly evaluates, and holds discussions with, various potential
acquisition candidates. As a general rule, the Company does not publicly
announce such acquisitions until after a definitive agreement has been reached,
as in the September 22, 1999 announcement of the definitive agreement entered
into between the Company and The Pacific Bank in a transaction valued at $153.0
million. Also as a matter of policy, the Company generally does not make any
specific projections as to future earnings nor does it endorse any projections
regarding future performance which may be made by others.
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded consolidated net income of $28.1 million, or $0.60 per
diluted common share, in the third quarter of 1999, compared to $25.4 million,
or $0.53 per diluted common share, in the third quarter of 1998. Increased net
income was primarily due to $7.6 million in higher net interest income, and $6.4
million higher noninterest income, partially offset by $10.5 million in higher
noninterest expense.
Net income for the first nine months of 1999 totaled $80.2 million, or $1.70 per
diluted common share compared with $71.5 million or $1.48 per diluted common
share in the 1998 period. The nine-month increase resulted largely from a $16.3
million increase in net interest income and a $13.5 million increase in
noninterest income, partially offset by a $16.9 million increase in noninterest
expense.
Return on average assets for the third quarter and first nine months of 1999
were 1.72% and 1.71%, respectively, compared with 1.78% and 1.74% for the
corresponding periods of 1998. Return on average equity for the third quarter
and first nine months of 1999 increased to 19.94% and 19.08% from 18.70% and
17.86% in 1998.
Earnings before the amortization of goodwill and core deposits intangibles
(net of applicable taxes) ("cash" earnings) for the quarter and nine months
ended September 30, 1999 were $29.8 million or $0.64 per diluted common share
and $84.9 million or $1.81 per diluted common share, respectively, compared
to $26.6 million or $0.56 per diluted common share and $75.6 million or $1.56
per diluted common share in the corresponding periods of 1998. On the same
basis, the returns on average assets were 1.83% for both the quarter and nine
months ended September 30, 1999 compared to 1.88% and 1.86% for the same
periods in 1998. Cash return on average common equity was 22.88% and 22.47%
for the quarter and nine months ended September 30, 1999, respectively,
compared to 21.91% and 20.98% for the year ago periods. "Cash" earnings are
presented because they measure the Company's ability to support growth, pay
dividends and repurchase stock. The Company's "cash" earnings per share and
other ratios are not necessarily comparable to similarly titled measures
reported by other companies.
Net interest income on a fully taxable-equivalent basis increased 10.0% to $83.9
million in the third quarter of 1999 compared with $76.3 million in the year-ago
quarter, and increased 6.6% from $78.7 million in the prior quarter. The
year-over-year increase resulted primarily from the 12.5% increase in average
loans over the last year. Interest recovered on nonaccrual and charged-off loans
was $4.9 million in the first nine months of 1999 compared with $6.0 million for
the same period a year ago. The third quarter fully taxable-net interest spread
and the net interest margin decreased to 4.14% and 5.57%, respectively, from
4.16% and 5.79%, for the comparable period a year ago. The combination of strong
growth in earning assets, which outpaced growth in lower cost core deposits, and
the slightly lower prime rate that took effect in the fourth quarter of 1998,
contributed to a decrease in net interest margin.
7
<PAGE>
Management expects modest growth in net interest income for the remainder of
1999, assuming, among other things, that loan balances will continue to grow.
Actual results may vary if the assumption proves to be incorrect.
Average loans increased $563.2 million (13.1%) in the third quarter to
$4,866.0 million compared to the prior-year quarter and $263.4 million (5.7%)
from the second quarter of 1999. This increase includes $85.0 million in
average loans from the APSB acquisition. The year-over-year growth was driven
primarily by increases in commercial, real estate commercial and construction
loans. Commercial loan average balances increased $334.5 million (14.9%) to
$2,575.8 million. Real estate commercial mortgage loan averages rose $108.6
million (14.5%) to $859.9 million. Construction loan average balances also
increased $81.6 million (36.6%) to $304.8 million.
Total loans at September 30, 1999 were $5.2 billion compared with $4.7 billion
at June 30, 1999 and $4.5 billion at December 31, 1998. This increase includes
$266.9 million from the American Pacific State Bank ("APSB") acquisition.
Relationship-originated loans increased $726.1 million in the first nine months
of 1999 while non-relationship-syndicated loans, which continue to be less than
10.0% of the portfolio, and purchased residential mortgage loans declined $84.6
million due to repayments and loan sales.
Total average deposits increased $488.8 million (11.4%) between third quarters
due primarily to increased deposit levels generated by banking offices, the
Bank's specialty deposit department and $133.8 million in average deposits from
the APSB acquisition. Total average securities increased $192.5 million (21.6%).
Total deposits as of September 30, 1999 increased $862.1 million (19.4%)
compared to September 30, 1998 and were $626.4 million (13.4%) higher than June
30, 1999. Included in this increase was $403.1 million from the acquisition of
APSB.
The Company recorded no credit loss provision for the quarters and nine months
ended September 30, 1999 and 1998 due to changes in the portfolio and net credit
recoveries of $0.3 million in the first nine months of 1999 compared with net
credit losses of $5.0 million in the first nine months of 1998. Loans charged
off in the third quarter of 1999 were $7.5 million, compared to $3.1 million in
the third quarter of 1998. Recoveries were $2.9 million and $2.8 million in the
quarters ended September 30, 1999 and 1998, respectively. The allowance for
credit losses was 2.69% of total loans at September 30, 1999 compared to 3.12%
at September 30, 1998 and 2.79% at June 30, 1999. The provision for credit
losses is expected to remain at reduced levels but not necessarily at zero for
the remainder of 1999. This assumes that general economic conditions in Southern
California will not deteriorate materially during the balance of 1999, and if
this assumption proves to be inaccurate, a higher provision for credit losses
may be required. The provision levels for the balance of 1999 will depend on
numerous factors including the general economic conditions that impact
borrowers.
Noninterest income of $23.2 million for the third quarter of 1999 continued a
sustained growth trend, increasing by $6.4 million (37.9%) over the $16.8
million reported in the same period a year ago. For the first nine months of
1999 noninterest income rose $13.5 million (26.7%) to $64.0 million compared to
$50.5 million for the same period in 1998. Investment services and trust fees
increased in the third quarter of 1999 compared to the year-earlier quarter as a
result of strong, internally generated new business as well as new revenue
generated from the North American Trust Company ("NATC") acquisition, which was
completed at the end of 1998. Noninterest income is expected to maintain its
growth trend over prior-year results for the remainder of 1999. Gains on sale of
assets and securities amounted to $2.1 million for the quarter compared with
$1.3 million in the year ago quarter.
Noninterest expense totaled $61.4 million in the third quarter of 1999, an
increase of $10.5 million (20.7%) from the third quarter of 1998. For the first
nine months of 1999 noninterest expense totaled $175.1 million, an increase of
$16.9 million (10.7%) from the first nine months of 1998. This increase is
primarily due to the additional personnel added as a result of the acquisition
of NATC, integration expenses of $1.1 million related to the APSB acquisition,
the hiring of additional personnel related to new branch openings and other
growth opportunities, and a more performance based compensation structure. Of
the $1.1 million of integration expenses, $0.5 million were paid in the third
quarter and $0.6 million reflects an accrual for new check orders of $0.3
million and unbilled integration costs of $0.3 million. All of the $0.2 million
of NATC integration expenses accrued in 1998 were paid in the first half of
1999. Noninterest expense levels for the remainder of 1999 are expected to be
higher than in 1998 reflecting the growth of the Company and the acquisition of
NATC and APSB.
8
<PAGE>
The Year 2000 issue is the result of computer programs written using two digits
(rather than four) to define years. Computers or other equipment with
date-sensitive software may recognize "00" as 1900 rather than 2000. This could
result in system failure or miscalculations. If the Company or significant
customers, suppliers or other third parties fail to properly address Year 2000
issues, the Company's ability to operate could be affected. The Company's Year
2000 Readiness discussion follows:
During the first nine months of 1999, efforts continued to address Year 2000
matters in accordance with the Company's five-phase project plan, which covers
information technology as well as embedded systems. The five phases are
awareness, assessment, renovation, validation and implementation with
contingency planning as a part of the validation phase. As previously reported,
the Company has completed all five phases and met all regulatory guidelines. As
an additional precaution, the Company has developed a contingency plan for each
of its mission critical business units which establishes trigger dates for
implementation of the plan for each software application. The field testing for
contingency plans has been completed. At this time, the Bank is implementing its
transition strategy and finalizing steps for the Year 2000 weekend. However,
these plans do not guarantee that circumstances beyond the Company's control
will not adversely impact operations. At this time, based on assessments and
testing to date, the Company does not foresee any Year 2000 issues that would
materially impair the Bank's ability to conduct business.
The Company is engaged in the ongoing process of considering and examining
whether or not there would be a material effect on its business, net income or
balance sheet if its vendors, suppliers and customers do not become Year 2000
compliant in a timely manner. With regard to customer readiness, the Company has
queried and continues to query all commercial borrowers with loans of $1.0
million and over. For those customers having responded, it has been determined
that their compliance efforts at this time appear satisfactory or their business
would not be significantly affected by Year 2000 matters. In addition, there is
a group of customers who have indicated their compliance will be in the future
and the Company continues to monitor their progress. The Company in its review
of the adequacy of its allowance for credit losses has considered the potential
for Year 2000 risks to its borrowers.
Where the Company is a third party vendor to customers, as in the area of cash
management, the Company appears to have reached Year 2000 readiness. The
Company's analysis of the corporate counterparties for its investments and
current hedging position has also been completed. The Company continues to
monitor the premises it occupies for any risks.
In the first nine months of 1999, approximately $1.8 million was directly and
indirectly expensed on Year 2000 matters. This amount excludes hardware and
software that was replaced in the normal course of business. Total direct and
indirect expenses are expected to be approximately $2.5 million for all of 1999.
The Company's effective tax rate of 34.8% in the third quarter of 1999 was
slightly lower than the previous year's third quarter and for all of 1998
reflecting an increase in state tax credits received as an incentive for making
or renewing loans in certain designated areas in and around Los Angeles. It is
expected that the Company's tax rate will remain in the 35.0% range for the
remainder of 1999 due to state tax credits and the Company's additional
investment in affordable housing limited partnerships.
9
<PAGE>
The following table presents the components of net interest income on a fully
taxable equivalent basis for the three months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
DOLLARS IN THOUSANDS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets (1)
Loans:
Commercial $2,575,814 $ 56,213 8.66% $2,241,282 $ 49,867 8.83%
Residential first mortgages 1,072,815 19,318 7.14 1,035,779 19,966 7.65
Real estate - construction 304,777 7,270 9.46 223,136 6,543 11.63
Real estate - commercial mortgage 859,944 19,062 8.79 751,291 17,369 9.17
Installment 52,666 1,376 10.37 51,345 958 7.40
---------- -------- ---------- ---------
Total loans (2) 4,866,016 103,239 8.42 4,302,833 94,703 8.73
Securities 1,015,193 17,326 6.77 818,243 13,877 6.73
Federal funds sold and securities
purchased under resale agreements 32,766 432 5.23 31,067 420 5.36
Trading account securities 68,477 799 4.63 72,837 1,095 5.96
---------- -------- ---------- ---------
Total earning assets 5,982,452 121,796 8.08 5,224,980 110,095 8.36
-------- ---------
Allowance for credit losses (141,756) (136,083)
Cash and due from banks 283,545 304,435
Other nonearning assets 367,053 275,427
---------- ----------
Total assets $6,491,294 $5,668,759
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts $ 396,533 445 0.45 $ 372,978 929 0.99
Money market accounts 967,247 7,206 2.96 917,014 7,128 3.08
Savings deposits 203,404 1,164 2.27 166,525 1,542 3.67
Time deposits - under $100,000 192,038 2,289 4.73 193,123 2,584 5.31
Time deposits - $100,000 and over 963,554 12,484 5.14 780,447 10,603 5.39
---------- -------- ---------- ---------
Total interest-bearing deposits 2,722,776 23,588 3.44 2,430,087 22,786 3.72
Federal funds purchased and securities
sold under repurchase agreements 549,034 7,003 5.06 414,103 5,713 5.47
Other borrowings 540,670 7,256 5.32 350,958 5,330 6.03
---------- -------- --------- ---------
Total interest-bearing liabilities 3,812,480 37,847 3.94 3,195,148 33,829 4.20
-------- ---------
Noninterest-bearing deposits 2,062,740 1,866,634
Other liabilities 57,381 68,467
Shareholders' equity 558,693 538,510
---------- ----------
Total liabilities and shareholders'
equity $6,491,294 $5,668,759
========== ==========
Net interest spread 4.14% 4.16%
===== =====
Fully taxable equivalent net interest income $ 83,949 $ 76,266
======== ==========
Net interest margin 5.57% 5.79%
===== =====
</TABLE>
(1) Includes average nonaccrual loans of $22,791 and $31,239 for 1999 and
1998, respectively.
(2) Loan income includes loan fees of $4,823 and $3,116 for 1999 and
1998, respectively.
10
<PAGE>
The following table presents the components of net interest income on a fully
taxable equivalent basis for the nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
DOLLARS IN THOUSANDS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets (1)
Loans:
Commercial $2,499,067 $160,463 8.58% $2,128,408 $144,618 9.08%
Residential first mortgages 1,042,781 56,344 7.22 1,028,118 58,684 7.63
Real estate - construction 274,247 19,748 9.63 174,332 14,763 11.32
Real estate - commercial mortgage 794,976 53,371 8.98 760,594 54,768 9.63
Installment 50,089 3,745 10.00 51,340 3,808 9.92
---------- -------- ---------- ---------
Total loans (2) 4,661,160 293,671 8.42 4,142,792 276,641 8.93
Securities 1,038,691 51,588 6.64 811,616 41,046 6.76
Federal funds sold and securities
purchased under resale agreements 35,836 1,416 5.28 43,850 1,827 5.57
Trading account securities 66,750 2,058 4.12 59,041 2,632 5.96
---------- -------- ---------- ---------
Total earning assets 5,802,437 348,733 8.04 5,057,299 322,146 8.52
-------- ---------
Allowance for credit losses (140,036) (137,742)
Cash and due from banks 285,147 309,709
Other nonearning assets 324,281 273,766
---------- ----------
Total assets $6,271,829 $5,503,032
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts $ 401,807 1,602 0.53 $ 384,482 2,850 0.99
Money market accounts 951,906 20,799 2.92 870,405 19,865 3.05
Savings deposits 192,458 5,297 3.68 167,688 4,520 3.60
Time deposits - under $100,000 185,294 6,526 4.71 204,683 8,050 5.26
Time deposits - $100,000 and over 843,100 30,188 4.79 749,724 29,826 5.32
---------- -------- ---------- ---------
Total interest-bearing deposits 2,574,565 64,412 3.34 2,376,982 65,111 3.66
Federal funds purchased and securities
sold under repurchase agreements 570,466 20,952 4.91 375,071 15,280 5.45
Other borrowings 505,140 20,553 5.44 335,240 15,149 6.04
---------- -------- ---------- ---------
Total interest-bearing liabilities 3,650,171 105,917 3.88 3,087,293 95,540 4.14
-------- ---------
Noninterest-bearing deposits 1,999,856 1,815,518
Other liabilities 60,018 65,010
Shareholders' equity 561,784 535,211
---------- ----------
Total liabilities and shareholders'
equity $6,271,829 $5,503,032
========== ==========
Net interest spread 4.16% 4.38%
===== =====
Fully taxable equivalent net interest income $242,816 $226,606
======== ==========
Net interest margin 5.58% 5.99%
===== =====
</TABLE>
(1) Includes average nonaccrual loans of $23,153 and $33,833 for 1999 and
1998, respectively.
(2) Loan income includes loan fees of $13,083 and $8,814 for 1999 and
1998, respectively.
11
<PAGE>
The following tables set forth the changes in net interest income on a fully
taxable equivalent basis broken down by volume and rates. The change in
interest due to both volume and in rate has been allocated to change due to
volume and rate in proportion to the relationship of the absolute dollar
amounts of the change in each.
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
FOR THE THREE
MONTHS ENDED SEPTEMBER 30,
DOLLARS IN THOUSANDS 1999 VS 1998
- -------------------- ------------------------------------------------------------
INCREASE (DECREASE)
DUE TO NET
------------------------------------- INCREASE
VOLUME RATE (DECREASE)
---------------- ------------------ -------------------
<S> <C> <C> <C>
Interest earned on:
Loans $ 12,003 $ (3,467) $ 8,536
Securities 3,366 83 3,449
Trading account securities (62) (234) (296)
Federal funds sold and
securities purchased
under resale agreements 22 (10) 12
---------------- ------------------ -------------------
Total interest-earning assets 15,329 (3,628) 11,701
---------------- ------------------ -------------------
Interest paid on:
Interest checking deposits 55 (539) (484)
Money market deposits 370 (292) 78
Savings deposits 293 (671) (378)
Other time deposits 2,355 (769) 1,586
Other borrowings 4,335 (1,119) 3,216
---------------- ------------------ -------------------
Total interest-bearing liabilities 7,408 (3,390) 4,018
---------------- ------------------ -------------------
$ 7,921 $ (238) $ 7,683
================ ================== ===================
FOR THE THREE
MONTHS ENDED SEPTEMBER 30,
DOLLARS IN THOUSANDS 1998 VS 1997
- -------------------- -----------------------------------------------------------
INCREASE (DECREASE)
DUE TO NET
------------------------------------- INCREASE
VOLUME RATE (DECREASE)
---------------- ------------------ -------------------
<S> <C> <C> <C>
Interest earned on:
Loans $ 18,832 $ (3,700) $ 15,132
Securities 29 (221) (192)
Trading account securities 341 (11) 330
Federal funds sold and
securities purchased
under resale agreements 125 (18) 107
---------------- ------------------ -------------------
Total interest-earning assets 19,327 (3,950) 15,377
---------------- ------------------ -------------------
Interest paid on:
Interest checking deposits 66 (18) 48
Money market deposits 882 83 965
Savings deposits (10) 119 109
Other time deposits 2,563 20 2,583
Other borrowings 2,278 234 2,512
---------------- ------------------ -------------------
Total interest-bearing liabilities 5,779 438 6,217
---------------- ------------------ -------------------
$ 13,548 $ (4,388) $ 9,160
================ ================== ===================
FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
DOLLARS IN THOUSANDS 1999 VS 1998
- -------------------- ------------------------------------------------------------
INCREASE (DECREASE)
DUE TO NET
------------------------------------- INCREASE
VOLUME RATE (DECREASE)
---------------- ------------------ -------------------
<S> <C> <C> <C>
Interest earned on:
Loans $ 33,394 $ (16,364) $ 17,030
Securities 11,283 (741) 10,542
Trading account securities 313 (887) (574)
Federal funds sold and
securities purchased
under resale agreements (320) (91) (411)
---------------- ------------------ -------------------
Total interest-earning assets 44,670 (18,083) 26,587
---------------- ------------------ -------------------
<S> <C> <C> <C>
Interest paid on:
Interest checking deposits 123 (1,371) (1,248)
Money market deposits 1,805 (871) 934
Savings deposits 676 101 777
Other time deposits 2,832 (3,994) (1,162)
Other borrowings 14,356 (3,280) 11,076
---------------- ------------------ -------------------
Total interest-bearing liabilities 19,792 (9,415) 10,377
---------------- ------------------ -------------------
$ 24,878 $ (8,668) $ 16,210
================ ================== ===================
FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
DOLLARS IN THOUSANDS 1998 VS 1997
- -------------------- ------------------------------------------------------------
INCREASE (DECREASE)
DUE TO NET
------------------------------------- INCREASE
VOLUME RATE (DECREASE)
---------------- ------------------ -------------------
<S> <C> <C> <C>
Interest earned on:
Loans $ 55,683 $ (5,060) $ 50,623
Securities (947) (72) (1,019)
Trading account securities 446 86 532
Federal funds sold and
securities purchased
under resale agreements 910 21 931
---------------- ------------------ -------------------
Total interest-earning assets 56,092 (5,025) 51,067
---------------- ------------------ -------------------
Interest paid on:
Interest checking deposits 145 (52) 93
Money market deposits 1,734 179 1,913
Savings deposits (38) 342 304
Other time deposits 8,750 444 9,194
Other borrowings 5,778 1,207 6,985
---------------- ------------------ -------------------
Total interest-bearing liabilities 16,369 2,120 18,489
---------------- ------------------ -------------------
$ 39,723 $ (7,145) $ 32,578
================ ================== ===================
</TABLE>
<PAGE>
BALANCE SHEET ANALYSIS
AVAILABLE-FOR-SALE SECURITY PORTFOLIO
Comparative period-end available-for-sale security portfolio balances are
presented below:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------------------------- -----------------------------------
DOLLARS IN THOUSANDS COST FAIR VALUE COST FAIR VALUE
- -------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
U.S. Gov. and federal agency $ 267,101 $ 265,587 $268,838 $ 275,145
Mortgage-backed 382,612 370,846 348,826 351,469
State and Municipal 149,483 147,129 121,743 123,845
Other debt 166,802 154,656 145,852 152,692
----------------- ---------------- ----------------- ----------------
Total debt securities 965,998 938,218 885,259 903,151
Marketable equity securities 124,609 122,213 104,893 109,375
----------------- ---------------- ----------------- ----------------
Total securities $1,090,607 $1,060,431 $990,152 $1,012,526
================= ================ ================= ================
SEPTEMBER 30,
1998
----------------------------------
DOLLARS IN THOUSANDS COST FAIR VALUE
- -------------------- ---------------- ----------------
<S> <C> <C>
U.S. Gov. and federal agency $270,032 $279,521
Mortgage-backed 189,559 193,225
State and Municipal 2,179 2,195
Other debt 136,870 138,942
---------------- ----------------
Total debt securities 598,640 613,883
Marketable equity securities 117,067 120,508
---------------- ----------------
Total securities $715,707 $734,391
================ ================
</TABLE>
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the available-for-sale
portfolio as of September 30, 1999.
<TABLE>
<CAPTION>
DEBT AVAILABLE-FOR-SALE SECURITIES
ONE YEAR OVER 1 YEAR
OR LESS THRU 5 YEARS
----------------------------------- -----------------------------------
DOLLARS IN THOUSANDS AMOUNT YIELD (%) AMOUNT YIELD (%)
- -------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
U.S. Gov. and federal agency $10,059 6.31 $180,936 6.30
Mortgage-backed -- -- -- --
State and Municipal 17,406 6.58 55,352 6.85
Other debt -- -- 103 7.00
----------------- ---------------- ----------------- ----------------
Total debt securities $27,465 6.48 $236,391 6.42
================= ================ ================= ================
Amortized cost $27,336 $236,293
================= ================ ================= ================
OVER 5 YEARS
THRU 10 YEARS OVER 10 YEARS
----------------------------------- ----------------------------------
DOLLARS IN THOUSANDS AMOUNT YIELD (%) AMOUNT YIELD (%)
- -------------------- ----------------- ---------------- ---------------- ----------------
<S>
U.S. Gov. and federal agency $ 74,592 6.34 $ -- --
Mortgage-backed 17,908 6.15 352,937 6.55
State and Municipal 72,831 6.40 1,541 6.31
Other debt 86,209 7.50 68,344 7.98
----------------- ---------------- ---------------- ----------------
Total debt securities $251,540 6.74 $422,822 6.78
================= ================ ================= ================
Amortized cost $264,426 $437,943
================= ================ ================ ================
TOTAL
-----------------------------------
DOLLARS IN THOUSANDS AMOUNT YIELD (%)
- -------------------- ---------------- ----------------
<S> <C> <C>
U.S. Gov. and federal agency $265,587 6.31
Mortgage-backed 370,845 6.53
State and Municipal 147,130 6.60
Other debt 154,656 7.71
---------------- ----------------
Total debt securities $938,218 6.68
================ ================
Amortized cost $965,998
================ ================
</TABLE>
Dividend income included in interest income on securities in the
Consolidated Statement of Income and Comprehensive Income in the third
quarter of 1999 and 1998 were $1.2 million and $1.9 million, and for the
nine months were $3.9 million and $6.5 million, respectively.
13
<PAGE>
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
<TABLE>
<CAPTION>
LOANS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
DOLLARS IN THOUSANDS 1999 1998 1998
- -------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C>
Commercial $2,693,902 $2,457,946 $2,280,202
Residential first mortgage 1,121,683 1,038,229 1,033,799
Real estate - construction 328,422 237,015 234,519
Real estate - mortgage 974,867 747,711 744,265
Installment 53,050 49,526 51,011
--------------------- -------------------- ---------------------
Total loans, gross 5,171,924 4,530,427 4,343,796
Less: Allowance for credit losses (139,015) (135,339) (135,486)
--------------------- -------------------- ---------------------
Total loans, net $5,032,909 $4,395,088 $4,208,310
===================== ==================== =====================
</TABLE>
Gross loans at September 30, 1999 amounted to $5,171.9 million, up
$828.1 million (19.1%) from September 30, 1998 and up $641.5 million (14.2%)
from December 31, 1998. This increase includes $266.9 million from the APSB
purchase acquisition. Contributing to the $413.7 million increase in
commercial loans from September 30, 1998 were $90.6 million from the APSB
acquisition, internal loan originations and the purchase of syndicated
corporate loans. During the quarter, commercial relationship-originated loans
increased $125.3 million while commercial non-relationship syndicated loans
increased $31.5 million. The $87.9 million increase in residential first
mortgage loans from the year ago quarter resulted from the Bank's own
originations. Construction loans, including $2.9 million from APSB, increased by
$93.9 million from September 30, 1998 as the Company continued to expand its
lending for residential and commercial construction development. Real estate
mortgage loans increased $230.6 million from the same period a year ago due
to $172.3 million from APSB and internal loan originations. The Company
expects that the Bank's loan portfolio will increase from third quarter 1999
levels due primarily to its own internal loan generation activities and loan
purchases.
The following table presents information concerning nonaccrual loans, ORE,
and restructured loans.
<TABLE>
<CAPTION>
NONACCRUAL LOANS, ORE AND RESTRUCTURED LOANS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
DOLLARS IN THOUSANDS 1999 1998 1998
- -------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial $ 7,803 $ 4,763 $10,200
Real estate 10,932 17,204 19,664
Installment 581 1,171 2,642
--------------------- -------------------- ---------------------
Total 19,316 23,138 32,506
ORE 2,134 3,480 2,148
--------------------- -------------------- ---------------------
Total nonaccrual loans and ORE $21,450 $26,618 $34,654
===================== ==================== =====================
Restructured loans, accruing $ 2,586 $ 1,982 $ 2,847
===================== ==================== =====================
Total non accrual loans as a
percentage of total loans.............. 0.37% 0.51% 0.75
Total non accrual loans and ORE as a
percentage of total loans and ORE...... 0.41 0.59 0.80
Allowance for credit losses to total loans... 2.69 2.99 3.12
Allowance for credit losses
to nonaccrual loans.................... 719.69 584.92 416.80
</TABLE>
14
<PAGE>
The table below summarizes the approximate changes in nonaccrual loans for
the quarters and nine months ended September 30, 1999 and September 30, 1998.
<TABLE>
<CAPTION>
CHANGES IN NONACCRUAL LOANS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- -------------------------------------
DOLLARS IN MILLIONS 1999 1998 1999 1998
- ------------------- --------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $26.5 $33.2 $ 23.1 $ 27.6
Additions from acquisitions 0.6 -- 0.6 3.1
Loans placed on nonaccrual 4.0 5.4 18.9 30.2
Charge offs (7.0) (1.9) (7.7) (9.5)
Loans returned to accrual status (1.0) -- (1.2) --
Repayments (including interest
applied to principal) (3.8) (4.2) (14.4) (18.9)
--------------------- ----------------- ----------------- ------------------
Balance, end of period $19.3 $32.5 $ 19.3 $ 32.5
===================== ================= ================= ==================
</TABLE>
At September 30, 1999, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $9.4 million of problem loans about
which the ability of the borrowers to comply with the present loan repayment
terms in the future is questionable.
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding and changes in the
allowance for credit losses for the periods presented:
<TABLE>
<CAPTION>
CHANGES IN ALLOWANCE FOR CREDIT LOSSES
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- --------------------------------------
DOLLARS IN MILLIONS 1999 1998 1999 1998
- ------------------- --------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Average amount of loans outstanding $4,866.0 $4,302.8 $4,661.2 $4,142.8
===================== ================= ================= ==================
Balance of allowance for credit losses,
beginning of period $ 140.2 $ 135.8 $ 135.3 $ 137.8
Loans charged off:
Commercial 7.2 1.9 9.6 12.9
Real estate 0.3 1.2 0.5 2.1
--------------------- ----------------- ----------------- ------------------
Total loans charged off 7.5 3.1 10.1 15.0
--------------------- ----------------- ----------------- ------------------
Less recoveries of loans previously charged off:
Commercial 2.5 2.4 9.7 9.5
Real estate 0.4 0.4 0.7 0.5
--------------------- ----------------- ----------------- ------------------
Total recoveries 2.9 2.8 10.4 10.0
--------------------- ----------------- ----------------- ------------------
Net loans (charged off)/recovered (4.6) (0.3) 0.3 (5.0)
Additions to allowance charged to earnings -- -- -- --
Additions to allowance from acquisitions 3.4 -- 3.4 2.7
--------------------- ----------------- ----------------- ------------------
Balance, end of period $ 139.0 $ 135.5 $ 139.0 $ 135.5
===================== ================= ================= ==================
Ratio of net charge-offs
to average loans 0.09% 0.01% N/M 0.12%
===================== ================= ================= ==================
Ratio of allowance for credit losses
to total period end loans 2.69% 3.12%
================= ==================
</TABLE>
15
<PAGE>
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for "well capitalized"
institutions and the capital ratios for the Company and the Bank at September
30, 1999, December 31, 1998 and September 30, 1998.
<TABLE>
<CAPTION>
REGULATORY
WELL CAPITALIZED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
STANDARDS 1999 1998 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CITY NATIONAL CORPORATION
- ------------------------------
Tier 1 leverage 4.00% 7.09% 7.99% 8.33%
Tier 1 risk-based capital 6.00 7.98 9.43 9.81
Total risk-based capital 10.00 11.44 13.20 13.69
CITY NATIONAL BANK
- ------------------------------
Tier 1 leverage 4.00% 6.77% 7.53% 7.90%
Tier 1 risk-based capital 6.00 7.63 8.90 9.28
Total risk-based capital 10.00 11.09 12.65 13.17
</TABLE>
Lower capital ratios than in previous quarters resulted from the goodwill
generated from the all-cash acquisition of APSB completed in August 1999.
Under the Company's current one million-share common stock buyback program,
which was announced on July 29, 1999, a total of 248,400 shares were repurchased
during the third quarter of 1999 at a cost of $8.2 million. As of October 31,
1999, a total of 280,800 shares were repurchased under this program at a cost of
$9.3 million. Shares purchased under the buyback program will be reissued for
the acquisition of The Pacific Bank, upon the exercise of stock options and for
other general corporate purposes.
On October 27, 1999, the Company declared a regular quarterly dividend of $0.165
per share, payable November 22, 1999 to shareholders of record as of November
10, 1999.
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 and
reflects the attrition and prepayment behavior of deposit and loan customers.
Present value of equity calculations are used to estimate the theoretical price
sensitivity of shareholder equity to changes in interest rates. 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.
Income simulation is the primary tool used to manage interest rate risk.
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
16
<PAGE>
Company enters into an interest rate contract. Notional principal amounts
express the volume of these transactions, although the amounts potentially
subject to credit and market risks are much smaller. The Company's interest
rate swaps are entered into as hedges against a decrease in interest income
generated from prime based loans if the prime decreased or to convert fixed
rate deposits and debt into floating rate liabilities. 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.
As of September 30, 1999, the Company has $985.0 million of notional principal
in "receive" fixed-pay LIBOR interest rate swaps, of which $520.0 million have
maturities greater than one year. The Company's interest-rate risk-management
instruments had a fair value of $(4.5) million and $6.4 million at September 30,
1999 and December 31, 1998, respectively, with no exposure to credit risk at
September 30, 1999 and $6.4 million at December 31, 1998. The credit exposure
represents the cost to replace, on a present value basis and at current market
rates, the net positive value of all contracts for each counterparty that were
outstanding at the end of the period. The Company's swap agreements require the
deposit of collateral to mitigate the amount of credit risk if certain credit
exposure thresholds are exceeded. As of September 30, 1999, the Company had
deposited $2.0 million par value in securities to mitigate credit exposure.
At September 30, 1999, the Company's outstanding foreign exchange contracts
totaled $43.3 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 September 30, 1999 had remaining maturities of six
months or less.
LIQUIDITY MANAGEMENT
The Company continues to manage its liquidity through the combination of core
deposits, federal funds purchased, repurchase agreements, collateralized
borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of
San Francisco, and a portfolio of securities available-for-sale. Liquidity is
also provided by maturing securities and loans. In addition as part of the
Company's year 2000 planning, a $50 million Federal Home Loan Bank Commitment
is in place.
Average core deposits and shareholders' equity comprised 68.5% of total funding
in the third quarter of 1999, compared to 71.5% in the third quarter of 1998.
This decrease has required that the Company increase its use of more costly
alternative funding sources. Despite the decrease in percentage of funding
derived from core deposits and shareholders' equity, the Company has not faced
any liquidity constraints.
17
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statement made by, or on behalf of, the Company.
- --Economic conditions. The Company's results are strongly influenced by general
economic conditions in its market area, Southern California, and a deterioration
in these conditions could have a material adverse impact on the quality of the
Bank's loan portfolio and the demand for its products and services. In
particular, changes in economic conditions in the real estate and entertainment
industries may affect the Company's performance.
- --Interest rates. Management anticipates that interest rates will remain flat or
slightly higher. 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 repeal
of, existing laws may cause results to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Bank, primarily through open
market operations in U.S. Government securities, the discount rate for member
bank borrowing and bank reserve requirements, and a material change in these
policies 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 competition change,
such as the merger of competing financial institutions.
- --Credit quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. The Bank has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Bank's credit portfolio, but such policies and procedures may not prevent
unexpected losses that could adversely affect the Company's results.
- --Other risks. From time to time, the Company details other risks to its
business and/or its financial results in its filings with the Securities and
Exchange Commission.
While management believes that its assumptions regarding these and other factors
on which forward looking statements are based are reasonable, such assumptions
are necessarily speculative in nature, and actual outcomes can be expected to
differ to some degree. Consequently, there can be no assurance that the results
described in such forward looking statements will, in fact, be achieved.
18
<PAGE>
PART 11. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The company filed a report on Form 8-K on September 22,
1999 under item 5 announcing the definitive agreement
plan for the acquisition of The Pacific Bank. Included
in the report is a press release dated September 22, 1999
and an information presentation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
--------------------------
(Registrant)
DATE: November 15, 1999 /s/ FRANK P. PEKNY
------------------------ --------------------------------
FRANK P. PEKNY
Executive Vice President
and Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 307,549
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 60,000
<TRADING-ASSETS> 55,082
<INVESTMENTS-HELD-FOR-SALE> 1,060,431
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,171,924
<ALLOWANCE> 139,015
<TOTAL-ASSETS> 6,935,616
<DEPOSITS> 5,310,737
<SHORT-TERM> 689,223
<LIABILITIES-OTHER> 71,863
<LONG-TERM> 303,405
0
0
<COMMON> 46,885
<OTHER-SE> 513,505
<TOTAL-LIABILITIES-AND-EQUITY> 6,935,616
<INTEREST-LOAN> 289,502
<INTEREST-INVEST> 47,967
<INTEREST-OTHER> 3,542
<INTEREST-TOTAL> 341,011
<INTEREST-DEPOSIT> 64,412
<INTEREST-EXPENSE> 105,917
<INTEREST-INCOME-NET> 235,094
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 4,015
<EXPENSE-OTHER> 175,104
<INCOME-PRETAX> 123,987
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,190
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 5.58
<LOANS-NON> 19,316
<LOANS-PAST> 5,151
<LOANS-TROUBLED> 2,586
<LOANS-PROBLEM> 9,371
<ALLOWANCE-OPEN> 138,754
<FN>
<F1> Increased by 3,415, adjustment for the
American Pacific Bank Acquisition.
</FN>
<CHARGE-OFFS> 10,102
<RECOVERIES> 10,363
<ALLOWANCE-CLOSE> 139,015
<ALLOWANCE-DOMESTIC> 139,015
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 264,476
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,000
<TRADING-ASSETS> 41,979
<INVESTMENTS-HELD-FOR-SALE> 1,023,582
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,722,739
<ALLOWANCE> 140,185
<TOTAL-ASSETS> 6,302,108
<DEPOSITS> 4,684,325
<SHORT-TERM> 654,779
<LIABILITIES-OTHER> 48,229
<LONG-TERM> 353,359
0
0
<COMMON> 46,885
<OTHER-SE> 514,531
<TOTAL-LIABILITIES-AND-EQUITY> 6,302,108
<INTEREST-LOAN> 187,667
<INTEREST-INVEST> 31,873
<INTEREST-OTHER> 2,322
<INTEREST-TOTAL> 221,862
<INTEREST-DEPOSIT> 40,824
<INTEREST-EXPENSE> 68,070
<INTEREST-INCOME-NET> 153,792
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,445
<EXPENSE-OTHER> 113,735
<INCOME-PRETAX> 80,889
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,107
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 5.55
<LOANS-NON> 26,533
<LOANS-PAST> 8,904
<LOANS-TROUBLED> 1,771
<LOANS-PROBLEM> 4,542
<ALLOWANCE-OPEN> 135,339
<CHARGE-OFFS> 2,619
<RECOVERIES> 7,465
<ALLOWANCE-CLOSE> 140,185
<ALLOWANCE-DOMESTIC> 140,185
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
