Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


 

FORM 10–Q

 

(Mark One)

 

ý  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004

 

or

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                

 

Commission File Number 1-10521

 


 

CITY NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2568550

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

City National Center
400 North Roxbury Drive, Beverly Hills, California    90210

(Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code    (310) 888–6000

 

Indicate  by  check  mark  whether  the  registrant (1) has filed  all  reports required  to  be  filed  by  Section  13 or 15  (d) of the Securities Exchange Act of  1934  during  the  preceding 12 months  (or for such shorter period that   the   registrant  was   required  to   file   such  reports),  and  (2)  has been  subject  to  such  filing  requirements  for  the  past  90  days.

 

YES

ý

 

NO

o

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

YES

ý

 

NO

o

 

 

Number of shares of common stock outstanding at April 30, 2004:  48,729,779

 

 



 

PART 1 - FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

 

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

Dollars in thousands, except per share amounts

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

472,541

 

$

461,443

 

$

448,152

 

Federal funds sold

 

519,000

 

240,000

 

615,000

 

Due from banks - interest bearing .

 

34,570

 

405,747

 

22,975

 

Securities available-for-sale - cost $3,563,508; $3,350,632 and $2,478,311 at March 31, 2004, December 31, 2003 and March 31, 2003, respectively

 

3,612,173

 

3,365,654

 

2,531,809

 

Trading account securities

 

39,549

 

91,535

 

53,288

 

Loans

 

7,967,639

 

7,882,742

 

7,832,823

 

Less allowance for credit losses

 

165,072

 

165,986

 

169,480

 

Net loans

 

7,802,567

 

7,716,756

 

7,663,343

 

Premises and equipment, net

 

60,175

 

62,719

 

62,630

 

Deferred tax asset

 

60,049

 

65,913

 

43,602

 

Goodwill

 

253,737

 

253,824

 

230,084

 

Intangibles

 

46,120

 

47,879

 

25,032

 

Bank owned life insurance

 

63,510

 

62,799

 

60,682

 

Affordable housing investments

 

65,831

 

66,480

 

67,326

 

Other assets

 

186,085

 

171,785

 

181,663

 

Customers’ acceptance liability

 

4,617

 

5,708

 

6,886

 

Total assets

 

$

13,220,524

 

$

13,018,242

 

$

12,012,472

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Demand deposits

 

$

5,525,627

 

$

5,486,668

 

$

4,625,439

 

Interest checking deposits

 

833,003

 

840,659

 

660,448

 

Money market deposits

 

3,535,809

 

3,260,959

 

3,101,656

 

Savings deposits

 

196,153

 

208,701

 

206,724

 

Time deposits-under $100,000

 

195,053

 

199,875

 

213,492

 

Time deposits-$100,000 and over

 

849,032

 

940,201

 

1,056,087

 

Total deposits

 

11,134,677

 

10,937,063

 

9,863,846

 

Federal funds purchased and securities sold under repurchase agreements

 

88,063

 

111,713

 

156,002

 

Other short-term borrowings

 

50,125

 

65,135

 

140,125

 

Subordinated debt

 

300,758

 

295,723

 

302,573

 

Long-term debt

 

239,804

 

230,555

 

274,001

 

Other liabilities

 

135,370

 

127,045

 

120,838

 

Acceptances outstanding

 

4,617

 

5,708

 

6,886

 

Total liabilities

 

11,953,414

 

11,772,942

 

10,864,271

 

Minority interest in consolidated subsidiaries

 

27,180

 

26,044

 

26,512

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Preferred Stock authorized - 5,000,000 : none outstanding

 

 

 

 

Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,583,124; 50,459,716 and 50,282,743 shares at March 31, 2004, December 31, 2003 and March 31, 2003, respectively

 

50,583

 

50,460

 

50,283

 

Additional paid-in capital

 

409,235

 

401,233

 

399,551

 

Accumulated other comprehensive income

 

32,237

 

12,903

 

37,631

 

Retained earnings

 

849,859

 

814,591

 

708,849

 

Deferred equity compensation

 

(14,343

)

(6,699

)

 

Treasury shares, at cost -  1,754,657; 1,255,569;  and 1,694,129 shares at March 31, 2004, December 31, 2003 and March 31, 2003, respectively

 

(87,641

)

(53,232

)

(74,625

)

Total shareholders’ equity

 

1,239,930

 

1,219,256

 

1,121,689

 

Total liabilities and shareholders’ equity

 

$

13,220,524

 

$

13,018,242

 

$

12,012,472

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

2



 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the three months ended
March 31,

 

In thousands, except per share amounts

 

2004

 

2003

 

Interest  Income

 

 

 

 

 

Loans

 

$

105,986

 

$

115,736

 

Securities available-for-sale

 

37,201

 

29,431

 

Federal funds sold and securities purchased under resale agreements

 

432

 

411

 

Due from bank - interest bearing

 

140

 

49

 

Trading account

 

38

 

49

 

Total interest income

 

143,797

 

145,676

 

Interest  Expense

 

 

 

 

 

Deposits

 

9,752

 

13,474

 

Subordinated debt

 

1,217

 

1,414

 

Other long-term debt

 

1,439

 

1,352

 

Federal funds purchased and securities sold under repurchase agreements

 

244

 

625

 

Other short-term borrowings

 

173

 

594

 

Total interest expense

 

12,825

 

17,459

 

Net interest income

 

130,972

 

128,217

 

Provision for credit losses

 

 

17,500

 

Net interest income after provision for credit losses

 

130,972

 

110,717

 

Noninterest  Income

 

 

 

 

 

Trust and investment fees

 

15,588

 

6,538

 

Brokerage and mutual fund fees

 

8,726

 

8,942

 

Cash management and deposit transaction charges

 

10,826

 

10,917

 

International services

 

5,126

 

4,328

 

Bank owned life insurance

 

831

 

714

 

Gain on sale of loans and assets

 

 

102

 

Gain on sale of securities

 

629

 

1,230

 

Other

 

4,844

 

6,205

 

Total noninterest income

 

46,570

 

38,976

 

Noninterest  Expense

 

 

 

 

 

Salaries and employee benefits

 

59,676

 

51,805

 

Net occupancy of premises

 

7,308

 

6,969

 

Professional fees

 

6,106

 

6,436

 

Information services

 

4,522

 

4,253

 

Depreciation

 

3,228

 

3,119

 

Marketing and advertising

 

3,507

 

3,112

 

Office services

 

2,419

 

2,570

 

Amortization of intangibles

 

1,759

 

1,976

 

Equipment

 

765

 

666

 

Other operating

 

5,241

 

4,506

 

Total noninterest expense

 

94,531

 

85,412

 

Minority interest in net income of consolidated subsidiaries

 

1,600

 

475

 

Income before income taxes

 

81,411

 

63,806

 

Income taxes

 

30,513

 

20,151

 

Net income

 

50,898

 

43,655

 

Other comprehensive income (loss)

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale

 

31,091

 

(2,848

)

Unrealized gain on cash flow hedges

 

2,891

 

528

 

Less reclassification adjustment for gain included in net income

 

613

 

2,455

 

Income taxes (benefit)

 

14,035

 

(2,006

)

Other comprehensive income (loss)

 

19,334

 

(2,769

)

Comprehensive income

 

$

70,232

 

$

40,886

 

Net income per share, basic

 

$

1.04

 

$

0.89

 

Net income per share, diluted

 

$

1.00

 

$

0.87

 

Shares used to compute income per share, basic

 

48,732

 

48,779

 

Shares used to compute income per share, diluted

 

50,679

 

50,124

 

Dividends per share

 

$

0.320

 

$

0.205

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

3



 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

For the three months ended
March 31,

 

Dollars in thousands

 

2004

 

2003

 

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

50,898

 

$

43,655

 

Adjustments to net income:

 

 

 

 

 

Provision for credit losses

 

 

17,500

 

Amortization of restricted stock awards

 

508

 

 

Amortization of intangibles

 

1,759

 

1,976

 

Depreciation

 

3,228

 

3,119

 

Deferred income tax benefit

 

(8,171

)

(5,018

)

Gain on sales of loans and assets

 

 

(102

)

Gain on sales of securities

 

(629

)

(1,230

)

Net decrease (increase) in other assets

 

6,800

 

(43,047

)

Net decrease in trading securities

 

51,986

 

118,923

 

Other, net

 

6,306

 

52,845

 

Net cash provided by operating activities

 

112,685

 

188,621

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of securities

 

(455,043

)

(714,151

)

Sales of securities available-or-ale

 

46,799

 

49,475

 

Maturities and paydowns of securities

 

193,811

 

354,823

 

Loan principal collections (originations), net

 

(84,897

)

151,765

 

Purchase of premises and equipment

 

(1,649

)

(5,449

)

Other, net

 

 

(1

)

Net cash used by investing activities

 

(300,979

)

(163,538

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Net increase in deposits

 

197,614

 

24,148

 

Net decrease in federal funds purchased and securities sold under repurchase agreements

 

(23,650

)

(110,725

)

Net decrease in short-term borrowings, net of transfers from long-term debt

 

(15,010

)

 

Repayment of long-term debt

 

 

(1,367

)

Net proceeds of issuance of senior debt

 

 

221,749

 

Proceeds from exercise of stock options

 

7,273

 

2,808

 

Stock repurchases

 

(43,382

)

(22,841

)

Cash dividends paid

 

(15,630

)

(10,001

)

Net cash provided by financing activities

 

107,215

 

103,771

 

 

 

 

 

 

 

Net  (decrease) increase in cash and cash equivalents

 

(81,079

)

128,854

 

Cash and cash equivalents at beginning of year

 

1,107,190

 

957,273

 

Cash and cash equivalents at end of period

 

$

1,026,111

 

$

1,086,127

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

20,170

 

$

20,919

 

Income taxes

 

 

6,000

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Transfer from loans to foreclosed assets

 

$

 

$

 

Transfer from long-term debt to short-term borrowings

 

 

15,000

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

4



 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

For the three months ended
March 31,

 

Dollars in thousands

 

2004

 

2003

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Balance, beginning of period

 

$

50,460

 

$

50,283

 

Restricted stock and units issued

 

123

 

 

Balance, end of period

 

50,583

 

50,283

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

Balance, beginning of period

 

401,233

 

400,866

 

Tax benefit from stock options

 

1,673

 

878

 

Stock options exercised

 

(1,700

)

(2,193

)

Restricted stock and units issued

 

8,029

 

 

Balance, end of period

 

409,235

 

399,551

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

Balance, beginning of period 

 

12,903

 

40,400

 

Other comprehensive income (loss) net of income taxes

 

19,334

 

(2,769

)

Balance, end of period

 

32,237

 

37,631

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance, beginning of period

 

814,591

 

675,195

 

Net income

 

50,898

 

43,655

 

Dividends paid

 

(15,630

)

(10,001

)

Balance, end of period

 

849,859

 

708,849

 

 

 

 

 

 

 

Deferred equity compensation

 

 

 

 

 

Balance, beginning of period

 

(6,699

)

 

Restricted stock and units issued

 

(8,152

)

 

Amortization of restricted stock awards

 

508

 

 

 

Balance, end of period

 

(14,343

)

 

 

 

 

 

 

 

Treasury shares

 

 

 

 

 

Balance, beginning of period 

 

(53,232

)

(56,785

)

Purchase of shares

 

(43,382

)

(22,841

)

Issuance of shares for stock options

 

8,973

 

5,001

 

Balance, end of period

 

(87,641

)

(74,625

)

 

 

 

 

 

 

Total shareholders’ equity

 

$

1,239,930

 

$

1,121,689

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

5



 

CITY NATIONAL CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.               City National Corporation (the “Corporation”) is the holding company for City National Bank (the “Bank”).  In light of the fact that the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank together.

 

2.               The results of operations reflect the interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.  The results for the 2004 interim period are not necessarily indicative of the results expected for the full year.

 

3.               Trading account securities are stated at market value.  Investments not classified as trading securities are classified as securities available-for-sale and recorded at fair value.  Unrealized holding gains or losses for securities available-for-sale, net of taxes are excluded from net income and are reported as other comprehensive income included as a separate component of shareholders’ equity.

 

4.               Certain prior periods’ data have been reclassified to conform to current period presentation.

 

5.               Reserves established as a purchase price adjustment for the February 29, 2000 acquisition of The Pacific Bank N.A. of $0.7 million for exit costs relating to surplus space remain as of March 31, 2004.  Reserves established as a purchase price adjustment for the February 28, 2002 acquisition of Civic BanCorp of $0.2 million for exit costs relating to surplus space remain as of March 31, 2004.

 

6.               The following table provides information about purchases by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

 

Period

 

Total Number
of Shares (or
Units)
Purchased

 

Average Price
Paid per Share
(or Unit)

 

Total number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs

 

01/01/04 - 01/31/04

 

420,900

 

$

58.77

 

420,900

 

329,000

 

02/01/04 - 02/29/04

 

187,300

 

60.00

 

187,300

 

141,700

 

03/01/04 - 03/31/04

 

124,800

 

59.36

 

124,800

 

1,016,900

(2)

 

 

733,000

(1)

59.18

 

733,000

 

1,016,900

 


 

 

 

 

 

 

 

(1)          We repurchased an aggregate of 733,000 shares of our common stock pursuant to repurchase programs that we publicly announced on January 22, 2003 and July 15, 2003 (the “Programs”).

 

 

(2)   Our board of directors, on March 24, 2004, approved the repurchase by us of up to an aggregate of  1 million shares of our common stock pursuant to a new program  to follow completion of the Programs described in (1) above.  Unless terminated earlier by resolution of our board of directors, the Programs will expire when we have repurchased all shares authorized for repurchase thereunder.

 

 

Basic earnings per share is based on the weighted average shares of common stock outstanding less unvested restricted shares and units.  Diluted earnings per share gives effect to all dilutive potential common shares which consists of stock options and restricted shares and units that were outstanding during the period.  At March 31, 2004, 481,758 stock options were antidilutive compared with 689,051 antidilutive stock options at March 31, 2003.

 

7.               The Company applies APB Opinion No. 25 in accounting for stock option plans and, accordingly, no compensation cost has been recognized for its plans in the financial statements.  As a practice, the Corporation’s stock option grants are such that the exercise price equals the current market price of the common stock.  Had the

 

6



 

Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 using the Black Scholes option-pricing model, the Company’s proforma net income would have been reduced to the proforma amounts indicated below:

 

 

 

For the three months ended
March 31,

 

Dollars in thousands, except for per share amounts

 

2004

 

2003

 

Net income, as reported

 

$

50,898

 

$

43,655

 

Proforma net income

 

50,175

 

42,188

 

Net income per share, basic, as reported

 

1.04

 

0.89

 

Proforma net income per share, basic

 

1.03

 

0.86

 

Net income per share, diluted, as reported

 

1.00

 

0.87

 

Proforma net income per share, diluted

 

0.99

 

0.84

 

Percentage reduction in net income per share, diluted

 

1.00

%

3.45

%

 

During the latter part of the second quarter of 2003, stock-based compensation performance awards for 2002 were granted to colleagues of the Company.  These performance awards for the first time included restricted stock grants with fewer stock options, which reduced the total number of shares awarded but better aligned the interests of shareholders and colleagues.  The number of shares awarded was further reduced in 2004 for stock-based compensation performance awards for 2003 when the Company took into consideration changes in the value of the Company’s stock price when determining share awards.  The 2004 percentage reduction in net income per share, diluted is lower because a fewer number of stock options have been awarded with a portion replaced by restricted stock awards, the cost of which is charged to noninterest expense.  The Company recorded $508,000 in expense for restricted stock awards in the first quarter of 2004.  There was no expense for restricted stock awards in the first quarter of 2003 since the first grant was not until June 2003. 

 

The Black Scholes option-pricing model requires assumptions on expected life of the options that is based upon the pattern of exercise of options granted by the Corporation in the past; volatility based on changes in the price of the Corporation’s common stock during the past 10 years, measured monthly; dividend yield and risk-free investment rate.  Actual dividend payments will depend upon a number of factors, including future financial results, and may differ substantially from the assumption.  The risk-free investment rate is based on the yield on 10-year U.S. Treasury Notes on the grant date.

 

The actual value, if any, which a grantee may realize will depend upon the difference between the option exercise price and the market price of the Corporation’s common stock on the date of exercise.

 

8.               On April 1, 2003, the Corporation acquired Convergent Capital Management LLC, a privately held Chicago-based company, and substantially all of its asset management holdings, including its majority ownership interests in eight asset management firms and minority interests in two additional firms.  Combined, these 10 firms manage assets of approximately $9.4 billion as of March 31, 2004.  The purchase price was $49.0 million, comprised of cash and the assumption of approximately $7.5 million of debt.  The acquisition resulted in $25.8 million in customer contract intangibles, which are being amortized over 20 years, and $21.5 million in goodwill.

 

9.     As previously reported, the California Franchise Tax Board (the “FTB”) announced that it is taking the position that certain tax deductions related to real estate investment trusts (“REITs”) and regulated investment companies (“RICs”) will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003.  The Company created its REITs (one of which was previously formed as a RIC in 2000) to raise capital for the Bank.  While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the statutory Voluntary Compliance Initiative (“VCI”)  requiring payment of all California taxes and interest on these disputed 2000 through 2002 tax benefits, and permitting the Company to claim a refund for these years while avoiding certain potential penalties should the FTB choose to litigate the Company’s position on the appropriate tax treatment of REITs and RICs.

 

On April 15, 2004, the Company made payment of taxes and interest to the FTB of $66.2 million for tax years 2000, 2001, and 2002.  We continue to believe that the tax deductions are appropriate and, as such, we have also filed refund claims for the amounts paid with the amended returns.  The refund claims for these years will be  reflected as assets in the Company’s consolidated financial statements.  As a result of these actions the Company retains  potential exposure for assertion of an accuracy-rated penalty should the FTB prevail in its position, in addition to the risk of not being successful in our refund claim for taxes and interest.  Management believes potential exposure to all other penalties has been eliminated.  On advice of our advisors, management intends to aggressively pursue its claims for refund for the 2000 through 2003 tax years.

 

7



 

CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

(Unaudited)

 

 

 

At or for the three months ended

 

Percentage change
March 31, 2004 from

 

Dollars in thousands, except per share amount

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

December 31,
2003

 

March 31,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Quarter

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

50,898

 

$

44,438

 

$

43,655

 

15

%

17

%

Net income per common share, basic

 

1.04

 

0.91

 

0.89

 

14

 

17

 

Net income per common share, diluted

 

1.00

 

0.87

 

0.87

 

15

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

At Quarter End

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

13,220,524

 

$

13,018,242

 

$

12,012,472

 

2

 

10

 

Deposits

 

11,134,677

 

10,937,063

 

9,863,846

 

2

 

13

 

Loans

 

7,967,639

 

7,882,742

 

7,832,823

 

1

 

2

 

Securities

 

3,612,173

 

3,365,654

 

2,531,809

 

7

 

43

 

Shareholders’ equity

 

1,239,930

 

1,219,256

 

1,121,689

 

2

 

11

 

Book value per share

 

25.54

 

24.85

 

23.09

 

3

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

12,606,754

 

$

12,756,557

 

$

11,480,626

 

(1

)

10

 

Deposits

 

10,533,471

 

10,693,959

 

9,373,839

 

(2

)

12

 

Loans

 

7,886,333

 

7,605,417

 

7,964,338

 

4

 

(1

)

Securities

 

3,462,547

 

3,424,291

 

2,414,970

 

1

 

43

 

Shareholders’ equity

 

1,222,017

 

1,200,390

 

1,117,573

 

2

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

1.62

%

1.38

%

1.54

%

17

 

5

 

Return on average shareholders’ equity

 

16.75

 

14.69

 

15.84

 

14

 

6

 

Corporation’s tier 1 leverage

 

7.61

 

7.48

 

7.65

 

2

 

(1

)

Corporation’s tier 1 risk-based capital

 

10.67

 

10.81

 

10.30

 

(1

)

4

 

Corporation’s total risk-based capital

 

14.43

 

14.86

 

14.46

 

(3

)

(0

)

Dividend payout ratio, per share

 

30.71

 

30.94

 

22.91

 

(1

)

34

 

Net interest margin

 

4.66

 

4.52

 

5.07

 

3

 

(8

)

Efficiency ratio *

 

53.39

 

52.77

 

50.28

 

1

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

0.54

%

0.54

%

1.27

%

0

 

(57

)

Nonaccrual loans and ORE to toal loans and ORE

 

0.54

 

0.54

 

1.28

 

0

 

(58

)

Allowance for credit losses  to total loans

 

2.07

 

2.11

 

2.16

 

(2

)

(4

)

Allowance for credit losses to nonaccrual loans

 

386.29

 

392.65

 

169.93

 

(2

)

127

 

Net charge-offs to average loans - annualized

 

(0.05

)

(0.01

)

(0.64

)

400

 

(92

)

 


*                 The efficiency ratio is defined as noninterest expense excluding ORE expense divided by total revenue (net interest income on a tax-equivalent basis and noninterest income).

 

8



 

ITEM 2.                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” below relating to “forward-looking” statements included in this report.

 

 

RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  The Company has identified four policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.  These policies relate to the accounting for securities, the allowance for credit losses, derivatives and hedging activities and stock-based performance plans.  The Company, in consultation with the Audit Committee, has reviewed and approved these critical accounting policies, which are further described in Management’s Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements in the Company’s 2003 Form 10-K.  There have been no material changes to the Company’s accounting policies since the last reporting period.

 

 Overview

 

The Corporation recorded net income of $50.9 million, or $1.00 per common share, for the first quarter of 2004, compared with net income of $43.7 million, or $0.87 per share, for the first quarter of 2003.

 

 

Highlights

 

                  Average deposits were up 12 percent and average core deposits were up 16 percent from the same period a year ago.  

 

                  Average loans came to nearly $7.9 billion for the first quarter of 2004, $280.9 million higher than the fourth quarter 2003 total of $7.6 billion.  Period-end loan balances at March 31, 2004 of $8.0 billion increased $84.9 million from $7.9 billion at December 31, 2003.

 

                  No provision for credit losses was recorded for the first quarter of 2004, a result of continued strong credit quality and an appropriate allowance for credit losses.  Net loan charge-offs were $0.9 million for the quarter.  Nonaccrual loans were $42.7 million, down 57 percent from March 31, 2003, and up 1 percent from December 31, 2003.

 

                  Average securities for the first quarter of 2004 were up 43 percent from the prior-year quarter due to higher deposit balances, and were up 1 percent from the fourth quarter of 2003.  The average duration of the total available-for-sale securities portfolio at March 31, 2004 was 3.1 years.

 

                  First-quarter noninterest income rose 19 percent over the same period a year ago.  Assets under management and administration surpassed $30 billion for the first time.  First-quarter 2004 results include the operations of Convergent Capital Management LLC (“CCM”) while first-quarter 2003 results do not include any CCM results since the acquisition was not completed until April 1, 2003.

 

9



 

 

Dollars in millions,
except per share

 

For the three months ended
March 31,

 

%
Change

 

For the three
months ended
December 31, 2003

 

2004

 

2003

Earnings Per Share

 

$

1.00

 

$

0.87

 

15

 

$

0.87

 

Net Income

 

50.9

 

43.7

 

17

 

44.4

 

Average Assets

 

12,606.8

 

11,480.6

 

10

 

12,756.6

 

Return on Average Assets

 

1.62

%

1.54

%

5

 

1.38

%

Return on Average Equity

 

16.75

 

15.84

 

6

 

14.69

 

 

As previously disclosed, in 2004 the Company is continuing its practice, adopted in the fourth quarter of 2003, of not recognizing tax benefits associated with its real estate investment trusts (“REITS”) in its financial statements.  First-quarter 2003 results included $2.8 million in net income, or $0.06 per share, from tax benefits of the Company’s two REITS.  Fourth-quarter 2003 results included a net charge of $8.1 million, or $0.16 per share, from the reversal of the REIT tax benefits recognized in the first three quarters of 2003.

 

Return on average assets and the return on average shareholders’ equity for the first quarter of 2004 increased from the same period a year ago due to higher net income.

 

Outlook

 

Consistent with its April 14, 2004 first-quarter earnings release, management continues to expect net income per diluted common share for 2004 to be approximately 7 to 9 percent higher than net income per diluted common share for 2003, based on current economic conditions and the business indicators below:

 

 

Average loan growth

 

6 to 9 percent

 

Average deposit growth

 

6 to 9 percent

 

Net interest margin

 

4.50 to 4.70 percent

 

Provision for credit losses

 

$10 million to $20 million

 

Noninterest income growth

 

6 to 8 percent

 

Noninterest expense growth

 

8 to 10 percent

 

Effective tax rate

 

36 to 38 percent

 

The Company considers that it is premature to modify its net income per share guidance in light of modest commercial loan demand to date.  Our outlook for 2004 is still built on the assumption that short-term interest rates will stay where they are until later this year.  An increase in interest rates sooner will increase net interest income since the Company is naturally asset-sensitive.

 

Revenues

 

First-quarter revenues (net interest income plus noninterest income) increased 6 percent to $177.5 million, compared with $167.2 million for the same period in 2003 due to higher net interest income, and noninterest income from the acquisition of CCM.  Revenues were down 1 percent from the fourth quarter of 2003 due to the absence of participating mortgage loan (“PML”) fees in the first quarter of 2004.  (These are fees earned upon completion of certain real estate construction projects and repayment of debt where the Company participates in the profits of the project by funding a portion of the equity requirement for the project.)

 

Net Interest Income

 

Fully taxable-equivalent net interest income for the first quarter of 2004 was $134.3 million, compared with $131.9 million for the first quarter of 2003 and $134.0 for the fourth quarter of 2003.

 

10



 

Dollars in millions

 

For the three months ended
March 31,

 

%
Change

 

For the three
months ended
December 31, 2003

 

2004

 

2003

Average Loans

 

$

7,886.3

 

$

7,964.3

 

(1

)

$

7,605.4

 

Average Securities

 

3,462.5

 

2,415.0

 

43

 

3,424.3

 

Average Deposits

 

10,533.5

 

9,373.8

 

12

 

10,694.0

 

Average Core Deposits

 

9,621.2

 

8,326.5

 

16

 

9,737.3

 

Fully Taxable-Equivalent Net Interest Income

 

134.3

 

131.9

 

2

 

134.0

 

Net Interest Margin

 

4.66

%

5.07

%

(8

)

4.52

%

 

Average loans for the first quarter of 2004 were slightly lower than they were in the first quarter of 2003, but increased 4 percent from the fourth quarter of 2003.  Compared with the prior-year first-quarter averages, residential first mortgage loans rose 11 percent; real estate mortgage loans rose 5 percent; real estate construction loans rose 2 percent; and commercial loans decreased 11 percent.  Compared with the fourth quarter of 2003, average loans increased in all categories except installment loans.

 

Period-end March 31, 2004 loans increased $84.9 million from December 31, 2003, reflecting growth in residential first mortgage, real estate mortgage, and real estate construction loans.

 

Average securities increased 43 percent for the first quarter of 2004 compared with the same period for 2003 primarily due to higher deposit balances.  Average securities were slightly higher than the fourth quarter of 2003.  As of March 31, 2004, unrealized gains on securities available-for-sale were $48.7 million.  The average duration of total available-for-sale securities at March 31, 2004 was 3.1 years compared with 3.4 years at December 31, 2003 and 2.3 years at March 31, 2003.

 

Average deposits during the first quarter of 2004 increased 12 percent over the same period last year and were down 2 percent from the fourth quarter of 2003, the latter change reflecting historical seasonal trends.  Average core deposits represented 91 percent, 89 percent, and 91 percent of the total average deposit base for the first quarters of 2004 and 2003, and the fourth quarter of 2003, respectively.  New clients and higher client balances maintained as deposits to pay for services contributed to the year-over-year growth of deposits.  

 

The net interest margin was slightly higher than the fourth quarter of 2003 due to higher yielding interest-earning assets.

 

As part of the Company’s long-standing asset/liability management strategy, its “plain vanilla” interest rate swaps hedging loans, deposits and borrowings, with a notional value of  $1.1 billion, added $8.3 million to net interest income in the first quarter of 2004, compared with $7.5 million in the first quarter of 2003 and $8.3 million in the fourth quarter of 2003.  These amounts included $6.0 million, $4.5 million, and $6.1 million, respectively, for interest rate swaps qualifying as fair value hedges.  Income from swaps qualifying as cash-flow hedges was $2.3 million for the first quarter of 2004, compared with $3.0 million for the first quarter of 2003, and $2.2 million for the fourth quarter of 2003.  Income from existing swaps qualifying as cash-flow hedges of loans expected to be recorded in net interest income within the next 12 months is $6.5 million.

 

Interest recovered on nonaccrual and charged-off loans included in net interest income for the first quarter of 2004 was $0.7 million, compared with $0.6 million for the first quarter of 2003, and $0.3 million for the fourth quarter of 2003.

 

The Bank’s prime rate was 4.00 percent as of March 31, 2004, compared with 4.25 percent a year earlier.

 

The following table presents the components of net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2004 and 2003.  To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

 

11



 

Net Interest Income Summary

 

 

 

For the three months ended
March 31, 2004

 

For the three months ended
March 31, 2003

 

Dollars in thousands

 

Average
Balance

 

Interest
income/
expense (2)

 

Average
interest
rate

 

Average
Balance

 

Interest
income/
expense (2)

 

Average
interest
rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,172,149

 

$

40,142

 

5.09

%

$

3,560,411

 

$

47,190

 

5.38

 

Real estate mortgages

 

2,001,733

 

30,214

 

6.07

 

1,908,554

 

31,652

 

6.73

 

Residential first mortgages

 

1,952,305

 

26,801

 

5.52

 

1,756,838

 

28,164

 

6.50

 

Real estate construction

 

678,479

 

8,571

 

5.08

 

663,956

 

8,840

 

5.40

 

Installment

 

81,667

 

1,432

 

7.05

 

74,579

 

1,500

 

8.16

 

Total loans (1)

 

7,886,333

 

107,160

 

5.47

 

7,964,338

 

117,346

 

5.98

 

Due from banks - interest bearing

 

78,348

 

140

 

0.72

 

26,826

 

49

 

0.74

 

Securities available-for-sale

 

3,432,391

 

39,390

 

4.62

 

2,385,584

 

31,460

 

5.35

 

Federal funds sold and securities purchased under resale agreements

 

174,649

 

432

 

0.99

 

132,989

 

411

 

1.25

 

Trading account securities

 

30,156

 

39

 

0.52

 

29,386

 

52

 

0.72

 

Total interest-earning assets

 

11,601,877

 

147,161

 

5.10

 

10,539,123

 

149,318

 

5.75

 

Allowance for credit losses

 

(166,660

)

 

 

 

 

(169,424

)

 

 

 

 

Cash and due from banks

 

447,220

 

 

 

 

 

441,078

 

 

 

 

 

Other nonearning assets

 

724,317

 

 

 

 

 

669,849

 

 

 

 

 

Total assets

 

$

12,606,754

 

 

 

 

 

$

11,480,626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking accounts

 

$

802,578

 

166

 

0.08

 

$

674,809

 

337

 

0.20

 

Money market accounts

 

3,421,000

 

5,819

 

0.68

 

2,988,825

 

7,573

 

1.03

 

Savings deposits

 

204,741

 

133

 

0.26

 

198,295

 

262

 

0.54

 

Time deposits - under $100,000

 

197,660

 

711

 

1.45

 

215,691

 

1,010

 

1.90

 

Time deposits - $100,000 and over

 

912,315

 

2,923

 

1.29

 

1,047,354

 

4,292

 

1.66

 

Total interest - bearing deposits

 

5,538,294

 

9,752

 

0.71

 

5,124,974

 

13,474

 

1.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under repurchase agreements

 

111,763

 

244

 

0.88

 

219,518

 

625

 

1.15

 

Other borrowings

 

578,988

 

2,829

 

1.97

 

615,443

 

3,360

 

2.21

 

Total interest - bearing liabilities

 

6,229,045

 

12,825

 

0.83

 

5,959,935

 

17,459

 

1.19

 

Noninterest - bearing deposits

 

4,995,177

 

 

 

 

 

4,248,865

 

 

 

 

 

Other liabilities

 

160,515

 

 

 

 

 

154,253

 

 

 

 

 

Shareholders’ equity

 

1,222,017

 

 

 

 

 

1,117,573

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

12,606,754

 

 

 

 

 

$

11,480,626

 

 

 

 

 

Net interest spread

 

 

 

 

 

4.27

%

 

 

 

 

4.56

%

Fully taxable-equivalent net interest income

 

 

 

$

134,336

 

 

 

 

 

$

131,859

 

 

 

Net interest margin

 

 

 

 

 

4.66

%

 

 

 

 

5.07

%

 


(1)           Includes average nonaccrual loans of $41,279 and $83,037 for 2004 and 2003, respectively.

(2)           Loan income includes loan fees of $5,328 and $5,428 for 2004 and 2003, respectively.

 

12



 

Net interest income is impacted by the volume, mix, and rate of interest-earning assets and interest-bearing liabilities.  The following table shows changes in net interest income on a fully taxable-equivalent basis between the first quarter of 2004 and the first quarter of 2003, as well as between the first quarter of 2003 and the first quarter of 2002.

 

Changes In Net Interest Income

 

Dollars in thousands

 

For the three months ended March 31,
2004 vs 2003

 

For the three months ended March 31,
2003 vs 2002

 

 

 

Increase (decrease)
due to

 

Net
increase

 

Increase (decrease)
due to

 

Net
increase

 

 

 

Volume

 

Rate

 

(decrease)

 

Volume

 

Rate

 

(decrease)

 

Interest earned on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(1,057

)

$

(9,129

)

$

(10,186

)

$

7,823

 

$

(12,663

)

$

(4,840

)

Due from banks - interest bearing

 

92

 

(1

)

91

 

6

 

(35

)

(29

)

Securities available-for-sale

 

12,625

 

(4,695

)

7,930

 

7,323

 

(5,017

)

2,306

 

Federal funds sold and securities purchased under resale agreements

 

115

 

(94

)

21

 

13

 

(109

)

(96

)

Trading account securities

 

1

 

(14

)

(13

)

(21

)

(57

)

(78

)

Total interest-earning assets

 

11,776

 

(13,933

)

(2,157

)

15,144

 

(17,881

)

(2,737

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking deposits

 

56

 

(227

)

(171

)

61

 

(77

)

(16

)

Money market deposits

 

1,022

 

(2,776

)

(1,754

)

2,551

 

(2,725

)

(174

)

Savings deposits

 

9

 

(138

)

(129

)

(116

)

(349

)

(465

)

Other time deposits

 

(590

)

(1,078

)

(1,668

)

(1,713

)

(3,101

)

(4,814

)

Other borrowings

 

(632

)

(280

)

(912

)

(2,638

)

(1,097

)

(3,735

)

Total interest-bearing liabilities

 

(135

)

(4,499

)

(4,634

)

(1,855

)

(7,349

)

(9,204

)

 

 

$

11,911

 

$

(9,434

)

$

2,477

 

$

16,999

 

$

(10,532

)

$

6,467

 

 

The impact of interest rate swaps, which increases loan interest income and reduces deposit and borrowing interest expense, is included in rate changes.

 

Provision for Credit Losses

 

The Company made no provision for credit losses in the first quarter of 2004.  This was attributable to the continued strong credit quality of its portfolio; a low level of net charged-off and nonaccrual loans; management’s ongoing assessment of the credit quality of the portfolio, modest loan growth and an improving economic environment.  Management believes the allowance for credit losses is adequate to cover risks in the portfolio at March 31, 2004.  See “¾ Allowance for Credit Losses.”

 

Noninterest Income

 

In the first quarter of 2004, noninterest income increased to $46.6 million, up 19 percent from $39.0 million in the first quarter of 2003.  This growth was mainly attributable to the CCM acquisition which was completed on April 1, 2003.  Noninterest income was 3 percent lower than the fourth quarter of 2003 due to the absence of PML fees in the first quarter of 2004.  This more than offset an increase in trust and investment fees.

 

As a percentage of total revenues, noninterest income was 26 percent for the first quarter of 2004 compared with 23 percent and 27 percent for the first quarter of 2003 and the fourth quarter of 2003, respectively.

 

13



 

Wealth Management  

 

Dollars in millions

 

At or for the
three months ended
March 31,

 

%
Change

 

At or for the three
months ended
December 31, 2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

Trust and Investment Fees

 

$

15.6

 

$

6.5

 

138

 

$

14.2

 

Brokerage and Mutual Fund Fees

 

8.7

 

8.9

 

(2

)

9.1

 

Assets Under Administration

 

30,532.3

 

19,840.8

 

54

 

28,835.3

 

Assets Under Management (1)(2)

 

14,339.3

 

6,978.0

 

105

 

13,610.8

 

 


(1)          Included above in assets under administration

(2)          Excludes $3,591 million and $2,858 million of assets under management for the CCM minority-owned asset managers as of March 31, 2004 and December 31, 2003, respectively

 

Assets under management at March 31, 2004 increased from the same period last year primarily due to the CCM acquisition.  New business, aided by strong relative investment performance and higher market values, also contributed to the increase during the first quarter of 2004.  The trust and investment fee revenue increase over both the first and fourth quarters of 2003 was driven by higher balances under management or administration.  Increases in market values are reflected in fee income primarily on a trailing-quarter basis.  Brokerage and mutual fund fees are down primarily due to a decline in money-market balances.

 

Other Noninterest Income

 

Cash management and deposit transaction fees for the first quarter of 2004 decreased 1 percent from the first quarter of 2003.  Cash management and deposit transaction fees increased 4 percent from the fourth quarter of 2003 due to the recognition in arrears of annual fees.

 

International services fees for the first quarter of 2004 were up 18 percent over the same period last year primarily due to higher foreign exchange and trade finance income.  These fees were essentially the same compared with the fourth quarter of 2003.

 

Other income in the first quarter of 2004 declined $1.4 million and $2.9 million from the first quarter and fourth quarter of 2003, respectively.  The decline from one year ago was primarily attributable to the absence of $1.2 million of fees received from the sale of certain merchant credit card business and $0.2 million of interest on loans available for sale.  The decline from the fourth quarter last year was due primarily to the absence of $2.6 million in PML fees.

 

The Company realized $0.6 million in gains on the sale of loans, assets and debt repurchase, and gains on the sale of securities for the first quarter of 2004, compared with $1.3 million in gains for the first quarter of 2003 and $0.5 million in gains for the fourth quarter of 2003.

 

Noninterest Expense

 

Noninterest expense was $94.5 million in the first quarter of 2004, up 11 percent from $85.4 million for the first quarter of 2003 and down 1 percent from $95.1 million for the fourth quarter of 2003.  Compared with the first quarter of 2003, expenses grew primarily because of the acquisition of CCM.  In addition, first-quarter 2004 noninterest expense included the cost of restricted stock awards made in the second quarter of 2003 and the first quarter of 2004.  These restricted stock awards continue to replace a portion of the stock option grants that are part of the Company’s equity compensation program.

 

The efficiency ratio for the first quarter of 2004 was 53.39 percent, compared with 50.28 percent for the first quarter of 2003 and 52.77 percent for the fourth quarter of 2003.  The increase in the efficiency ratio over the year ago period is primarily attributable to the acquisition of CCM. 

 

14



 

Minority Interest

 

Minority interest consists of preferred stock dividends on the Bank’s real estate investment trust subsidiaries and the minority ownership share of earnings of the Corporation’s majority owned asset management firms.

 

Income Taxes

 

The first-quarter 2004 effective tax rate was 37.5 percent, compared with 36.6 percent for all of 2003.  The effective tax rate reflects changes in the mix of tax rates applicable to income before tax.  Quarterly comparisons with the first three quarters of 2003 will be impacted by the real estate investment trust (“REIT”) state tax benefits which were added to net income in the first three quarters of 2003 and were reversed in the fourth quarter of 2003.

 

The effective tax rates differ from the applicable statutory federal tax rate due to various factors, including state taxes, tax-exempt income including interest on bank-owned life insurance, and affordable housing investments.

 

The Company’s tax returns are being audited by the Internal Revenue Service back to 1998 and by the Franchise Tax Board of the State of California back to 1996.  From time to time, there may be differences in opinions with respect to the tax treatment accorded transactions.  When, and if, such differences occur and become probable and estimable, such amounts will be recognized.

 

As previously reported, the California Franchise Tax Board (the “FTB”) announced that it is taking the position that certain tax deductions related to real estate investment trusts (“REITs”) and regulated investment companies (“RICs”) will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003.  The Company created its REITs (one of which was previously formed as a RIC in 2000) to raise capital for the Bank.  While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the statutory Voluntary Compliance Initiative (“VCI”)  requiring payment of all California taxes and interest on these disputed 2000 through 2002 tax benefits, and permitting the Company to claim a refund for these years while avoiding certain potential penalties should the FTB choose to litigate the Company’s position on the appropriate tax treatment of REITs and RICs.

 

On April 15, 2004, the Company made payment of taxes and interest to the FTB of $66.2 million for tax years 2000, 2001, and 2002.  We continue to believe that the tax deductions are appropriate and, as such, we have also filed refund claims for the amounts paid with the amended returns.  The refund claims for these years will be  reflected as assets in the Company’s consolidated financial statements.  As a result of these actions the Company retains potential exposure for assertion of an accuracy-rated penalty should the FTB prevail in its position, in addition to the risk of not being successful in our refund claim for taxes and interest.  Management believes potential exposure to all other penalties has been eliminated.  On advice of our advisors, management intends to aggressively pursue its claims for refund for the 2000 through 2003 tax years.

 

BALANCE SHEET ANALYSIS

 

Average assets of $12.6 billion were 10 percent higher than the first quarter of 2003, primarily due to an increase in deposits, which were invested in securities and, to a lesser extent, federal funds sold.  Total assets at March 31, 2004 increased 10 percent to $13.2 billion from $12.0 billion at March 31, 2003 and increased 2 percent from $13.0 billion at December 31, 2003.

 

Total average interest-earning assets for the first quarter of 2004 were $11.6 billion, an increase of 10 percent over the $10.5 billion in total average interest-earning assets for the first quarter of 2003 and were 1 percent lower than the $11.7 billion in average interest-earning assets for the fourth quarter of 2003.

 

Securities

 

Comparative period-end security portfolio balances are presented below:

 

Securities Available-for-Sale

 

 

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

Dollars in thousands

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

U.S. Government and federal agency

 

$

349,978

 

$

354,096

 

$

345,725

 

$

348,468

 

$

287,444

 

$

292,055

 

Mortgage-backed

 

2,758,964

 

2,787,267

 

2,561,976

 

2,561,997

 

1,763,370

 

1,801,838

 

State and Municipal

 

266,329

 

279,075

 

255,355

 

268,041

 

228,619

 

241,479

 

Other

 

 

 

 

 

5,449

 

4,620

 

Total debt securities

 

3,375,271

 

3,420,438

 

3,163,056

 

3,178,506

 

2,284,882

 

2,339,992

 

Marketable equity securities

 

188,237

 

191,735

 

187,576

 

187,148

 

193,429

 

191,817

 

Total securities

 

$

3,563,508

 

$

3,612,173

 

$

3,350,632

 

$

3,365,654

 

$

2,478,311

 

$

2,531,809

 

 

Average securities available-for-sale continued to increase primarily due to strong deposit growth.  At March 31, 2004, securities available-for-sale totaled $3.6 billion, an increase of $1.1 billion compared with holdings at March 31, 2003 and an increase of $0.2 billion from December 31, 2003.  At March 31, 2004 the portfolio had an unrealized net gain of $48.7 million compared with $15.0 million and $53.5 million at December 31, 2003 and March 31, 2003, respectively.  The average duration of total available-for-sale securities at March 31, 2004 was 3.1 years.    The 3.1 duration compares with 3.4 at December 31, 2003 and 2.3 at March 31, 2003.  Duration provides a measure of fair value sensitivity to changes in interest rates.  This is within the investment guidelines set by the Company’s

 

15



 

Asset/Liability Committee and the interest rate risk guidelines set by the Board of Directors.  See “¾ Asset /Liability Management” for a discussion of the Company’s interest rate position. 

 

The following table provides the contractual remaining maturities and yields (taxable-equivalent basis) of debt securities within the securities portfolio as of March 31, 2004.  Contractual maturities of mortgage-backed securities are substantially longer than their expected maturities due to scheduled and unscheduled principal payments.  To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

 

Debt Securities Available-for-Sale

 

 

 

One year
or less

 

Over 1 year
thru 5 years

 

Over 5 years
thru 10 years

 

Over 10 years

 

Total

 

Dollars in thousands

 

Amount

 

Yield
(%)

 

Amount

 

Yield
(%)

 

Amount

 

Yield
(%)

 

Amount

 

Yield
(%)

 

Amount

 

Yield
(%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

 

$

25,933

 

4.07

 

$

327,096

 

3.28

 

$

1,067

 

6.17

 

$

 

 

$

354,096

 

3.35

 

Mortgage—backed

 

171,436

 

4.21

 

 

 

290,061

 

3.99

 

2,325,770

 

4.54

 

2,787,267

 

4.46

 

State and Municipal

 

6,003

 

6.93

 

117,066

 

6.66

 

98,118

 

6.29

 

57,888

 

6.10

 

279,075

 

6.42

 

Total debt securities

 

$

203,372

 

4.27

 

$

444,162

 

4.17

 

$

389,246

 

4.58

 

$

2,383,658

 

4.58

 

$

3,420,438

 

4.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

199,641

 

 

 

$

433,287

 

 

 

$

381,509

 

 

 

$

2,360,834

 

 

 

$

3,375,271

 

 

 

 

Dividend income included in interest income on securities in the Unaudited Consolidated Statement of Income and Comprehensive Income for the first quarter of both 2004 and 2003 was $1.9 million.

 

Loan Portfolio

 

A comparative period-end loan table is presented below:

 

Loans

 

Dollars in thousands

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,163,312

 

$

3,222,444

 

$

3,401,610

 

Real estate mortgages

 

2,004,860

 

2,002,229

 

1,920,209

 

Residential first mortgages

 

1,977,952

 

1,937,979

 

1,762,629

 

Real estate construction

 

741,637

 

637,595

 

676,618

 

Installment

 

79,878

 

82,495

 

71,757

 

Total loans, gross

 

7,967,639

 

7,882,742

 

7,832,823

 

Less allowance for credit losses

 

165,072

 

165,986

 

169,480

 

Total loans, net

 

$

7,802,567

 

$

7,716,756

 

$

7,663,343

 

 

Total loans at March 31, 2004 were 2 percent and 1 percent higher than total loans at March 31, 2003 and December 31, 2003, respectively.  At March 31, 2004, the Company’s loan portfolio included approximately $478.7 million of loans managed in Northern California offices.  In addition, the portfolio included approximately $138.3 million in outstanding dairy loans, an industry which the Company expects to exit over the next 21 months.

 

The following table presents information concerning nonaccrual loans, ORE, and restructured loans.  Bank policy requires that a loan be placed on nonaccrual status if (1) either principal or interest payments are 90 days past due, unless the loan is both well secured and in process of collection, (2) full collection of interest or principal becomes uncertain, regardless of the time period involved or (3) regulators’ ratings of credits suggest that the loan be placed on nonaccrual.

 

16



 

Nonaccrual Loans, ORE and Restructured Loans

 

Dollars in thousands

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

 

 

 

 

 

 

 

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

$

37,457

 

$

37,418

 

$

85,075

 

Real estate

 

4,847

 

4,510

 

14,663

 

Installment

 

429

 

345

 

 

Total

 

42,733

 

42,273

 

99,738

 

ORE

 

 

 

210

 

Total nonaccrual loans and ORE

 

$

42,733

 

$

42,273

 

$

99,948

 

 

 

 

 

 

 

 

 

Total nonaccrual loans as a percentage of total loans

 

0.54

%

0.54

%

1.27

 

Total nonaccrual loans and ORE as a percentage of total loans and ORE

 

0.54

 

0.54

 

1.28

 

Allowance for credit losses to total loans

 

2.07

 

2.11

 

2.16

 

Allowance for credit  losses to nonaccrual loans

 

386.29

 

392.65

 

169.93

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more on accrual status:

 

 

 

 

 

 

 

Commercial

 

$

5,057

 

$

235

 

$

907

 

Real estate

 

 

1,808

 

 

Installment

 

 

 

964

 

Total

 

$

5,057

 

$

2,043

 

$

1,871

 

 

Nonaccrual loans increased slightly this quarter.  Approximately 40 percent of the nonperforming assets were loans to Northern California clients, and 26 percent were 3 dairy credits.  The remaining 34 percent were loans to other borrowers with no major industry concentrations

 

At March 31, 2004, there were $41.9 million of impaired loans included in nonaccrual loans, that had an allowance of $5.9 million allocated to them.  On a comparable basis, at December 31, 2003, there were $40.7 million of impaired loans, which had an allowance of $5.0 million allocated to themThe assessment for impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured.  When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral.  In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows.  As a final alternative, the observable market price of the debt may be used to assess impairment.  Additionally, some impaired loans with commitments of less than $500,000 are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement.

 

If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for credit losses.  The Company’s policy is to record cash receipts on impaired loans first as reductions in principal and then as interest income.

 

17



 

The following table summarizes the changes in nonaccrual loans for the three months ended March 31, 2004 and 2003.

 

Changes in Nonaccrual Loans

 

 

 

For the three months ended
March 31,

 

Dollars in thousands

 

2004

 

2003

 

 

 

 

 

 

 

Balance, beginning of period

 

$

42,273

 

$

71,357

 

Loans placed on nonaccrual

 

17,414

 

52,742

 

Charge-offs

 

(3,595

)

(10,517

)

Loans returned to accrual status

 

(5,975

)

 

Repayments (including interest applied to principal)

 

(7,384

)

(13,844

)

Balance, end of period

 

$

42,733

 

$

99,738

 

 

In addition to loans disclosed above as nonaccrual or restructured, management has also identified $13.0 million of credits to 14 borrowers, including one real estate-secured loan totaling $6.5 million, where the ability to comply with the present loan payment terms in the future is questionable.  However, the inability of the borrower to comply with repayment terms was not sufficiently probable to place the loan on nonaccrual status at March 31, 2004.  This amount was determined based on analysis of information known to management about the borrowers’ financial condition and current economic conditions.

 

Management’s classification of credits as nonaccrual, restructured or problems does not necessarily indicate that the principal is uncollectable in whole or in part.

 

Allowance for Credit Losses

 

The allowance for credit losses at March 31, 2004 totaled $165.1 million, or 2.07 percent of outstanding loans.  This compares with an allowance of $169.5 million, or 2.16 percent at March 31, 2003 and an allowance of $166.0 million, or 2.11 percent at December 31, 2003.  The allowance for credit losses as a percentage of nonaccrual loans was 386 percent at March 31, 2004, compared with 170 percent at March 31, 2003 and 393 percent at December 31, 2003. 

 

Net charge-offs for the first quarter of 2004 were $0.9 million, compared with $12.5 million and $0.2 million, respectively, for the first quarter of 2003 and the fourth quarter of 2003.  As an annualized percentage of average loans, net charge-offs were 0.05 percent, 0.64 percent and 0.01 percent for the first quarters of 2004 and 2003 and the fourth quarter of 2003, respectively.

 

The allowance for credit losses is maintained at a level that management deems appropriate based on a thorough analysis of numerous factors, including levels of net charge-offs and nonaccrual loans and changes in the loan portfolio.  Credit quality will be influenced by underlying trends in the economy, particularly in California, and other factors that may be beyond management’s control.  No assurances can be given that the Company will not sustain credit losses, in any particular period, that are sizable in relation to the allowance for credit losses.  Based on known information available to it at the date of this report, management believes the allowance for credit losses is adequate to cover risks inherent in the portfolio at March 31, 2004.  Subsequent evaluation of the loan portfolio, in light of factors then prevailing, will dictate the level of provisions required to maintain the adequacy of the allowance for credit losses.

 

18



 

The table below summarizes the changes in the allowance for credit losses for the three months ended March 31, 2004 and 2003.

 

Changes in Allowance for Credit Losses

 

 

 

For the three months ended
March 31,

 

Dollars in thousands

 

2004

 

2003

 

 

 

 

 

 

 

Loans outstanding

 

$

7,967,639

 

$

7,832,823

 

Average amount of loans outstanding

 

$

7,886,333

 

$

7,964,338

 

Balance of allowance for credit losses, beginning of period

 

$

165,986

 

$

164,502

 

Loans charged off:

 

 

 

 

 

Commercial

 

(3,256

)

(13,287

)

Real estate and other

 

(1,093

)

(1,595

)

Total loans charged off

 

(4,349

)

(14,882

)

Less recoveries of loans previously charged off:

 

 

 

 

 

Commercial

 

3,324

 

2,268

 

Real estate and other

 

111

 

92

 

Total recoveries

 

3,435

 

2,360

 

Net loans charged off

 

(914

)

(12,522

)

Additions to allowance charged to operating expense

 

 

17,500

 

Balance, end of period

 

$

165,072

 

$

169,480

 

 

 

 

 

 

 

Total net charge-offs to average loans (annualized)

 

(0.05

)%

(0.64

)%

 

 

 

 

 

 

Ratio of allowance for credit losses to total period end loans

 

2.07

%

2.16

%

 

 

Other Assets

 

Other assets included the following:

 

Other Assets

 

Dollars in thousands

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

Interest rate swap mark-to-market

 

$

54,188

 

$

42,133

 

$

57,538

 

Accrued interest receivable

 

44,600

 

43,980

 

43,724

 

Claim in receivership and other assets

 

12,151

 

12,151

 

23,214

 

Loans held-for-sale

 

 

 

10,412

 

Income tax refund

 

16,133

 

17,813

 

3,305

 

Other

 

59,013

 

55,708

 

43,470

 

Total other assets

 

$

186,085

 

$

171,785

 

$

181,663

 

 

The claim in receivership and other assets were acquired in the acquisition of Pacific Bank.  The reduction in 2003 was due to the claim in receivership being collected.

 

See “¾ Net Interest Income” for a discussion of interest rate swaps that result in the swap mark-to-market asset of $54.2 million.

 

19



 

Off Balance Sheet

 

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 balance sheet.  Commitments to extend credit are agreements to lend to a client 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 client’s creditworthiness on a case-by-case basis.

 

The Company had outstanding and unfunded loan commitments aggregating $3,526.8 million at March 31, 2004.  In addition, the Company had $430.0 million outstanding in bankers’ acceptances and letters of credit of which $389.5 million relate to standby letters of credit at March 31, 2004.  Substantially all of the Company’s loan commitments are on a variable rate basis and are comprised of real estate and commercial loan commitments.  There have been no material changes to the information provided in the Company’s off balance sheet arrangements since the last reporting period.

 

Deposits

 

Deposits totaled $11.1 billion at March 31, 2004, an increase of 13 percent compared with $9.9 billion at March 31, 2003, and increased 2 percent over the $10.9 billion at December 31, 2003.  New clients, additional trust and escrow deposits and a lower earnings credit on analyzed deposit accounts resulting from lower interest rates, contributed to the growth of deposits.

 

Demand deposits accounted for 50 percent of total deposits at March 31, 2004.  Core deposits, which continued to provide substantial benefits to the Bank’s cost of funds, were 92 percent of total deposits at March 31, 2004.  See “¾ Net Interest Income.”

 

Other Borrowings

 

Other borrowings have declined by $24.4 million from December 31, 2003 and $194.0 million from March 31, 2003 to $678.8 million at March 31, 2004 as deposits have increased.

 

CAPITAL ADEQUACY REQUIREMENT

 

The following table presents the regulatory standards for well capitalized institutions and the capital ratios for the Corporation and the Bank at March 31, 2004, December 31, 2003, and March 31, 2003.

 

 

 

Regulatory
Well Capitalized
Standards

 

March 31,
2004

 

December 31,
2003

 

March 31,
2003

 

City National Corporation

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

N/A

%

7.61

%

7.48

%

7.65

%

Tier 1 risk-based capital

 

6.00

 

10.67

 

10.81

 

10.30

 

Total risk-based capital

 

10.00

 

14.43

 

14.86

 

14.46

 

 

 

 

 

 

 

 

 

 

 

City National Bank

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

5.00

 

8.41

 

8.01

 

7.53

 

Tier 1 risk-based capital

 

6.00

 

11.74

 

11.51

 

10.15

 

Total risk-based capital

 

10.00

 

15.50

 

15.58

 

14.33

 

 

March 31, 2004 capital ratios for the Corporation have been adjusted slightly upward from originally published ratios due to CCM acquisition allocation adjustments.

 

20



 

Tier 1 capital ratios include the impact of $26.0 million of preferred stock issued by real estate investment trust subsidiaries of the Bank which is included in minority interest in consolidated subsidiaries.

 

The following table provides information about purchases by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant of Section 12 of the Exchange Act.

 

Period

 

Total Number
of Shares (or
Units) Purchased

 

Average Price
Paid per Share
(or Unit)

 

Total number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs

 

01/01/04 - 01/31/04

 

420,900

 

$

58.77

 

420,900

 

329,000

 

02/01/04 - 02/29/04

 

187,300

 

60.00

 

187,300

 

141,700

 

03/01/04 - 03/31/04

 

124,800

 

59.36

 

124,800

 

1,016,900

(2)

 

 

733,000

(1)

59.18

 

733,000

 

1,016,900

 

 


(1)          We repurchased an aggregate of 733,000 shares of our common stock pursuant to repurchase programs that we publicly announced on January 22, 2003 and July 15, 2003 (the “Programs”).

 

(2)          Our board of directors, on March 24, 2004, approved the repurchase by us of up to an aggregate of  1 million shares of our common stock pursuant to a new program  to follow completion of the Programs described in (1) above.  Unless terminated earlier by resolution of our board of directors, the Programs will expire when we have repurchased all shares authorized for repurchase thereunder.

 

On April 28, 2004, the Corporation declared a regular quarterly cash dividend on common stock at a rate of $0.32 per share to shareholders of record on May 12, 2004, payable on May 24, 2004.

 

LIQUIDITY MANAGEMENT

 

The Company continues to manage its liquidity through the combination of core deposits, federal funds purchased, repurchase agreements, collateralized borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco and a portfolio of securities available-for-sale.  Liquidity is also provided by maturing securities and loans.

 

Average core deposits and shareholders’ equity comprised 86 percent of total funding of average assets in the first quarter of 2004, compared with 82 percent in the first quarter of 2003.  This increase allowed the Company to decrease its use of more costly alternative funding sources.  See “¾ Net Interest Income.”

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ASSET/LIABILITY MANAGEMENT

 

The principal objective of asset/liability management is to maximize net interest income subject to margin volatility and liquidity constraints. Margin volatility results when the rate reset (or repricing) characteristics of assets are materially different from those of the Company’s liabilities.  Liquidity risk results from the mismatching of asset and liability cash flows.  Management chooses asset/liability strategies that promote stable earnings and reliable funding.  Interest rate risk and funding positions are kept within limits established by the Board of Directors to ensure that risk taking is managed within prudent interest rate and liquidity guidelines.

 

A quantitative and qualitative discussion about market risk is included on pages A-16 to A-21 of the Corporation’s Form 10-K for the year ended December 31, 2003.

 

Net Interest Simulation: During the first three months of 2004, the Company maintained a moderate asset sensitive interest rate position.  Based on the balance sheet at March 31, 2004, the Company’s net interest income

 

21



 

simulation model indicates that net interest income would not be substantially adversely impacted by changes in interest rates.  Assuming a static balance sheet, a gradual 100 basis point decline in interest rates over a twelve-month horizon would result in a decrease in projected net interest income of approximately 2.9 percent.  The 2.9 percent at-risk amount is down slightly from the previous two quarters, which were 3.1 percent and 3.2 percent at September 30, 2003, and December 31, 2003, respectively.  (Note: The 100 basis point decline could cause some rates to be negative.  We assume that interest rates may fall to zero but no further.)  A gradual 100 basis point increase in interest rates over the next 12-month period would result in an increase in projected net interest income of approximately 2.1 percent.  This is down slightly from the September 30, 2003 and December 31, 2003 results which were 2.3 percent and 2.5 percent, respectively.  Exposure remains within ALCO guidelines.  The Company continues to use a variety of other tools to manage its asset sensitivity.

 

Present Value of Equity: The model indicates that the Present Value of Equity (PVE) is somewhat vulnerable to a sudden and substantial change in interest rates.  As of March 31, 2004, a 200 basis point increase in interest rates results in a 4.1 percent decline in PVE.  This compares to a 3.8 percent decline at December 31, 2003.  These two measures of PVE reflect changes to our deposit longevity assumptions approved during the first quarter of 2004.

 

As of March 31, 2004, the Company had $1,065.9 million of notional principal in receive fixed-pay LIBOR interest rate swaps. The Company’s interest-rate risk-management instruments had a fair value and credit exposure risk of $54.2 million and  $42.1 million at  March 31, 2004 and December 31, 2003, respectively taking into consideration legal right of offset. The credit exposure represents the cost to replace, on a present value basis and at current market rates, the net positive value of all contracts for each counterparty that were outstanding at the end of the period. The Company’s swap agreements require collateral to mitigate the amount of credit risk if certain market value exposure thresholds are exceeded. As of March 31, 2004, the Company held cash and securities with a total market value of $30.2 million to reduce counterparty exposure.

 

At March 31, 2004, the Company’s outstanding foreign exchange contracts for both those purchased as well as sold totaled $81.6 million including $0.8 million of foreign exchange contracts with maturities over 1 year.  Total outstanding foreign exchange contracts for both those purchased as well as sold at December 31, 2003 were $63.9 million, all with maturities of 1 year or less.  The Company enters into foreign exchange contracts with its clients and counterparty banks primarily for the purpose of offsetting or hedging for clients’ transaction and economic exposures arising out of commercial transactions.  The Company’s policies also permit limited proprietary currency positioning.  The Company actively manages its foreign exchange exposures within prescribed risk limits and controls.

 

ITEM 4.  CONTROL AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Under SEC rules, the Company is required to maintain disclosure controls and procedures designed to ensure that information required by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  As part of the Company’s system of disclosure controls and procedures, we have created a disclosure committee which consists of certain members of the Company’s senior management.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including the chief executive officer, acting chief financial officer and other members of the Disclosure Committee, as appropriate to allow timely decisions regarding required disclosure. 

 

The Company has carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report.  The Company’s management, including the Company’s disclosure committee and its chief executive officer and acting chief financial officer, supervised and participated in the evaluation.  Based on the evaluation, the chief executive officer and the acting chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.  

 

22



 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

23



 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

We have made forward-looking statements in this document that are subject to risks and uncertainties.  These statements are based on the beliefs and assumptions of our management, and on information currently available to our management.  Forward-looking statements include the information concerning our possible or assumed future results of operations, business and earnings outlook and statements preceded by, followed by, or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.

 

Our management believes these forward-looking statements are reasonable.  However, you should not place undue reliance on the forward-looking statements, since they are based on current expectations.  Actual results may differ materially from those currently expected or anticipated.

 

Forward-looking statements are not guarantees of performance.  They involve risks, uncertainties, and assumptions.  Our future results and shareholder values may differ materially from those expressed in these forward-looking statements.  Many of the factors described below that will determine these results and values are beyond our ability to control or predict.  For those statements, we claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.

 

Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur as of the date the statements are made or to update earnings guidance including the factors that influence earnings.

 

A number of factors, some of which are beyond the Corporation’s ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements.  These factors which include (1) the unknown economic impact of state, county, and county budget issues, (2) earthquake or other natural disasters impacting the condition of real estate collateral or business operations, (3) the effect of acquisitions and integration of acquired businesses, and (4) the impact of proposed and/or recently adopted changes in regulatory, judicial, or legislative tax treatment of business transactions, particularly recently enacted California tax legislation and the December 31, 2003 announcement by the FTB regarding the taxation of REITs and RICs could have the following consequences, any of which could negatively impact our business.

 

                                          Loan delinquencies may increase;

 

                                          Problem assets and foreclosures may increase;

 

                                          Demand for our products and services may decline; and

 

                                          Collateral for loans made by us, especially real estate, may decline in value, in turn reducing clients’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

 

Changes in interest rates affect our profitability.  We derive our income mainly from the difference or “spread” between the interest earned on loans, securities, and other interest-earning assets, and interest paid on deposits, borrowings, and other interest-bearing liabilities.  In general, the wider the spread, the more we earn.  When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities fluctuates.  This causes changes in our spread and affects our net interest income.  In addition, interest rates affect how much money we lend.

 

Significant changes in the provision or applications of laws or regulations affecting our business could materially affect our business.  The banking industry is subject to extensive federal and state regulations, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially.  Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements.  A material change in these conditions would affect our results.  Parts of our business are also subject to federal and state securities laws and regulations.  Significant changes in these laws and regulations would also affect our business.

 

24



 

 We face strong competition from financial service companies and other companies that offer banking services which can negatively impact our business.  Increased competition in our market may result in reduced loans and deposits.  Ultimately, we may not be able to compete successfully against current and future competitors.  Many competitors offer the banking services that we offer in our service area.  These competitors include national, regional, and community banks.  We also face competition from many other types of financial institutions, including, without limitation, savings and loans, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, and other financial intermediaries.  Recently passed legislation will make it easier for other types of financial institutions to compete with us.

 

 Our results would be adversely affected if we suffered higher than expected losses on our loans.  We assume risk from the possibility that we will suffer losses because borrowers, guarantors, and related parties fail to perform under the terms of their loans.  We try to minimize this risk by adopting and implementing what we believe are effective underwriting and credit policies and procedures, including how we establish and review the allowance for credit losses.  We assess the likelihood of nonperformance, track loan performance, and diversify our credit portfolio.  Those policies and procedures may still not prevent unexpected losses that could adversely affect our results.

 

25



 

PART II.                OTHER INFORMATION

 

Item 2.                                                     Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

The information required by this item regarding purchases by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act is incorporated by reference from that portion of Part I, Item 2 of this report under the heading “Capital Adequacy Requirement” and is set forth in the second table of that section and the accompanying footnotes.

 

 

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Corporation’s Annual Shareholders’ Meeting was held on Wednesday, April 28, 2004, in Beverly Hills, California, at which the shareholders were asked to vote on the following matters:

 

1.  Election of nominees to serve on the Corporation’s Board of Directors.

 

Votes regarding the election of three Class II directors to serve for a term of three years and until their successors are duly elected and qualified are as follows:

 

 

 

For

 

Withheld

 

Russell Goldsmith

 

42,802,908

 

2,005,843

 

Michael L. Meyer

 

43,752,757

 

1,055,994

 

Ronald L. Olson

 

33,658,086

 

11,150,665

 

 

Additional directors, whose terms of office as directors continued after the meeting, are as follows:

 

Class I Directors

 

George H. Benter Jr.

Kenneth L. Coleman

Peter M. Thomas

Andrea L. Van de Kamp

 

Class III Directors

 

Richard L. Bloch

Bram Goldsmith

Bob Tuttle

Kenneth Ziffren

 

2.  Approval of the City National Corporation Amended and Restated 2002 OmnibusPlan  (the  “Amended 2002 Plan”)

 

For

 

Against

 

Abstain

 

Broker Non-Vote

 

31,872,102

 

6,251,574

 

114,718

 

6,570,357

 

 

3.  Approval of the City National Corporation Amended and Restated 1999 Bonus Plan (the “Amended Variable Bonus Plan”)

 

For

 

Against

 

Abstain

 

Broker Non-Vote

 

36,998,948

 

1,938,940

 

120,778

 

5,750,085

 

 

26



 

ITEM 6.                                                     EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  Exhibits

 

No.

 

 

 

 

 

31.1

 

Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Acting Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.0

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

(b)                                 Report on Form 8-K

 

On January 7, 2004, the Corporation filed a report on Form 8-K under item 9 (Regulation FD Disclosure) and item 12 (results of Operations and Financial Condition) of Form 8-K regarding the announcement of a change in guidance for 2003 financial results.  Included in the report was a press release dated January 7, 2004.

 

On January 14, 2004 the Corporation filed a report on Form 8-K under item 9 (Regulation FD Disclosure) and item 12 (results of Operations and Financial Condition) of Form 8-K regarding the financial results for the quarter and year ended December 31, 2003.  Included in the report was a press release dated January 14, 2004.

 

On March 15, 2004 the Corporation filed a report on Form 8-K under item 9 (Regulation FD Disclosure) of Form 8-K regarding the announcement of its Chief Financial Officer stepping down for health reasons.  Included in the report was a press release dated March 15, 2004.

 

On March 24, 2004 the Corporation filed a report on Form 8-K under item 9 (Regulation FD Disclosure) of Form 8-K regarding the announcement of an increase of one million shares in the Corporation common share buyback program.  Included in the report was a press release dated March 24, 2004.

 

On April 14, 2004 the Corporation filed a report on Form 8-K under item 9 (Regulation FD Disclosure) and item 12 (results of Operations and Financial Condition) of Form 8-K regarding the financial results for the quarter ended March 31, 2004.  Included in the report was a press release dated April 14, 2004.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

CITY NATIONAL CORPORATION

 

 

 

(Registrant)

 

 

 

 

 

 

DATE:

May 10, 2004

 

/s/ Stephen D. McAvoy

 

 

 

 

 

 

STEPHEN D. McAVOY

 

 

Acting Chief Financial Officer

 

 

(Authorized Officer and
Principal Financial Officer)

 

27