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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-10521
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CITY NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-2568550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CITY NATIONAL CENTER
400 NORTH ROXBURY DRIVE,
BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 888-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 par value New York Stock Exchange
NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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Number of shares of common stock outstanding at February 27, 1998:
46,858,109
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 27, 1998: $1,495,778,309
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE DISCLOSED PURSUANT TO PART III OF THIS REPORT
EITHER SHALL BE (I) DEEMED TO BE INCORPORATED BY REFERENCE FROM SELECTED
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR CITY NATIONAL CORPORATION'S 1998
ANNUAL MEETING OF SHAREHOLDERS, IF SUCH PROXY STATEMENT IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120
DAYS AFTER THE END OF THE CORPORATION'S MOST RECENTLY COMPLETED FISCAL YEAR, OR
(II) INCLUDED IN AN AMENDMENT TO THIS REPORT FILED WITH THE COMMISSION ON FORM
10-K/A.
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PART I
ITEM 1. BUSINESS
City National Corporation (the Corporation) was organized in Delaware in
1968 to acquire the outstanding capital stock of City National Bank (the Bank).
Because the Bank comprises substantially all of the business of the Corporation,
references to the "Company" reflect the consolidated activities of the
Corporation and the Bank. The Corporation owns all the outstanding shares of the
Bank.
The Bank, which was founded in 1953 and opened for business in January 1954,
conducts business in Southern California. Following the completion of the
acquisition of Harbor Bancorp (HB) in January 1998 and the sale of the
Wilmington branch in February 1998, the bank operates twenty three banking
offices in Los Angeles County, five in Orange County, one in San Diego County,
four in Riverside County and four in Ventura County.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp (VCNB), a two bank holding company with six branches and total
assets at December 31, 1996 of $279.8 million. The total purchase price was
approximately $49.1 million. The Company issued approximately 1.3 million
treasury shares with a market value of approximately $28.1 million and paid the
remainder in cash.
On January 24, 1997, the Company completed its acquisition of Riverside
National Bank (RNB), a four branch bank with total assets at December 31, 1996
of $252.2 million. The total purchase price was approximately $41.4 million. The
Company issued approximately 1.0 million treasury shares with a market value of
approximately $20.7 million and paid the remainder in cash.
On January 9, 1998, the Company completed its acquisition of HB, a one-bank
holding company with six branches and total assets at December 31, 1997 of
$241.8 million. The total purchase price was approximately $34.5 million. The
Company issued approximately 540,000 shares, primarily from treasury with an
aggregate market value of $17.9 million and paid the remainder in cash. The
Company closed the Huntington Beach branch of Harbor Bank on January 26, 1998.
On February 27, 1998, the Company sold its Wilmington branch, which was
acquired as part of the acquisition of VCNB, to Banco Popular, N.A.
(California).
The Bank has received regulatory approval from the Office of the Comptroller
of the Currency to close RNB's former Magnolia branch on May 15, 1998.
The Bank primarily serves middle-market companies, professional and business
borrowers and associated individuals with commercial banking and fiduciary needs
and purchases participations in syndicated loans. The Bank provides revolving
lines of credit, term loans, asset based loans, residential first trust deed
mortgages, commercial real estate secured loans, trade facilities, and deposit,
cash management and other business services. The Bank's City National
Investments Division offers personal and employee benefit trust and estate
services, and deals in money market and other investments for its own account
and for its customers. The Bank offers mutual funds in association with other
companies.
COMPETITION
The banking business is highly competitive. The Bank competes with domestic
and foreign banks for deposits, loans and other banking business. In addition,
other financial intermediaries, such as savings and loans, money market mutual
funds, credit unions and other financial services companies, compete with the
Bank. Furthermore, the geographic constraints on portions of the financial
services industry can be expected to erode.
Non-depository institutions can also be expected to increase the extent to
which they act as financial intermediaries.
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MONETARY POLICY
The net income of the Bank is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities in the U.S. and abroad. In particular, the Board of Governors of the
Federal Reserve System (Federal Reserve Board) exerts a substantial influence on
interest rates and credit conditions, primarily through open market operations
in U.S. government securities, varying the discount rate on member bank
borrowings and setting reserve requirements against deposits. Federal Reserve
Board monetary policies have had a significant effect on the operating results
of financial institutions in the past and are expected to continue to do so in
the future.
SUPERVISION AND REGULATION
Bank holding companies, banks and their non-bank affiliates are extensively
regulated under both federal and state law. The following is not intended to be
an exhaustive description of the statutes and regulations applicable to the
Corporation's or the Bank's business. The description of statutory and
regulatory provisions is qualified in its entirety by reference to the
particular statutory or regulatory provisions.
Moreover, major new legislation and other regulatory changes affecting the
Corporation, the Bank, banking and the financial services industry in general
have occurred in the last several years and can be expected to occur in the
future. The nature, timing and impact of new and amended laws and regulations
cannot be accurately predicted.
BANK HOLDING COMPANIES
Bank holding companies are regulated under the Bank Holding Company Act (BHC
Act) and are supervised by the Federal Reserve Board. Under the BHC Act, the
Corporation files reports of its operations with the Federal Reserve Board and
is subject to examination by it.
The BHC Act requires, among other things, the Federal Reserve Board's prior
approval whenever a bank holding company proposes to (i) acquire all or
substantially all the assets of a bank, (ii) acquire direct or indirect
ownership or control of 5% or more of the voting shares of a bank, or (iii)
merge or consolidate with another bank holding company. In 1996, legislation was
approved to substantially streamline the application process for
well-capitalized and well-managed bank holding companies, and in 1997
regulations were adopted by the bank regulatory authorities to implement such
legislation.
In September 1994, the Riegle-Neal Interstate Banking and Branch Efficiency
Act (the Riegle-Neal Act) was enacted. Under the Riegle-Neal Act, interstate
banking is allowed in three different forms:
- Effective September 1995, a bank owned by a holding company may acquire a
subsidiary bank anywhere in the United States.
- Effective September 1995, a bank owned by a holding company may act as an
agent in accepting deposits or servicing loans for any other bank or
savings or loan owned by the holding company.
- Effective June 1, 1997, a bank itself may establish a branch in another
state, but only if the bank's home state permits interstate mergers and
branches, and the other state has not passed a law to prohibit interstate
mergers or branches.
Interstate bank subsidiaries and branch banks are subject to concentration
limits, Community Reinvestment Act requirements, bank supervisory controls and
other restrictions of the Riegle-Neal Act and of state law.
California law permits bank holding companies in other states to acquire
California banks and bank holding companies, provided the acquiring company's
home state has enacted "reciprocal" legislation that
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expressly authorizes California bank holding companies to acquire banks or bank
holding companies in that state on terms and conditions substantially no more
restrictive than those applicable to such an acquisition in California by a bank
holding company from the other state.
The BHC Act also prohibits a bank holding company, with certain exceptions,
from acquiring 5% or more of the voting shares of any company that is not a bank
and from engaging in any activities without the Federal Reserve Board's prior
approval other than (1) managing or controlling banks and other subsidiaries
authorized by the BHC Act, or (2) furnishing services to, or performing services
for, its subsidiaries. The BHC Act authorizes the Federal Reserve Board to
approve the ownership of shares in any company the activities of which have been
determined to be closely related to banking or to managing or controlling banks
as to be a proper incident thereto.
Consistent with its "source of strength" policy (see "Capital Adequacy
Requirements," below), the Federal Reserve Board has stated that, as a matter of
prudent banking, a bank holding company generally should not pay cash dividends
unless its net income available to common shareholders is sufficient to fund
fully the dividends, and the prospective rate of net income retention appears
consistent with the company's capital needs, asset quality and overall financial
condition.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tying arrangements in connection with the extension of credit.
The Federal Reserve Board may, among other things, issue cease-and-desist
orders with respect to activities of bank holding companies and nonbanking
subsidiaries that represent unsafe or unsound practices or violate a law,
administrative order or written agreement with a federal banking regulator. The
Federal Reserve Board can also assess civil money penalties against companies or
individuals who violate the BHC Act or other federal laws or regulations, order
termination of nonbanking activities by nonbanking subsidiaries of bank holding
companies and order termination of ownership and control of a nonbanking
subsidiary by a bank holding company.
NATIONAL BANKS
The Bank is a national bank and, as such, is subject to supervision and
examination by the Office of the Comptroller of the Currency (OCC) and
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged,
and limitations on the types of investments that may be made and services that
may be offered. Various consumer laws and regulations also affect the Bank's
operations. These laws primarily protect depositors and other customers of the
Bank, rather than the Corporation and its shareholders.
"Brokered deposits" are deposits obtained by a bank from a "deposit broker"
or that pay above-market rates of interest. Because the Bank is categorized as a
well capitalized financial institution, the Bank can accept brokered deposits
without the prior approval of the Federal Deposit Insurance Corporation (FDIC).
The Corporation's principal asset is its investment in the Bank. Bank
dividends are one of the Corporation's principal sources of liquidity. The
Bank's ability to pay dividends is limited by certain statutes and regulations.
OCC approval is required for a national bank to pay a dividend if the total of
all dividends declared in any calendar year exceeds the total of the bank's net
profits (as defined) for that year combined with its retained net profits for
the preceding two calendar years, less any required transfer to surplus. A
national bank may not pay any dividend that exceeds its net profits then on hand
after deducting its loan losses and bad debts, as defined by the OCC. The OCC
and the Federal Reserve Board have also issued banking circulars emphasizing
that the level of cash dividends should bear a direct correlation to the level
of a national bank's current and expected earnings stream, the bank's need to
maintain an adequate capital base and other factors. National banks that are not
in compliance with regulatory capital
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requirements generally are not permitted to pay dividends. The Bank is in
compliance with such requirements. The OCC also can prohibit a national bank
from engaging in an unsafe or unsound practice in its business. Depending on a
bank's financial condition, payment of dividends could be deemed to constitute
an unsafe or unsound practice. Except under certain circumstances and with prior
regulatory approval, a bank may not pay a dividend if, after so doing, it would
be undercapitalized. The Bank's ability to pay dividends in the future is, and
could be further, influenced by regulatory policies or agreements and by capital
guidelines.
The Bank's ability to make funds available to the Corporation is also
subject to restrictions imposed by federal law on the Bank's ability to extend
credit to the Corporation to purchase assets from it, to issue a guarantee,
acceptance or letter of credit on its behalf (including an endorsement or
standby letter of credit), to invest in its stock or securities, or to take such
stock or securities as collateral for loans to any borrower. Such extensions of
credit and issuances generally must be secured and are generally limited, with
respect to the Corporation, to 10% of the Bank's capital stock and surplus.
The Bank is insured by the FDIC and therefore is subject to its regulations.
Among other things, the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) provided authority for special assessments against insured
deposits and required the FDIC to develop a general risk-based assessment
system. During 1995, the Bank Insurance Fund reached its targeted level of 1.25%
of estimated insured deposits. The FDIC reduced the assessment rate for well
capitalized banks to $2,000 per year for 1996. Beginning January 1, 1997, the
FDIC collected an assessment against Bank Insurance Fund-assessable deposits to
be paid to the Financing Corporation of approximately 1.29 basis points on total
deposits, as defined. Beginning January 1, 1998, the rate was reduced to
approximately 1.26 basis points on total deposits, as defined.
Banks and bank holding companies are also subject to the Community
Reinvestment Act of 1977, as amended (CRA). CRA requires the Bank to ascertain
and meet the credit needs of the communities it serves, including low-income and
moderate-income neighborhoods. The Bank's compliance with CRA is reviewed and
evaluated by the OCC, which assigns the Bank a publicly available CRA rating at
the conclusion of the examination. Further, an assessment of CRA compliance is
also required in connection with applications for OCC approval of certain
activities, including establishing or relocating a branch office that accepts
deposits or merging or consolidating with, or acquiring the assets or assuming
the liabilities of, a federally regulated financial institution. An unfavorable
rating may be the basis for OCC denial of such an application, or approval may
be conditioned upon improvement of the applicant's CRA record. In the case of a
bank holding company applying for approval to acquire a bank or other bank
holding company, the Federal Reserve Board will assess the CRA record of each
subsidiary bank of the applicant, and such records may be the basis for denying
the application.
In the most recently completed CRA compliance examination, conducted in
1997, the OCC assigned the Bank a rating of "Satisfactory," the second highest
of four possible ratings. The CRA regulations governing the Corporation and the
Bank emphasize measurements of performance in the area of lending (specifically,
the bank's home mortgage, small business, small farm and community development
loans), investment (the bank's community development investments) and service
(the bank's community development services and the availability of its retail
banking services), although examiners are still given a degree of flexibility in
taking into account unique characteristics and needs of the bank's community and
its capacity and constraints in meeting such needs. The regulations also require
certain levels of collection and reporting of data regarding certain kinds of
loans.
The OCC's FDICIA regulations incorporate guidelines establishing standards
for safety and soundness, including operational and managerial standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, assets growth
and compensation, fees and benefits, and prohibit compensation deemed excessive.
If the OCC finds that a bank has failed to meet any applicable standard, it may
require the institution to submit an
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acceptable plan to achieve compliance, and if the bank fails to comply, the OCC
must, by order, require it to correct the deficiency.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have adopted regulations requiring
regulators to consider interest rate risk (when the interest rate sensitivity of
an institution's assets does not match the sensitivity of its liabilities or its
off-balance-sheet position) in the evaluation of a bank's capital adequacy.
The OCC has enforcement powers with respect to national banks for violations
of federal laws or regulations that are similar to the powers of the Federal
Reserve Board with respect to bank holding companies and nonbanking
subsidiaries. See "Bank Holding Companies," above.
CAPITAL ADEQUACY REQUIREMENTS
Both the Federal Reserve Board and the OCC have adopted similar, but not
identical, "risk-based" and "leverage" capital adequacy guidelines for bank
holding companies and national banks, respectively. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
ranging from zero percent for risk-free assets (E.G., cash) to 100% for
relatively high-risk assets (E.G., commercial loans). These risk weights are
multiplied by corresponding asset balances to determine a risk-adjusted asset
base. Certain off-balance sheet items (E.G., standby letters of credit) are
added to the risk-adjusted asset base. The minimum required ratio of total
capital to risk-weighted assets for both bank holding companies and national
banks is presently 8%. At least half of the total capital is required to be
"Tier 1 capital," consisting principally of common shareholders' equity, a
limited amount of perpetual preferred stock, trust preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less certain
intangible items. The remainder (Tier 2 capital) may consist of a limited amount
of subordinated debt, certain hybrid capital instruments and other debt
securities, preferred stock and a limited amount of the general loan-loss
allowance. As of December 31, 1997, the Corporation had a ratio of total capital
to risk-weighted assets (Total risk-based capital ratio) of 12.27% and a ratio
of Tier 1 capital to risk-weighted assets (Tier 1 risk-based capital ratio) of
10.99%, while the Bank had a total risk-based capital ratio of 10.78% and a Tier
1 risk-based capital ratio of 9.50%.
The minimum Tier 1 leverage ratio, consisting of Tier 1 capital to average
adjusted total assets, is 3% for bank holding companies and national banks that
have the highest regulatory examination rating and are not contemplating
significant growth or expansion. All other bank holding companies and national
banks are expected to maintain a ratio of at least 1% to 2% or more above the
stated minimum. As of December 31, 1997, the Corporation had a Tier 1 leverage
ratio of 9.19%, and the Bank's Tier 1 leverage ratio was 7.93%.
The OCC has adopted regulations under FDICIA establishing capital categories
for national banks and prompt corrective actions for undercapitalized
institutions. The regulations create five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. The following table shows as of December 31, 1997
the minimum total risk-based capital, Tier 1 risk-based capital and Tier 1
leverage ratios, all of which must be satisfied for a bank
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to be classified as well capitalized, adequately capitalized or
undercapitalized, respectively, together with the Bank's ratios which in all
cases exceed the well capitalized minimums.
MINIMUM
MINIMUM TOTAL MINIMUM TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
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City National Bank............................ 10.78% 9.50% 7.93%
Well capitalized(1)........................... 10.00% 6.00% 5.00%
Adequately capitalized........................ 8.00% 4.00% 4.00%(2)
Undercapitalized.............................. 6.00% 4.00% 3.00%
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(1) A bank may not be classified as well capitalized if it is subject to a
specific agreement with the OCC to meet and maintain a specified level of
capital.
(2) 3% for institutions having a composite rating of "1" in the most recent OCC
examination.
If any one or more of a bank's ratios are below the minimum required to be
classified as undercapitalized, it will be classified as significantly
undercapitalized. In addition, if its ratio of tangible equity to total assets
is 2% or less, it will be classified as critically undercapitalized. A bank may
be reclassified by the OCC to the next level below that determined by the
criteria described above if the OCC finds that it is in an unsafe or unsound
condition or if it has received a less-than-satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity in its most
recent examination and the deficiency has not been corrected, except that a bank
cannot be reclassified as critically undercapitalized for such reasons.
Under FDICIA and its implementing regulations, the OCC may subject national
banks to a broad range of restrictions and regulatory requirements. A national
bank may not pay management fees to any person having control of the
institution, nor, except under certain circumstances and with prior regulatory
approval, make any capital distribution if, after doing so, it would be
undercapitalized. Undercapitalized banks are subject to increased monitoring by
the OCC, are restricted in their asset growth, must obtain regulatory approval
for certain corporate activities, such as acquisitions, new branches and new
lines of business, and, in most cases, must submit to the OCC a plan to bring
their capital levels to the minimum required in order to be classified as
adequately capitalized. The OCC may not approve a capital restoration plan
unless each company that controls the bank guarantees that the bank will comply
with it. Significantly and critically undercapitalized banks are subject to
additional mandatory and discretionary restrictions and, in the case of
critically undercapitalized institutions, must be placed into conservatorship or
receivership unless the OCC and the FDIC agree otherwise.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support each such bank. In addition, a bank holding company is
required to guarantee that its subsidiary bank will comply with any capital
restoration plan required under FDICIA. The amount of such a guarantee is
limited to the lesser of (i) 5% of the bank's total assets at the time it became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the bank into compliance with all applicable capital
standards as of the time the bank fails to comply with the capital restoration
plan. A holding company guarantee of a capital restoration plan for the Bank
would result in a priority claim to the holding company's assets ahead of its
other unsecured creditors and shareholders that is enforceable even in the event
of the holding company's bankruptcy or the subsidiary bank's insolvency.
YEAR 2000 ISSUES
During 1996 and 1997, the Federal Financial Institutions Examination Council
("FFIEC"), an organization comprised of representatives of the major bank
regulatory agencies, including the Federal
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Reserve Board, the OCC and the FDIC, issued a number of statements relating to
Year 2000 Issues--the risks attributed to the programming codes in many existing
computer systems that may result in inaccurate calculations based on any
two-digit field containing the value "00". For many systems, the two-digit "00"
field will not permit accurate calculations based on current formulas on or
after January 1, 2000 because that date may be read as January 1, 1900. The
potential impact, particularly in the financial services industry, is that
date-sensitive calculations could be based on erroneous data or could cause a
systems failure.
The FFIEC Statement of May 5, 1997 (the "Statement"), as supplemented by the
FFIEC Guidelines of December 17, 1997 (the "Guidelines"), emphasize the need to
make all information processing systems Year 2000 compliant and to identify
specific concerns which should be considered in managing such a conversion
program. Among other things, the Statement and Guidelines: (a) outline the Year
2000 project management process; (b) identify certain external risk issues that
a Year 2000 conversion plan should consider, including reliance on vendors, data
exchange with other firms and Year 2000 compliance by borrowers; and (c)
describe other operational issues that may be relevant to a Year 2000 plan. The
Guidelines also outline the responsibilities of senior management and the board
of directors for addressing Year 2000 problems through active management and
oversight of efforts to ensure that adequate resources and personnel are devoted
to Year 2000 efforts. The Guidelines stress that Year 2000 Issues are an
enterprise-wide challenge, and not solely a technology issue, require management
to provide the board at least quarterly status reports on management's Year 2000
efforts and require development of a project planning process. The Guidelines
also clarify the Statement regarding Year 2000 compliance by an institution's
vendors.
ITEM 2. PROPERTIES
The Company has its principal offices in the City National Center, 400 North
Roxbury Drive, Beverly Hills, California 90210, which the Bank owns and
occupies. As of December 31, 1997, the Bank and its subsidiaries actively
maintained premises composed of 33 banking offices, a computer center, and
certain other properties.
Since 1967, the Bank's Pershing Square Regional Office and a number of Bank
departments have been the major tenant of the office building located at 606
South Olive Street in downtown Los Angeles. The building was originally
developed and built by a partnership between a wholly-owned subsidiary of the
Bank, Citinational Bancorporation, and Buckeye Construction Co. and Buckeye
Realty and Management Corporation (two corporations then affiliated with Mr.
Bram Goldsmith, Chairman of the Board of the Corporation). Since its completion,
the building has been owned by Citinational-Buckeye Building Co., a limited
partnership of which Citinational Bancorporation and Olive-Sixth Buckeye Co. are
the only general partners, each with a 29% partnership interest. Citinational
Bancorporation has an additional 3% interest as a limited partner of
Citinational-Buckeye Building Co.; the remainder is held by other, unaffiliated
limited partners. Olive-Sixth Buckeye Co. is a limited partnership of which Mr.
Goldsmith is a 49% general partner; therefore, Mr. Goldsmith has an indirect 14%
ownership interest in Citinational-Buckeye Building Co. The remaining general
partner and all limited partners of Olive-Sixth Buckeye Co. are not affiliated
with the Corporation. Since 1990, Citinational-Buckeye Building Co. has managed
the building, which is almost fully leased.
The major encumbrance on real properties owned directly by the Bank or its
subsidiaries is a deed of trust on the 606 South Olive Street building, securing
Citinational-Buckeye Building Company's note to City National Bank, maturing in
December 1998 on which the unpaid balance at December 31, 1997, was $15,703,786.
Citinational-Buckeye Building Co. is in the process of refinancing the Bank's
mortgage, although there can be no assurance that such refinancing will be
accomplished.
The Bank's subsidiary, Citinational Bancorporation, owned as of December 31,
1997 two buildings located on Olympic Boulevard in downtown Los Angeles, which
are occupied primarily by the Bank's
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support departments and one of which contains a banking office. In addition, as
of December 31, 1997, the Bank owned five other branch properties; the former
main office of Riverside National Bank and two of its branches located in
Riverside, a 9,007 square foot building in Wilmington which was sold on February
27, 1998 and its branch located in Studio City.
The remaining twenty five branch locations throughout Southern California
are leased by the Bank at annual rentals (exclusive of operating charges and
real property taxes) of approximately $7.1 million, with expiration dates
ranging from 1998 to 2009, exclusive of renewal options.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various pending
lawsuits claiming substantial amounts. Based on present knowledge, management
and in-house counsel are of the opinion that the final outcome of such lawsuits
will not have a material adverse effect upon the Corporation.
The Company is not aware of any material proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than 5% of the voting securities of the Company, or any associate of any such
director, officer or security holder is a party adverse to the Company or any of
its subsidiaries or has a material interest adverse to the Company or any of its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during the
fourth quarter of the year ended December 31, 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Shown below are names and ages of all executive officers of the Corporation
and officers of the Bank who may be deemed to be executive officers of the
Corporation, with indication of all positions and offices with the Corporation
and the Bank. Mr. Russell Goldsmith is the son of Mr. Bram Goldsmith.
Capacities in which served:
PRESENT PRINCIPAL OCCUPATION AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
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Bram Goldsmith..................... 75 Chief Executive Officer (until October 1995) Chairman of the Board,
City National Corporation; Chairman of the Board and Chief Executive
Officer, City National Bank, until October 1995
Russell Goldsmith.................. 48 Chief Executive Officer and Vice Chairman, City National Corporation.
October 1995 to present; Chairman of the Board and Chief Executive
Officer, City National Bank, October 1995 to present; President,
Goldsmith Entertainment Company, production and media company, 1994 to
1995; Consultant, Spelling Entertainment Group, Inc, television and
home video company, 1994 to 1995; Chairman of the Board and Chief
Executive Officer, Republic Pictures Corporation, entertainment
company, until 1994
George H. Benter, Jr............... 56 President and Chief Operating Officer, City National Bank, since 1992;
President, City National Corporation, since 1993
Frank P. Pekny..................... 54 Executive Vice President and Treasurer/Chief Financial Officer, City
National Corporation, since 1992. Vice Chairman and Chief Financial
Officer, City National Bank since 1995; Executive Vice President and
Chief Financial Officer, City National Bank, 1992 to October 1995
Robert A. Moore.................... 55 Executive Vice President and Manager, Credit Services, City National
Bank, since 1992
Jeffery L. Puchalski............... 42 Executive Vice President and Senior Risk Management Officer, City
National Bank from 1992
Richard H. Sheehan, Jr............. 54 Senior Vice President, Secretary and General Counsel, City National
Bank and City National Corporation 1994 to present; Senior Vice
President and Assistant General Counsel, Bank of America, NT & SA,
commercial bank, 1987 to 1994
Heng W. Chen....................... 45 Controller, City National Corporation since 1995, Assistant Treasurer,
City National Corporation from 1992. Senior Vice President--Finance
and Controller, City National Bank since 1995, Senior Vice President,
Finance, City National Bank from 1988
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed and traded principally on the New
York Stock Exchange under the symbol "CYN," information concerning the range of
high and low sales prices for the Corporation's common stock, and the dividends
declared, for each quarterly period within the past two fiscal years in set
forth below.
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- --------------------------------------------------------------- --------- --------- -----------
1997
March 31....................................................... $ 25.38 $ 20.38 $ 0.11
June 30........................................................ 25.50 20.88 .11
September 30................................................... 32.25 24.25 .11
December 31.................................................... 37.50 28.00 .11
1996
March 31....................................................... $ 14.13 $ 12.63 $ 0.09
June 30........................................................ 16.50 15.50 .09
September 30................................................... 19.00 14.63 .09
December 31.................................................... 22.25 17.38 .09
As of February 27, 1998 the closing price of the Corporation's stock on the
New York Stock Exchange was $37.19 per share. As of that date, there were
approximately 2,300 record holders of the Corporation's common stock. On January
28, 1998, the Board of Directors authorized a regular quarterly cash dividend on
its common stock at an increased rate of $.14 per share payable on February 12,
1998.
For a discussion of dividend restrictions on the Corporation's common stock,
see Note 11 (Availability of Funds From Subsidiaries, Restrictions on Cash
Balances; Capital) to the consolidated financial statements on page A-50 of this
report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page A-2 under the caption
"SELECTED FINANCIAL INFORMATION," and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item appears on pages A-3 through A-28,
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS," and is incorporated
herein by reference.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears on pages A-16 through A-19
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS" and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages A-31 through A-56,
and on page A-29 under the captions "1997 QUARTERLY OPERATING RESULTS" and "1996
QUARTERLY OPERATING RESULTS" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, to the extent not included under the
caption "Executive Officers of the Registrant" in Part I of this report, or
below, will appear under the caption "Election of Directors" in the
Corporation's definitive proxy statement for the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement"), and such information either shall be
(i) deemed to be incorporated herein by reference from that portion of the 1998
Proxy Statement, if filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the Corporation's
most recently completed fiscal year, or (ii) included in an amendment to this
report filed with the Commission on Form 10-K/A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear under the captions
"Compensation of Directors and Executive Officers," "Board Compensation and
Directors Nominating Committee Report on Executive Compensation" and
"Stockholder Return Graph" in the 1998 Proxy Statement, and such information
either shall be (i) deemed to be incorporated herein by reference from those
portions of the 1998 Proxy Statement, if filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the Corporation's most recently completed fiscal year, or (ii) included in an
amendment to this report filed with the Commission on Form 10-K/A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear under the captions "Record
Date, Number of Shares Outstanding and Voting Rights; Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the 1998
Proxy Statement, and such information either shall be (i) deemed to be
incorporated herein by reference from that portion of the 1998 Proxy Statement,
if filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the Corporation's most recently
completed fiscal year, or (ii) included in an amendment to this report filed
with the Commission on Form 10-K/A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the caption "Certain
Transactions with Management and Others" in the 1998 Proxy Statement, and such
information either shall be (i) deemed to be incorporated herein by reference
from that portion of the 1998 Proxy Statement, if filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the Corporation's most recently completed fiscal year, or (ii) included
in an amendment to this report filed with the Commission on Form 10-K/A. Also
see Note 5 (Loans and Allowance for Credit Losses) to the consolidated financial
statements on page A-43 and A-44 of this report.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
Managements' Responsibility for Financial Statements......................... A-30
Independent Auditors' Report................................................. A-31
Consolidated Balance Sheet at December 31, 1997 and 1996..................... A-32
Consolidated Statement of Income for each of the years in the three-year
period ended December 31, 1997............................................. A-33
Consolidated Statement of Cash Flows for each of the years in the three-year
period ended December 31, 1997............................................. A-34
Consolidated Statement of Changes in Shareholders' Equity for each of the
years in the three-year period ended December 31, 1997..................... A-35
Notes to the Consolidated Financial Statements............................... A-36
2. All other schedules and separate financial statements of 50% or less owned
companies accounted for by the equity method have been omitted because they
are not applicable.
3. Exhibits (listed by numbers corresponding to Exhibit Table of Item 601 in
Regulation S-K)
NO.
3.1 Certificate of Incorporation (This Exhibit is incorporated by reference from the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.)
3.2 By-Laws, as amended to date (This Exhibit is incorporated by reference from the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.)
4.1 6 3/8% Subordinated Notes Due 2008 in the principal amount of $125 million
4.2 Stockholder Rights Plan (This Exhibit is incorporated by reference from the Registrant's Form
8-A filed on March 12, 1997.)
10.2.2 Employment Agreement made as of March 18, 1998, by and between Bram Goldsmith and City
National Bank, including Sixth Amendment to Split Dollar Life Insurance Agreement Collateral
Assignment Plan between City National Bank and the Goldsmith 1980 Insurance Trust, dated March
18, 1998
10.3 Split Dollar Life Insurance Agreement Collateral Assignment Plan between City National Bank
and the Goldsmith 1980 Insurance Trust, dated as of June 13, 1980, as amended to December 31,
1991 (This Exhibit is incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1991.)
10.3.1 Fifth Amendment to Split Dollar Life Insurance Agreement Collateral Assignment Plan between
City National Bank and the Goldsmith 1980 Insurance Trust, dated May 15, 1995
10.10 City National Corporation 1985 Stock Option Plan, as amended to date (This Exhibit is
incorporated by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.22 Employment Agreement dated as of October 16, 1995, between Russell Goldsmith and City National
Bank (This Exhibit is incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.)
13
NO.
10.22.1 Stock Option Agreement Under the City National Corporation 1985 Stock Option Plan dated as of
October 16, 1995, between City National Corporation and Russell Goldsmith (This Exhibit is
incorporated by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.24 City National Corporation 1995 Omnibus Plan (This Exhibit is incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.24.1 Amended and Restated Section 2.8 of City National Corporation 1995 Omnibus Plan
10.28 Lease dated September 30, 1996, between Citinational-Buckeye Building Co. and City National
Bank for space until December 31, 2006.
21 Subsidiaries of the registrant
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
(b) During the calendar quarter ended December 31, 1997, the registrant did not
file any current reports on Form 8-K.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITY NATIONAL CORPORATION
(Registrant)
By /s/ RUSSELL D. GOLDSMITH
-----------------------------------------
Russell D. Goldsmith,
March 18, 1998 CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ RUSSELL D. GOLDSMITH
-------------------------------------------
Russell D. Goldsmith Chief Executive Officer and Director March 18, 1998
(Principal Executive Officer)
/s/ FRANK P. PEKNY
------------------------------------------- Executive Vice President and
Frank P. Pekny Treasurer/Chief Financial Officer March 18, 1998
(Principal Financial Officer)
/s/ HENG W. CHEN
-------------------------------------------
Heng W. Chen Controller March 18, 1998
(Principal Accounting Officer)
/s/ BRAM GOLDSMITH
------------------------------------------- Chairman of the Board and Director March 18, 1998
Bram Goldsmith
/s/ GEORGE H. BENTER, JR.
------------------------------------------- President and Director March 18, 1998
George H. Benter, Jr.
/s/ RICHARD L. BLOCH
------------------------------------------- Director March 18, 1998
Richard L. Bloch
------------------------------------------- Director March 18, 1998
Mirion P. Bowers, M.D.
/s/ STUART D. BUCHALTER
------------------------------------------- Director March 18, 1998
Stuart D. Buchalter
15
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ BURTON S. HORWITCH
------------------------------------------- Director March 18, 1998
Burton S. Horwitch
------------------------------------------- Director March 18, 1998
Barry M. Meyer
/s/ CHARLES E. RICKERSHAUSER, JR.
------------------------------------------- Director March 18, 1998
Charles E. Rickershauser, Jr.
/s/ EDWARD SANDERS
------------------------------------------- Director March 18, 1998
Edward Sanders
/s/ ANDREA L. VAN DE KAMP
------------------------------------------- Director March 18, 1998
Andrea L. Van De Kamp
/s/ KENNETH ZIFFREN
------------------------------------------- Director March 18, 1998
Kenneth Ziffren
16
FINANCIAL HIGHLIGHTS
INCREASE
DOLLARS IN THOUSANDS, (DECREASE)
EXCEPT PER SHARE AMOUNTS 1997 1996 AMOUNT
- ------------------------------------------------------------------------ ------------ ------------ ------------
FOR THE YEAR
Net income.......................................................... $ 80,133 $ 66,563 $ 13,570
Net income per common share, basic.................................. 1.74 1.52 0.22
Net income per common share, diluted................................ 1.68 1.47 0.21
Dividends, per common share......................................... 0.44 0.36 0.08
AT YEAR END
Assets.............................................................. $ 5,252,032 $ 4,216,496 $ 1,035,536
Deposits............................................................ 4,228,348 3,386,523 841,825
Loans............................................................... 3,825,224 2,839,435 985,789
Securities.......................................................... 833,122 811,092 22,030
Shareholders' equity................................................ 508,670 400,747 107,923
Book value, per common share........................................ 11.03 9.13 1.90
AVERAGE BALANCES
Assets.............................................................. $ 4,703,886 $ 3,821,314 $ 882,572
Deposits............................................................ 3,614,068 2,871,870 742,198
Loans............................................................... 3,387,784 2,539,323 848,461
Securities.......................................................... 829,557 839,564 (10,007)
Shareholders' equity................................................ 472,843 373,491 99,352
SELECTED RATIOS
Return on average assets............................................ 1.70% 1.74% (0.04)%
Return on average shareholders' equity.............................. 16.95 17.82 (0.87)
Tier 1 leverage..................................................... 9.19 9.75 (0.56)
Tier 1 risk-based capital........................................... 10.99 13.26 (2.27)
Total risk-based capital............................................ 12.27 14.55 (2.28)
Dividend payout ratio, per share.................................... 26.19 24.49 1.70
Net interest margin................................................. 6.13 5.87 0.26
Efficiency ratio.................................................... 58.22 58.00 0.22
A-1
SELECTED FINANCIAL INFORMATION
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996 1995 1994 1993
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Interest income................................. $ 357,996 $ 282,123 $ 217,594 $ 181,825 $ 169,792
Interest expense................................ 104,328 82,389 55,331 38,414 41,996
---------- ---------- ---------- ---------- ----------
Net interest income............................. 253,668 199,734 162,263 143,411 127,796
Provision for credit losses..................... -- -- -- 7,535 60,163
Noninterest income (other than gains and losses
on securities transactions)................... 54,466 43,808 35,162 36,180 45,810
Gains (losses) on securities transactions....... (1,048) 187 (596) (3,383) --
Noninterest expense (other than ORE and
consolidation charge)......................... 184,324 144,795 118,684 121,296 129,226
Consolidation charge............................ -- -- -- -- 12,000
ORE income...................................... (2,567) (200) (608) (5,297) (4,489)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
taxes......................................... 125,329 99,134 78,753 52,674 (23,294)
Income taxes (benefit).......................... 45,196 32,571 29,961 15,511 (9,260)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations........ 80,133 66,563 48,792 37,163 (14,034)
Income from discontinued operations............. -- -- -- -- 7,128
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 80,133 $ 66,563 $ 48,792 $ 37,163 $ (6,906)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Income (loss) per share, diluted, from
continuing operations......................... $ 1.68 $ 1.47 $ 1.06 $ 0.81 $ (0.35)
Net income (loss) per share, basic.............. 1.74 1.52 1.08 0.83 (0.17)
Net income (loss) per share, diluted............ 1.68 1.47 1.06 0.81 (0.17)
Cash dividends declared......................... 0.44 0.36 0.26 0.05 --
Book value per share............................ 11.03 9.13 8.19 7.32 6.62
Shares used to compute income (loss) per share,
basic......................................... 46,018 43,888 45,198 44,725 39,580
Shares used to compute income (loss) per share,
diluted....................................... 47,809 45,146 45,886 45,626 39,685
BALANCE SHEET DATA--AT PERIOD END:
Assets.......................................... $5,252,032 $4,216,496 $4,157,551 $3,012,775 $3,100,626
Loans........................................... 3,825,224 2,839,435 2,346,611 1,643,918 1,628,803
Securities...................................... 833,122 811,092 975,407 749,435 904,481
Interest-earning assets......................... 4,838,926 3,844,834 3,784,245 2,716,524 2,838,698
Deposits........................................ 4,228,348 3,386,523 3,248,035 2,417,762 2,526,767
Shareholders' equity............................ 508,670 400,747 366,957 330,721 298,074
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets.......................................... $4,703,886 $3,821,314 $2,849,807 $2,831,471 $2,944,461
Loans........................................... 3,387,784 2,539,323 1,758,671 1,537,997 1,762,663
Securities...................................... 829,557 839,564 705,122 854,823 517,059
Interest-earning assets......................... 4,290,453 3,505,422 2,624,436 2,594,241 2,623,164
Deposits........................................ 3,614,068 2,871,870 2,062,412 2,241,175 2,380,106
Shareholders' equity............................ 472,843 373,491 350,551 313,196 260,649
ASSET QUALITY:
Nonaccrual loans................................ $ 27,566 $ 41,543 $ 48,124 $ 58,801 $ 79,303
ORE............................................. 2,126 15,116 7,439 4,726 2,052
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and ORE................ $ 29,692 $ 56,659 $ 55,563 $ 63,527 $ 81,355
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Assets held for accelerated disposition......... $ -- $ -- $ -- $ -- $ 17,450
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PERFORMANCE RATIOS:
Return on average assets........................ 1.70% 1.74% 1.71% 1.31% (0.23)%
Return on average shareholders' equity.......... 16.95 17.82 13.92 11.87 (2.65)
Net interest spread............................. 4.64 4.47 4.84 4.60 4.12
Net interest margin............................. 6.13 5.87 6.26 5.57 4.92
Average shareholders' equity to average
assets........................................ 10.05 9.77 12.30 11.06 8.85
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans................. 0.72% 1.46% 2.05% 3.58% 4.87%
Nonaccrual loans and ORE to total assets........ 0.57 1.34 1.34 2.11 2.62
Allowance for credit losses to total loans...... 3.60 4.58 5.60 6.41 6.78
Allowance for credit losses to nonaccrual
loans......................................... 499.75 313.14 273.28 179.15 139.34
Net charge offs (recoveries) to average loans... (0.02) 0.06 (0.40) 0.83 4.78
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
City National Corporation (the "Company") is the holding company for City
National Bank (the "Bank"). In light of the fact that the Bank comprises
substantially all of the business of the Company, references to the "Company"
mean the Company and the Bank together.
Consolidated net income was $80.1 million, or $1.68 per diluted common share
in 1997, compared to $66.6 million, or $1.47 per diluted common share in 1996.
Net income per basic share was $1.74 in 1997 compared with $1.52 in 1996. The
increase in net income reflects the growth in the Company's loans and deposits
during 1997 including the impact from the acquisitions of VCNB and RNB in
January 1997. Fully taxable equivalent net interest income in 1997 increased
$57.5 million over 1996 and noninterest income increased $9.4 million compared
with 1996. Partially offsetting these increases were a $37.2 million increase in
noninterest expense, compared with 1996, and a $12.6 million increase in income
tax expense in 1997.
The return on average assets was 1.70% and the return on average common
equity was 16.95%, compared with 1.74% and 17.82%, respectively, in 1996.
Earnings before the amortization of goodwill and core deposit intangibles
(net of applicable taxes) ("cash" earnings) for the year ended December 31, 1997
were $84.1 million, or $1.76 per diluted common share, compared with $67.4
million, or $1.49 per diluted common share for the year ended December 31, 1996.
On the same basis, the return on average assets was 1.80% and the return on
average common equity was 19.53%, compared with 1.77% and 18.35%, respectively,
in 1996. "Cash" earnings are presented because they measure the Company's
ability to support growth, pay dividends and repurchase stock. The Company's
"cash" earnings per share and other ratios are not necessarily comparable to
similarly titled measures reported by other companies.
Average assets increased to $4,703.9 million in 1997 from $3,821.3 million
in 1996, an increase of $882.6 million or 23.1%, largely due to increased loan
demand and the acquisitions of VCNB and RNB. Total average loans increased
$848.5 million or 33.4% between 1996 and 1997 due to strong internal loan
originations of both commercial, residential first trust deed and construction
loans, approximately $315.0 million from the acquisitions of VCNB and RNB and
the purchases of corporate loans. Average core deposits (checking, savings and
money market accounts and time certificates of deposit of less than $100,000)
increased to $3,079.6 million in 1997 from $2,508.2 million in 1996, an increase
of $571.4 million or 22.8% due to the Company's increased marketing efforts in
1997 and approximately $375 million from the acquisitions of VCNB and RNB.
Nonaccrual loans declined to $27.6 million at December 31, 1997, or .72% of
total loans, compared to $41.5 million, or 1.46% a year earlier. ORE totaled
$2.1 million at year end, down from $15.1 million a year earlier.
The allowance for credit losses at December 31, 1997 was $137.8 million or
3.60% of loans outstanding at year end. Net recoveries totaled $.7 million in
1997, compared with net chargeoffs of $1.4 million in 1996.
Based on its review of the loan portfolio, management considers the
allowance for credit losses to be adequate and anticipates that a provision for
credit losses may not be required for 1998. However, credit quality will be
influenced by underlying trends in the economic cycle, particularly for Southern
California, among other factors, which are beyond management's control.
Consequently, no assurances can be given that the Company will not sustain loan
losses, in any particular period, that are sizable in relation to the allowance
for credit losses. Additionally, subsequent evaluations of the loan portfolio,
in light of factors then prevailing, by the Company and its regulators may
indicate a requirement for increases in the allowance for credit losses through
charges to the provision for credit losses. See "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995," below.
A-3
In the latter part of 1997, the Company completed the conversion of its core
data processing applications to a new data processing provider. Noninterest
expense in 1997 included $6.3 million in expenses related to the conversion and
to buy out the Company's former data processing contract. The Company also spent
over $18.0 million for new personal computers, item processing and
telecommunications equipment and customized software expenditures in connection
with the conversion.
On January 17, 1997, the Company completed its acquisition of VCNB for $49.1
million by issuing approximately 1.3 million treasury shares with an aggregate
market value of approximately $28.1 million and paying the remainder in cash.
VCNB had total assets, loans and deposits of $279.8 million, $176.1 million and
$245.8 million, respectively at December 31, 1996. The acquisition of VCNB
resulted in the recording of goodwill and intangibles of approximately $27.4
million
On January 24, 1997, the Company completed its acquisition of RNB for $41.4
million. The Company issued approximately 1.0 million treasury shares with an
aggregate market value of approximately $20.7 million and paid the remainder in
cash. RNB had total assets, loans and deposits of $252.2 million, $177.0 million
and $224.2 million, respectively, at December 31, 1996. The acquisition of RNB
resulted in the recording of goodwill and intangibles of approximately $27.4
million.
On January 9, 1998, the Company completed its acquisition of HB for $34.5
million. The Company issued approximately 540,000 shares, primarily treasury
shares, with an aggregate market value of $17.9 million and paid the remainder
in cash. HB had total assets, loans and deposits of $241.8 million, $152.8
million and $221.3 million, respectively, at December 31, 1997. The acquisition
of HB is expected to result in the recording of goodwill and intangibles of
approximately $24.0 million. On January 26, 1998, the Company completed the
conversion of Harbor Bancorp's loan and deposit accounts to the Company's data
processing system.
On February 27, 1998, the Company sold its Wilmington branch which was
acquired as part of the acquisition of VCNB to Banco Popular, N.A. (California).
With the sale the purchaser received approximately $40 million of deposits.
The Company paid dividends of $.44 per share of common stock in 1997 and
$.36 per share of common stock in 1996. On January 28, 1998, the Board of
Directors authorized a regular quarterly cash dividend on common stock at an
increased rate of $.14 per share to shareholders of record on February 2, 1998,
payable on February 12, 1998.
On March 17, 1997, the Company announced a program for the repurchase of up
to 1.5 million shares of its common stock. At December 31, 1997, a total of
943,300 shares had been repurchased at a cost of $22.5 million, of which 563,928
shares remained in treasury at year-end. In January 1998, these shares were
reissued to cover the exercise of stock options and the majority of the stock
consideration for the HB acquisition. The Company will continue with its
previously announced repurchase program.
On March 3, 1997, the Company announced that its Board of Directors had
adopted a Stockholder Rights Plan designed to assure that all City National
shareholders would receive fair treatment in the event of any future "change of
control" (as that term is defined in the Rights Plan) of the Company. The Rights
Plan provides each City National Stockholder with one right for each common
share held. Under certain conditions, each right would be exercisable to
purchase that number of City National common shares having at that time a market
value equal to two times the then current exercise price. The rights are subject
to redemption by the board of directors at $.001 per right at any time prior to
the first date upon which they become exercisable.
On January 12, 1998, the Company's wholly owned subsidiary, City National
Bank, issued $125 million of 6 3/8% Subordinated Notes, due in 2008, in a
private offering. Proceeds, which qualify as Tier II capital, will be used for
general corporate purposes.
A-4
OPERATIONS SUMMARY
INCREASE INCREASE YEAR ENDED DECEMBER
YEAR (DECREASE) YEAR (DECREASE) 31,
DOLLARS IN THOUSANDS, ENDED -------------------- ENDED ---------------------- --------------------
EXCEPT PER SHARE AMOUNTS 1997 AMOUNT % 1996 AMOUNT % 1995 1994
- ---------------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
Interest income(1)...................... $ 367,505 $ 79,456 28 $ 288,049 $ 68,423 31 $ 219,626 $ 182,960
Interest expense........................ 104,328 21,939 27 82,389 27,058 49 55,331 38,414
--------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income..................... 263,177 57,517 28 205,660 41,365 25 164,295 144,546
Provision for credit losses............. -- -- -- -- -- -- -- 7,535
Noninterest income...................... 54,466 10,658 24 43,808 8,646 25 35,162 36,180
Gain (loss) on securities
transactions.......................... (1,048) (1,235) (660) 187 783 131 (596) (3,383)
Noninterest expense:
Staff expense......................... 97,634 20,623 27 77,011 11,636 18 65,375 64,396
Amortization of goodwill and core
deposit intangibles................. 5,619 4,097 269 1,522 1,522 -- -- --
Other expense......................... 81,071 14,809 22 66,262 12,953 24 53,309 56,900
Consolidation charge.................. -- -- -- -- -- -- -- --
ORE income............................ (2,567) (2,367) (1,184) (200) 408 67 (608) (5,297)
--------- --------- --------- --------- ----------- --------- --------- ---------
Total............................... 181,757 37,162 26 144,595 26,519 22 118,076 115,999
--------- --------- --------- --------- ----------- --------- --------- ---------
Income (loss) before income taxes....... 134,838 29,778 28 105,060 24,275 30 80,785 53,809
Income taxes (benefit).................. 45,196 12,625 39 32,571 2,610 9 29,961 15,511
Less adjustments(1)..................... 9,509 3,583 60 5,926 3,894 192 2,032 1,135
--------- --------- --------- --------- ----------- --------- --------- ---------
Income (loss) from continuing
operations............................ 80,133 13,570 20 66,563 17,771 36 48,792 37,163
Income from discontinued operations..... -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income (loss)................... $ 80,133 $ 13,570 20 $ 66,563 $ 17,771 36 $ 48,792 $ 37,163
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income (loss) per share,
diluted........................... $ 1.68 $ 0.21 14 $ 1.47 $ 0.41 39 $ 1.06 $ 0.81
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS 1993
- ---------------------------------------- ---------
Interest income(1)...................... $ 171,134
Interest expense........................ 41,996
---------
Net interest income..................... 129,138
Provision for credit losses............. 60,163
Noninterest income...................... 45,810
Gain (loss) on securities
transactions.......................... --
Noninterest expense:
Staff expense......................... 69,783
Amortization of goodwill and core
deposit intangibles................. --
Other expense......................... 59,443
Consolidation charge.................. 12,000
ORE income............................ (4,489)
---------
Total............................... 136,737
---------
Income (loss) before income taxes....... (21,952)
Income taxes (benefit).................. (9,260)
Less adjustments(1)..................... 1,342
---------
Income (loss) from continuing
operations............................ (14,034)
Income from discontinued operations..... 7,128
---------
Net income (loss)................... $ (6,906)
---------
---------
Net income (loss) per share,
diluted........................... $ (0.17)
---------
---------
- ---------
(1) Includes amounts to convert nontaxable income to a fully taxable equivalent
basis.
OPERATIONS SUMMARY ANALYSIS
NET INTEREST INCOME
1997 COMPARED WITH 1996
Taxable equivalent net interest income totaled $263.2 million in 1997, up
$57.5 million, or 28.0%, from 1996. The increase from 1996 to 1997 was due to a
$785.0 million, or 22.4% increase in average total earning assets and an
increase in the net interest margin to 6.13% from 5.87%.
Average loans increased to $3,387.8 million in 1997 from $2,539.3 million in
1996, an increase of $848.5 million or 33.4%. The majority of this increase
reflects higher average commercial loans outstanding, up $500.0 million or
44.5%. This increase resulted from the Bank's increased marketing efforts,
including the formation of several specialized industry teams in 1997, the
acquisitions of VCNB and RNB and purchases of corporate loans. Average
residential first mortgage loans increased $158.7 million or 20.3% due to
continued strong internal loan originations, primarily of fixed rate mortgages.
The Company purchased $74.7 million in single family mortgages during 1997,
which was substantially less than mortgage loan repayments and prepayments from
purchased mortgages. Due to continued strong originations, the Company does not
expect to purchase any significant amounts of residential mortgages during 1998.
Average construction loans increased $39.4 million or 44.5% due to the Bank's
emphasis in this area. Average real estate mortgage loans increased $138.1
million or 27.1% primarily due to the impact of the acquisitions of VCNB and
RNB. Average loan balances are expected to increase in 1998, resulting from
continued loan growth and the acquisition of HB. See "Cautionary Statement for
Purposes of the `Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
A-5
Average total investment and available-for-sale securities decreased $10.0
million or 1.2% between 1996 and 1997 as a result of the redeployment of the
proceeds from securities maturities and sales to fund the growth in loans.
Average noninterest-bearing deposits increased to $1,522.7 million in 1997
from $1,193.0 million in 1996, an increase of $329.7 million or 27.6%, while
average interest-bearing core deposits increased to $1,556.9 million in 1997
from $1,315.3 million in 1996, an increase of $241.6 million or 18.4%. Average
time deposits of $100,000 or more increased $170.8 million or 47.0% between 1996
and 1997. These increases resulted from the Bank's increased marketing efforts
as well as from the acquisitions of VCNB and RNB.
RATIOS TO AVERAGE ASSETS
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Net interest income(1)............................................... 5.59% 5.38% 5.76% 5.10% 4.39%
Noninterest income................................................... 1.14 1.15 1.21 1.16 1.56
Less provision for credit losses..................................... -- -- -- 0.27 2.04
Less noninterest expense:
Staff expense........................................................ 2.08 2.02 2.29 2.27 2.37
Other expense........................................................ 1.72 1.73 1.87 2.01 2.02
Amortization of goodwill and core deposit intangibles................ 0.12 0.04 -- -- --
Consolidation charge................................................. -- -- -- -- 0.41
ORE expense (income)................................................. (0.05) (0.01) (0.02) (0.19) (0.15)
--------- --------- --------- --------- ---------
Total............................................................ 3.87 3.78 4.14 4.09 4.65
--------- --------- --------- --------- ---------
Income (loss) before income taxes(1)................................. 2.86 2.75 2.83 1.90 (0.74)
--------- --------- --------- --------- ---------
Net income (loss) from continuing operations......................... 1.70 1.74 1.71 1.31 (0.47)
Net income from discontinued operations.............................. -- -- -- -- 0.24
--------- --------- --------- --------- ---------
Net income (loss).................................................... 1.70% 1.74% 1.71% 1.31% (0.23)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ---------
(1) Fully taxable equivalent basis.
1996 COMPARED WITH 1995
Taxable equivalent net interest income totaled $205.7 million in 1996, up
$41.4 million, or 25.2% from 1995. The increase from 1995 to 1996 was due to a
$881.0 million, or 33.6% increase in total earning assets, which was partially
offset by a decline in the net interest margin from 6.26% to 5.87%.
Average loans increased to $2,539.3 million in 1996 from $1,758.7 million in
1995, an increase of $780.7 million or 44.4%. The majority of this increase
reflects higher average residential first mortgage loans outstanding, up $407.7
million or 108.5%. During 1996, the Bank continued to purchase residential
mortgages to supplement its in-house origination program. Average commercial
loans increased $248.9 million or 28.5% due to improved loan demand and the
purchase of corporate commercial loans. Average real estate mortgage loans
increased $86.1 million or 20.3% due to the impact of the acquisition of First
Los Angeles Bank (First LA) on December 31, 1995.
Average total investment and available-for-sale securities increased $134.4
million or 19.1% between 1995 and 1996 as a result of the acquisition of First
LA which had substantial excess liquidity.
Average noninterest-bearing deposits increased from $898.6 million in 1995
to $1,193.0 million in 1996, an increase of $294.4 million or 32.8%, while
average interest-bearing core deposits increased from $1,023.8 million in 1995
to $1,315.3 million in 1996, an increase of $291.5 million or 28.5%. Average
time deposits of $100,000 or more increased $223.6 million or 159.7% between
1995 and 1996. These increases resulted from the Bank's increased marketing
efforts as well as from the acquisition of First LA.
A-6
The following table shows the change in net interest income broken down
between volume and rate. The change in interest due to both rate and volume has
been allocated to the change due to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
CHANGE IN NET INTEREST INCOME
1997 VS 1996 1996 VS 1995
----------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: NET DUE TO: NET
DOLLARS IN THOUSANDS-FULLY ---------------------- INCREASE ---------------------- INCREASE
TAXABLE EQUIVALENT BASIS VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
- --------------------------------------------- ----------- --------- ----------- ---------- ---------- ----------
Interest earned on:
Interest-bearing deposits in other banks... $ (1,112) $ (249) $ (1,361) $ 1,060 $ (23) $ 1,037
Loans...................................... 77,116 3,618 80,734 70,457 (13,881) 56,576
Taxable securities......................... 59 167 226 (24,710) 4,458 (20,252)
State and municipal securities............. 3,362 (23) 3,339 2,381 (37) 2,344
Securities available for sale.............. (3,893) 1,874 (2,019) 32,222 100 32,322
Trading account securities................. 636 162 798 (44) (109) (153)
Federal funds sold and securities purchased
under resale
agreements............................... (2,255) (6) (2,261) (2,930) (521) (3,451)
----------- --------- ----------- ---------- ---------- ----------
Total interest-earning assets............ 73,913 5,543 79,456 78,436 (10,013) 68,423
----------- --------- ----------- ---------- ---------- ----------
Interest paid on:
Interest checking.......................... 513 239 752 431 (144) 287
Money market deposits...................... 2,114 292 2,406 3,891 806 4,697
Savings deposits........................... 1,238 13 1,251 1,405 1,481 2,886
Other time deposits........................ 13,400 724 14,124 14,483 364 14,847
Other borrowings........................... 2,289 1,117 3,406 6,391 (2,050) 4,341
----------- --------- ----------- ---------- ---------- ----------
Total interest-bearing liabilities....... 19,554 2,385 21,939 26,601 457 27,058
----------- --------- ----------- ---------- ---------- ----------
$ 54,359 $ 3,158 $ 57,517 $ 51,835 $ (10,470) $ 41,365
----------- --------- ----------- ---------- ---------- ----------
----------- --------- ----------- ---------- ---------- ----------
A-7
The following table shows average balances and interest rates for the last
five years.
NET INTEREST INCOME SUMMARY
1997 1996
----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
DOLLARS IN THOUSANDS BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE
- ---------------------------------------------- --------- ----------- ----------- --------- ----------- -----------
ASSETS
Earning assets(2)
Loans:
Commercial.............................. $1,623,851 $ 150,528 9.27% $1,123,819 $ 101,039 8.99%
Residential first mortgage.............. 942,381 73,199 7.77 783,648 62,293 7.95
Real estate-construction................ 127,867 15,004 11.73 88,498 10,295 11.63
Real estate-commercial mortgage......... 647,658 63,662 9.83 509,565 49,452 9.70
Installment............................. 46,027 5,035 10.94 33,793 3,615 10.70
--------- ----------- ----------- --------- ----------- -----------
Total loans(3)........................ 3,387,784 307,428 9.07 2,539,323 226,694 8.93
Due from banks-interest bearing........... 2,238 100 4.47 25,989 1,461 5.62
State and municipal investment
securities.............................. 105,325 7,400 7.03 57,461 4,061 7.07
Taxable investment securities............. 117,874 7,683 6.52 116,970 7,457 6.38
Securities available for sale............. 606,358 40,822 6.73 665,133 42,841 6.44
Federal funds sold and securities
purchased under resale agreements....... 23,485 1,301 5.54 64,230 3,562 5.55
Trading account securities................ 47,389 2,771 5.85 36,316 1,973 5.43
--------- ----------- ----------- --------- ----------- -----------
Total earning assets.................. 4,290,453 367,505 8.57 3,505,422 288,049 8.22
----------- ----------- ----------- -----------
Allowance for credit losses................. (136,587) (129,788)
Cash and due from banks..................... 327,013 284,331
Other nonearning assets..................... 223,007 161,349
--------- ---------
Total assets.......................... $4,703,886 $3,821,314
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Interest checking accounts................ $ 366,997 3,677 1.00 $ 316,146 2,925 0.93
Money market accounts..................... 797,902 23,995 3.01 726,942 21,589 2.97
Savings deposits.......................... 169,030 5,701 3.37 132,591 4,450 3.36
Time deposits--under $100,000............. 222,972 11,414 5.12 139,572 7,196 5.16
Time deposits--$100,000 and over.......... 534,431 28,502 5.33 363,659 18,596 5.11
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing deposits....... 2,091,332 73,289 3.50 1,678,910 54,756 3.26
Federal funds purchased and securities
sold under repurchase agreements........ 222,617 11,731 5.27 253,853 12,835 5.06
Other borrowings.......................... 338,930 19,308 5.70 265,638 14,798 5.57
--------- ----------- ----------- --------- ----------- -----------
Total interest-bearing liabilities.... 2,652,879 104,328 3.93 2,198,401 82,389 3.75
----------- ----------- ----------- -----------
Noninterest-bearing deposits................ 1,522,736 1,192,960
Other liabilities........................... 55,428 56,462
Shareholders' equity........................ 472,843 373,491
--------- ---------
Total liabilities and shareholders'
equity.............................. $4,703,886 $3,821,314
--------- ---------
--------- ---------
Net interest spread......................... 4.64 4.47
Fully taxable equivalent net interest income
and margin................................ $ 263,177 6.13% $ 205,660 5.87%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ------------
(1) Fully taxable equivalent basis.
(2) Includes average nonaccrual loans of $37,879, $45,813, $46,931, $69,164 and
$131,381 for 1997, 1996, 1995, 1994 and 1993, respectively.
(3) Loan income includes loan fees of $8,857, $7,492, $6,850, $6,835 and $5,304
for 1997, 1996, 1995, 1994 and 1993, respectively.
A-8
1995 1994 1993
----------------------------------- ----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE BALANCE EXPENSE(1) RATE
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
$ 874,875 $ 88,629 10.13% $ 865,672 $ 74,893 8.65% $1,007,343 $ 75,155 7.46%
375,932 29,454 7.83 68,768 4,541 6.60 3,089 186 6.02
49,160 6,168 12.55 17,947 1,853 10.32 70,783 5,023 7.10
423,462 42,297 9.99 545,724 45,474 8.33 629,188 46,294 7.36
35,242 3,570 10.13 39,886 3,959 9.93 52,260 5,234 10.02
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,758,671 170,118 9.67 1,537,997 130,720 8.50 1,762,663 131,892 7.48
7,151 424 5.93 655 17 2.60 835 30 3.59
23,793 1,717 7.22 17,799 1,320 7.42 1,905 176 9.24
516,495 27,709 5.36 697,421 34,070 4.89 499,484 26,973 5.40
164,834 10,519 6.38 139,603 8,301 5.95 15,670 1,448 9.24
116,387 7,013 6.03 173,451 7,264 4.19 307,078 9,357 3.05
37,105 2,126 5.73 27,315 1,268 4.64 35,529 1,258 3.54
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
2,624,436 219,626 8.37 2,594,241 182,960 7.05 2,623,164 171,134 6.52
----------- ----------- ----------- ----------- ----------- -----------
(110,570) (113,100) (129,873)
239,032 249,768 272,610
96,909 100,562 178,560
--------- --------- ---------
$2,849,807 $2,831,471 $2,944,461
--------- --------- ---------
--------- --------- ---------
$ 268,593 2,638 0.98 $ 285,983 2,758 0.96 $ 283,871 3,379 1.19
595,467 16,892 2.84 719,203 16,212 2.25 767,121 17,858 2.33
79,391 1,564 1.97 95,097 1,869 1.97 103,161 2,255 2.19
80,341 3,826 4.76 88,195 3,226 3.66 108,135 4,063 3.76
140,020 7,119 5.08 145,463 4,958 3.41 203,176 6,419 3.16
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,163,812 32,039 2.75 1,333,941 29,023 2.18 1,465,464 33,974 2.32
287,015 16,404 5.72 215,130 8,552 3.98 265,082 7,499 2.83
114,865 6,888 6.00 20,348 839 4.12 16,147 523 3.24
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- -----------
1,565,692 55,331 3.53 1,569,419 38,414 2.45 1,746,693 41,996 2.40
----------- ----------- ----------- ----------- ----------- -----------
898,600 907,234 914,642
34,964 41,622 22,477
350,551 313,196 260,649
--------- --------- ---------
$2,849,807 $2,831,471 $2,944,461
--------- --------- ---------
--------- --------- ---------
4.84 4.60 4.12
$ 164,295 6.26% $ 144,546 5.57% $ 129,138 4.92%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
A-9
PROVISION FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgment of the adequacy of the allowance for credit losses and is determined
through periodic analysis of the loan portfolio. This analysis includes a
detailed review of the classification and categorization of problem and
potential problem loans and loans to be charged off; an assessment of the
overall quality and collectibility of the portfolio; and consideration of the
loan loss experience, trends in problem loans and concentrations of credit risk,
as well as current and expected future economic conditions (particularly in
Southern California). The Bank has an internal risk analysis and review staff
that ultimately reports to the Audit and Examining Committee of the Board of
Directors and continuously reviews loan quality. Such reviews also assist
management in establishing the level of the allowance for credit losses.
For 1997, 1996 and 1995, the Company did not record a provision for credit
losses. In 1997 and 1995, net recoveries totaled $.7 million and $7.1 million,
respectively, compared with net chargeoffs in 1996 of $1.4 million. The Company
did not record a provision for credit losses for the last three years because of
the combination of low net charge offs, a change in the risk profile of the loan
portfolio, 25.6% of which now consists of residential first mortgages, the
continued reduction in problem loans, and the improvement of the Southern
California economy. Based on its review of the loan portfolio, management
anticipates that a provision for credit losses for 1998 may not be required.
However, credit quality will be influenced by underlying trends in the economic
cycle, particularly in Southern California, and other factors which are beyond
management's control. Consequently, no assurances can be given that the Company
will not sustain loan losses, in any particular period, that are sizable in
relation to the allowance for credit losses. Additionally, subsequent evaluation
of the loan portfolio, in light of factors then prevailing, by the Company and
its regulators may indicate a requirement for increases in the allowance for
credit losses through charges to the provision for credit losses. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
NONINTEREST INCOME
Noninterest income in 1997 totaled $53.4 million, up $9.4 million or 21.4%
from 1996 which was also up $9.4 million or 27.2% from 1995. A breakdown of
noninterest income by category is reflected below.
ANALYSIS OF CHANGES IN NONINTEREST INCOME
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------------- ----------------------
DOLLARS IN MILLIONS 1997 AMOUNT % 1996 AMOUNT % 1995
- -------------------------------------------------- --------- ----------- --------- --------- ----------- --------- ---------
Service charges on deposit accounts............... $ 14.3 $ 3.5 32.4 $ 10.8 $ 2.7 33.3 $ 8.1
Investment services income........................ 13.2 1.7 14.8 11.5 2.7 30.7 8.8
Trust fees........................................ 8.3 1.1 15.3 7.2 0.7 10.8 6.5
International fee income.......................... 7.3 2.1 40.4 5.2 1.3 33.3 3.9
Gain on sale of assets............................ 1.6 0.5 45.5 1.1 1.1 NM --
Gain (loss) on sale of securities................. (1.0) (1.2) NM 0.2 0.8 (133.3) (0.6)
All other income.................................. 9.7 1.7 21.3 8.0 0.1 1.3 7.9
--------- ----- --------- --------- ----- --------- ---------
Total..................................... $ 53.4 $ 9.4 21.4 $ 44.0 $ 9.4 27.2 $ 34.6
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
Service charges on deposit accounts increased $3.5 million, or 32.4%,
compared to a 33.3% increase in 1996. The increase in 1997 is the result of the
acquisitions of VCNB and RNB and strong growth in deposits as well as higher
service charge levels. The increase in 1996 is the result of the acquisition of
First LA and strong growth in deposits. Service charges on deposit accounts are
expected to increase in 1998 primarily as a result of the acquisition of HB.
Investment services income, which includes fees, commissions and markups on
securities transactions with customers, and fees on money market mutual funds,
increased in 1997, compared to 1996, by $1.7 million or 14.8% primarily due to
new investment products offered to customers, an increase in new
A-10
customers and higher fees. Trust fees increased $1.1 million or 15.3% from 1996
to 1997 and increased $.7 million or 10.8% from 1995 to 1996 due to increased
number of new customers. The increase in investment services income and trust
fees from 1995 to 1996 was also attributable to the same factors discussed
above. At December 31, 1997 the Company had $7.6 billion of assets under custody
or management, including $1.5 billion in money market funds, under custody or
management in its Trust and Investment Services Division, compared to $6.9
billion at December 31, 1996. Investment services income and trust fees are
expected to increase in 1998 as a result of additional marketing personnel and a
continued emphasis on developing and marketing new products in these areas.
International fee income increased $2.1 million or 40.4% from 1996 to 1997
and $1.3 million or 33.3% from 1995 to 1996 due to the hiring of several
experienced foreign exchange traders and the expansion of international
activities. All other income categories increased $1.7 million or 21.3% from
1996 to 1997 due to higher volumes and a $.9 million settlement of a lawsuit
with a borrower in the second quarter of 1997. International income is expected
to increase in 1998, although at a slower rate than in past years. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
Securities losses in 1997 totaled $1.0 million compared to gains of $.2
million in 1996 and losses of $.6 million in 1995, respectively.
NONINTEREST EXPENSE
Noninterest expense, before ORE income, totaled $184.3 million in 1997, up
$39.5 million or 27.3% from 1996 which was up $26.1 million or 22.0% from 1995.
Noninterest expense in 1997 and 1996 included $6.3 million and $1.0 million,
respectively, in expenses related to data processing conversions and to buy out
the Company's former data processing contract. Noninterest expense in 1997 also
included approximately $4.6 million in support and overhead expenses related to
the separate data processing, loan support and customer service operations of
VCNB and RNB prior to the conversion and integration of these functions into the
Company as well as for one time costs, i.e. new check printing, etc. of $1.6
million. A breakdown of noninterest expense by category is reflected below.
ANALYSIS OF CHANGES IN NONINTEREST EXPENSE
INCREASE INCREASE
(DECREASE) (DECREASE)
---------------------- ----------------------
DOLLARS IN MILLIONS 1997 AMOUNT % 1996 AMOUNT % 1995
- ----------------------------------------------- --------- ----------- --------- --------- ----------- --------- ---------
Salaries and employee benefits................. $ 97.6 $ 20.6 26.8 $ 77.0 $ 11.6 17.7 $ 65.4
--------- ----- --------- --------- ----- --------- ---------
All other:
Professional............................... 21.5 7.8 56.9 13.7 4.9 55.7 8.8
Net occupancy of premises.................. 10.7 1.7 18.9 9.0 1.1 13.9 7.9
Data processing............................ 9.0 0.3 4.5 8.7 1.2 16.0 7.5
Promotion.................................. 8.0 2.4 42.9 5.6 1.2 27.3 4.4
Depreciation............................... 6.1 1.0 19.6 5.1 1.0 24.4 4.1
Office supplies............................ 7.3 2.5 52.1 4.8 0.8 20.0 4.0
FDIC insurance............................. 0.4 0.4 NM -- (2.5) (100.0) 2.5
Amortization of goodwill and core deposit
intangibles.............................. 5.6 4.1 273.3 1.5 1.5 NM --
Equipment.................................. 2.5 0.3 13.6 2.2 (0.1) (4.3) 2.3
Lender liability settlement................ (2.5) (5.9) NM 3.4 3.4 NM --
Other operating............................ 18.1 4.3 31.2 13.8 2.0 16.9 11.8
--------- ----- --------- --------- ----- --------- ---------
86.7 18.9 27.9 67.8 14.5 27.2 53.3
--------- ----- --------- --------- ----- --------- ---------
ORE income..................................... (2.6) (2.4) NM (0.2) 0.4 (66.7) (0.6)
--------- ----- --------- --------- ----- --------- ---------
Total.................................. $ 181.7 $ 37.1 25.7 $ 144.6 $ 26.5 22.4 $ 118.1
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
A-11
Staff expense increased 26.8% in 1997 compared to a 17.7% increase in 1996.
The increase in 1997 is the result of the additional personnel that joined the
Bank as a result of the acquisitions of VCNB and RNB, the hiring of new
personnel in the Bank's expansion efforts and higher costs associated with
performance incentives and contributions to the Profit Sharing Plan. The
increase in 1996 is due to the acquisition of First LA and the hiring of new
personnel. On a full-time equivalent basis, staff levels have increased to
approximately 1,570 at December 31, 1997 from 1,320 at December 31, 1996. Staff
levels are expected to increase in 1998 as a result of the completion of the
acquisition of HB in January 1998 and current hiring plans. See "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995", below.
Excluding ORE income, the remaining expense categories increased $18.9
million, or 27.9%, between 1996 and 1997. The increase in professional expense
resulted primarily from $3.1 million in consulting and other professional fees
attributed to the conversion to the new data processing system which was
completed in the latter part of 1997. The increase in promotion expense resulted
from the Company's expanded advertising program. The increase in depreciation
expense resulted from the Company's expenditures during 1997 totaling $17.7
million for new PC's, item processing and telecommunications equipment as well
as the major remodeling of City National Center, the Company's headquarters
building. The increase in office expense resulted from higher office supplies
and telecommunications expenses due to the increased number of personnel and
branches, primarily resulting from the acquisitions of VCNB and RNB. In March
1997, the Company reached agreements with its insurance carriers regarding a
lender liability lawsuit which it settled with a former bank customer in the
fourth quarter of 1996. The insurance reimbursements of $2.5 million have been
credited to other noninterest expense and offset most of the $3.4 million lender
liability charge recorded in the fourth quarter of 1996. Amortization of
goodwill and core deposit intangibles increased $4.1 million due to the
acquisitions of VCNB and RNB. The remaining other increases resulted from the
acquisitions of VCNB and RNB, including $1.7 million in acquisition related
charges in 1997 compared to $.7 million in 1996, higher operating losses and
other factors. Due to the acquisition of HB, most categories of noninterest
expense are expected to increase in 1998 above the 1997 levels, adjusted for the
nonrecurring expenses in 1997 discussed above. See "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995", below.
Between 1995 and 1996, the remaining expense categories, excluding ORE
income, increased $14.5 million, or 27.2%, due to higher professional expenses
for consulting and other professional services, increases in occupancy, data
processing, depreciation and office expense and amortization of core deposit
intangibles expense of $1.5 million due to the acquisition of First LA,
increased promotional expense to attract and retain business and a $3.4 million
charge to reflect the settlement of a lender liability lawsuit in the fourth
quarter of 1996. These increases were partially offset by the $2.5 million
decrease in FDIC insurance premiums from 1995 to 1996.
The Company was sufficiently concerned in 1996 and early 1997 about issues
associated with the programming code in existing computer systems as the
millenium (Year 2000) approaches, that in February 1997, the Company terminated
its data processing agreement for facilities managed service utilizing the
Bank's developed core processing systems with ALLTEL Information Services, Inc.
This agreement had been scheduled to expire on December 31, 2000.
Later in 1997, the Company signed a seven year agreement, calling for annual
minimum payments of $1.2 million, adjusted for inflation, with a new third party
provider, Marshall & Ilsley Corporation. This company is among the largest bank
data processing servicers in the U.S. and one who had the capability of being
Year 2000 compliant. In addition, the Company is utilizing both internal and
external resources to identify, correct, reprogram or replace, and test all
other systems for Year 2000 compliance. It is also completing the process of
determining whether major credit customers and suppliers are aware of the Year
2000 implications on their businesses and are taking appropriate steps to be in
compliance.
The FFIEC Statement (see Supervision and Regulation--YEAR 2000 ISSUES,
above) required the Company to complete, by September 30, 1997, a risk
assessment which, among other things, identified all
A-12
information and environmental systems required to be renovated or modified to
become Year 2000 compliant and an evaluation of all third-party service or
software providers to determine their Year 2000 compliance. In part, because of
the effort expanded in converting the core data processing systems and certain
other applications during 1997, these matters were not completed at September
30, 1997 as urged by the Statement. The Company anticipates they will complete
the risk assessment phase of the entire Year 2000 project by March 31, 1998.
Marshall & Ilsley Corporation and the Company expect to be fully Year 2000
compliant by December 31, 1998. The Company expects to spend approximately $3.5
million in capital and operating costs in this effort during 1998. The Company
expects that its normal data processing expense for 1998 will decrease from 1997
levels. See "Cautionary Statement for Purpose of the 'Safe Harbor' Provisions of
the Private Securities Litigation Reform Act of 1995", below.
ORE operations resulted in net income of $2.6 million, $.2 million and $.6
million in 1997, 1996 and 1995, respectively. The $2.6 million income from ORE
activities in 1997 was primarily due to the sale of residential lots located in
Los Angeles in the fourth quarter of 1997.
INCOME TAXES
The 1997 effective tax rate was 36.1% compared to 32.9% in 1996 and 38.0% in
1995. The effective rates differed from the applicable statutory federal tax
rate due to various factors including state taxes, tax exempt income,
amortization of nondeductible goodwill and recognition of previously unrecorded
deferred tax benefits.
The Company recognized $5.0 million and $.9 million in previously unrecorded
California deferred tax benefits in 1996 and 1995, respectively. The recognition
of the California deferred tax benefits in 1996 resulted from the Company's
continued and increasing profitability and the Company's evaluation of deferred
tax assets which it believes are more likely than not to be realized on future
tax returns.
The effective tax rate for 1998 is expected to increase but will still be
below the combined statutory federal and California tax rates due to the impact
of municipal securities and leases, the dividends received deduction for
preferred stock, and tax credits from investments in low income housing. See
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995", below.
A-13
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Form 10-K which are not historical facts. The Company
cautions readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
any forward looking statement made by, or on behalf of, the Company.
- ECONOMIC CONDITIONS. The Company's results are strongly influenced by
general economic conditions in its market area, Southern California, and
a deterioration in these conditions could have a material adverse impact
on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in economic conditions in
the real estate and entertainment industries may affect the Company's
performance.
- INTEREST RATES. Management anticipates that interest rate levels will
remain generally constant but there is some risk of accelerating
inflation leading to Federal Reserve tightening. If interest rates vary
substantially from present levels, this may cause the Company's results
to differ materially.
- GOVERNMENT REGULATION AND MONETARY POLICY. All forward-looking statements
presume a continuation of the existing regulatory environment and U.S.
Government monetary policies. The banking industry is subject to
extensive federal and state regulations, and significant new laws or
changes in, or repeals of, existing laws may cause results to differ
materially. Further, federal monetary policy, particularly as implemented
through the Federal Reserve System, significantly affects credit
conditions for the Bank, primarily through open market operations in U.S.
government securities, the discount rate for member bank borrowing and
bank reserve requirements, and a material change in these conditions
would be likely to have an impact on results.
- COMPETITION. The Bank competes with numerous other domestic and foreign
financial institutions and non-depository financial intermediaries.
Results may differ if circumstances affecting the nature or level of
competitive change, such as the merger of competing financial
institutions or the acquisition of California institutions by
out-of-state companies.
- CREDIT QUALITY. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans.
The Bank has adopted underwriting and credit policies, including the
establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing
the likelihood of nonperformance, tracking loan performance and
diversifying the Bank's credit portfolio, but such policies and
procedures may not prevent unexpected losses that could adversely affect
the Company's results.
- OTHER RISKS. From time to time, the Company details other risks to its
business and/or its financial results in its filings with the Securities
and Exchange Commission.
While management believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance that
the results described in such forward-looking statements will, in fact, be
achieved.
BALANCE SHEET ANALYSIS
CAPITAL
At December 31, 1997, the Company's and the Bank's Tier 1 capital, which is
comprised of common shareholders' equity as modified by certain regulatory
adjustments, amounted to $448.0 million and
A-14
$381.6 million, respectively. At December 31, 1996, the Company's and the Bank's
Tier 1 capital amounted to $385.3 million and $322.0 million, respectively. The
increase from December 31, 1996 resulted from the retention of 1997 earnings,
the issuance of shares for the acquisitions of VCNB and RNB and the exercise of
stock options, less dividends paid and amounts related to shares repurchased.
The following table presents the regulatory standards for well capitalized
institutions and the capital ratios for the Company and the Bank at December 31,
1997, 1996 and 1995.
REGULATORY DECEMBER 31
WELL CAPITALIZED -------------------------------
STANDARDS 1997 1996 1995
----------------- --------- --------- ---------
CITY NATIONAL CORPORATION
Tier 1 leverage.............................................. 5.00% 9.19% 9.75% 11.17%
Tier 1 risk-based capital.................................... 6.00 10.99 13.26 13.60
Total risk-based capital..................................... 10.00 12.27 14.55 14.91
CITY NATIONAL BANK
Tier 1 leverage.............................................. 5.00 7.93 8.22 10.40
Tier 1 risk-based capital.................................... 6.00 9.50 11.24 12.64
Total risk-based capital..................................... 10.00 10.78 12.53 13.95
The Company paid dividends of $.44 per share of common stock in 1997 and
$.36 per share of common stock in 1996. On January 28, 1998, the Board of
Directors authorized a regular quarterly cash dividend on common stock at an
increased rate of $.14 per share to shareholders of record on February 2, 1998,
payable on February 12, 1998.
On March 17, 1997, the Company announced a program for the repurchase of up
to 1.5 million shares of its common stock. At December 31, 1997, a total of
943,300 shares had been repurchased at a cost of $22.5 million, of which 563,928
shares remain in treasury at year-end. In January 1998, these shares were
reissued to cover the exercise of stock options and the majority of the stock
consideration for the HB acquisition.
On January 12, 1998, the Company's wholly owned subsidiary, City National
Bank, issued $125 million of 6 3/8% Subordinated Notes, due in 2008. On a
proforma basis, issuance of the Subordinated Notes would have increased the
Company's and the Bank's total risk-based capital at December 31, 1997 to 15.33%
and 13.90%, respectively.
LIQUIDITY MANAGEMENT
The objective of liquidity management is the ability to maintain cash flow
adequate to fund the Company's operations and meet obligations and other
commitments on a timely and cost effective basis. The Company manages to this
objective through the selection of asset and liability maturity mixes that it
believes best meet the needs of the Company. The Company's liquidity position is
enhanced by its ability to raise additional funds as needed in the money
markets.
The Company's core deposit base in recent years provided the majority of the
Company's funding requirements. This relatively stable and low-cost source of
funds has, along with shareholders' equity provided 76% and 75% of funding for
average total assets in 1997 and 1996, respectively.
A significant portion of remaining funding of average total assets is
provided by short term federal fund purchases and sales of securities under
repurchase agreements. This funding source, on average, totaled $222.6 million
and $253.9 million in 1997 and 1996, respectively. Additionally, the Bank
increased its funding from other borrowings, primarily Federal Home Loan Bank
advances, to $338.9 million on average in 1997 from $265.6 million in 1996.
Liquidity is also provided by reductions in assets such as federal funds
sold, securities purchased under resale agreements and trading account
securities which may be immediately converted to cash at minimal
A-15
cost. The aggregate of these assets averaged $70.9 million during 1997, down
$29.7 million, or 29.5% from the prior year. This decrease resulted from the
Company's decision to continue to maintain a substantially lower level of
liquidity due to the stabilization in deposits and the Company's improved
operating performance.
Liquidity is also provided by the portfolio of available-for-sale securities
which total $607.2 million at December 31, 1997. In addition, the unpledged
portion of investment securities at December 31, 1997 totaled $66.5 million and
would be available as collateral for borrowing. Maturing loans also provide
liquidity, and $1,613.0 million of the Bank's loans are scheduled to mature in
1998.
ASSET LIABILITY MANAGEMENT
The principal objectives of asset/liability management are to maximize net
interest margin subject to margin volatility and liquidity constraints. Margin
volatility results when the rate reset (or repricing) characteristics of assets
are materially different from those of the Company's liabilities. Liquidity risk
results from the mismatching of asset and liability cash flows. Management
chooses asset/liability strategies that promote stable earnings and reliable
funding. Interest rate risk and funding positions are kept within limits
established by the Company's board of directors to ensure that risk-taking is
not excessive and that liquidity is properly managed.
The Company has established three measurement processes to quantify and
manage exposure to interest rate risk: net interest income simulation modeling,
gap analysis, and present value of equity analysis. Net interest income
simulations are used to identify the direction and severity of interest rate
risk exposure across a twelve month forecast horizon. Gap analysis provides
insight into structural mismatches of assets and liability repricing
characteristics. Present value of equity calculations are used to estimate the
theoretical price sensitivity of shareholder equity to changes in interest
rates.
Generally, an asset sensitive gap indicates that net interest income will
improve during a period of rising interest rates. The gap report is based on the
contractual cash flows of all asset and liability balances on the Company's
books. The contractual life of these balances may differ substantially from
their expected lives however. For example, checking accounts are all subject to
immediate withdrawal. Experience suggests that these accounts will have an
average life of several years. Also, certain loans (such as first mortgages) are
subject to prepayment. The cash flows shown in the gap report are adjusted to
reflect these behaviors. The gap report also shows the effects that interest
rate swaps have had on the repricing profile of the Company.
The table on page A-19 shows the Company's interest rate gap position as of
December 31, 1997 and 1996. Rate sensitive assets exceed liabilities by $382
million over the first year of the cash flow horizon. The gap is the result of
the Company's natural composition of assets and liabilities, which include loans
tied to the prime and checking account deposits. This gap is reduced by interest
rate swaps. The Company has $425 million of notional principal in receive
fixed-pay LIBOR interest rate swaps, of which $250 million have maturities
greater than one year. The one year cumulative hedged gap is $132 million, or
about three percent of total assets. From December 31, 1996 to December 31,
1997, the Company's one year cumulative hedged gap increased from $58 million to
$132 million as a result of the Company's growth in assets being partially
funded by an increase in capital.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Company's interest rate sensitivity position. To supplement
traditional gap analysis, the Company uses simulation modeling to estimate the
potential effects of changing interest rates. This process allows the Company to
fully explore the complex relationships within the gap over time and various
interest rate scenarios.
The following table presents in tabular form information about the Company's
financial instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and related average
A-16
interest rates by expected maturity dates and fair values as of December 31,
1997. Expected maturities of assets are contractual maturities. Interest-bearing
demand and savings deposits are included in the earliest maturity category, even
though withdrawal of these balances is not contractually required and may not
actually occur during that period. Average interest rates on variable rate
instruments are based upon the Company's interest rate forecast. Actual
maturities of interest-sensitive assets and liabilities could vary substantially
from expectations if different assumptions are used or if actual experience
differs from the assumptions used.
INTEREST-SENSITIVE FINANCIAL INSTRUMENT MATURITIES
FAIR
(DOLLARS IN MILLIONS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE
- ---------------------------------- --------- --------- --------- --------- --------- ----------- --------- ---------
INTEREST-SENSITIVE ASSETS:
Investment securities............. $ 13.4 $ 22.0 $ 19.4 $ 16.6 $ 14.4 $ 140.1 $ 225.9 $ 227.5
Average interest rate........... 6.92% 6.92% 6.55% 6.29% 6.72% 6.67% 6.65%
Loans
Commercial...................... 1,275.5 97.1 95.9 154.1 105.7 243.9 1,972.2 1,923.7
Average interest rate......... 7.84% 8.41% 8.09% 8.06% 8.41% 8.65% 8.03%
Real estate construction
loans........................... 101.4 31.9 11.0 -- -- 0.3 144.6 141.1
Average interest rate......... 9.64% 9.46% 9.46% 0.0% 0.0% 9.41% 9.56%
Real estate mortgage loans...... 222.1 73.5 70.7 61.6 75.7 182.6 686.2 658.7
Average interest rate......... 9.33% 9.17% 9.09% 8.79% 9.24% 8.83% 9.06%
Residential first mortgage
loans........................... 6.3 3.1 0.2 0.2 27.2 943.0 980.0 981.6
Average interest rate......... 8.05% 7.81% 7.82% 7.67% 7.60% 7.54% 7.77%
Installment loans............... 7.7 4.3 6.9 6.9 5.5 10.9 42.2 42.2
Average interest rate......... 9.67% 9.68% 9.72% 9.66% 9.65% 9.32% 9.62%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
assets...................... $ 1,626.4 $ 231.9 $ 204.1 $ 239.4 $ 228.5 $ 1,520.8 $ 4,051.1 $ 3,974.8
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
INTEREST-SENSITIVE LIABILITIES:
Deposits
Interest checking............... $ 439.1 $ $ $ $ $ $ 439.1 $ 439.1
Average interest rate......... 1.0% 1.0%
Savings......................... 171.1 171.1 171.1
Average interest rate......... 3.4% 3.4%
Money market.................... 773.3 773.3 773.3
Average interest rate......... 3.0% 3.0%
Time............................ 761.6 23.2 22.1 6.0 4.7 0.2 817.8 818.3
Average interest rate......... 5.31% 5.72% 5.63% 5.64% 5.93% 6.09% 5.33%
--------- --------- --------- --------- --------- ----------- --------- ---------
Total interest-sensitive
liabilities $ 2,145.1 $ 23.2 $ 22.1 $ 6.0 $ 4.7 $ 0.2 $ 2,201.3 $ 2,201.8
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
The use of interest rate swaps to manage interest rate exposure involves the
risk of dealing with counterparties and their ability to meet contractual terms.
These counterparties must receive appropriate credit approval before the Company
enters into an interest rate contract. Notional principal amounts express the
volume of these transactions, although the amounts potentially subject to credit
and market risk are much smaller. At December 31, 1997, all of the Company's
interest rate swaps were entered into as hedges against a decrease in interest
income generated from prime based loans if the prime decreased. The Company has
not entered into transactions involving any other interest rate derivative
financial instruments, such as interest rate floors, caps and interest rate
futures contracts.
A-17
The table below shows the notional amounts of the Company's interest rate
swap maturities and average rates at December 31, 1997:
INTEREST RATE SWAP MATURITIES AND AVERAGE RATES
FAIR
NOTIONAL AMOUNTS IN MILLIONS 1998 1999 2000 TOTAL VALUE
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
Receive-fixed rate (hedge loans)
Notional amount................................................ $ 175.0 $ 125.0 $ 125.0 $ 425.0 $ 1.7(1)
Weighted average rate received................................. 5.81% 6.07% 6.29% 6.03%
Weighted average rate paid..................................... 5.94% 5.81% 5.81% 5.87%
- ---------
(1) Estimated net gain to settle derivative contracts as of respective period
ends.
At December 31, 1997, the Company's outstanding foreign exchange contracts
totaled $10.7 million. The Company enters into foreign exchange contracts with
its customers and counterparty banks solely for the purpose of offsetting or
hedging transaction and economic exposures arising out of commercial
transactions. The Company's policies prohibit outright speculation by the
Company and its employees. The Company actively manages its foreign exchange
exposures within prescribed risk limits and controls. All foreign exchange
contracts outstanding at December 31, 1997 had remaining maturities of six
months or less, with the exception of $1.5 million which had remaining
maturities ranging between six months and 24 months.
A-18
INTEREST RATE GAP POSITION
SUBJECT TO OVER 10
IMMEDIATE REMAINDER OF YEARS > 1 YEARS > 6 YEARS &
DOLLARS IN MILLIONS REPRICING 1ST QUARTER FIRST YEAR THROUGH 5 THROUGH 10 NON-STATED TOTAL
- ------------------------------ ----------- ----------- ------------- ----------- ------------- ------------- ---------
DECEMBER 31, 1997
ASSETS
Investments................. $ 181.6 $ 85.5 $ 112.6 $ 515.8 $ 57.5 $ 60.7 $ 1,013.7
Net Loans................... 1,518.7 612.6 384.7 718.9 314.9 137.7 3,687.5
Non Earning Assets.......... 227.3 7.7 34.1 281.7 -- 550.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Assets.............. 1,927.6 705.8 531.4 1,516.4 372.4 198.4 5,252.0
----------- ----------- ------ ----------- ------ ------------- ---------
LIABILITIES
Checking Accounts........... 1,027.0 -- -- 1,000.0 -- -- 2,027.0
Other Core Deposits......... 566.2 62.0 118.5 841.4 0.1 -- 1,588.2
CDs over $100M & Other
Time...................... -- 406.7 183.6 22.7 0.1 -- 613.1
----------- ----------- ------ ----------- ------ ------------- ---------
Total Deposits.............. 1,593.2 468.7 302.1 1,864.1 0.2 -- 4,228.3
Total Borrowed Funds........ 259.2 150.0 9.8 50.0 -- -- 469.0
Other Liabilities........... -- -- -- 46.0 -- -- 46.0
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities........... 1,852.4 618.7 311.9 1,960.1 0.2 -- 4,743.3
Total Capital............... -- -- -- -- -- 508.7 508.7
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities and
Capital................. 1,852.4 618.7 311.9 1,960.1 0.2 508.7 5,252.0
----------- ----------- ------ ----------- ------ ------------- ---------
Gap........................... $ 75.2 $ 87.1 $ 219.5 $ (443.7) $ 372.2 $ (310.3) $ --
----------- ----------- ------ ----------- ------ ------------- ---------
----------- ----------- ------ ----------- ------ ------------- ---------
Cumulative Gap................ $ 75.2 $ 162.3 $ 381.8 $ (61.9) $ 310.3 $ --
Interest Rate Swaps........... (425.0) 50.0 125.0 250.0 -- --
----------- ----------- ------ ----------- ------ -------------
Hedged Gap.................... $ (349.8) $ 137.1 $ 344.5 $ (193.7) $ 372.2 $ (310.3)
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap......... $ (349.8) $ (212.7) $ 131.8 $ (61.9) $ 310.3 $ --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap as a %
of Total Assets............. (7)% (4)% 3% (1)% 6% --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
DECEMBER 31, 1996
ASSETS
Investments................. $ 183.2 $ 47.7 $ 64.1 $ 556.5 $ 73.5 $ 80.4 $ 1,005.4
Net Loans................... 853.5 264.7 517.2 758.9 259.4 55.6 2,709.3
Non Earning Assets.......... 234.7 8.4 24.9 233.8 -- -- 501.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Assets.............. 1,271.4 320.8 606.2 1,549.2 332.9 136.0 4,216.5
----------- ----------- ------ ----------- ------ ------------- ---------
LIABILITIES
Checking Accounts........... 637.1 -- -- 1,005.5 -- -- 1,642.6
Other Core Deposits......... 429.9 30.3 101.8 820.3 0.7 -- 1,383.0
CDs over $100M & Other
Time...................... -- 179.5 169.0 12.4 -- -- 360.9
----------- ----------- ------ ----------- ------ ------------- ---------
Total Deposits.............. 1,067.0 209.8 270.8 1,838.2 0.7 -- 3,386.5
Total Borrowed Funds........ 293.2 50.0 25.0 9.8 -- -- 378.0
Other Liabilities........... -- -- -- 51.2 -- -- 51.2
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities........... 1,360.2 259.8 295.8 1,899.2 0.7 -- 3,815.7
Total Capital............... -- -- -- -- -- 400.8 400.8
----------- ----------- ------ ----------- ------ ------------- ---------
Total Liabilities and
Capital................. 1,360.2 259.8 295.8 1,899.2 0.7 400.8 4,216.5
----------- ----------- ------ ----------- ------ ------------- ---------
Gap........................... $ (88.8) $ 61.0 $ 310.4 $ (350.0) $ 332.2 $ (264.8) $ --
----------- ----------- ------ ----------- ------ ------------- ---------
----------- ----------- ------ ----------- ------ ------------- ---------
Cumulative Gap................ $ (88.8) $ (27.8) $ 282.6 $ (67.4) $ 264.8 $ --
Interest Rate Swaps........... (325.0) -- 100.0 225.0 -- --
----------- ----------- ------ ----------- ------ -------------
Hedged Gap.................... $ (413.8) $ 61.0 $ 410.4 $ (125.0) $ 332.2 $ (264.8)
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap......... $ (413.8) $ (352.8) $ 57.6 $ (67.4) $ 264.8 $ --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
Cumulative Hedged Gap as a %
of Total Assets............. (10)% (8)% 1% (2)% 6% --
----------- ----------- ------ ----------- ------ -------------
----------- ----------- ------ ----------- ------ -------------
A-19
SECURITIES
The Company classifies its securities as investment, available-for-sale or
trading. Those securities which the Company has the ability and intent to hold
to maturity are classified as investment securities. Securities held to
facilitate customer trading orders are classified as trading securities. All
other securities are classified as available-for-sale.
INVESTMENT SECURITIES
Investment securities at December 31, 1997 were up $30.7 million or 15.7%
from 1996. This increase was due primarily to the purchase of state and
municipal securities during 1997. The average duration of total investment
securities was 2.7 years at December 31, 1997 compared to 2.6 years at the end
of 1996.
The following table shows the maturities of investment securities at
December 31, 1997.
ONE YEAR OR LESS OVER 1 YEAR THRU 5 YEARS OVER 5 YEARS THRU 10
YEARS OVER 10 YEARS
------------------------- ------------------------- ------------------------- -------------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ----------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Mortgage-backed
securities........... $ -- -- % $ 3,366 7.30% $ 21,033 5.88% $ 82,987 6.72%
State and municipal
securities........... 12,373 6.85 67,892 6.61 22,289 7.11 5,013 6.86
Other securities(2).... 1,010 7.73 1,205 7.62 1,000 6.74 7,766 5.99
----------- --- ----------- --- ----------- --- ----------- ---
Total.......... $ 13,383 6.92% $ 72,463 6.66% $ 44,322 6.52% $ 95,766 6.67%
----------- --- ----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- --- ----------- ---
Fair value..... $ 13,419 $ 73,290 $ 44,692 $ 96,064
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL 1997 TOTAL 1996 TOTAL 1995
----------------------- ----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ----------------------- --------- ------------ --------- ------------ --------- ------------
Mortgage-backed
securities........... $ 107,386 6.57% $ 97,638 6.45% $ 80,935 6.14%
State and municipal
securities........... 107,567 6.75 88,445 6.72 19,833 7.61
Other securities(2).... 10,981 6.40 9,146 6.49 9,238 6.00
--------- --- --------- --- --------- ---
Total.......... $ 225,934 6.65% $ 195,229 6.57% $ 110,006 6.39%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
Fair value..... $ 227,465 $ 194,655 $ 110,524
--------- --------- ---------
--------- --------- ---------
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
AVAILABLE-FOR-SALE SECURITIES
At December 31, 1997, securities available-for-sale totaled $607.2 million,
a decrease of $8.7 million or 1.4% from December 31, 1996. This decrease was due
to the redeployment of proceeds generated from the maturities and sales of
available-for-sale securities to fund the growth in loans. The average duration
of total available-for-sale securities at December 31, 1997 was 2.8 years
compared with 2.1 years at December 31, 1996.
The following table shows the maturities of available-for-sale securities at
December 31, 1997.
ONE YEAR OR LESS OVER 1 YEAR THRU 5 OVER 5 YEARS THRU 10
YEARS YEARS OVER 10 YEARS
------------------------- ----------------------- ------------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------- ----------- ------------ --------- ------------ ----------- ------------ --------- ------------
U.S. Government and
federal agency
securities.......... $ 9,953 5.00% $ 239,610 6.38% $ 7,494 5.88% $ -- -- %
Mortgage-backed
securities.......... -- -- -- -- -- -- 172,075 6.66
State and municipal
securities.......... -- -- 4,911 6.61 1,086 7.14 -- --
Other securities(2)... 31,164 10.69 58,836 9.79 -- -- 82,059 7.60
----------- ----- --------- --- ----------- --- --------- ---
Total......... $ 41,117 9.31% $ 303,357 7.05% $ 8,580 6.04% $ 254,134 6.96%
----------- ----- --------- --- ----------- --- --------- ---
----------- ----- --------- --- ----------- --- --------- ---
Amortized
Cost........ $ 40,777 $ 299,159 $ 8,586 $ 249,388
----------- --------- ----------- ---------
----------- --------- ----------- ---------
TOTAL 1997 TOTAL 1996 TOTAL 1995
----------------------- ----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------- --------- ------------ --------- ------------ --------- ------------
U.S. Government and
federal agency
securities.......... $ 257,057 6.31% $ 372,316 5.69% $ 587,950 5.31%
Mortgage-backed
securities.......... 172,075 6.66 127,936 6.28 212,704 6.46
State and municipal
securities.......... 5,997 6.71 14,067 6.76 17,386 7.86
Other securities(2)... 172,059 8.91 101,544 10.74 47,361 8.58
--------- --- --------- ----- --------- ---
Total......... $ 607,188 7.15% $ 615,863 6.67% $ 865,401 5.82%
--------- --- --------- ----- --------- ---
--------- --- --------- ----- --------- ---
Amortized
Cost........ $ 597,910 $ 619,580 $ 862,276
--------- --------- ---------
--------- --------- ---------
- ---------
(1) Fully taxable equivalent.
(2) Equity securities, except preferred stock, are reported in the "over ten
years" category
A-20
LOAN PORTFOLIO
LOANS BY TYPE
The amount of loans outstanding at the indicated year ends are shown in the
following table according to type of loans. The Company's lending activities are
predominately in Southern California although corporate loans, which comprise
approximately 9% of the total loan portfolio at December 31, 1997, are primarily
to borrowers located out of state. The Bank has no foreign loans.
LOANS BY TYPE
DECEMBER 31,
--------------------------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Commercial(1).............................. $ 1,972,232 $ 1,334,577 $ 1,080,125 $ 906,417 $ 944,459
Residential first mortgage................. 980,040 882,573 593,546 212,595 6,586
Real estate--construction.................. 144,558 92,322 81,318 31,201 11,699
Real estate--commercial mortgage........... 686,188 499,377 553,095 457,030 620,574
Installment................................ 42,206 30,586 38,527 36,675 45,485
------------ ------------ ------------ ------------ ------------
Total loans................................ $ 3,825,224 $ 2,839,435 $ 2,346,611 $ 1,643,918 $ 1,628,803
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
- ---------
(1) Commercial includes unsecured loans to real estate developers and customers
involved in real estate investments and commercial loans where real estate
partially secures the borrowing.
Gross loans at December 31, 1997 were $3,825.2 million, up $985.8 million or
34.7% from the previous year-end.
Reflecting increases in loan demand and in the purchasing of participations
in corporate loans, commercial loans accounted for almost two thirds of the
increase. Commercial loans increased $637.7 million or 47.8% during 1997 and
represented 51.6% of the Company's total loan portfolio at December 31, 1997.
Residential first mortgage loans, which comprised 25.6% of total loans at
December 31, 1997, continued a five-year growth trend, increasing $97.5 million
to $980.0 million or 11% at December 31, 1997. At December 31, 1997, 64% of the
portfolio was originated internally and the balance was purchased from third
parties. The Company expects continued runoff of the purchased residential first
mortgage loan portfolio in 1998. See "Cautionary Statement for Purposes of the
'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995", above.
Commercial mortgage real estate loans, representing 17.9% of the December
31, 1997 loan portfolio, increased $186.8 million or 37.4% during the year to
$686.2 million at December 31, 1997. The increase is primarily attributable to
loan portfolios acquired in the VCNB and RNB acquisitions.
At December 31, 1997, 53.2% of commercial loans, 36.4% of real estate loans
and 14.2% of installment loans outstanding were floating interest rate loans.
Floating rate loans comprised 44.8% of the total loan portfolio at December 31,
1997 and 50.6% at December 31, 1996. Total loans at December 31, 1997 were
comprised of 42.2% due in one year or less, 21.7% due in 1-5 years and 36.1% due
after 5 years.
The loan maturities shown in the table below are based on contractual
maturities. As is customary in the banking industry, loans that meet sound
underwriting criteria can be renewed by mutual agreement between the Bank and
the borrower. Because the Bank is unable to estimate the extent to which its
borrowers will renew their loans the table is based on contractual maturities.
A-21
LOAN MATURITIES
DECEMBER 31, 1997
----------------------------------------------------------------------------------
RESIDENTIAL REAL ESTATE--
FIRST REAL ESTATE-- COMMERCIAL
DOLLARS IN THOUSANDS COMMERCIAL MORTGAGE CONSTRUCTION MORTGAGE INSTALLMENT TOTAL
- -------------------------------------------- ------------ ----------- ------------- ------------- ----------- ------------
Aggregate maturities of loan balances due:
In one year or less
Interest rates--floating................ $ 704,892 $ 156 $ 78,358 $ 130,432 $ 187 $ 914,025
Interest rates--fixed................... 570,500 6,188 23,072 91,673 7,561 698,994
After one year but within five years
Interest rates--floating................ 243,160 890 42,848 162,145 1,456 450,499
Interest rates--fixed................... 209,756 29,818 -- 119,304 22,104 380,982
After five years
Interest rates--floating................ 101,409 192,545 -- 52,036 4,371 350,361
Interest rates--fixed................... 142,515 750,443 280 130,598 6,527 1,030,363
------------ ----------- ------------- ------------- ----------- ------------
Total loans......................... $ 1,972,232 $ 980,040 $ 144,558 $ 686,188 $ 42,206 $ 3,825,224
------------ ----------- ------------- ------------- ----------- ------------
------------ ----------- ------------- ------------- ----------- ------------
CREDIT RISK MANAGEMENT
The Company assesses and manages credit risk on an ongoing basis through
diversification guidelines, lending limits, credit review and approval policies
and internal monitoring. As part of the control process, an independent credit
review function regularly examines the Company's loan portfolio and other credit
related products, including unused commitments and letters of credit. In
addition to this internal credit process, the Company's loan portfolio is
subject to examination by external regulators in the normal course of business.
Credit quality will be influenced by underlying trends in the economic and
business cycle. The Company seeks to manage and control its risk through
diversification of the portfolio by type of loan, industry concentration and
type of borrower.
REAL ESTATE LENDING, EXCLUDING RESIDENTIAL FIRST MORTGAGE
The Company engages in real estate lending in the form of construction loans
and permanent loans secured by deeds of trust.
Following is a breakdown of construction loans by collateral type.
Construction loans collateralized by industrial property represented $42.7
million of the increase of $52.2 million from December 31, 1996 to December 31,
1997.
REAL ESTATE CONSTRUCTION LOANS BY TYPE
DECEMBER 31,
---------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------- ---------- ---------
Industrial................................................................................. $ 54,628 $ 11,913
Office building............................................................................ 8,712 3,642
Shopping centers........................................................................... 15,314 18,866
1-4 family (includes land)................................................................. 34,304 32,915
Condo/apartment............................................................................ 10,189 10,878
Other...................................................................................... 21,411 14,108
---------- ---------
Total.............................................................................. $ 144,558 $ 92,322
---------- ---------
---------- ---------
A-22
At year-end 1997, commercial real estate mortgage loans totaled $686.2
million, or 17.9% of total loans, compared with 17.6% and 23.6% at year-end 1996
and 1995, respectively. The increase in commercial real estate mortgage loans
from 1996 to 1997 was due to the acquisitions of VCNB and RNB and was
concentrated in the industrial and condo/apartment categories. The Company has
not actively sought new originations of commercial real estate mortgage loans
for the last several years. Following is a breakdown of commercial real estate
mortgage loans by type.
COMMERCIAL REAL ESTATE MORTGAGE LOANS BY TYPE
DECEMBER 31,
----------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
Industrial................................................................................ $ 225,921 $ 109,205
Office building........................................................................... 88,973 67,207
Shopping centers.......................................................................... 70,816 41,842
1-4 family................................................................................ 9,186 8,261
Condo/apartment........................................................................... 95,485 55,544
Land, nonresidential...................................................................... 7,270 14,128
Churches/religious........................................................................ 10,560 18,588
Equity lines of credit.................................................................... 42,249 28,052
Other..................................................................................... 135,728 156,550
---------- ----------
Total............................................................................. $ 686,188 $ 499,377
---------- ----------
---------- ----------
A-23
RISK ELEMENTS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning nonaccrual loans, ORE,
accruing loans which are contractually past due 90 days or more as to interest
or principal payments and still accruing, and restructured loans:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
DECEMBER 31,
------------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ----------------------------------------------------------------- --------- --------- --------- --------- ----------
Nonaccrual loans:
Real estate mortgage........................................... $ 19,243 $ 25,661 $ 39,536 $ 35,534 $ 51,523
Commercial..................................................... 6,589 15,882 8,316 23,267 27,780
Installment.................................................... 1,734 -- 272 -- --
--------- --------- --------- --------- ----------
Total.................................................... 27,566 41,543 48,124 58,801 79,303
ORE.............................................................. 2,126 15,116 7,439 4,726 2,052
--------- --------- --------- --------- ----------
Total nonaccrual loans and ORE................................... $ 29,692 $ 56,659 $ 55,563 $ 63,527 $ 81,355
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Total nonaccrual loans as a percentage of total loans............ 0.72% 1.46% 2.05% 3.58% 4.87%
Total nonaccrual loans and ORE as a percentage of total loans and
ORE............................................................ 0.78 1.98 2.36 3.85 4.99
Allowance for credit losses to total loans....................... 3.60 4.58 5.60 6.41 6.78
Allowance for credit losses to nonaccrual loans.................. 499.75 313.14 273.28 179.15 139.34
Assets held for accelerated disposition.......................... $ -- $ -- $ -- $ -- $ 17,450
Loans past due 90 days or more on accrual status:
Real estate mortgage........................................... $ 13,370 $ 4,076 $ 3,816 $ 2,830 $ 17,412
Commercial..................................................... 9,226 8,076 2,623 1,068 11,382
Installment.................................................... 3,596 292 58 404 155
--------- --------- --------- --------- ----------
Total.................................................... $ 26,192 $ 12,444 $ 6,497 $ 4,302 $ 28,949
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Restructured loans:
On accrual status.............................................. $ 2,813 $ 2,569 $ 5,483 $ 2,061 $ 958
On nonaccrual status........................................... 1,286 -- 1,707 7,043 --
--------- --------- --------- --------- ----------
Total.................................................... $ 4,099 $ 2,569 $ 7,190 $ 9,104 $ 958
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
A-24
The table below summarizes the approximate changes in nonaccrual loans for
the years ended December 31, 1997 and 1996.
CHANGES IN NONACCRUAL LOANS
YEAR ENDED DECEMBER
31,
---------------------
DOLLARS IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ----------
Balance, beginning of the year................................................................ $ 41,543 $ 48,124
Loans placed on nonaccrual.................................................................... 32,930 44,353
Loans acquired: RNB........................................................................... 1,337 --
Loans acquired: VCNB.......................................................................... 1,101 --
Charge offs................................................................................... (12,788) (13,608)
Loans returned to accrual status.............................................................. (9,798) (11,034)
Repayments (including interest applied to principal).......................................... (23,598) (14,995)
Transfers to ORE.............................................................................. (3,161) (11,297)
--------- ----------
Balance, end of year.......................................................................... $ 27,566 $ 41,543
--------- ----------
--------- ----------
The additional interest income that would/(would not) have been recorded
from nonaccrual loans, if the loans had not been on nonaccrual status was $(.1)
million, $2.1 million and $4.6 million for the years ended December 31, 1997,
1996 and 1995, respectively. Interest payments received on nonaccrual loans are
applied to principal unless there is no doubt as to ultimate full repayment of
principal, in which case, the interest payment is recognized as interest income.
Interest income includes $5.5 million, $4.1 million and $2.7 million for the
years ended December 31, 1997, 1996, and 1995, respectively, from collection of
interest related to nonaccrual loans. Interest income not recognized on
nonaccrual loans reduced the net interest margin by 0, 6, and 17 basis points
for the years ended December 31, 1997, 1996, and 1995, respectively.
Bank policy requires that a loan be placed on nonaccrual status if either
principal or interest payments are past due in excess of ninety days unless the
loan is both well secured and in process of collection, or if full collection of
interest or principal becomes uncertain, regardless of the time period involved.
At December 31, 1997, in addition to loans disclosed above as past due,
nonaccrual or restructured, management also identified $23.8 million of loans
about which the ability of the borrowers to comply with the present loan payment
terms in the future is questionable. However, the inability of the borrowers to
comply with repayment terms was not sufficiently probable to place the loan on
nonaccrual status. This amount was determined based on analysis of information
known to management about the borrower's financial condition and current and
expected economic conditions. If economic conditions change, adversely or
otherwise, or if additional facts on borrowers' financial condition come to
light, then the amount of potential problem loans may change, possibly
significantly. Estimated potential losses from these potential problem loans
have been provided for in determining the allowance for credit losses.
At December 31, 1997, the allowance for credit losses was 3.60% of gross
loans compared to 4.58% at December 31, 1996. The allowance at December 31, 1997
was equal to 499.8% of total nonaccrual loans, up from 313.1% at December 31,
1996.
A-25
ALLOWANCE FOR CREDIT LOSSES
The following table summarizes average loans outstanding during the year and
changes in the allowance for credit losses for the five-year period 1993 to
1997.
ALLOWANCE FOR CREDIT LOSSES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- --------------------------------------- --------- --------- --------- --------- ---------
Average amount of loans outstanding.... $3,387,784 $2,539,323 $1,758,671 $1,537,997 $1,762,663
--------- --------- --------- --------- ---------
Balance of allowance for credit losses,
beginning of year.................... $ 130,089 $ 131,514 $ 105,343 $ 110,499 $ 136,095
--------- --------- --------- --------- ---------
Loans charged off:
Commercial loans..................... (14,651) (14,647) (11,124) (22,038) (56,012)
Real estate loans--construction...... -- -- -- -- (13,949)
Real estate loans--commercial
mortgage........................... (4,275) (5,338) (5,869) (26,354) (42,546)
Residential first mortgage........... (474) (253) -- -- --
Installment loans.................... (112) (104) (48) (128) (621)
--------- --------- --------- --------- ---------
Total loans charged off............ (19,512) (20,342) (17,041) (48,520) (113,128)
--------- --------- --------- --------- ---------
Recoveries of loans previously charged
off:
Commercial loans..................... 11,098 13,325 22,045 34,163 27,842
Real estate loans--construction...... -- -- -- 161 20
Real estate loans--commercial
mortgage........................... 8,894 5,313 1,862 758 767
Residential first mortgage........... 58 -- -- -- --
Installment loans.................... 118 279 228 747 215
--------- --------- --------- --------- ---------
Total recoveries................... 20,168 18,917 24,135 35,829 28,844
--------- --------- --------- --------- ---------
Net loans (charged off) recovered...... 656 (1,425) 7,094 (12,691) (84,284)
Additions to allowance charged to
operating expense.................... -- -- -- 7,535 60,163
Acquisition of First LA................ -- -- 19,077 -- --
Acquisition of VCNB.................... 4,637 -- -- -- --
Acquisition of RNB..................... 2,379 -- -- -- --
Other(1)............................... -- -- -- -- (1,475)
--------- --------- --------- --------- ---------
Balance, end of year................... $ 137,761 $ 130,089 $ 131,514 $ 105,343 $ 110,499
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net (charge offs) recoveries
to average loans..................... 0.02% (0.06)% 0.40% (0.83)% (4.78)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ---------
(1) Allowance for credit losses allocated to $73.7 million of Equity Lines of
Credit sold in April, 1993.
The following table reflects management's allocation of the allowance for
credit losses by loan category and the ratio of loans in each category to total
loans at December 31 for each of the last five years.
A-26
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
ALLOWANCE AMOUNT PERCENT OF LOANS TO TOTAL LOANS
----------------------------------------------------- ------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993 1997 1996 1995 1994
- ------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Commercial..................... $ 91,914 $ 75,754 $ 37,778 $ 55,179 $ 53,110 51% 47% 46% 55%
Real estate-construction....... 3,357 2,405 4,550 2,341 1,410 4 3 3 2
Real estate-commercial
mortgage..................... 27,378 37,748 77,730 43,745 55,020 18 18 24 28
Residential first mortgage..... 14,750 13,283 10,705 3,200 100 26 31 25 13
Installment.................... 362 899 751 878 859 1 1 2 2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total.................. $ 137,761 $ 130,089 $ 131,514 $ 105,343 $ 110,499 100% 100% 100% 100%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
DOLLARS IN THOUSANDS 1993
- ------------------------------- ---------
Commercial..................... 58%
Real estate-construction....... 1
Real estate-commercial
mortgage..................... 38
Residential first mortgage..... --
Installment.................... 3
---------
Total.................. 100%
---------
---------
The allowance allocated to the loan categories shown above are based on
previous loan loss experience, management's evaluation of the current loan
portfolio, and anticipated economic conditions. While the allowance is allocated
to specific loans and to portfolio segments, the allowance is general in nature
and is available for the portfolio in its entirety. Due to an increase in
problem loans in the commercial category and a decrease in problem loans in the
real estate mortgage category during 1997, an increased portion of the allowance
for credit losses was allocated to the commercial loan category.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Once a loan is determined to be impaired, SFAS No. 114 requires that
the impairment be measured based on the present value of the expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the impairment may be measured by using the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
If the expected realizable value of the impaired loan is less than the
recorded amount of the loan, an impairment will be recognized by creating a
valuation allowance with a corresponding charge to the provision for credit
losses or by adjusting an existing valuation allowance for the impaired loan
with a corresponding charge or credit to the provision for credit losses. As
amended by SFAS No. 118, the change in estimated value of an impaired loan may
be reported in a manner consistent with the existing methods currently used by
the Company.
At December 31, 1997 and 1996, the Company had identified impaired loans
with recorded investments of $16.6 million and $33.3 million, respectively.
Allowances of $.5 million and $.5 million on loans with outstanding balances of
$3.0 million and $3.3 million, respectively, at December 31, 1997 and 1996,
respectively, representing the difference between the value of the collateral
supporting the loans and their outstanding balance are included in the allowance
for credit losses. The Company's policy is to record cash receipts on impaired
loans first as reductions to principal and then to interest income.
OTHER REAL ESTATE
The Company's OREO totaled $2.1 million at year end 1997 compared to $15.1
million a year ago due to sale of existing properties and a significant
reduction in the amount of new foreclosures. The Company's policy is to record
these properties at estimated fair value, net of selling expenses, at the time
they are transferred into ORE, thereby tying future gains or losses from sale or
potential additional write downs to underlying changes in the market.
A-27
DEPOSITS
The maturity distribution of time deposits of $100,000 or more at December
31, 1997 is as follows:
PUBLIC TIME CERTIFICATES
DOLLARS IN THOUSANDS DEPOSITS OF DEPOSIT TOTAL
- ---------------------------------------------------------------------------- ----------- ----------- ----------
Under 3 months.............................................................. $ 54,845 $ 220,745 $ 275,590
4 to 12 months.............................................................. 14,100 174,664 188,764
1 to 5 years................................................................ 3,004 116,756 119,760
Over 5 years................................................................ 3,316 25,698 29,014
----------- ----------- ----------
Total............................................................... $ 75,265 $ 537,863 $ 613,128
----------- ----------- ----------
----------- ----------- ----------
At December 31, 1997 and 1996, the aggregate amount of deposits by foreign
depositors in domestic offices totaled $31.8 million and $30.2 million,
respectively, the majority of which was interest bearing. The Bank had brokered
deposits of $21.7 million and $18.4 million, at December 31, 1997 and 1996,
respectively.
SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings and weighted average
rates.
1997 1996 1995
------------------------------------ ------------------------------------ ----------------------
BALANCES AT AVERAGE BALANCES AT AVERAGE BALANCES AT AVERAGE
DOLLARS IN THOUSANDS YEAR-END BALANCE AVERAGE RATE YEAR-END BALANCE AVERAGE RATE YEAR-END BALANCE
- -------------------------------- ----------- --------- ------------ ----------- --------- ------------ ----------- ---------
Federal funds purchased and
securities sold under
repurchase agreements......... $ 206,427 $ 222,617 5.27% $ 194,549 $ 253,853 5.06% $ 258,353 $ 287,015
Other short-term borrowings..... 212,575 315,886 5.21 148,642 232,379 5.52 195,100 104,480
DOLLARS IN THOUSANDS AVERAGE RATE
- -------------------------------- ------------
Federal funds purchased and
securities sold under
repurchase agreements......... 5.72%
Other short-term borrowings..... 5.58
- ---------
A-28
The following table summarizes quarterly operating results for 1997 and
1996.
1997 QUARTERLY OPERATING RESULTS
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
- ----------------------------------------------- ---------- ---------- ------------- ------------ -----------
Interest income
From loans................................. $ 70,011 $ 75,017 $ 78,651 $ 80,378 $ 304,057
From investments........................... 13,296 13,679 13,544 13,420 53,939
---------- ---------- ------------- ------------ -----------
83,307 88,696 92,195 93,798 357,996
Interest expense............................... (23,535) (25,904) (27,612) (27,277) (104,328)
---------- ---------- ------------- ------------ -----------
Net interest income............................ 59,772 62,792 64,583 66,521 253,668
Provision for credit losses.................... -- -- -- -- --
---------- ---------- ------------- ------------ -----------
Net interest income after provision for credit
losses....................................... 59,772 62,792 64,583 66,521 253,668
Noninterest income............................. 12,902 13,676 13,272 14,616 54,466
Gain (loss) on sale of securities.............. (277) (262) (224) (285) (1,048)
Noninterest expense............................ (43,547) (45,725) (45,744) (49,308) (184,324)
ORE (expense) income........................... (378) 411 797 1,737 2,567
---------- ---------- ------------- ------------ -----------
Income before taxes............................ 28,472 30,892 32,684 33,281 125,329
Income taxes................................... (10,469) (11,334) (11,790) (11,603) (45,196)
---------- ---------- ------------- ------------ -----------
Net income..................................... $ 18,003 $ 19,558 $ 20,894 $ 21,678 $ 80,133
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, basic.................... $ 0.39 $ 0.42 $ 0.45 $ 0.47 $ 1.74(1)
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, diluted.................. $ 0.38 $ 0.41 $ 0.44 $ 0.45 $ 1.68
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
(1) Due to rounding quarterly per share amounts do not add up to total
1996 QUARTERLY OPERATING RESULTS
QUARTER ENDED
---------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
- ----------------------------------------------- ---------- ---------- ------------- ------------ -----------
Interest income
From loans................................. $ 53,223 $ 53,826 $ 57,980 $ 59,673 $ 224,702
From investments........................... 15,098 13,943 14,556 13,824 57,421
---------- ---------- ------------- ------------ -----------
68,321 67,769 72,536 73,497 282,123
Interest expense............................... (19,161) (19,705) (22,346) (21,177) (82,389)
---------- ---------- ------------- ------------ -----------
Net interest income............................ 49,160 48,064 50,190 52,320 199,734
Provision for credit losses.................... -- -- -- -- --
---------- ---------- ------------- ------------ -----------
Net interest income after provision for credit
losses....................................... 49,160 48,064 50,190 52,320 199,734
Noninterest income............................. 10,645 10,405 11,323 11,435 43,808
Gain (loss) on sale of securities.............. 742 (450) 30 (135) 187
Noninterest expense............................ (35,987) (34,049) (34,838) (39,921) (144,795)
ORE (expense) income........................... (174) 215 186 (27) 200
---------- ---------- ------------- ------------ -----------
Income before taxes............................ 24,386 24,185 26,891 23,672 99,134
Income taxes................................... (8,534) (8,169) (9,091) (6,777) (32,571)
---------- ---------- ------------- ------------ -----------
Net income..................................... $ 15,852 $ 16,016 $ 17,800 $ 16,895 $ 66,563
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, basic.................... $ 0.36 $ 0.37 $ 0.41 $ 0.38 $ 1.52
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
Net income per share, diluted.................. $ 0.35 $ 0.36 $ 0.39 $ 0.37 $ 1.47
---------- ---------- ------------- ------------ -----------
---------- ---------- ------------- ------------ -----------
A-29
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions, and that the consolidated financial
statements reasonably present the Company's financial position and results of
operations in conformity with generally accepted accounting principles.
Management also has included in the Company's consolidated financial statements
amounts that are based on estimates and judgements that it believes are
reasonable under the circumstances.
The independent auditors audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Corporation has an Audit Committee composed
solely of three non-management Directors. The Committee meets periodically with
financial management, the internal auditors and the independent auditors to
review accounting control, auditing and financial matters.
/s/ RUSSELL GOLDSMITH
------------------------------------------------------------------
Russell Goldsmith
Chief Executive Officer
/s/ BRAM GOLDSMITH
------------------------------------------------------------------
Bram Goldsmith
Chairman of the Board
/s/ FRANK P. PEKNY
------------------------------------------------------------------
Frank P. Pekny
Executive Vice President and
Chief Financial Officer
A-30
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of
City National Corporation:
We have audited the accompanying consolidated balance sheets of City
National Corporation and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of City
National Corporation and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 15, 1998
A-31
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
--------------------------
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
ASSETS
Cash and due from banks............................................................. $ 327,398 $ 331,046
Federal funds sold.................................................................. 150,000 151,200
Interest--bearing deposits in other banks........................................... 301 10,978
Investment securities (fair value $227,465 in 1997 and $194,655 in 1996)............ 225,934 195,229
Securities available-for-sale (cost $597,910 in 1997 and $619,580 in 1996).......... 607,188 615,863
Trading account securities.......................................................... 30,279 32,129
Loans............................................................................... 3,825,224 2,839,435
Less allowance for credit losses.................................................... 137,761 130,089
------------ ------------
Net loans......................................................................... 3,687,463 2,709,346
Leveraged leases.................................................................... 5,471 6,147
Premises and equipment, net......................................................... 43,402 24,196
Customers' acceptance liability..................................................... 1,553 2,339
Other real estate................................................................... 2,126 15,116
Deferred tax asset.................................................................. 58,815 65,291
Goodwill and core deposit intangibles............................................... 54,921 10,083
Other assets........................................................................ 57,181 47,533
------------ ------------
Total assets...................................................................... $ 5,252,032 $ 4,216,496
------------ ------------
------------ ------------
LIABILITIES
Demand deposits..................................................................... $ 2,027,014 $ 1,642,558
Interest checking deposits.......................................................... 439,071 386,211
Money market deposits............................................................... 773,291 714,127
Savings deposits.................................................................... 171,100 136,691
Time deposits--under $100,000....................................................... 204,744 146,076
Time deposits--$100,000 and over.................................................... 613,128 360,860
------------ ------------
Total deposits....................................................................... 4,228,348 3,386,523
Federal funds purchased and securities sold under repurchase agreements............. 206,427 194,549
Other short-term borrowings......................................................... 212,575 148,642
Long-term debt...................................................................... 50,000 34,800
Other liabilities................................................................... 44,459 48,896
Acceptances outstanding............................................................. 1,553 2,339
------------ ------------
Total liabilities................................................................. 4,743,362 3,815,749
------------ ------------
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
Preferred Stock authorized--5,000,000, none outstanding............................. -- --
Common Stock--par value--$1.00; authorized--75,000,000 Issued-- 46,700,891 shares in
1997 and 46,302,782 shares in 1996................................................ 46,701 46,303
Additional paid-in capital.......................................................... 297,654 275,610
Unrealized gain (loss) on available-for-sale securities............................. 5,349 (2,149)
Retained earnings................................................................... 173,089 113,266
Treasury shares, at cost--563,928 shares in 1997 and 2,394,600 shares in 1996....... (14,123) (32,283)
------------ ------------
Total shareholders' equity........................................................ 508,670 400,747
------------ ------------
Total liabilities and shareholders' equity........................................ $ 5,252,032 $ 4,216,496
------------ ------------
------------ ------------
See accompanying Notes to Consolidated Financial Statements.
A-32
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
INTEREST INCOME
Interest and fees on loans...................................................... $ 304,057 $ 224,702 $ 168,862
Interest on federal funds sold and securities purchased under resale
agreements.................................................................... 1,301 3,562 7,013
Interest on investments securities:
U. S. Treasury and federal agency securities.................................. 7,023 6,829 25,853
Municipal securities.......................................................... 4,753 2,607 1,091
Other securities.............................................................. 758 2,089 2,280
Interest on securities available-for-sale....................................... 37,539 40,485 10,480
Interest on trading account..................................................... 2,565 1,849 2,015
--------- --------- ---------
Total....................................................................... 357,996 282,123 217,594
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits............................................................ 73,289 54,756 32,039
Interest on federal funds purchased and securities sold under repurchase
agreements.................................................................... 11,731 12,835 16,404
Interest on other short-term borrowings......................................... 16,470 12,835 5,829
Interest on long-term debt...................................................... 2,838 1,963 1,059
--------- --------- ---------
Total....................................................................... 104,328 82,389 55,331
--------- --------- ---------
Net interest income............................................................. 253,668 199,734 162,263
Provision for credit losses..................................................... -- -- --
--------- --------- ---------
Net interest income after provision for credit losses........................... 253,668 199,734 162,263
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts............................................. 14,321 10,798 8,073
Investment services............................................................. 13,221 11,453 8,779
Trust fees...................................................................... 8,304 7,176 6,496
International services.......................................................... 7,271 5,181 3,939
Gain (loss) on sale of assets................................................... 1,604 1,124 (83)
Gain (loss) on sale of securities............................................... (1,048) 187 (596)
All other income................................................................ 9,745 8,076 7,958
--------- --------- ---------
Total....................................................................... 53,418 43,995 34,566
--------- --------- ---------
NONINTEREST EXPENSE
Salaries and other employee benefits............................................ 97,634 77,011 65,375
Professional.................................................................... 21,509 13,698 8,836
Net occupancy of premises....................................................... 10,659 8,976 7,923
Data processing................................................................. 9,052 8,659 7,476
Promotion....................................................................... 7,972 5,563 4,419
Depreciation.................................................................... 6,144 5,143 4,120
Office supplies................................................................. 7,286 4,828 3,955
FDIC insurance.................................................................. 419 2 2,486
Equipment....................................................................... 2,460 2,249 2,272
Amortization of goodwill and core deposit intangibles........................... 5,619 1,522 --
Other operating................................................................. 15,570 17,144 11,822
ORE income...................................................................... (2,567) (200) (608)
--------- --------- ---------
Total....................................................................... 181,757 144,595 118,076
--------- --------- ---------
INCOME BEFORE INCOME TAXES...................................................... 125,329 99,134 78,753
Income tax expense.............................................................. 45,196 32,571 29,961
--------- --------- ---------
NET INCOME...................................................................... $ 80,133 $ 66,563 $ 48,792
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, BASIC..................................................... $ 1.74 $ 1.52 $ 1.08
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, DILUTED................................................... $ 1.68 $ 1.47 $ 1.06
--------- --------- ---------
--------- --------- ---------
Shares used to compute income per share, basic.................................. 46,018 43,888 45,198
--------- --------- ---------
--------- --------- ---------
Shares used to compute income per share, diluted................................ 47,809 45,146 45,886
--------- --------- ---------
--------- --------- ---------
Dividends per share............................................................. $ 0.44 $ 0.36 $ 0.26
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
A-33
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $ 80,133 $ 66,563 $ 48,792
Adjustments to net income:
Writedowns on ORE.............................................................. -- 229 96
Gain on sales of ORE........................................................... (3,730) (325) (1,055)
Depreciation................................................................... 6,144 5,143 4,120
Amortization of goodwill and core deposit intangibles.......................... 5,619 1,522 --
Net (increase) decrease in trading securities.................................. 1,850 (2,401) (4,197)
Deferred income tax expense (benefit).......................................... 4,288 (8,996) (9,310)
Prepaid income taxes........................................................... -- (4,932) --
Net increase in other liabilities (assets)..................................... 16,446 (24,699) (6,277)
Other, net..................................................................... (16,475) 24,965 9,280
--------- --------- ---------
Net cash provided by operating activities.................................. 94,275 57,069 41,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in short-term investments................................ 10,677 69,718 (80,022)
Purchase of securities available-for-sale........................................ (322,392) (418,339) (184,905)
Sales of securities available-for-sale........................................... 340,762 327,456 150,861
Maturities of securities available-for-sale...................................... 58,089 328,644 9,552
Maturities of investment securities.............................................. 15,993 34,819 181,615
Purchase of investment securities................................................ (46,147) (123,706) (32,951)
Purchase of residential mortgage loans........................................... (74,681) (250,726) (178,084)
Sale of residential mortgage loans............................................... 47,513 62,717 --
(Loan originations) and principal collections, net............................... (634,616) (340,802) (206,580)
Proceeds from sales of ORE....................................................... 26,473 5,730 6,489
Proceeds from sale of leveraged leases........................................... -- 1,824 329
Purchase of premises and equipment............................................... (17,695) (1,444) (5,828)
Net cash from acquisitions....................................................... 42,876 -- 95,624
Other, net....................................................................... 908 32,493 23,516
--------- --------- ---------
Net cash used by investing activities...................................... (552,240) (271,616) (220,384)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements.......................................................... 11,878 (63,804) 83,633
Net increase in deposits......................................................... 390,646 138,488 33,717
Net increase (decrease) in short-term borrowings................................. 54,133 (46,458) 145,000
Proceeds from issuance of long-term debt......................................... 50,000 9,800 25,000
Repayment of long-term debt...................................................... (25,000) -- --
Proceeds from exercise of stock options.......................................... 11,365 7,847 3,131
Stock repurchases................................................................ (22,503) (22,384) (9,899)
Cash dividends paid.............................................................. (20,310) (15,815) (11,755)
Other, net....................................................................... 2,908 (2,421) 5,967
--------- --------- ---------
Net cash provided by financing activities.................................. 453,117 5,253 274,794
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. (4,848) (209,294) 95,859
Cash and cash equivalents at beginning of year................................... 482,246 691,540 595,681
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 477,398 $ 482,246 $ 691,540
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................... $ 103,392 $ 82,535 $ 53,198
Income taxes................................................................. 38,502 31,750 36,248
Non-cash investing activities:
Transfer from loans to foreclosed assets..................................... 11,885 15,608 2,465
Transfers from investment securities to securities available for sale........ -- -- 402,304
See accompanying Notes to Consolidated Financial Statements
A-34
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES TOTAL
SHARES COMMON PAID-IN AVAILABLE- RETAINED TREASURY SHAREHOLDERS'
DOLLARS IN THOUSANDS ISSUED STOCK CAPITAL FOR-SALE EARNINGS STOCK EQUITY
- --------------------------------------- --------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1994............ 45,192,678 $ 45,193 $ 263,611 $ (3,564) $ 25,481 $ -- $ 330,721
Net income............................. -- -- -- -- 48,792 -- 48,792
Stock options exercised................ 361,046 361 2,770 -- -- -- 3,131
Tax benefit from stock options......... -- -- 448 -- -- -- 448
Cash dividends......................... -- -- -- -- (11,755) -- (11,755)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- 5,519 -- -- 5,519
Repurchased shares..................... -- -- -- -- -- (9,899) (9,899)
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1995............ 45,553,724 45,554 266,829 1,955 62,518 (9,899) 366,957
Net income............................. -- -- -- -- 66,563 -- 66,563
Stock options exercised................ 749,058 749 7,098 -- -- -- 7,847
Tax benefit from stock options......... -- -- 1,683 -- -- -- 1,683
Cash dividends......................... -- -- -- -- (15,815) -- (15,815)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- (4,104) -- -- (4,104)
Repurchased shares..................... -- -- -- -- -- (22,384) (22,384)
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1996............ 46,302,782 46,303 275,610 (2,149) 113,266 (32,283) 400,747
Net income............................. -- -- -- -- 80,133 -- 80,133
Stock options exercised................ 398,109 398 5,004 -- -- -- 5,402
Tax benefit from stock options......... -- -- 2,908 -- -- -- 2,908
Cash dividends......................... -- -- -- -- (20,310) -- (20,310)
Change in unrealized gain (loss) on
securities available-for-sale........ -- -- -- 7,498 -- -- 7,498
Repurchased shares, net................ -- -- -- -- -- (22,503) (22,503)
Issuance of treasury shares for
acquisitions......................... -- -- 18,187 -- -- 30,643 48,830
Issuance of treasury shares for stock
options.............................. -- -- (4,055) -- -- 10,020 5,965
--------- ----------- ----------- ------------- ----------- ----------- -------------
Balances, December 31, 1997............ 46,700,891 $ 46,701 $ 297,654 $ 5,349 $ 173,089 $ (14,123) $ 508,670
--------- ----------- ----------- ------------- ----------- ----------- -------------
--------- ----------- ----------- ------------- ----------- ----------- -------------
See accompanying Notes to Consolidated Financial Statements
A-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of City National Corporation (the
Corporation) and of City National Bank (the Bank) and its subsidiaries conform
to generally accepted accounting principles and to prevailing practices within
the banking industry. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported periods.
City National Corporation and subsidiaries (the Company), through its
primary subsidiary, the Bank, engages in commercial banking serving primarily
middle market companies, professional and business borrowers, and associated
individuals with commercial banking, fiduciary, residential mortgage, and
personal banking services.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
the Corporation, the Bank (100% owned), and its wholly owned subsidiaries after
elimination of all material intercompany transactions. Certain prior years' data
have been reclassified to conform to current year presentation.
SECURITIES
Securities held-for-investment are classified as investment securities.
Because the Company has the ability and management has the intent to hold
investment securities until maturity, investment securities are stated at cost
adjusted for amortization of premiums and accretion of discounts. Trading
account securities are stated at market value. Investments not classified as
trading securities nor as investment securities are classified as
available-for-sale securities and recorded at fair value. Unrealized gains or
losses on available-for-sale securities are excluded from net income and
reported as an amount net of taxes as a separate component of shareholders'
equity. Premiums or discounts on investment and available-for-sale securities
are amortized or accreted into income using the interest method. Realized gains
or losses on sales of investment or available-for-sale securities are recorded
using the specific identification method. Investment services income consists of
fees, commissions and markups on securities transactions with customers and
money market mutual fund fees.
LOANS
Loans are generally carried at principal amounts outstanding less unearned
income. Unearned income includes deferred unamortized fees net of direct
incremental loan origination costs. Interest income is accrued as earned. Net
deferred fees are accreted into interest income using the interest method. Loans
held for sale are recorded at the lower of cost or market.
Loans are placed on nonaccrual status when a loan becomes 90 days past due
as to interest or principal unless the loan is both well secured and in process
of collection. Loans are also placed on nonaccrual status when the full
collection of interest or principal becomes uncertain. When a loan is placed on
nonaccrual status, the accrued and unpaid interest receivable is reversed and
the accretion of deferred loan fees is ceased. Thereafter, interest collected on
the loan is accounted for on the cash collection or cost recovery method until
qualifying for return to accrual status. Generally, a loan may be returned to
accrual status when all delinquent principal and interest are brought current in
accordance with the terms of the loan agreement and certain performance criteria
have been met.
The Company considers a loan to be impaired when it is probable that it will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Once a loan is determined to be
A-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
impaired, the impairment is measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, the impairment is measured by using the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
When the measurement of the impaired loan is less than the recorded amount
of the loan, an impairment is recognized by creating a valuation allowance with
a corresponding charge to the provision for credit losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for credit losses.
The Company's policy is to record cash receipts received on impaired loans
first as reductions to principal and then to interest income.
ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses charged to operations reflects management's
judgement of the adequacy of the allowance for credit losses and is determined
through periodic analytical reviews of the loan portfolio, problem loans and
consideration of such other factors as the Bank's loan loss experience, trends
in problem loans, concentrations of credit risk, and current and expected future
economic conditions, as well as the results of the Company's ongoing examination
process and that of its regulators.
PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed generally on a straight-line basis
over the estimated useful life of each type of asset. Gains and losses on
dispositions are reflected in current operations. Maintenance and repairs are
charged to operating expenses.
OTHER REAL ESTATE (ORE)
Other real estate is comprised of real estate acquired in satisfaction of
loans. Properties acquired by foreclosure or deed in lieu of foreclosure are
transferred to ORE and are recorded at fair value less estimated costs to sell,
at the date of transfer of the property. The fair value of the ORE property is
based upon a current appraisal. Losses that result from the ongoing periodic
valuation of these properties are charged against ORE expense in the period in
which they are identified. Expenses for holding costs are charged to operations
as incurred.
INCOME TAXES
The Company files a consolidated federal income tax return and a combined
state income tax return. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of existing differences between financial
reporting and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carry forwards, using enacted tax laws and
rates. Deferred tax assets will be reduced through a valuation allowance
whenever it becomes more likely than not that all, or some portion, will not be
realized. Deferred income taxes (benefit) represents the net change in the
deferred tax asset or liability balance during the year. This amount, together
with income taxes currently payable or refundable in the current year,
represents the total tax expense (benefit) for the year.
NET INCOME PER SHARE
Beginning with year end 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which,
required the disclosure of two new earnings per share calculations, "basic
earnings per share" and, if applicable, "diluted earnings per share." Earnings
per
A-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
share for comparative years have been restated for SFAS No. 128. Basic earnings
per share is based on the weighted average shares of common stock, which were
calculated as 46,018,000, 43,888,000 and 45,198,000 for 1997, 1996 and 1995,
respectively. Diluted earnings per share gives effect to all dilutive potential
common shares that were outstanding during part or all of the year and were
calculated as 47,809,000, 45,146,000 and 45,886,000, respectively.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and overnight federal funds sold.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions and are amortized over seven
years. Goodwill and other intangibles are evaluated periodically for other than
temporary impairment. Should such an assessment indicate that the undiscounted
value of an intangible may be impaired, the net book value of the intangible
would be written down to net estimated recoverable value.
OTHER
The Company and its subsidiaries are on the accrual basis of accounting for
income and expenses. In accordance with the usual practice of banks, assets and
liabilities of individual trust, agency and fiduciary funds have not been
included in the financial statements.
INTEREST-RATE-RISK MANAGEMENT ACTIVITIES
For those interest-rate instruments that alter the repricing characteristics
of assets or liabilities, the net differential to be paid or received on the
instrument is treated as an adjustment to the yield on the underlying assets or
liabilities (the accrual method). To qualify for the accrual method, the
interest-rate instrument must be designated to specific assets or liabilities or
pools of assets or liabilities, and must be effective at altering the
interest-rate characteristics of the related assets or liabilities. To be
effective, there must be correlation between the interest-rate index on the
underlying asset or liability and the variable rate paid on the instrument.
STOCK OPTION PLAN
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Pro forma net
income and pro forma net income per share disclosures for employee stock option
grants are based on recognition as expense, over the vesting period, of the fair
value on the date of grant of all stock-based awards made in 1995 and subsequent
years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that
A-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from nonowner
sources. Comprehensive income will thus represent the sum of net income and
comprehensive income, although SFAS 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated balance of
other comprehensive income is required to be displayed separately from retained
earnings and additional paid in capital in the statement of financial condition.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. At this time the Company has determined that
this Statement will have no significant impact on its financial position or
results of operations for 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that selected information
about those operating segments be reported in interim financial statements. This
statement supersedes SFAS 14 "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 requires that all public enterprises report financial
and descriptive information about its reportable operating segments. Operating
segments are defined as components regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years should be restated. Management is in the process of
determining the impact, if any, this statement will have on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132"). This Statement
standardizes the disclosure requirements for defined benefit plans and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. This Statement is effective for fiscal years beginning
after December 15, 1997. At this time the Company has determined that this
Statement will have no significant impact on it since it has no defined benefit
plans.
NOTE 2. ACQUISITIONS
On January 9, 1998, the Company completed its acquisition of Harbor Bancorp
for $34.5 million. The Company issued approximately 540,000 shares, primarily
from treasury with an aggregate market value of $17.9 million and paid the
remainder in cash. The acquisition of Harbor Bancorp is expected to result in
the recording of goodwill and intangibles of approximately $24.0 million under
the purchase method of accounting.
On January 24, 1997, the Company completed its acquisition of Riverside
National Bank (RNB). The Company paid approximately $41.4 million for RNB by
issuing approximately 1.0 million treasury shares with an aggregate market value
of approximately $20.7 million and paid the remainder in cash. The acquisition
of RNB was accounted for under the purchase method of accounting and resulted in
the recording of goodwill and intangibles of approximately $27.4 million. At
December 31, 1997, the remaining unamortized balance was approximately $25.0
million. The results of RNB's operations are included in those reported by the
Company beginning on January 25, 1997.
On January 17, 1997, the Company completed its acquisition of Ventura County
National Bancorp (VCNB). The Company paid approximately $49.1 million for VCNB
by issuing approximately 1.3 million treasury shares with an aggregate market
value of approximately $28.1 million and paid the remainder in cash. The
acquisition of VCNB was accounted for under the purchase method of accounting
and resulted in the recording of goodwill and intangibles of approximately $27.4
million. At December 31, 1997, the remaining unamortized balance was
approximately $25.0 million. The results of VCNB's operations are included in
those reported by the Company beginning on January 18, 1997.
A-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 31, 1995, the Bank acquired all of the outstanding stock of
First Los Angeles Bank (First LA) for $85 million in cash in a transaction that
has been accounted for as a purchase. Merger related expenses of $.7 million and
$1.0 million were recorded in 1996 and 1995, respectively, to cover certain
integration, data processing, and lease termination expenses related to the
acquisition. The Company recorded core deposit intangible assets of $7.9 million
related to the First LA acquisition. At December 31, 1997, the remaining
unamortized balance was $5.0 million. The recording of First LA's assets and
liabilities at fair value did not result in any goodwill. The results of First
LA's operations are included in those reported by the Company beginning on
January 1, 1996.
The following table presents an unaudited pro forma combined summary of
operations of the Company, VCNB and RNB (collectively, the Acquired Banks) for
the years ended December 31, 1997 and 1996. The unaudited pro forma combined
summary of operations is presented as if the mergers had been effective January
1, 1996. This information combines the historical results of the Company and the
Acquired Banks after giving effect to amortization of purchase accounting
adjustments. The unaudited pro forma combined summary of operations is based on
the Company's historical results and those of the Acquired Banks. The unaudited
pro forma combined summary of operations is intended for informational purposes
only and is not necessarily indicative of the future results of the Company or
of the results of the Company that would have occurred had the acquisition been
in effect for the full year presented.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER
31,
----------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
Interest income........................................................................... $ 360,164 $ 318,768
Interest expense.......................................................................... 104,999 94,100
---------- ----------
Net interest income............................................................... 255,165 224,668
Provision for credit losses............................................................... -- 75
---------- ----------
Net interest income after provision for credit losses............................. 255,165 224,593
Noninterest income........................................................................ 53,758 48,832
Noninterest expense....................................................................... 186,388 175,411
---------- ----------
Income before income taxes................................................................ 122,535 98,014
Income taxes.............................................................................. 44,336 32,709
---------- ----------
Net income........................................................................ $ 78,199 $ 65,305
---------- ----------
---------- ----------
Net income per share, basic....................................................... $ 1.69 $ 1.41
---------- ----------
---------- ----------
Net income per share, diluted..................................................... $ 1.63 $ 1.38
---------- ----------
---------- ----------
The unaudited pro forma combined net income per share were calculated based
on the pro forma combined net income and the pro forma average common shares and
share equivalents outstanding during the years presented.
A-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. INVESTMENT SECURITIES
The following is a summary of the amortized cost and estimated fair value
for the major categories of investment securities:
GROSS GROSS
CARRYING UNREALIZED UNREALIZED
DOLLARS IN THOUSANDS VALUE GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
December 31, 1997
Mortgage-backed securities................................... $ 107,386 $ 693 $ 351 $ 107,728
State and municipal securities............................... 107,567 1,370 181 108,756
Other securities............................................. 10,981 -- -- 10,981
---------- ----------- ----------- ----------
Total.................................................... $ 225,934 $ 2,063 $ 532 $ 227,465
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 1996
Mortgage-backed securities................................... $ 97,638 $ 194 $ 1,074 $ 96,758
State and municipal securities............................... 88,445 550 244 88,751
Other securities............................................. 9,146 -- -- 9,146
---------- ----------- ----------- ----------
Total.................................................... $ 195,229 $ 744 $ 1,318 $ 194,655
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
The carrying value and estimated fair values of investment securities at
December 31, 1997 by contractual maturity, are shown below:
OVER 1 YEAR OVER 5 YEARS THRU 10 OVER 10
ONE YEAR OR LESS THRU 5 YEARS YEARS YEARS
----------------------- ------------------------- ------------------------- -----------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
- ---------------------------------- --------- ------------ ----------- ------------ ----------- ------------ -----------
Mortgage-backed securities........ $ -- --% $ 3,366 7.30% $ 21,033 5.88% $ 82,987
State and municipal securities.... 12,373 6.85 67,892 6.61 22,289 7.11 5,013
Other securities(2)............... 1,010 7.73 1,205 7.62 1,000 6.74 7,766
--------- --- ----------- --- ----------- --- -----------
Total........................... $ 13,383 6.92% $ 72,463 6.66% $ 44,322 6.52% $ 95,766
--------- --- ----------- --- ----------- --- -----------
--------- --- ----------- --- ----------- --- -----------
Fair value...................... $ 13,419 $ 73,290 $ 44,692 $ 96,064
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
TOTAL 1997 TOTAL 1996
----------------------- -----------------------
DOLLARS IN THOUSANDS YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------------------- ------------ --------- ------------ --------- ------------
Mortgage-backed securities........ 6.72% $ 107,386 6.57% $ 97,638 6.45%
State and municipal securities.... 6.86 107,567 6.75 88,445 6.72
Other securities(2)............... 5.99 10,981 6.40 9,146 6.49
--- --------- --- --------- ---
Total........................... 6.67% $ 225,934 6.65% $ 195,229 6.57%
--- --------- --- --------- ---
--- --------- --- --------- ---
Fair value...................... $ 227,465 $ 194,655
--------- ---------
--------- ---------
- ---------
(1) Fully taxable equivalent.
(2) Equity securities are reported in the "over ten years" category
Investment securities totaling $159.2 million were pledged to secure trust
funds, public deposits, or for other purposes permitted by law at December 31,
1997.
A-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SECURITIES AVAILABLE-FOR-SALE
The following is a summary of amortized cost and estimated fair value for
the major categories of securities available-for-sale:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
December 31, 1997
U.S. Government and federal agency securities................ $ 255,552 $ 2,105 $ 600 $ 257,057
Mortgage-backed securities................................... 171,439 1,247 611 172,075
State and municipal securities............................... 5,911 86 -- 5,997
Other securities............................................. 165,008 7,309 258 172,059
---------- ----------- ----------- ----------
Total.................................................... $ 597,910 $ 10,747 $ 1,469 $ 607,188
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
December 31, 1996
U.S. Government and federal agency securities................ $ 375,120 $ 484 $ 3,288 $ 372,316
Mortgage-backed securities................................... 130,680 270 3,014 127,936
State and municipal securities............................... 13,995 91 19 14,067
Other securities............................................. 99,785 2,156 397 101,544
---------- ----------- ----------- ----------
Total.................................................... $ 619,580 $ 3,001 $ 6,718 $ 615,863
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Gross realized gains and losses related to the available for sale portfolios
were $638,000 and $1,686,000, respectively, for the year ended December 31,
1997, $2,784,000 and $2,597,000, respectively, for the year ended December 31,
1996 and $1,287,000 and $1,883,000, respectively, for the year ended December
31, 1995.
The estimated fair value and amortized cost of securities available-for-sale
at December 31, 1997, by contractual maturity, are shown below:
ONE YEAR OVER 1 YEAR OVER 5 YEARS OVER
OR LESS THRU 5 YEARS THRU 10 YEARS 10 YEARS
------------------------- ----------------------- ------------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- -------------------------- ----------- ------------ --------- ------------ ----------- ------------ --------- ------------
U.S. Government and
federal agency
securities.............. $ 9,953 5.00% $ 239,610 6.38% $ 7,494 5.88% $ -- -- %
Mortgage-backed
securities.............. -- -- -- -- -- -- 172,075 6.66
State and municipal
securities.............. -- -- 4,911 6.61 1,086 7.14 -- --
Other securities(2)....... 31,164 10.69 58,836 9.79 -- -- 82,059 7.60
----------- ----- --------- --- ----------- --- --------- ---
Total................... $ 41,117 9.31% $ 303,357 7.05% $ 8,580 6.04% $ 254,134 6.96%
----------- ----- --------- --- ----------- --- --------- ---
----------- ----- --------- --- ----------- --- --------- ---
Amortized Cost.......... $ 40,777 $ 299,159 $ 8,586 $ 249,388
----------- --------- ----------- ---------
----------- --------- ----------- ---------
TOTAL 1997 TOTAL 1996
----------------------- -----------------------
DOLLARS IN THOUSANDS AMOUNT YIELD(1) AMOUNT YIELD(1)
- -------------------------- --------- ------------ --------- ------------
U.S. Government and
federal agency
securities.............. $ 257,057 6.31% $ 372,316 5.69%
Mortgage-backed
securities.............. 172,075 6.66 127,936 6.28
State and municipal
securities.............. 5,997 6.71 14,067 6.76
Other securities(2)....... 172,059 8.91 101,544 10.74
--------- --- --------- -----
Total................... $ 607,188 7.15% $ 615,863 6.67%
--------- --- --------- -----
--------- --- --------- -----
Amortized Cost.......... $ 597,910 $ 619,580
--------- ---------
--------- ---------
- ---------
(1) Fully taxable equivalent.
(2) Equity securities, except preferred stock, are reported in the "over ten
years" category
Available-for-sale securities totaling $309.9 million were pledged to secure
trust funds, public deposits, or for other purposes required or permitted by law
at December 31, 1997.
A-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of the major categories of loans:
DECEMBER 31,
--------------------------
DOLLARS IN THOUSANDS 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
Commercial............................................................................ $ 1,972,232 $ 1,334,577
Residential first mortgage............................................................ 980,040 882,573
Real estate construction.............................................................. 144,558 92,322
Real estate mortgage.................................................................. 686,188 499,377
Installment........................................................................... 42,206 30,586
------------ ------------
Total loans (net of unearned income and fees of $4,310 and $5,364).................. $ 3,825,224 $ 2,839,435
------------ ------------
------------ ------------
At December 31, 1997 and 1996, the Company had identified impaired loans
with recorded investments of $16.6 million and $33.3 million, respectively.
Allowances of $.5 million and $.5 million on loans with outstanding balances of
$3.0 million and $3.3 million, respectively, at December 31, 1997 and 1996,
respectively, representing the differences between the value of the collateral
supporting the loans and their outstanding balances, is included in the
allowance for credit losses. For 1997 and 1996, the average balance of impaired
loans was $21.2 million and $36.2 million, respectively. During 1997, 1996 and
1995, no interest income was recognized on impaired loans until the book
balances of these loans were paid off.
In the normal course of business, the Bank has loans to officers and
directors as well as loans to companies and individuals affiliated with or
guaranteed by officers and directors of the Company and the Bank. These loans
were made in the ordinary course of business at rates and terms no more
favorable than those offered to other customers with a similar credit standing.
The aggregate dollar amounts of these loans were $16.8 million and $16.1 million
at December 31, 1997 and 1996, respectively. During 1997, new loans made totaled
$1.1 million and repayments totaled $.4 million. Interest income recognized on
these loans amounted to $1.4 million, $1.4 million and $1.5 million during 1997,
1996 and 1995, respectively. At December 31, 1997, none of these loans were on
nonaccrual status. Based on analysis of information presently known to
management about the loans to officers and Directors and their affiliates,
management believes all have the ability to comply with the present loan
repayment terms.
Loans past due 90 days or more and still accruing interest totaled $26.2
million, $12.4 million and $6.5 million at December 31, 1997, 1996 and 1995,
respectively. Restructured loans totaled $4.1 million, $2.6 million, and $7.2
million at December 31, 1997, 1996 and 1995, respectively.
The following is a summary of activity in the allowance for credit losses:
DOLLARS IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Balance, January 1........................................................... $ 130,089 $ 131,514 $ 105,343
Provision charged to expense................................................. -- -- --
Allowance of acquired institutions........................................... 7,016 -- 19,077
Charge offs.................................................................. (19,512) (20,342) (17,041)
Recoveries................................................................... 20,168 18,917 24,135
---------- ---------- ----------
Net (charge offs) recoveries................................................. 656 (1,425) 7,094
---------- ---------- ----------
Balance, December 31......................................................... $ 137,761 $ 130,089 $ 131,514
---------- ---------- ----------
---------- ---------- ----------
A-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of non-performing loans and related interest
foregone (received):
DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
Nonaccrual loans................................................................. $ 27,566 $ 41,543 $ 48,124
--------- --------- ---------
--------- --------- ---------
Contractual interest due......................................................... $ 5,364 $ 6,262 $ 7,232
Interest recognized.............................................................. 5,490 4,135 2,663
--------- --------- ---------
Net interest foregone (received)............................................. $ (126) $ 2,127 $ 4,569
--------- --------- ---------
--------- --------- ---------
The following is a summary of foregone interest on nonaccrual loans at
December 31. The summary does not include interest foregone on loans on
nonaccrual status that were either charged off prior to year end, or restored to
accrual status prior to year end or transferred to ORE prior to year end.
DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
Contractual interest due............................................................. $ 3,709 $ 4,425 $ 5,821
Interest recognized.................................................................. 1,782 491 847
--------- --------- ---------
Net interest foregone............................................................ $ 1,927 $ 3,934 $ 4,974
--------- --------- ---------
--------- --------- ---------
The Company has pledged all of its eligible residential first mortgages to
the Federal Home Loan Bank of San Francisco under that institution's blanket
lien program.
NOTE 6. PREMISES AND EQUIPMENT
The following is a summary of data for the major categories of premises and
equipment:
ACCUMULATED
DEPRECIATION
AND CARRYING
DOLLARS IN THOUSANDS COST AMORTIZATION VALUE
- ------------------------------------------------------------------------------ --------- ------------ ---------
DECEMBER 31, 1997
Premises, including land of $5,182........................................ $ 50,270 $ 26,532 $ 23,738
Furniture, fixtures and equipment......................................... 47,311 27,647 19,664
--------- ------------ ---------
Total................................................................. $ 97,581 $ 54,179 $ 43,402
--------- ------------ ---------
--------- ------------ ---------
DECEMBER 31, 1996
Premises, including land of $2,548........................................ $ 35,025 $ 21,606 $ 13,419
Furniture, fixtures and equipment......................................... 35,012 24,235 10,777
--------- ------------ ---------
Total................................................................. $ 70,037 $ 45,841 $ 24,196
--------- ------------ ---------
--------- ------------ ---------
Depreciation and amortization expense was $6.1 million in 1997, $5.1 million
in 1996 and $4.1 million in 1995. Net rental payments on operating leases
included in net occupancy of premises in the Consolidated Statement of Income
were $7.1 million in 1997, $6.4 million in 1996, and $5.4 million in 1995.
A-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The future net minimum rental commitments were as follows at December 31,
1997:
NET MINIMUM RENTAL
DOLLARS IN THOUSANDS COMMITMENTS
- ---------------------------------------------------------------------------------------------- ------------------
1998.......................................................................................... $ 12,264
1999.......................................................................................... 11,832
2000.......................................................................................... 10,021
2001.......................................................................................... 8,206
2002.......................................................................................... 7,260
Thereafter.................................................................................... 18,966
-------
Total....................................................................................... $ 68,549
-------
-------
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions and escalation clauses. The Bank paid
$1.1 million, $1.1 million and $.9 million during 1997, 1996 and 1995,
respectively, for rent and operating expense pass throughs to a real estate
partnership in which the Bank owns a 32% interest, and Mr. Bram Goldsmith,
Chairman, indirectly owns a 14% interest.
The rental commitment amounts in the table above reflects the contractual
obligations of the Company under all leases including those assumed from the
Acquired Banks. Lease obligations assumed from the Acquired Banks have been
adjusted to current market values through purchase accounting adjustments. The
allowance thus created will be accreted over the terms of the leases and reduce
the total expense recognized by the Company in its operating expenses. At
December 31, 1997, the Company is contractually entitled to receive minimum
future rentals of $8.5 million under noncancellable sub-leases.
NOTE 7. INCOME TAXES
Income tax (benefit) in the Consolidated Statement of Income includes the
following amounts:
DOLLARS IN THOUSANDS CURRENT DEFERRED TOTAL
- --------------------------------------------------------------------------------- --------- --------- ---------
1997
Federal...................................................................... $ 30,684 $ 2,988 $ 33,672
State........................................................................ 10,224 1,300 11,524
--------- --------- ---------
Total.................................................................... $ 40,908 $ 4,288 $ 45,196
--------- --------- ---------
--------- --------- ---------
1996
Federal...................................................................... $ 31,399 $ (3,639) $ 27,760
State........................................................................ 10,168 (5,357) 4,811
--------- --------- ---------
Total.................................................................... $ 41,567 $ (8,996) $ 32,571
--------- --------- ---------
--------- --------- ---------
1995
Federal...................................................................... $ 31,829 $ (9,020) $ 22,809
State........................................................................ 7,442 (290) 7,152
--------- --------- ---------
Total.................................................................... $ 39,271 $ (9,310) $ 29,961
--------- --------- ---------
--------- --------- ---------
A-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below.
NET DEFERRED TAX ASSETS
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------- --------- ----------
Deferred tax assets:
Allowance for credit losses........................................................ $ 47,282 $ 45,518
Net operating loss carryforwards................................................... 17,064 18,775
Accrued expenses................................................................... 3,189 2,897
State income taxes................................................................. 13,851 15,277
Unrealized losses on available for sale securities................................. -- 1,568
Purchase accounting fair value adjustment.......................................... 5,397 4,254
Other.............................................................................. 1,934 1,085
--------- ----------
Total gross deferred tax assets................................................ 88,717 89,374
Valuation allowance................................................................ (8,248) (11,557)
--------- ----------
80,469 77,817
--------- ----------
Deferred tax liabilities:
Leveraged leases................................................................... 4,461 5,014
Core deposit and other intangibles................................................. 8,232 3,577
Installment sales.................................................................. 1,264 1,614
Unrealized gains on available for sale securities.................................. 3,929 --
Deferred loan origination costs.................................................... 1,348 936
Loan fees.......................................................................... 1,117 830
Other.............................................................................. 1,303 555
--------- ----------
Total gross deferred tax liabilities........................................... 21,654 12,526
--------- ----------
Net deferred tax assets.................................................................... $ 58,815 $ 65,291
--------- ----------
--------- ----------
Income taxes resulted in effective tax rates that differ from the statutory
federal income tax rate for the following reasons:
% OF PRETAX INCOME (LOSS)
-------------------------------
1997 1996 1995
--------- --------- ---------
Statutory rate (benefit)............................................................. 35.0% 35.0% 35.0%
Net state income tax (benefit)....................................................... 6.0 6.4 6.6
Tax exempt income.................................................................... (4.4) (3.6) (1.5)
Tax credits.......................................................................... (0.8) (1.1) (1.0)
Reduction in valuation allowances.................................................... -- (4.3) (0.7)
Amortization of goodwill............................................................. 0.5 -- --
All other--net....................................................................... (0.2) 0.5 (0.4)
--------- --------- ---------
Effective tax provision.............................................................. 36.1% 32.9% 38.0%
--------- --------- ---------
--------- --------- ---------
The tax benefit of deductible temporary differences and net operating loss
carry forwards are recorded as an asset to the extent that management assesses
the utilization of such temporary differences and carry forwards to be "more
likely than not." The realization of tax benefits of deductible temporary
differences and carry forwards depends on whether the Company has sufficient
taxable income within the
A-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carry back and carry forward period permitted by the tax law to allow for
utilization of the deductible amounts. As of any period end, the amount of
deferred tax asset that is considered realizable could be reduced if estimates
of future taxable income are reduced.
As of January 1, 1996, the Company had a $19.8 million valuation allowance
principally related to net California deductible temporary differences of $76.0
million. California law does not permit carry backs and requires a 50% reduction
of tax losses that are carried forward. In 1996, the Company reduced the
valuation allowance by $6.0 million as part of the Company's periodic
reevaluation of deferred tax assets which it believes are more likely than not
to be realized in future tax returns. The Company considered, among other
factors, the record net income reported in 1997 in its evaluation of those
deferred tax assets that it believes to be more likely than not to be realized.
At December 31, 1997, the Company's valuation allowance totaled $8.2
million, of which $5.4 million resulted from the net operating loss carry
forwards of First LA. First LA's federal net operating loss carry forwards total
$48.7 million, of which $23.5 million will expire in 2009 and $25.2 million will
expire in 2010. First LA's California net operating loss carry forwards total
$27.8 million, of which $6.5 million will expire in 1998, $10.1 million will
expire in 1999 and $11.2 million will expire in 2000. Future reversals, if any,
of the $5.4 million valuation allowances resulting from the acquisition of First
LA will reduce core deposit intangibles since there was no goodwill resulting
from the acquisition of First LA.
NOTE 8. RETIREMENT PLAN
The Company has a profit sharing retirement plan with an IRS Section 401 (K)
feature covering all employees with at least one year of continuous service.
Contributions are made on an annual basis into a trust fund and are allocated to
the participants based on their salaries and length of service. The profit
sharing contribution requirement is based on a percentage of annual operating
income. For 1997, 1996 and 1995, the Company recorded total contributions
expense of $6.7 million, $5.6 million and $4.1 million, respectively.
Employees may contribute up to 15% of their pretax salary, but not more than
the maximum allowed under IRS regulations. In 1997, the Bank matched 50% of the
first six percent of covered compensation. Through December 31, 1996, the Bank
matched 10% of the first four percent of covered compensation contributed using
forfeitures and cash. For 1997, 1996, and 1995 the Bank's matching contribution
included in the total contribution above was $1,318,000, $40,000 and $63,000,
respectively.
The Company does not provide for any post retirement employee benefits
beyond the profit sharing retirement plan.
NOTE 9. STOCK OPTION PLANS
Under the 1995 Omnibus Plan (the Plan), 3,000,000 shares of the Company's
common stock were reserved for grant of stock options. The Corporation's 1983
Stock Option Plan and 1985 Stock Option Plan have expired but options granted
thereunder remain outstanding. Grants to employees will be at prices at least
equal to the market price of the Company's stock on the effective date of the
grant. In each succeeding year following the date of grant, 25% of the options
become exercisable. After ten years from grant, all unexercised options will
expire.
A-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $9.09, $4.51 and $4.39 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997--expected dividend yield of 2.00%, volatility of 33.8%,
risk-free interest rate of 6.49% and an expected life of 7.5 years;
1996--expected dividend yield of 1.64%, volatility of 35.0%, risk-free interest
rate of 6.01%, and an expected life of 7.5 years; 1995--expected dividend yield
of 1.87%, volatility of 35.0%, risk-free interest rate of 6.86%, and an expected
life of 7.5 years.
The Company applies APB Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
1997 1996 1995
--------- --------- ---------
Net income, as reported.......................................................... $ 80,133 $ 66,563 $ 48,792
Pro forma net income............................................................. 77,840 65,140 47,824
Net income per share, basic, as reported......................................... $ 1.74 $ 1.52 $ 1.08
Proforma net income per share, basic............................................. 1.69 1.48 1.06
Net income per share, diluted, as reported....................................... 1.68 1.47 1.06
Proforma net income per share, diluted........................................... 1.63 1.44 1.04
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of generally four years and compensation cost for options granted prior
to January 1, 1995 is not considered.
The Corporation, on October 16, 1995 (in connection with an employment
agreement), granted to Mr. Russell Goldsmith, Chief Executive Officer, a
nonstatutory stock option for 350,000 shares of the Company's common stock at
the market price at the date of the grant, $13.38. The options are exercisable
one-third upon grant, one-third at the end of the first year of such employment
contract, and the final one-third at the end of the second year of the
employment contract and were all exercisable at December 31, 1997. These options
are included in the following tables.
The following is a summary of the transactions under the stock option plans
described above:
STOCK OPTION PLANS:
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES IN THOUSANDS SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
- ---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Options outstanding, January 1.... 3,687 $ 12.06 4,120 $ 11.76 4,251 $ 11.56
Granted........................... 751 24.48 603 13.65 1,056 12.47
Converted for acquisitions........ 176 8.99 -- -- -- --
Exercised......................... (858) 13.05 (749) 10.48 (361) 8.68
Canceled or expired............... (67) 14.79 (287) 16.14 (826) 16.33
----- ------ ----- ------ ----- ------
Options outstanding, December
31.............................. 3,689 $ 14.57 3,687 $ 12.06 4,120 $ 11.76
----- ------ ----- ------ ----- ------
----- ------ ----- ------ ----- ------
Exercisable....................... 2,283 2,424 2,696
----- ----- -----
----- ----- -----
During 1997 the Company issued 460,000 treasury shares for exercises of
stock options.
A-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The information concerning currently outstanding and exercisable options at
December 31, 1997 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING OUTSTANDING NUMBER EXERCISE
SHARES IN THOUSANDS OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------- ------------- ------------- ------------- -----------
Options issued at prices less than $11.00 per
share............................................ 1,055 5.82 $ 7.43 1,045 $ 7.44
Options issued at prices between $11.00 and $12.99
per share........................................ 697 6.20 11.53 435 11.59
Options issued at prices between $13.00 and $19.99
per share........................................ 1,052 7.03 14.35 652 14.71
Options issued at prices between $20.00 and
$32.00........................................... 885 7.98 24.13 151 21.79
----- -----
3,689 2,283
----- -----
----- -----
At December 31, 1997, nonstatutory and incentive stock options covering
615,557 and 1,667,032 shares, respectively, of the Company's common stock were
exercisable under the plans. At December 31, 1997, 1,477,480 shares were
available for future grants.
In addition to the above, the Corporation's 1995 Omnibus Plan provides for
the automatic annual grant, on the date of the Annual Meeting of Stockholders,
of a discounted stock option (which is not Incentive Stock Option) to each
non-employee director, including members of the Compensation and Directors
Nominating Committee to purchase 500 shares of the Corporation's Common Stock
("Director Stock Options"). The exercise price of Director Stock Options is
$1.00 per share, payable in cash or cash equivalents, by surrender of the
Corporation's Common Stock held by the director for at least a year before
exercise, or any combination of the two. Director Stock Options vest 6 months
after the date of issuance or upon the termination of the holder's directorship
(other than for cause), whichever is earlier, and expire 10 years after the date
of grant. Such options fully vest six months after grant. During 1997 and 1996,
options to purchase 4,000 and 1,904 shares respectively, were granted to
directors of the Company.
NOTE 10. BORROWED FUNDS
The following is a summary of borrowed funds of the Company excluding
federal funds purchased and securities sold under agreements to repurchase.
DECEMBER 31,
--------------------
DOLLARS IN THOUSANDS 1997 1996
- -------------------------------------------------------------------------------------------- --------- ---------
Other short-term borrowings:
Term federal funds purchased........................................................ $ 50,000 $ --
Guaranteed investment contract...................................................... 9,800 --
Treasury, tax and loan note......................................................... 52,775 98,642
Federal Home Loan Bank advances..................................................... 100,000 50,000
--------- ---------
Total........................................................................... $ 212,575 $ 148,642
--------- ---------
--------- ---------
Long-term debt:
Guaranteed investment contract...................................................... $ -- $ 9,800
Federal Home Loan Bank advances..................................................... 50,000 25,000
--------- ---------
Total........................................................................... $ 50,000 $ 34,800
--------- ---------
--------- ---------
Short term borrowings consist of funds with remaining maturities of one year
or less, and long-term debt consists of borrowings with remaining maturities of
greater than one year. The maximum amount of other short-term borrowings at any
month end was $267.9 million, $206.6 million and $160.0 million in 1997, 1996,
and 1995, respectively.
A-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The maximum amount of securities sold under agreements to repurchase
outstanding at any month end was $127.5 million, $141.3 million and $207.7
million, in 1997, 1996 and 1995, respectively. The average amount of securities
sold under agreement to repurchase was $53.4 million, $95.2 million and $106.5
million during 1997, 1996 and 1995, respectively.
The long term debt is comprised of $50.0 million of Federal Home Loan Bank
(FHLB) advances; $25.0 million maturing on November 18, 2002, but putable
beginning on November 19, 1999 and any time thereafter, with a fixed interest
rate of 5.58% and $25.0 million maturing on December 16, 2002 with a fixed
interest rate of 5.99%.
The Bank had $464.5 million and $455.0 million of unused borrowing capacity
from the FHLB at December 31, 1997 and 1996, respectively.
On January 12, 1998, the Bank issued $125.0 million of 6 3/8% Subordinated
Notes, due in 2008, in a private offering. These Subordinated Notes qualify as
Tier II capital.
NOTE 11. AVAILABILITY OF FUNDS FROM SUBSIDIARIES; RESTRICTIONS ON CASH BALANCES;
CAPITAL
The Company is authorized to issue 5,000,000 shares of Preferred Stock. The
Board of Directors has the authority to issue the preferred stock in one or more
series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preferences and
sinking fund terms.
Historically, the majority of the funds for the payment of dividends by the
Company have been obtained from the Bank. Under federal banking law, dividends
declared by national banks in any calendar year may not, without the approval of
the Office of the Comptroller of the Currency (OCC), exceed net profits (as
defined), for that year combined with its retained net income for the preceding
two calendar years. At December 31, 1997, the Bank could have declared dividends
of $53.0 million without the approval of regulators.
Federal banking law also prohibits the Corporation from borrowing from the
Bank on less than a fully secured basis. At December 31, 1997 and 1996, the
Corporation had borrowed from the Bank $45.0 million and $27.5 million,
respectively, all of which was appropriately secured in compliance with
regulatory requirements.
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances. Cash balances maintained to meet reserve requirements
are not available for use by the Bank or the Company. During 1997 and 1996,
reserve balances averaged approximately $45.4 million and $68.7 million,
respectively.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company and Bank's assets, liabilities and certain
off-balance-sheet items as calculated under the regulatory accounting practices.
The Company's and the Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined). Management believes, as of
December 31, 1997, the Company and the Bank meet all capital adequacy
requirements to which it is subject.
A-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the most recent notification from the OCC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Company's actual amounts and ratios are presented in the table:
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ------------
As of December 31, 1997:
Total capital
(to risk weighted assets)............................... $500.0 12.27% $326.0 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 448.0 10.99% 163.0 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 448.0 9.19% 195.0 GREATER THAN OR EQUAL TO 4.0%
As of December 31, 1996:
Total capital
(to risk weighted assets)............................... $422.7 14.55% $232.5 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 385.3 13.26% 116.2 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 385.3 9.75% 158.0 GREATER THAN OR EQUAL TO 4.0%
A-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank's actual amounts and ratios are presented in the table:
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- ------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ------------
As of December 31, 1997:
Total capital
(to risk weighted assets)............................... $432.9 10.78% $321.4 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 381.6 9.50% 160.5 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 381.6 7.93% 192.4 GREATER THAN OR EQUAL TO 4.0%
As of December 31, 1996:
Total capital
(to risk weighted assets)............................... $359.0 12.53% $229.2 GREATER THAN OR EQUAL TO 8.0%
Tier 1 capital
(to risk weighted assets)............................... 322.0 11.24% 114.6 GREATER THAN OR EQUAL TO 4.0%
Tier 1 capital
(to average assets)..................................... 322.0 8.22% 156.6 GREATER THAN OR EQUAL TO 4.0%
NOTE 12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit, letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount reflected in the consolidated statement of
financial condition.
Exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit, letters of credit
and financial guarantees written, is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
A-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had outstanding loan commitments aggregating $1,947.8 million
and $854.1 million in December 31, 1997 and 1996, respectively. In addition, the
Company had $140.3 million and $81.5 million outstanding in bankers acceptances
and letters of credit of which $115.5 million and $79.1 million relate to
standby letters of credit at December 31, 1997 and 1996, respectively.
Substantially all of the Company's loan commitments are on a variable rate basis
and are comprised of real estate and commercial loan commitments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis.
The Corporation or its subsidiaries are defendants in various pending
lawsuits claiming substantial amounts. Based upon present knowledge, management
and in-house counsel are of the opinion that the final outcome of such lawsuits
will not have a material adverse effect on the Corporation.
NOTE 13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES AND TRADING ACCOUNT ASSETS
For securities held as investments or available for sale, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. For
trading account securities, fair values are based on quoted market prices or
dealer quotes.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using dealer
quotes, adjusted for differences in loan characteristics. The fair value of
other types of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. In establishing the credit
risk component of the fair value calculations for loans, the Company concluded
that the allowance for credit losses represented a reasonable estimate of the
credit risk component of the fair value of loans at December 31, 1997 and 1996.
DEPOSIT LIABILITIES
The fair value of demand and interest checking deposits, savings deposits,
and certain money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
A-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
The fair value of long term debt was estimated by discounting the future
payments at current interest rates.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties. The Company
does not make fixed-rate loan commitments. The fair value of letters of
guarantee and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counter parties at the reporting date.
DERIVATIVES
The fair value of exchange traded derivatives is based on quoted market
prices or dealer quotes. The fair value of non-exchange traded derivatives
consists of net unrealized gains or losses, accrued interest receivable or
payable and any premiums paid or received.
The estimated fair values of financial instruments of the company are as
follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
DOLLARS IN MILLIONS AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------- ------------ ------------ ------------ ------------
Financial Assets:
Cash and due from banks..................................... $ 327.7 $ 327.7 $ 342.0 $ 342.0
Federal funds sold and securities purchased under resale
agreements................................................ 150.0 150.0 151.2 151.2
Investment securities....................................... 225.9 227.5 195.2 194.7
Securities available for sale............................... 607.2 607.2 615.9 615.9
Trading account assets...................................... 30.3 30.3 32.1 32.1
Loans, net of allowance for credit losses................... 3,687.5 3,747.3 2,709.3 2,714.5
Financial Liabilities:
Deposits.................................................... 4,228.3 4,228.8 3,386.5 3,385.4
Federal funds purchased and securities sold under resale
agreements................................................ 206.4 206.4 194.5 194.5
Other short-term borrowings................................. 212.6 212.6 148.6 148.6
Long-term debt.............................................. 50.0 50.0 34.8 34.8
Commitments to extend credit................................ (9.1) (9.1) (5.7) (5.7)
Derivative contracts........................................ 425.0(1) 1.7(2) 325.0(1) (0.4)(2)
- ---------
(1) Notional Amount
(2) Estimated net gains (losses) to settle derivative contracts as of respective
period ends
A-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
DECEMBER 31,
----------------------
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
ASSETS
- ------------------------------------------------------------------------------------------
Cash...................................................................................... $ 6,075 $ 23,776
Securities available-for-sale............................................................. 104,108 67,533
Other assets.............................................................................. 515 1,156
Investment in City National Bank.......................................................... 440,380 336,632
Investment in nonbank subsidiary.......................................................... 4,440 --
---------- ----------
Total assets.......................................................................... $ 555,518 $ 429,097
---------- ----------
---------- ----------
LIABILITIES
- ------------------------------------------------------------------------------------------
Notes payable to City National Bank....................................................... $ 45,000 $ 27,500
Other liabilities......................................................................... 1,848 850
---------- ----------
Total liabilities..................................................................... 46,848 28,350
Shareholders' Equity...................................................................... 508,670 400,747
---------- ----------
Total liabilities and shareholders' equity............................................ $ 555,518 $ 429,097
---------- ----------
---------- ----------
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
Income
Dividends from Bank.......................................................... $ 46,792 $ 63,891 $ 24,066
Interest and dividend income................................................. 6,318 4,313 2,081
Gain on sale of securities................................................... (339) 407 972
--------- --------- ---------
Total income............................................................. 52,771 68,611 27,119
--------- --------- ---------
Interest on notes payable to Bank................................................ 2,555 1,720 803
Other expenses................................................................... 411 463 341
--------- --------- ---------
Total expenses........................................................... 2,966 2,183 1,144
--------- --------- ---------
Income before taxes and equity in undistributed income of Bank................... 49,805 66,428 25,975
Income taxes (benefit)........................................................... (462) 22 112
--------- --------- ---------
Income before equity in undistributed income of Bank............................. 50,267 66,406 25,863
Equity in undistributed income of Bank........................................... 29,866 157 22,929
--------- --------- ---------
Net income....................................................................... $ 80,133 $ 66,563 $ 48,792
--------- --------- ---------
--------- --------- ---------
A-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 80,133 $ 66,563 $ 48,792
Adjustments to net income:
Equity in undistributed income of Bank.................................. (29,866) (157) (22,929)
Other, net.............................................................. 1,009 (363) (115)
---------- ---------- ----------
Net cash provided by operating activities............................. 51,276 66,043 25,748
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in short-term investments......................... -- 9,400 (8,925)
Maturities of investment securities....................................... -- -- 500
Maturities of securities available for sale............................... 22,423 2,000 1,500
Purchase of securities available-for-sale................................. (61,560) (39,096) (21,188)
Sales of securities available for sale.................................... 5,813 4,731 2,380
Other, net................................................................ -- (172) (750)
---------- ---------- ----------
Net cash used in investing activities................................. (33,324) (23,137) (26,483)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment in subsidiaries................................................ (24,582) -- --
Cash dividends paid....................................................... (20,310) (15,815) (11,755)
Borrowings from City National Bank........................................ 17,500 7,800 19,700
Net issuance of treasury shares........................................... (22,503) (22,384) (9,899)
Stock options exercised................................................... 11,365 7,847 3,131
Other, net................................................................ 2,877 1,773 1,003
---------- ---------- ----------
Net cash provided by (used in) financing activities................... (35,653) (20,779) 2,180
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... (17,701) 22,127 1,445
Cash and cash equivalents at beginning of year................................ 23,776 1,649 204
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 6,075 $ 23,776 $ 1,649
---------- ---------- ----------
---------- ---------- ----------
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The following table presents the notional amount and fair value of
interest-rate risk-management instruments at December 31, 1997 and 1996:
1997 1996
------------------------ ------------------------
NOTIONAL FAIR NOTIONAL FAIR
DOLLARS IN MILLIONS AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------ ----------- ----- ----------- -----
Receive-fixed/pay variable.................................................... $ 425.0 $ 1.7 $ 325.0 $ (.4)
Interest-rate swap agreements involve the exchange of fixed- and
variable-rate interest payments based upon a notional principal amount and
maturity date. The Company's interest-rate risk-management instruments had an
exposure to credit risk of $1.8 million and $.4 million at December 31, 1997 and
1996, respectively. The credit exposure represents the cost to replace, on a
present value basis and at current market rates, all profitable contracts
outstanding at year end. The Company's swaps agreements require the deposit of
collateral to mitigate the amount of credit risk if certain thresholds are
exceeded. No amounts were required to be deposited by the Company or its
counterparties as of December 31, 1997.
A-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The periodic net settlement of interest-rate risk-management instruments is
recorded as an adjustment to net interest income. These interest-rate
risk-management instruments generated $.8 million and $.3 million in net
interest income in 1997 and 1996, respectively, and had no effect on net
interest income in 1995.
A-56