<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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 0210
--------------------------------------------------------------------------------
(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 July 31, 2000: 47,665,219
<PAGE>
PART 1 - FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1999
------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks ....................................................... $ 448,501 $ 233,178 $ 264,476
Federal funds sold ............................................................ 50,000 57,000 50,000
Securities available-for-sale (cost $1,449,993; $1,149,013 and $1,042,300 at
June 30, 2000, December 31, 1999 and June 30, 1999, respectively) ......... 1,395,739 1,102,092 1,023,582
Trading account securities .................................................... 46,369 27,714 41,979
Loans ......................................................................... 6,345,195 5,490,669 4,722,739
Less allowance for credit losses .............................................. 140,484 134,077 140,185
----------- ----------- -----------
Net loans ................................................................. 6,204,711 5,356,592 4,582,554
Premises and equipment, net ................................................... 59,072 62,446 59,019
Customers' acceptance liability ............................................... 14,532 6,784 2,404
Deferred tax asset ............................................................ 72,308 75,841 56,604
Goodwill and core deposit intangibles ......................................... 188,655 127,255 69,916
Bank owned life insurance ..................................................... 51,520 49,981 43,626
Affordable housing investments ................................................ 46,936 47,934 45,719
Other assets .................................................................. 98,425 66,802 62,229
----------- ----------- -----------
Total assets .............................................................. $ 8,676,768 $ 7,213,619 $ 6,302,108
=========== =========== ===========
LIABILITIES
Demand deposits ............................................................... $ 2,678,556 $ 2,448,916 $ 2,148,956
Interest checking deposits .................................................... 549,850 472,996 399,631
Money market deposits ......................................................... 1,326,943 1,103,907 892,096
Savings deposits .............................................................. 236,502 221,002 193,560
Time deposits-under $100,000 .................................................. 261,335 253,894 177,933
Time deposits-$100,000 and over ............................................... 1,341,668 1,168,694 872,149
----------- ----------- -----------
Total deposits ............................................................ 6,394,854 5,669,409 4,684,325
Federal funds purchased and securities sold under repurchase agreements ....... 243,604 95,487 308,642
Other short-term borrowings ................................................... 955,163 496,724 346,137
Subordinated debt ............................................................. 123,547 123,453 123,359
Long-term debt ................................................................ 180,000 180,000 230,000
Other liabilities ............................................................. 93,046 70,116 45,825
Acceptances outstanding ....................................................... 14,532 6,784 2,404
----------- ----------- -----------
Total liabilities ......................................................... 8,004,746 6,641,973 5,740,692
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock authorized - 5,000,000 : none outstanding ..................... -- -- --
Common Stock-par value-$1.00; authorized - 75,000,000;
Issued - 47,623,014; 46,885,182; and 46,885,182 shares at
June 30, 2000, December 31, 1999 and June 30, 1999, respectively .......... 47,623 46,885 46,885
Additional paid-in capital .................................................... 286,405 276,464 279,373
Accumulated other comprehensive loss .......................................... (31,441) (27,193) (10,793)
Retained earnings ............................................................. 369,435 321,210 280,196
Treasury shares, at cost - 0; 1,428,439 and 1,097,112 shares at
June 30, 2000, December 31, 1999 and June 30, 1999, respectively .......... -- (45,720) (34,245)
----------- ----------- -----------
Total shareholders' equity ................................................ 672,022 571,646 561,416
----------- ----------- -----------
Total liabilities and shareholders' equity ................................ $ 8,676,768 $ 7,213,619 $ 6,302,108
=========== =========== ===========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
2
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
---------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ...................................................... $ 140,341 $ 92,868 $ 262,305 $ 187,667
Federal funds sold and securities purchased under
resale agreements ........................................ 892 479 1,680 984
Securities available-for-sale .............................. 22,056 16,187 40,402 31,873
Trading account ............................................ 787 836 1,756 1,338
------------ ------------ ------------ ------------
Total interest income .................................. 164,076 110,370 306,143 221,862
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits ................................................... 35,871 21,083 66,620 40,824
Federal funds purchased and securities sold under
repurchase agreements .................................... 4,527 2,813 8,563 5,826
Other short-term borrowings ................................ 14,793 4,999 25,682 10,841
Subordinated debt .......................................... 1,929 1,965 3,817 4,005
Other long-term debt ....................................... 2,312 3,398 4,570 6,574
------------ ------------ ------------ ------------
Total interest expense ................................. 59,432 34,258 109,252 68,070
------------ ------------ ------------ ------------
Net interest income ........................................ 104,644 76,112 196,891 153,792
Provision for Credit Losses ................................... (4,000) -- (4,000) --
------------ ------------ ------------ ------------
Net interest income after provision for credit losses ...... 100,644 76,112 192,891 153,792
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts ........................ 5,749 4,090 11,306 8,165
Investment services ........................................ 6,436 4,619 12,333 8,939
Trust fees ................................................. 5,389 4,474 10,449 8,865
International services ..................................... 3,749 2,395 7,057 4,386
Bank owned life insurance .................................. 657 541 1,278 1,080
Gain on sale of assets ..................................... -- 1,121 5 1,179
Gain (loss) on sale of securities .......................... (5) 1,192 218 2,445
Other ...................................................... 4,815 3,255 8,387 5,773
------------ ------------ ------------ ------------
Total noninterest income ............................... 26,790 21,687 51,033 40,832
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and other employee benefits ....................... 41,587 32,313 80,438 64,826
Professional ............................................... 6,306 4,926 11,691 9,711
Net occupancy of premises .................................. 5,743 4,486 10,548 7,972
Information services ....................................... 3,409 2,938 6,996 5,459
Marketing and advertising .................................. 3,621 2,581 6,324 5,145
Depreciation ............................................... 3,241 2,705 6,281 5,149
Office services ............................................ 2,776 2,029 4,842 3,865
Equipment .................................................. 737 473 1,202 1,124
Amortization of goodwill and core deposit intangibles ...... 4,379 1,911 7,868 3,971
Acquisition integration .................................... 13 26 1,322 26
Other operating ............................................ 4,236 3,393 7,674 6,399
Other real estate (income) ................................. 26 53 (27) 88
------------ ------------ ------------ ------------
Total noninterest expense .............................. 76,074 57,834 145,159 113,735
------------ ------------ ------------ ------------
Income before income taxes ................................. 51,360 39,965 98,765 80,889
Income taxes ............................................... 17,915 13,859 34,312 28,782
------------ ------------ ------------ ------------
NET INCOME ................................................. 33,445 26,106 64,453 52,107
------------ ------------ ------------ ------------
Other comprehensive income (loss)
Unrealized loss on securities available-for-sale ....... (7,765) (23,196) (6,949) (42,129)
Less: reclassification adjustment for gains (losses)
included in noninterest income .................... (412) 511 (385) 1,035
Income taxes (benefits) ................................ (3,440) (9,606) (3,086) (17,400)
------------ ------------ ------------ ------------
Other comprehensive loss ................................... (4,737) (13,079) (4,248) (23,694)
------------ ------------ ------------ ------------
Comprehensive income ....................................... $ 28,708 $ 13,027 $ 60,205 $ 28,413
============ ============ ============ ============
Net income per share, basic ............................... $ 0.70 $ 0.57 $ 1.38 $ 1.14
============ ============ ============ ============
Net income per share, diluted ............................. $ 0.68 $ 0.55 $ 1.34 $ 1.10
============ ============ ============ ============
Shares used to compute income per share, basic ............. 47,540 45,739 46,792 45,864
============ ============ ============ ============
Shares used to compute income per share, diluted ........... 48,937 47,121 47,986 47,229
============ ============ ============ ============
Dividends per share ........................................ $ 0.175 $ 0.165 $ 0.35 $ 0.33
============ ============ ============ ============
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
3
<PAGE>
CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------------------- ------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................... $ 64,453 $ 52,107
Adjustments to net income:
Gain on sales of ORE ..................................................... (50) (35)
Depreciation ............................................................. 6,281 5,149
Amortization of goodwill and core deposit intangibles .................... 7,868 3,971
Net (increase) decrease in trading securities ............................ (18,655) 6,964
Deferred income tax (benefit) ............................................ 447 (7,869)
Gain on sale of securities ............................................... (218) (2,445)
Provision for credit losses .............................................. 4,000 --
Net increase in other liabilities (assets) ............................... 10,479 (53,137)
Other, net ............................................................... 12,108 14,634
------------ ------------
Net cash provided by operating activites ............................. 86,713 19,339
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities ........................................................ (536,680) (152,772)
Sales of securities available-for-sale ........................................ 202,440 42,158
Maturities of securities ...................................................... 157,115 58,113
Purchase of residential mortgage loans ........................................ (25,280) --
Sale of residential mortgage loans ............................................ -- 41,357
Loan originations net of principal collections ................................ (355,537) (236,288)
Proceeds from sales of ORE .................................................... 1,104 1,162
Purchase of premises and equipment ............................................ (2,937) (9,367)
Net cash from acquisitions .................................................... 78,715 --
Bank owned life insurance premium paid ........................................ -- (11)
Other, net .................................................................... (2,525) 352
------------ ------------
Net cash used by investing activities .................................... (483,585) (255,296)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in federal funds purchased and securities sold
under repurchase agreements .............................................. 148,117 32,331
Net increase (decrease) in deposits ........................................... 23,752 (203,077)
Net increase (decrease) in short-term borrowings, net of transfers
from long-term debt ...................................................... 383,424 (35,864)
Proceeds from issuance of other long-term debt ................................ 100,000 95,000
Repayment of long-term debt ................................................... (25,000) --
Proceeds from exercise of stock options ....................................... 4,028 5,295
Stock repurchases ............................................................. (14,216) (20,549)
Cash dividends paid ........................................................... (16,228) (15,186)
Other, net .................................................................... 1,318 1,640
------------ ------------
Net cash provided (used) by financing activities ......................... 605,195 (140,410)
------------ ------------
Net increase (decrease) in cash and cash equivalents .......................... 208,323 (376,367)
Cash and cash equivalents at beginning of year ................................ 290,178 690,843
------------ ------------
Cash and cash equivalents at end of period .................................... $ 498,501 $ 314,476
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 105,101 $ 67,932
Income taxes ......................................................... 6,921 26,800
Non-cash investing activities:
Transfer from loans to foreclosed assets ............................. 156 158
Transfer from long-term debt to short-term borrowings ................ 75,000 115,000
</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 SIX MONTHS ENDED
JUNE 30,
-----------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------------------- ------------ ------------
<S> <C> <C>
Common Stock
Balance, beginning of period ..................................... $ 46,885 $ 46,885
Stock issued for acquisitions .................................... 650 --
Stock options exercised .......................................... 88 --
------------ ------------
Balance, end of period ........................................... 47,623 46,885
------------ ------------
Additional paid-in capital
Balance, beginning of period ..................................... 276,464 287,363
Tax benefit from stock options ................................... 1,318 1,640
Excess of cost of treasury shares reissued
over stock option exercise amounts .......................... (615) (9,630)
Excess of market value of shares issued
for acquisitions over historical cost ....................... 9,149 --
Other ............................................................ 89 --
------------ ------------
Balance, end of period ........................................... 286,405 279,373
------------ ------------
Accumulated other comprehensive income (loss)
Balance, beginning of period ..................................... (27,193) 12,901
Other comprehensive (loss) income net of income taxes/benefits ... (4,248) (23,694)
------------ ------------
Balance, end of period ........................................... (31,441) (10,793)
------------ ------------
Retained earnings
Balance, beginning of period ..................................... 321,210 243,275
Net income ....................................................... 64,453 52,107
Dividends paid ................................................... (16,228) (15,186)
------------ ------------
Balance, end of period ........................................... 369,435 280,196
------------ ------------
Treasury shares
Balance, beginning of period ..................................... (45,720) (28,621)
Purchase of shares ............................................... (14,216) (20,549)
Issuance of shares for acquisitions .............................. 55,381 --
Issuance of shares for stock options ............................. 4,555 14,925
------------ ------------
Balance, end of period ........................................... -- (34,245)
------------ ------------
Total shareholders' equity ............................................. $ 672,022 $ 561,416
============ ============
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
5
<PAGE>
CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. City National Corporation (the "Corporation") 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 Corporation,
references to the "Company" mean the Corporation and the Bank together.
2. 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 the interim
period presented. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1999.
3. 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 was originally scheduled to be
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. In June 2000, the FASB also issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which amends SFAS No. 133. The Company uses interest
rate swaps to manage interest rate exposure, which are accounted for as
hedging activities. Management does not believe that the implementation
will have a significant impact on the Corporation's financial position,
net income or net comprehensive income.
4. 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, net of taxes are excluded
from net income and are reported as other comprehensive loss included as
a separate component of shareholders' equity.
5. Certain prior periods' data have been reclassified to conform to current
period presentation.
6. On February 29, 2000, the Company acquired The Pacific Bank, N.A.
("Pacific Bank"). In that transaction, Pacific Bank merged into the Bank
and the Corporation paid consideration equal to $145.2 million (including
the consideration for stock options), 47.0% of which was paid in the
Corporation's common stock and 53.0% of which was paid in cash. The
transaction was accounted for as a purchase. Pacific Bank had total
assets, loans, and deposits of $782.0 million, $488.0 million, and $702.0
million, respectively, at the date of acquisition. The acquisition of
Pacific Bank resulted in the recording of goodwill and intangibles of
approximately $69.4 million. Included in goodwill as purchase price
adjustments were $3.9 million of accrued severance and change of control
costs, of which $1.2 million remain unpaid as of June 30, 2000, $1.3
million of paid transaction-related expenses and $3.2 million of exit
costs of which approximately $2.1 million remain unpaid as of June 30,
2000. Results reflect the operations of Pacific Bank from February 29,
2000, the date of acquisition.
7. Reserves established as a purchase price adjustment for the August 27,
1999 acquisition of American Pacific State Bank ("APSB") of $0.2 million
for severance accruals and $0.2 million for exit costs remain as of June
30, 2000. Reserves established as a purchase price adjustment for the
December 31, 1998 acquisition of North American Trust Company of $0.4
million for excess space continue to be amortized over the remaining 5.42
years of a lease.
8. Under the Corporation's current stock buyback program of one million
common shares announced on July 29, 1999, 731,100 shares have been
repurchased for a cost of $23.5 million. No shares were repurchased in
the second quarter of 2000. The shares purchased under the buyback
program have been reissued for acquisitions and upon the exercise of
stock options. There were no Treasury shares at June 30, 2000.
6
<PAGE>
CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED PERCENTAGE CHANGE
---------------------------------------- JUNE 30, 2000 FROM
JUNE 30, MARCH 31, JUNE 30, MARCH 31, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2000 2000 1999 2000 1999
-------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE QUARTER
Net income ......................................... $ 33,445 $ 31,008 $ 26,106 8 % 28 %
Net income per common share, basic ................. 0.70 0.68 0.57 3 23
Net income per common share, diluted ............... 0.68 0.66 0.55 3 24
Dividends, per common share ........................ 0.175 0.175 0.165 -- 6
AT QUARTER END
Assets ............................................. $8,676,768 $8,423,505 $6,302,108 3 38
Deposits ........................................... 6,394,854 6,377,460 4,684,325 -- 37
Loans .............................................. 6,345,195 6,164,016 4,722,739 3 34
Securities ......................................... 1,442,108 1,196,531 1,065,561 21 35
Shareholders' equity ............................... 672,022 647,452 561,416 4 20
Book value per share ............................... 14.11 13.64 12.26 3 15
AVERAGE BALANCES
Assets ............................................. $8,525,861 $7,661,611 $6,219,097 11 37
Deposits ........................................... 6,277,831 5,676,364 4,564,235 11 38
Loans .............................................. 6,331,721 5,740,343 4,602,614 10 38
Securities ......................................... 1,381,920 1,208,883 1,140,966 14 21
Shareholders' equity ............................... 660,325 598,166 562,429 10 17
SELECTED RATIOS
Return on average assets ........................... 1.58 % 1.63 % 1.68 % (3) (6)
Return on average shareholders' equity ............. 20.37 20.85 18.62 (2) 9
Tier 1 leverage .................................... 6.19 6.46 8.18 (4) (24)
Tier 1 risk-based capital .......................... 7.49 7.21 9.82 4 (24)
Total risk-based capital ........................... 10.56 10.32 13.53 2 (22)
Dividend payout ratio, per share ................... 24.85 25.53 28.94 (3) (14)
Net interest margin ................................ 5.58 5.47 5.48 2 2
Efficiency ratio ................................... 56.51 57.82 57.54 (2) (2)
ASSET QUALITY RATIOS
Nonaccrual loans to total loans .................... 0.55 % 0.52 % 0.56 % 6 (2)
Nonaccrual loans and ORE to toal loans and ORE ..... 0.56 0.53 0.60 6 (7)
Allowance for credit losses to total loans ........ 2.21 2.28 2.97 (3) (26)
Allowance for credit losses to non accrual loans ... 400.50 434.43 528.34 (8) (24)
Net (charge-offs) recoveries to average loans ...... (0.06) (0.06) 0.11 -- N/M
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See "Cautionary Statement for Purposes of the `Safe Harbor' Provisions of
the Private Securities Litigation Reform Act of 1995", below relating to
"forward-looking" statements included in this report.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income for the second quarter of 2000 was $33.4 million,
or $0.68 per diluted common share, compared with $26.1 million, or $0.55 per
diluted common share, and $31.0 million, or $0.66 per diluted common share, for
the second quarter of 1999 and first quarter of 2000, respectively. The increase
in net income over the prior year results reflects the continued growth in the
Company's loans and deposits, a $28.5 million increase in net interest income
and a $5.1 million increase in noninterest income, partially offset by a $18.2
million increase in noninterest expense and a $4.0 million provision for credit
losses.
Net income for the first six months of 2000 was $64.5 million, or $1.34
per diluted common share, compared with $52.1 million, or $1.10 per diluted
common share, for the comparable 1999 period. The six-month increase resulted
primarily from an increase of $43.1 million in net interest income, an increase
of $10.2 million in noninterest income, partially offset by a $31.4 million
increase in noninterest expense and a $4.0 million provision for credit losses.
Contributing to both the second quarter and the six-month increase were
the acquisitions of APSB in August 1999 and Pacific Bank in February 2000 and a
decrease in the effective tax rate.
For the second quarter of 2000, the return on average assets was 1.58%
compared with 1.68% in the 1999 second quarter and 1.63% in the first quarter of
2000. The return on average shareholders' equity was 20.37% compared with 18.62%
for the prior-year quarter and 20.85% for the first quarter of 2000. For the
first six months of 2000, the return on average assets was 1.60% and the return
on average shareholders' equity was 20.60% compared with a 1.71% return on
average assets and 18.65% return on average shareholders' equity for the first
six months of 1999.
Income before the amortization of goodwill and core deposit intangibles
(net of applicable taxes) from acquisitions ("cash" income) for the quarter
ended June 30, 2000 was $37.2 million, or $0.76 per diluted common share,
compared with $27.6 million, or $0.58 per diluted common share, and $33.9
million, or $0.72 per diluted common share, for the corresponding periods ended
June 30, 1999 and March 31, 2000, respectively. For the first six months of
2000, "cash" income was $71.1 million, or $1.48 per diluted common share,
compared with $55.2 million, or $1.17 per diluted common share for the first six
months of 1999. On the same basis, the return on average assets was 1.79% and
the return on average shareholders' equity was 31.28% for the quarter ended June
30, 2000, compared with 1.79% and 21.94%, respectively, for the second quarter
of 1999 and compared with 1.81% and 28.31%, respectively, for the first quarter
of 2000. For the first six months of 2000, the return on average assets and the
return on average shareholders' equity were 1.80% and 29.00%, respectively,
compared with 1.82% and 22.06%, respectively, for the year-ago-period. "Cash"
income is presented because it measures the Corporation's ability to support
growth, pay dividends and repurchase stock. The Corporation's "cash" income per
share and other ratios are not necessarily comparable to similarly titled
measures reported by other companies.
NET INTEREST INCOME
Net interest income is the difference between interest income (which
includes yield-related loan fees) and interest expense. Net interest income on a
taxable-equivalent basis expressed as a percentage of average total earning
assets is referred to as the net interest margin, which represents the average
net effective yield on earning assets.
8
<PAGE>
Net interest income on a fully taxable-equivalent basis increased 36.9%
to $107.8 million compared with $78.7 million for the second quarter of 1999,
and increased 13.1% from $95.3 million in the first quarter of 2000. Net
interest income was $203.1 million for the first half of 2000, an increase of
27.9% over $158.9 million for the first half of 1999. Interest recovered on
nonaccrual and charged-off loans was $1.3 million for the second quarter of 2000
compared with $0.6 million for the second quarter of 1999 and $1.0 million for
the first quarter of 2000. Interest recovered was $2.3 million in the first half
of 2000 compared with $4.1 million for the first half of 1999.
The fully taxable-equivalent net interest margin was 5.58% for the
quarter ended June 30, 2000 and 5.53% for the first half of 2000 compared
with 5.48% and 5.55% for the quarter and first half of 1999, respectively.
The net interest margin was 5.47% for the first quarter of 2000. The higher
net interest margin in the second quarter of 2000 compared with the year ago
quarter is primarily attributable to an increase in the proportionate funding
from noninterest-bearing funding sources as higher interest rates increased
both total yields on interest-earning assets and total rates of
interest-bearing liabilities. See "-- Liquidity Management."
9
<PAGE>
The following tables present the components of net interest income on a
fully taxable-equivalent basis for the three and six months ended June 30, 2000
and 1999. To compare the tax-exempt asset yields to taxable yields, amounts are
adjusted to pre-tax equivalents based on the marginal corporate federal tax rate
of 35%.
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
FOR THE THREE MONTHS ENDED
JUNE 30, 2000
------------------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (2) RATE
---------------------- ------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans
Commercial $ 3,303,927 $ 76,064 9.26 %
Residential first mortgages 1,225,906 22,281 7.31
Real estate construction 403,339 10,377 10.35
Real estate mortgages 1,336,108 31,693 9.54
Installment 62,441 1,420 9.15
--------------- -----------------
Total loans (1) 6,331,721 141,835 9.01
Securities available-for-sale 1,321,064 23,676 7.21
Federal funds sold and securities
purchased under resale agreements 54,679 892 6.56
Trading account securities 60,856 816 5.39
--------------- -----------------
Total interest-earning assets 7,768,320 167,219 8.66
-----------------
Allowance for credit losses (140,330)
Cash and due from banks 347,346
Other nonearning assets 550,525
---------------
Total assets $ 8,525,861
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest checking accounts $ 544,627 697 0.51
Money market accounts 1,327,780 12,082 3.66
Savings deposits 232,602 2,346 4.06
Time deposits - under $100,000 263,212 3,665 5.60
Time deposits - $100,000 and over 1,205,730 17,081 5.70
--------------- -----------------
Total interest-bearing deposits 3,573,951 35,871 4.04
Federal funds purchased and securities
sold under repurchase agreements 290,032 4,527 6.28
Other borrowings 1,196,552 19,034 6.40
--------------- -----------------
Total interest-bearing liabilities 5,060,535 59,432 4.72
-----------------
Noninterest-bearing deposits 2,703,880
Other liabilities 101,121
Shareholders' equity 660,325
---------------
Total liabilities and shareholders' equity $ 8,525,861
===============
Net interest spread 3.94 %
============
Fully taxable-equivalent net interest income $ 107,787
=================
Net interest margin 5.58 %
============
<CAPTION>
NET INTEREST INCOME SUMMARY
FOR THE THREE MONTHS ENDED
JUNE 30, 1999
------------------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (2) RATE
---------------------- ------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans
Commercial $ 2,486,626 $ 51,441 8.30 %
Residential first mortgages 1,018,360 18,313 7.21
Real estate construction 271,802 6,517 9.62
Real estate mortgages 776,706 16,746 8.65
Installment 49,120 1,239 10.12
---------------- -----------------
Total loans (1) 4,602,614 94,256 8.21
Securities available-for-sale 1,060,974 17,428 6.59
Federal funds sold and securities
purchased under resale agreements 37,925 479 5.07
Trading account securities 79,992 833 4.18
---------------- -----------------
Total interest-earning assets 5,781,505 112,996 7.84
-----------------
Allowance for credit losses (139,832)
Cash and due from banks 275,716
Other nonearning assets 301,708
----------------
Total assets $ 6,219,097
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest checking accounts $ 407,123 558 0.55
Money market accounts 948,835 6,858 2.90
Savings deposits 190,546 2,157 4.54
Time deposits - under $100,000 178,001 2,056 4.63
Time deposits - $100,000 and over 838,562 9,454 4.52
---------------- -----------------
Total interest-bearing deposits 2,563,067 21,083 3.30
Federal funds purchased and securities
sold under repurchase agreements 242,837 2,813 4.65
Other borrowings 793,325 10,362 5.24
---------------- -----------------
Total interest-bearing liabilities 3,599,229 34,258 3.82
-----------------
Noninterest-bearing deposits 2,001,168
Other liabilities 56,271
Shareholders' equity 562,429
----------------
Total liabilities and shareholders' equity $ 6,219,097
================
Net interest spread 4.02 %
============
Fully taxable-equivalent net interest income $ 78,738
=================
Net interest margin 5.48 %
============
</TABLE>
(1) Includes average nonaccrual loans of $34,526 and $22,585 for 2000 and
1999, respectively.
(2) Loan income includes loan fees of $5,049 and $3,669 for 2000 and 1999,
respectively.
10
<PAGE>
<TABLE>
<CAPTION>
NET INTEREST INCOME SUMMARY
FOR THE SIX MONTHS ENDED
JUNE 30, 2000
------------------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (2) RATE
---------------------- ------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans
Commercial $ 3,127,413 $ 141,053 9.07 %
Residential first mortgages 1,216,906 44,056 7.28
Real estate construction 390,386 19,722 10.16
Real estate mortgages 1,238,711 57,558 9.34
Installment 62,614 2,883 9.26
--------------- -----------------
Total loans (1) 6,036,030 265,272 8.84
Securities available-for-sale 1,226,818 43,600 7.15
Federal funds sold and securities
purchased under resale agreements 55,937 1,680 6.04
Trading account securities 68,582 1,815 5.32
--------------- -----------------
Total interest-earning assets 7,387,367 312,367 8.50
-----------------
Allowance for credit losses (138,910)
Cash and due from banks 333,741
Other nonearning assets 511,538
---------------
Total assets $ 8,093,736
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest checking accounts $ 505,382 1,243 0.49
Money market accounts 1,253,273 21,343 3.42
Savings deposits 228,796 4,584 4.03
Time deposits - under $100,000 265,387 7,096 5.38
Time deposits - $100,000 and over 1,180,168 32,354 5.51
--------------- -----------------
Total interest-bearing deposits 3,433,006 66,620 3.90
Federal funds purchased and securities
sold under repurchase agreements 290,406 8,563 5.93
Other borrowings 1,101,593 34,069 6.22
--------------- -----------------
Total interest-bearing liabilities 4,825,005 109,252 4.55
-----------------
Noninterest-bearing deposits 2,544,091
Other liabilities 95,394
Shareholders' equity 629,246
---------------
Total liabilities and shareholders' equity $ 8,093,736
===============
Net interest spread 3.95 %
============
Fully taxable-equivalent net interest income $ 203,115
=================
Net interest margin 5.53 %
============
<CAPTION>
NET INTEREST INCOME SUMMARY
FOR THE SIX MONTHS ENDED
JUNE 30, 1999
------------------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (2) RATE
---------------------- ------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans
Commercial $ 2,460,056 $ 104,250 8.55 %
Residential first mortgages 1,027,516 37,026 7.27
Real estate construction 258,728 12,478 9.73
Real estate mortgages 761,954 34,309 9.08
Installment 48,780 2,369 9.79
------------------ ---------------
Total loans (1) 4,557,034 190,432 8.43
Securities available-for-sale 1,050,636 34,262 6.58
Federal funds sold and securities
purchased under resale agreements 37,397 984 5.31
Trading account securities 65,872 1,259 3.85
------------------ ---------------
Total interest-earning assets 5,710,939 226,937 8.01
---------------
Allowance for credit losses (139,161)
Cash and due from banks 285,960
Other nonearning assets 302,539
------------------
Total assets $ 6,160,277
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest checking accounts $ 404,486 1,157 0.58
Money market accounts 944,108 13,593 2.90
Savings deposits 186,895 4,133 4.46
Time deposits - under $100,000 181,866 4,237 4.70
Time deposits - $100,000 and over 781,875 17,704 4.57
------------------ ---------------
Total interest-bearing deposits 2,499,230 40,824 3.29
Federal funds purchased and securities
sold under repurchase agreements 255,255 5,826 4.60
Other borrowings 813,185 21,420 5.31
------------------ ---------------
Total interest-bearing liabilities 3,567,670 68,070 3.85
---------------
Noninterest-bearing deposits 1,967,893
Other liabilities 61,359
Shareholders' equity 563,355
------------------
Total liabilities and shareholders' equity $ 6,160,277
==================
Net interest spread 4.16 %
============
Fully taxable-equivalent net interest income $ 158,867
===============
Net interest margin 5.55 %
============
</TABLE>
(1) Includes average nonaccrual loans of $31,352 and $23,334 for 2000 and
1999, respectively.
(2) Loan income includes loan fees of $8,959 and $8,260 for 2000 and 1999,
respectively.
11
<PAGE>
Average loans rose 37.6% during the second quarter of 2000 to $6.3
billion compared with the second quarter of 1999. Average loans increased 10.3%
from the 2000 first quarter. For the first six months of 2000, average loans
increased 32.5% to $6.0 billion from $4.6 billion for the first six months of
1999. Loan growth was driven primarily by increases in commercial loans and real
estate commercial mortgages. Compared with the year-ago quarter, commercial loan
average balances rose 32.9% from $2.5 billion to $3.3 billion. Real estate
commercial mortgage averages rose 72.0% from $0.8 billion to $1.3 billion.
During the first six months of 2000, commercial loan average balance rose 27.1%
to $3.1 billion compared with $2.5 billion for the first six months of 1999 and
real estate commercial mortgage averages rose 62.6% to $1.2 billion compared
with $0.8 billion for the first six months of 1999. Growth in all other loan
categories also contributed to the increases in average loans.
Average securities increased $241.0 million, or 21.1%, to $1.4 billion
for the second quarter of 2000 compared with the second quarter of 1999 and
increased 14.3% from the first quarter of 2000. For the first six months of
2000, average securities increased $178.9 million, or 16.0%, to $1.3 billion.
Average deposits rose 37.5% during the second quarter of 2000 to $6.3
billion compared with the second quarter of 1999 and increased 10.6% from the
2000 first quarter. During the first six months of 2000, average deposits
increased 33.8% to $6.0 billion compared with $4.5 billion for the same period a
year ago.
Net interest income is impacted by the volume and rate of
interest-earning assets and interest-bearing liabilities. The following table
shows changes in net interest income between the second quarter and the first
six months of 2000 and the second quarter and the first six months of 1999 as
well as between the second quarter and the first six months of 1999 and the
second quarter and the first six months of 1998.
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
FOR THE THREE FOR THE THREE
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2000 VS 1999 1999 VS 1998
---------------------- -------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO NET DUE TO NET
------------------------ INCREASE ------------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 37,759 $ 9,820 $ 47,579 $ 10,411 $ (6,933) $ 3,478
Securities available-for-sale 4,512 1,736 6,248 4,246 (121) 4,125
Trading account securities (226) 209 (17) 241 (271) (30)
Federal funds sold and
securities purchased
under resale agreements 248 165 413 (307) (111) (418)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 42,293 11,930 54,223 14,591 (7,436) 7,155
---------- ---------- ---------- ---------- ---------- ----------
Interest paid on:
Interest checking deposits 181 (42) 139 47 (451) (404)
Money market deposits 3,151 2,073 5,224 643 (358) 285
Savings deposits 436 (247) 189 223 457 680
Other time deposits 5,899 3,337 9,236 831 (1,802) (971)
Other borrowings 6,596 3,790 10,386 4,714 (1,133) 3,581
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 16,263 8,911 25,174 6,458 (3,287) 3,171
---------- ---------- ---------- ---------- ---------- ----------
$ 26,030 $ 3,019 $ 29,049 $ 8,133 $ (4,149) $ 3,984
========== ========== ========== ========== ========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2000 VS 1999 1999 VS 1998
---------------------- -------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO NET DUE TO NET
----------------------- INCREASE ------------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 65,110 $ 9,730 $ 74,840 $ 21,147 $ (12,653) $ 8,494
Securities 6,163 3,175 9,338 7,918 (825) 7,093
Trading account securities 54 502 556 348 (626) (278)
Federal funds sold and
securities purchased
under resale agreements 546 150 696 (345) (78) (423)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 71,873 13,557 85,430 29,068 (14,182) 14,886
---------- ---------- ---------- ---------- ---------- ----------
Interest paid on:
Interest checking deposits 276 (190) 86 78 (842) (764)
Money market deposits 5,012 2,738 7,750 1,419 (563) 856
Savings deposits 874 (423) 451 304 851 1,155
Other time deposits 12,586 4,923 17,509 490 (3,238) (2,748)
Other borrowings 9,305 6,081 15,386 10,028 (2,168) 7,860
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 28,053 13,129 41,182 12,319 (5,960) 6,359
---------- ---------- ---------- ---------- ---------- ----------
$ 43,820 $ 428 $ 44,248 $ 16,749 $ (8,222) $ 8,527
========== ========== ========== ========== ========== ==========
</TABLE>
PROVISION FOR CREDIT LOSSES
The Corporation recorded a $4.0 million credit loss provision for the
second quarter and first half of 2000. There were no credit loss provisions in
the year-earlier periods. Net charge-offs for the second quarter and first half
of 2000 were $4.0 million and $7.5 million compared with net recoveries of $1.5
million and $4.8 million in the year-earlier periods. See "-- Allowance for
Credit Losses."
NONINTEREST INCOME
Noninterest income continued its strong growth, totaling $26.8 million
for the second quarter 2000, a 23.5% increase over the $21.7 million reported in
the second quarter of 1999. These results reflect a 10.5% increase over the
$24.2 million for the first quarter of 2000. Noninterest income for the first
six months of this year of $51.0 million increased 25.0% over the $40.8 million
for the first six months of 1999. Noninterest income was 21% of total revenues
for the first six months of both 2000 and 1999.
All categories of recurring noninterest income increased over the
prior-year periods, reflecting the Corporation's emphasis on growing fee income.
Investment services and trust fees also rose as a result of a strong
cross-selling program to existing Bank customers, and business generated from
new customers as a result of direct sales activities by City National
Investments (CNI), a division of the Bank. Assets under administration by CNI
were $15.5 billion at June 30, 2000, including $5.4 billion under management,
compared with $13.3 billion and $3.5 billion, respectively, at June 30, 1999,
and $14.9 billion and $4.8 billion at March 31, 2000. The increase in assets
under management is primarily attributable to customers investing in the new CNI
Charter Funds introduced in 1999 and 2000. International services income rose
significantly as a result of increased foreign exchange fees and, to a lesser
extent, an increase in letter of credit and standby letter of credit fees. There
were no material gains on sale of assets and securities for the quarter and a
gain of $0.2 million for the first six months of 2000 compared with $2.3 million
in the prior-year quarter and $3.6 million for the first six months of 1999.
NONINTEREST EXPENSE
Noninterest expense was $76.1 million for the second quarter of 2000
compared with $57.8 million in the second quarter and $69.1 million in the first
quarter of 2000. Noninterest expense for the first six months of 2000 increased
$31.5 million to $145.2 million compared with $113.7 million for the first six
months of 1999. The year-over-year increases in expenses were primarily the
result of additional offices and a substantial number of new
13
<PAGE>
colleagues, including those added through bank acquisitions, as well as
higher professional fees and amortization of goodwill and core deposit
intangibles. Salaries and other employee benefits increased by $9.3 million,
or 28.7%, compared with the second quarter of 1999; they increased by $2.7
million, or 7.0%, compared with the first quarter of 2000. All other expenses
increased $9.0 million, or 35.1%, from the second quarter of 1999, and
increased $4.3 million, or 14.1%, from the first quarter of 2000. For the
first six months of 2000, salaries and other employee benefits increased
$15.6 million, or 24.1%, and all other expenses increased $15.8 million, or
32.3%, compared with the first six months of 1999. Reserves of approximately
$0.5 million remain from the $1.3 million integration charge for Pacific Bank.
During 1999, the Company completed the process of preparing for the
Year 2000 date change. To date, the Company has successfully managed the
transition. Although considered unlikely, unanticipated problems in the
Company's business process, including problems associated with non-compliant
third parties and disruptions to the economy in general, could still occur
despite efforts to date to remediate systems problems and develop contingency
plans. Management will continue to monitor all business processes, including
interaction with the Company's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
INCOME TAXES
The effective tax rate in the second quarter of 2000 was 34.9%
compared with 35.4% for all of 1999. This lower rate is due primarily to the
impact of the formation of a regulated investment company subsidiary that
provides flexibility to raise additional capital in a tax efficient manner.
There can be no assurance as to the timing or ability of the Company to raise
capital through this subsidiary. The effective tax rate is expected to remain
at this lower rate for the balance of the year.
BALANCE SHEET ANALYSIS
Total assets were $8.7 billion at June 30, 2000 compared with $6.3
billion at June 30, 1999 and $7.2 billion at December 31, 1999. Increased
loan balances due to internally generated loan growth as well as the
acquisitions of APSB and Pacific Bank contributed to this growth in assets.
SECURITIES
Comparative period-end security portfolio balances are presented below:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
--------------------------- --------------------------- ---------------------------
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Gov. and federal agency $ 595,432 $ 590,846 $ 291,407 $ 286,546 $ 263,000 $ 262,571
Mortgage-backed 366,467 350,082 368,948 351,251 385,870 375,673
State and Municipal 162,789 159,511 155,736 152,244 151,293 149,094
Other debt securities 166,662 144,452 166,772 150,913 142,765 136,262
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities 1,291,350 1,244,891 982,863 940,954 942,928 923,600
Marketable equity securities 158,643 150,848 166,150 161,138 99,372 99,982
------------ ------------ ------------ ------------ ------------ ------------
Total securities $ 1,449,993 $ 1,395,739 $ 1,149,013 $ 1,102,092 $ 1,042,300 $ 1,023,582
============ ============ ============ ============ ============ ============
</TABLE>
At June 30, 2000, securities available-for-sale totaled $1.4 billion, an
increase of $372.2 million compared with holdings at June 30, 1999 and increased
$253.3 million from March 31, 2000. Unrealized net losses increased
14
<PAGE>
$35.5 million and $8.2 million from June 30, 1999 and March 31, 2000,
respectively. The unrealized gain or loss on securities available-for-sale is
reported on an after-tax basis as a valuation allowance that is a component
of other comprehensive income (loss).
The following table provides the expected remaining maturities and yields
(taxable-equivalent basis) of debt securities within the securities portfolio as
of June 30, 2000. To compare the tax-exempt assets yields to taxable yields,
amounts are adjusted to pre-tax equivalents based on the marginal corporate
federal tax rate of 35%.
<TABLE>
<CAPTION>
DEBT SECURITIES AVAILABLE-FOR-SALE
ONE YEAR OVER 1 YEAR OVER 5 YEARS
OR LESS THRU 5 YEARS THRU 10 YEARS
------------------------ ------------------------- -------------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD (%) AMOUNT YIELD (%) AMOUNT YIELD (%)
---------------------- ------------ ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Gov. and federal agency $ 297,499 6.51 $ 239,266 6.46 $ 54,081 6.40
Mortgage-backed 2,330 6.17 - - 21,458 6.00
State and Municipal 14,682 6.72 47,298 6.89 96,208 6.70
Other debt securities 51 7.00 - - 80,883 7.50
------------ ----------- ------------- ----------- ------------ -----------
Total debt securities $ 314,562 6.52 $ 286,564 6.53 $ 252,630 6.83
============ ============= ============
Amortized cost $ 314,581 $ 289,519 $ 271,995
============ ============= ============
<CAPTION>
OVER 10 YEARS TOTAL
------------------------- --------------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD (%) AMOUNT YIELD (%)
---------------------- ------------ ----------- ------------- -----------
<S> <C> <C> <C>
U.S. Gov. and federal agency $ - - $ 590,846 6.48
Mortgage-backed 326,294 6.59 350,082 6.55
State and Municipal 1,323 7.55 159,511 6.77
Other debt securities 63,518 7.99 144,452 7.72
------------ ----------- ------------- -----------
Total debt securities $ 391,135 6.82 $ 1,244,891 6.68
============ =============
Amortized cost $ 415,255 $ 1,291,350
============ =============
</TABLE>
Dividend income included in interest income on securities in the
Unaudited Consolidated Statement of Income and Comprehensive Income for the
second quarter of 2000 and 1999 was $2.8 million and $1.3 million, and $5.1
million and $2.6 million for the first half of 2000 and 1999, respectively.
LOAN PORTFOLIO
A comparative period-end loan table is presented below:
<TABLE>
<CAPTION>
LOANS
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in thousands) 2000 1999 1999
---------------------- ---------- ------------ ----------
<S> <C> <C> <C>
Commercial $3,224,904 $2,870,438 $2,537,110
Residential first mortgage 1,238,224 1,173,334 1,044,656
Real estate construction 421,178 344,870 288,501
Real estate mortgages 1,395,187 1,042,123 802,246
Installment 65,702 59,904 50,226
---------- ------------ ----------
Total loans, gross 6,345,195 5,490,669 4,722,739
Less: Allowance for credit losses 140,484 134,077 140,185
---------- ------------ ----------
Total loans, net $6,204,711 $5,356,592 $4,582,554
========== ============ ==========
</TABLE>
Total loans at June 30, 2000 were $6.3 billion compared with $4.7 billion
at June 30, 1999 and $6.2 billion at March 31, 2000. During the quarter, total
loans increased $181.2 million, or 2.9%, from March 31, 2000. Loan growth was
driven primarily by loans originated as part of a client relationship.
Non-relationship, syndicated loans declined $94.5 million, or 18.0%, during the
first half of 2000 to $442.0 million representing less than 7.0% of the loan
portfolio at June 30, 2000. Management expects that non-relationship, syndicated
loans will continue to decline for the remainder of the year. On a
year-over-year basis, the acquisitions of Pacific Bank and APSB also contributed
to the loan growth.
15
<PAGE>
The following table presents information concerning nonaccrual loans,
ORE, and restructured loans.
<TABLE>
<CAPTION>
NONACCRUAL LOANS, ORE AND RESTRUCTURED LOANS
JUNE 30, DECEMBER 31, JUNE 30,
(DOLLARS IN THOUSANDS) 2000 1999 1999
---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Nonaccrual loans:
Real estate $ 11,056 $ 10,380 $ 14,569
Commercial 21,083 13,368 11,250
Installment 2,938 1,540 714
------------ ------------ ------------
Total 35,077 25,288 26,533
ORE 447 1,413 1,696
------------ ------------ ------------
Total nonaccrual loans and ORE $ 35,524 $ 26,701 $ 28,229
============ ============ ============
Loans past due 90 days or more on accrual status,
including credits in the
process of being paid or renewed
and not anticipated to move to nonaccrual status $ 5,703 $ 4,033 $ 8,904
============ ============ ============
Restructured loans, accruing $ 2,532 $ 2,707 $ 1,771
============ ============ ============
Total non accrual loans as a percentage of total loans 0.55% 0.46% 0.56%
Total non accrual loans and ORE as a
percentage of total loans and ORE 0.56 0.49 0.60
Allowance for credit losses to total loans 2.21 2.44 2.97
Allowance for credit losses to nonaccrual loans 400.50 530.20 528.34
</TABLE>
The table below summarizes the approximate changes in nonaccrual loans
for the three and six months ended June 30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
CHANGES IN NONACCRUAL LOANS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 32,330 $ 23,264 $ 25,288 $ 23,138
Additions from acquisitions -- -- 4,428 --
Loans placed on nonaccrual 13,821 10,985 20,504 14,936
Charge offs (4,101) (338) (5,304) (727)
Loans returned to accrual status (109) (102) (109) (209)
Repayments (including interest
applied to principal) (6,864) (7,276) (9,730) (10,605)
------------ ------------ ------------ ------------
Balance, end of period $ 35,077 $ 26,533 $ 35,077 $ 26,533
============ ============ ============ ============
</TABLE>
At June 30, 2000, in addition to loans disclosed above as nonaccrual or
restructured, management had also identified $7.3 million of problem loans about
which the ability of the borrowers to comply with the present loan repayment
terms in the future is questionable. Problem loans were $4.5 million at June 30,
1999 and $9.4 million at March 31, 2000.
16
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses at June 30, 2000, totaled $140.5
million, or 2.21% of outstanding loans. This compares with an allowance of
$140.2 million, or 2.97% of outstanding loans at June 30, 1999, and an
allowance of $140.5 million, or 2.28% of outstanding loans at March 31, 2000.
The allowance for credit losses as a percentage of nonaccrual loans was
400.50% at June 30, 2000 compared with 528.34% at June 30, 1999 and 434.43%
at March 31, 2000. Total non-performing assets (nonaccrual loans and ORE)
were $35.5 million, or 0.56% of total loans and ORE at June 30, 2000,
compared with $28.2 million, or 0.60%, at June 30, 1999 and $32.8 million, or
0.53%, at March 31, 2000. The provision for credit losses during the second
quarter reflects a variety of factors, including levels of net charge-offs
and nonaccrual loans and continuing growth of the loan portfolio.
The allowance for credit losses is maintained at a level which
management deems appropriate based on a thorough analysis of numerous
factors. The level of the allowance for credit losses can be expected to
fluctuate through the remainder of 2000 and may require additional provisions
for credit losses. Credit quality will be influenced by underlying trends in
the economic cycle, particularly in California, and other factors which may
be beyond management's control. No assurances can be given that the Company
will not sustain credit losses, in any particular period, that are sizable in
relation to the allowance for credit losses. Based on known information
available to it at the date of this report, management believes that the
Company's allowance for credit losses was adequate at June 30, 2000. However,
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.
<TABLE>
<CAPTION>
CHANGES IN ALLOWANCE FOR CREDIT LOSSES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average amount of loans outstanding $ 6,331,721 $ 4,602,614 $ 6,036,030 $ 4,557,034
============ ============ ============ ============
Balance of allowance for credit losses,
beginning of period $ 140,450 $ 138,710 $ 134,077 $ 135,339
Loans charged off:
Commercial 8,811 1,329 13,710 2,373
Real estate 43 192 703 246
------------ ------------ ------------ ------------
Total loans charged off 8,854 1,521 14,413 2,619
------------ ------------ ------------ ------------
Less recoveries of loans previously charged off:
Commercial 3,482 2,772 5,214 7,170
Real estate 1,406 224 1,679 295
------------ ------------ ------------ ------------
Total recoveries 4,888 2,996 6,893 7,465
------------ ------------ ------------ ------------
Net loans (charged off) recovered (3,966) 1,475 (7,520) 4,846
Additions to allowance charged to operating expense 4,000 -- 4,000 --
Additions to allowance from acquisitions -- -- 9,927 --
------------ ------------ ------------ ------------
Balance, end of period $ 140,484 $ 140,185 $ 140,484 $ 140,185
============ ============ ============ ============
Ratio of net charge-offs
to average loans 0.06% N/M 0.12% N/M
============ ============ ============ ============
Ratio of allowance for credit losses
to total period end loans 2.21% 2.97%
============ ============
</TABLE>
17
<PAGE>
OTHER ASSETS
Other assets included the following:
<TABLE>
<CAPTION>
OTHER ASSETS
JUNE 30, DECEMBER 31, JUNE 30,
(DOLLARS IN THOUSANDS) 2000 1999 1999
---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Accrued interest receivable .......... $ 50,044 $ 42,206 $ 38,314
Claim in receivership ................ 17,200 -- --
Income tax refunds ................... 8,153 4,188 --
Other 23,028 20,408 23,915
------------ ------------ ------------
Total other assets $ 98,425 $ 66,802 $ 62,229
============ ============ ============
</TABLE>
The claim in receivership was acquired in the acquisition of Pacific
Bank.
DEPOSITS
Deposits totaled $6.4 billion at June 30, 2000 compared with $4.7 billion
at June 30, 1999 and $6.4 billion at March 31, 2000. Core deposits which
continued to provide substantial benefits to the Bank's cost of funds rose 3.1%
during the quarter. The year-over-year increase resulted from the Company's
increased marketing efforts, the nature of the Company's relationship business
which allows customers to maintain balances as compensation for banking
services, as well as from the acquisitions of APSB and Pacific Bank. See "-- Net
Interest Income."
CAPITAL ADEQUACY REQUIREMENT
The following table presents the regulatory standards for well
capitalized institutions and the capital ratios for the Corporation and the Bank
at June 30, 2000, December 31, 1999 and June 30, 1999.
<TABLE>
<CAPTION>
Regulatory
Well Capitalized June 30, December 31, June 30,
Standards 2000 1999 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
City National Corporation
Tier 1 leverage 4.00 % 6.19 % 6.73 % 8.18 %
Tier 1 risk-based capital 6.00 7.49 7.88 9.82
Total risk-based capital 10.00 10.56 11.21 13.53
City National Bank
Tier 1 leverage 4.00 % 5.96 % 6.30 % 7.92 %
Tier 1 risk-based capital 6.00 7.22 7.40 9.51
Total risk-based capital 10.00 10.29 10.75 13.20
</TABLE>
The reduction in capital ratios was due primarily to the acquisitions of
APSB and Pacific Bank and the Corporation's stock repurchase program but remain
above the well capitalized standards.
On July 26, 2000, the Corporation declared a regular quarterly cash
dividend on common stock at a rate of $0.175 per share to shareholders of record
on August 9, 2000 payable on August 21, 2000.
18
<PAGE>
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.
Average core deposits and shareholders' equity comprised 67.0% of total
funding in the second quarter of 2000, compared with 69.0% in the second quarter
of 1999. 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. See "-- Net Interest Income."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The principal objective of asset/liability management is to maximize net
interest income 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 Board of Directors to ensure that risk taking is not
excessive and that liquidity is properly managed.
A quantitative and qualitative discussion about market risk is included
on pages A-15 to A-18 of the Corporation's Form 10-K for the year ended December
31, 1999. During the second quarter of 2000, the Company remained slightly more
asset sensitive, and at all times remained within the limits set by the Board of
Directors.
As of June 30, 2000, the Company had $945.0 million of notional principal
in receive fixed-pay LIBOR interest rate swaps, of which $490.0 million have
maturities greater than one year. The Company's interest-rate risk-management
instruments had a fair value of $(10.4) million and $(12.0) million at June 30,
2000 and March 31, 2000, respectively, with no exposure to credit risk at June
30, 2000 or at March 31, 2000. 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 market value exposure thresholds
are exceeded. As of June 30, 2000, the Company had deposited $5.7 million par
value in securities with counterparties.
At June 30, 2000, the Company's outstanding foreign exchange contracts
for both those purchased as well as sold totaled $117.8 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 colleagues. The Company
actively manages its foreign exchange exposures within prescribed risk limits
and controls. All foreign exchange contracts outstanding at June 30, 2000 have
remaining maturities of six months or less, with the exception of $0.7 million
with remaining maturties ranging between six and 12 months.
19
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We have made forward-looking statements in this document that are subject
to risks and uncertainties. These statements are based on the beliefs and
assumptions of our management, and on information currently available to our
management. Forward-looking statements include the information concerning our
possible or assumed future results of operations, and statements preceded by,
followed by or that include the words "will," believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
Our management believes these forward-looking statements are reasonable;
however, you should not place undue reliance on the forward-looking statements,
which are based on current expectations. Actual results may differ materially
from those currently expected or anticipated.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Many of the factors described below that will determine these
results and values are beyond our ability to control or predict. For those
statements, we claim the protection of the safe harbor contained in the Private
Securities Litigation Reform Act of 1995.
AN ECONOMIC SLOWDOWN IN CALIFORNIA COULD HURT OUR BUSINESS. Prior to the
merger with Pacific Bank, we have focused our business in Los Angeles, Orange,
Riverside, San Bernardino, San Diego, and Ventura counties of Southern
California. After the merger, our operations include San Francisco and San Mateo
counties. An economic slowdown in California could have the following
consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Demand for our products and services may decline; and
- Collateral for loans made by us, especially real estate, may
decline in value, in turn reducing customers' borrowing power, and
reducing the value of assets and collateral associated with our
existing loans.
CHANGES IN INTEREST RATES AFFECT OUR PROFITABILITY. Changes in prevailing
rates may hurt our business. We derive our income mainly from the difference or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. In general, the wider the spread, the more we
earn. When market rates of interest change, the interest we receive on our
assets and the interest we pay on our liabilities will fluctuate. This can cause
decreases in our spread and can affect our income. In addition, interest rates
affect how much money we can lend. For example, when interest rate rise, loan
originations tend to decrease. We expect interest rates to rise in 2000.
SIGNIFICANT CHANGES IN BANKING LAWS OR REGULATIONS COULD MATERIALLY
AFFECT OUR BUSINESS. 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 our credit conditions, primarily through open market
operations in U.S. government securities, the discount rate for member bank
borrowing and bank reserve requirements. A material change in these conditions
would have an impact on results.
WE FACE STRONG COMPETITION FROM FINANCIAL SERVICE COMPANIES AND OTHER
COMPANIES THAT OFFER BANKING SERVICES WHICH CAN HURT OUR BUSINESS. Increased
competition in our market may result in reduced loans and deposits. Ultimately,
we may not be able to compete successfully against current and future
competitors. Many competitors offer the banking services that we offer in our
service area. These competitors include national, regional, and community banks.
We also face competition from many other types of financial institutions,
including, without limitation, savings and loans, finance companies, brokerage
firms, insurance companies, credit unions, mortgage banks, and other financial
intermediaries. Recently passed legislation will make it easier for other types
of financial institutions to compete with us.
OUR RESULTS WOULD BE ADVERSELY AFFECTED IF WE SUFFERED HIGHER THAN
EXPECTED LOSSES ON OUR LOANS. We assume risk from the possibility that losses
will be sustained because borrowers, guarantors, and related parties may fail to
20
<PAGE>
perform in accordance with the terms of their loans. We have adopted
underwriting and credit policies, including establishing and reviewing the
allowance for credit losses that we believe are appropriate to minimize this
risk. We assess the likelihood of nonperformance, track loan performance, and
diversify our credit portfolio. Those policies and procedures may not prevent
unexpected losses that could adversely affect our results.
PART 11. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 26, 2000, the Registrant held its annual meeting of
stockholders. Proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees as listed in the
proxy statement, and all of such nominees were elected. The following
table sets forth the number of votes cast for, or withheld with respect
to, each director nominated for election.
<TABLE>
<CAPTION>
DIRECTORS FOR WITHHELD
----------------------------------- ------------------ --------------------
<S> <C> <C>
George H. Benter, Jr. 37,033,716 139,068
Stuart D. Buchalter 36,807,073 365,711
Ezunial Burts 37,025,338 147,446
Andrea L. Van de Kamp 37,002,230 170,554
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On April 17, 2000, the Corporation filed a report on Form 8-K
under item 5 regarding the financial results for the quarter
ended March 31, 2000. Included in the report was a press release
dated April 13, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY NATIONAL CORPORATION
-------------------------
(Registrant)
DATE: August 11, 2000 /s/ FRANK P. PEKNY
--------------- -------------------------
FRANK P. PEKNY
Executive Vice President and
Chief Financial Officer/Treasurer
(Authorized Officer and
Principal Financial Officer)
21
