UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

(Mark One)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

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

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

City National Center

 

400 North Roxbury Drive, Beverly Hills, California

90210

(Address of principal executive offices)

(Zip Code)

 

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

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

YES x      NO   o

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

YES x      NO   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES o      NO   x

Number of shares of common stock outstanding at October 31, 2005:  49,159,199.




PART 1 - FINANCIAL INFORMATON

ITEM 1.                FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)

 

 

September 30,

 

December 31,

 

September 30,

 

Dollars in thousands, except per share amounts

 

 

 

2005

 

2004

 

2004

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

$

438,786

 

 

 

$

240,492

 

 

 

$

410,694

 

 

Federal funds sold

 

 

185,000

 

 

 

427,000

 

 

 

890,000

 

 

Due from banks - interest-bearing

 

 

39,485

 

 

 

236,362

 

 

 

37,890

 

 

Securities available-for-sale - cost $4,084,366; $4,114,620 and $3,775,384 at September 30, 2005, December 31, 2004 and September 30, 2004, respectively

 

 

4,030,296

 

 

 

4,114,298

 

 

 

3,780,750

 

 

Trading account securities

 

 

42,634

 

 

 

75,878

 

 

 

49,752

 

 

Loans

 

 

9,026,905

 

 

 

8,494,187

 

 

 

8,174,137

 

 

Less allowance for credit losses

 

 

152,920

 

 

 

148,568

 

 

 

148,056

 

 

Net loans

 

 

8,873,985

 

 

 

8,345,619

 

 

 

8,026,081

 

 

Premises and equipment, net

 

 

76,754

 

 

 

68,624

 

 

 

63,097

 

 

Deferred tax asset

 

 

121,384

 

 

 

102,196

 

 

 

98,955

 

 

Goodwill .

 

 

248,373

 

 

 

253,740

 

 

 

253,817

 

 

Intangibles

 

 

37,181

 

 

 

41,063

 

 

 

42,860

 

 

Bank-owned life insurance

 

 

67,266

 

 

 

64,969

 

 

 

64,491

 

 

Affordable housing investments

 

 

68,285

 

 

 

62,864

 

 

 

62,759

 

 

Other assets

 

 

196,753

 

 

 

193,693

 

 

 

196,500

 

 

Customers’ acceptance liability

 

 

3,262

 

 

 

4,715

 

 

 

3,754

 

 

Total assets

 

 

$

14,429,444

 

 

 

$

14,231,513

 

 

 

$

13,981,400

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

$

6,345,907

 

 

 

$

6,026,428

 

 

 

$

5,922,689

 

 

Interest checking deposits

 

 

779,319

 

 

 

889,512

 

 

 

812,387

 

 

Money market deposits

 

 

3,396,777

 

 

 

3,760,142

 

 

 

3,887,011

 

 

Savings deposits

 

 

188,345

 

 

 

196,366

 

 

 

198,138

 

 

Time deposits-under $100,000

 

 

180,776

 

 

 

181,618

 

 

 

186,014

 

 

Time deposits-$100,000 and over

 

 

1,224,590

 

 

 

932,849

 

 

 

859,314

 

 

Total deposits

 

 

12,115,714

 

 

 

11,986,915

 

 

 

11,865,553

 

 

Federal funds purchased and securities sold under repurchase agreements

 

 

191,036

 

 

 

204,654

 

 

 

71,570

 

 

Other short-term borrowings

 

 

26,197

 

 

 

125

 

 

 

50,125

 

 

Subordinated debt

 

 

278,076

 

 

 

288,934

 

 

 

291,073

 

 

Long-term debt

 

 

221,168

 

 

 

230,416

 

 

 

231,882

 

 

Reserve for off-balance sheet credit commitments.

 

 

14,563

 

 

 

11,751

 

 

 

12,295

 

 

Other liabilities

 

 

137,395

 

 

 

129,106

 

 

 

114,741

 

 

Acceptances outstanding

 

 

3,262

 

 

 

4,715

 

 

 

3,754

 

 

Total liabilities

 

 

12,987,411

 

 

 

12,856,616

 

 

 

12,640,993

 

 

Minority interest in consolidated subsidiaries

 

 

24,856

 

 

 

26,362

 

 

 

27,180

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Common Stock-par value-$1.00; authorized - 75,000,000;Issued - 50,600,943; 50,589,408 and 50,585,201 shares at September 30, 2005, December 31, 2004 and September 30, 2004, respectively.

 

 

50,601

 

 

 

50,589

 

 

 

50,585

 

 

Additional paid-in capital

 

 

414,073

 

 

 

410,216

 

 

 

409,597

 

 

Accumulated other comprehensive income

 

 

(36,879)

 

 

 

(1,352)

 

 

 

3,683

 

 

Retained earnings

 

 

1,077,561

 

 

 

957,987

 

 

 

924,066

 

 

Deferred equity compensation

 

 

(15,784)

 

 

 

(12,262)

 

 

 

(13,355)

 

 

Treasury shares, at cost - 1,107,734; 1,042,629; and 1,157,468 shares at September 30, 2005, December 31, 2004 and September 30, 2004, respectively

 

 

(72,395)

 

 

 

(56,643)

 

 

 

(61,349)

 

 

Total shareholders’ equity

 

 

1,417,177

 

 

 

1,348,535

 

 

 

1,313,227

 

 

Total liabilities and shareholders’ equity

 

 

$

14,429,444

 

 

 

$

14,231,513

 

 

 

$

13,981,400

 

 

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

2




CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

In thousands, except per share amounts

 

 

 

2005

 

2004

 

2005

 

2004

 

Interest Income

 

 

 

 

 

 

 

 

 

Loans

 

$

142,251

 

$

112,635

 

$

400,129

 

$

325,069

 

Securities available-for-sale

 

41,345

 

37,178

 

123,786

 

111,865

 

Federal funds sold and securities purchased under resale agreements

 

604

 

2,450

 

1,362

 

3,998

 

Due from banks - interest-bearing

 

150

 

84

 

479

 

316

 

Trading account

 

360

 

84

 

869

 

158

 

Total interest income

 

184,710

 

152,431

 

526,625

 

441,406

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

20,622

 

11,429

 

53,247

 

31,019

 

Subordinated debt

 

2,848

 

1,497

 

7,500

 

3,946

 

Other long-term debt

 

2,597

 

1,571

 

7,337

 

4,429

 

Federal funds purchased and securities sold under repurchase agreements

 

2,100

 

411

 

5,821

 

924

 

Other short-term borrowings

 

229

 

182

 

334

 

500

 

Total interest expense

 

28,396

 

15,090

 

74,239

 

40,818

 

Net interest income

 

156,314

 

137,341

 

452,386

 

400,588

 

Provision for credit losses

 

 

 

 

 

Net interest income after provision for credit losses

 

156,314

 

137,341

 

452,386

 

400,588

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Trust and investment fees

 

19,856

 

16,850

 

58,925

 

49,102

 

Brokerage and mutual fund fees

 

10,910

 

9,675

 

30,706

 

27,768

 

Service charges on deposit accounts

 

8,370

 

10,322

 

26,254

 

32,362

 

International services

 

6,107

 

5,191

 

16,903

 

15,359

 

Bank-owned life insurance

 

1,017

 

588

 

2,533

 

2,134

 

Gain on sale of loans and other assets

 

801

 

9

 

986

 

9

 

Gain on sale of securities

 

241

 

327

 

1,340

 

1,827

 

Other

 

6,247

 

4,678

 

17,619

 

13,915

 

Total noninterest income

 

53,549

 

47,640

 

155,266

 

142,476

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

66,467

 

59,675

 

196,938

 

178,657

 

Net occupancy of premises

 

8,666

 

7,513

 

25,009

 

21,175

 

Legal and professional fees

 

10,672

 

8,193

 

30,177

 

22,324

 

Information services

 

5,492

 

4,522

 

15,668

 

13,632

 

Depreciation

 

3,530

 

3,614

 

10,685

 

10,116

 

Marketing and advertising

 

4,182

 

3,666

 

11,699

 

10,985

 

Office services

 

2,578

 

2,444

 

7,755

 

7,350

 

Amortization of intangibles

 

1,445

 

1,763

 

4,327

 

5,282

 

Equipment

 

578

 

478

 

1,773

 

1,879

 

Other operating

 

7,269

 

5,893

 

20,773

 

16,547

 

Total noninterest expense

 

110,879

 

97,761

 

324,804

 

287,947

 

Minority interest expense

 

1,761

 

1,502

 

5,104

 

4,408

 

Income before income taxes

 

97,223

 

85,718

 

277,744

 

250,709

 

Income taxes

 

37,413

 

32,240

 

104,766

 

94,133

 

Net income

 

$

59,810

 

$

53,478

 

$

172,978

 

$

156,576

 

Net income per share, basic

 

$

1.22

 

$

1.09

 

$

3.52

 

$

3.20

 

Net income per share, diluted

 

$

1.17

 

$

1.04

 

$

3.39

 

$

3.07

 

Shares used to compute income per share, basic

 

49,198

 

49,076

 

49,133

 

48,868

 

Shares used to compute income per share, diluted

 

51,123

 

51,182

 

51,066

 

50,970

 

Dividends per share

 

$

0.36

 

$

0.32

 

$

1.08

 

$

0.96

 

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

3




CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 

 

For the nine months ended
September 30,

 

Dollars in thousands

 

 

 

2005 

 

2004 

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net income

 

 

$

172,978

 

 

$

156,576

 

Adjustments to net income:

 

 

 

 

 

 

 

Provision for credit losses

 

 

 

 

 

Amortization of restricted stock grants

 

 

3,057

 

 

2,209

 

Amortization of intangibles

 

 

4,327

 

 

5,282

 

Depreciation and software amortization

 

 

13,656

 

 

12,955

 

Tax benefit from exercise of stock options

 

 

7,291

 

 

2,797

 

Deferred income tax benefit

 

 

(19,188

)

 

(26,365

)

Gain on sale of assets

 

 

(986

)

 

(9

)

Gain on sales of securities

 

 

(1,340

)

 

(1,827

)

Net change in other assets and other liabilities

 

 

12,748

 

 

(39,313

)

Net decrease in trading securities

 

 

33,244

 

 

41,783

 

Amortization of cost and discount on long-term debt

 

 

531

 

 

531

 

Mark to market on long-term debt

 

 

(15,345

)

 

(9,112

)

Other, net

 

 

21,237

 

 

16,857

 

Net cash provided by operating activities

 

 

232,210

 

 

162,364

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Purchase of securities available-for-sale

 

 

(631,749

)

 

(1,449,766

)

Sales of securities available-for-sale

 

 

89,580

 

 

416,355

 

Maturities and paydowns of securities

 

 

564,797

 

 

602,649

 

Loan originations, net of principal collections

 

 

(532,718

)

 

(291,395

)

Purchase of premises and equipment

 

 

(21,786

)

 

(13,333

)

Other investing activities

 

 

(445

)

 

(4

)

Net cash (used) by investing activities

 

 

(532,321

)

 

(735,494

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

Net increase in deposits

 

 

128,799

 

 

928,490

 

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

 

 

(13,618

)

 

(40,143

)

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

 

 

26,072

 

 

(15,010

)

Net decrease in equity notes

 

 

(2,568

)

 

(2,091

)

Proceeds from exercise of stock options

 

 

18,182

 

 

24,205

 

Stock repurchases

 

 

(43,935

)

 

(43,826

)

Cash dividends paid

 

 

(53,404

)

 

(47,101

)

Net cash provided by financing activities

 

 

59,528

 

 

804,524

 

Net (decrease) increase in cash and cash equivalents

 

 

(240,583

)

 

231,394

 

Cash and cash equivalents at beginning of year

 

 

903,854

 

 

1,107,190

 

Cash and cash equivalents at end of period

 

 

$

663,271

 

 

$

1,338,584

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

 

$

78,772

 

 

$

47,981

 

Income taxes

 

 

80,537

 

 

78,500

 

Non-cash investing activities:

 

 

 

 

 

 

 

Restructuring of investment in affiliate

 

 

943

 

 

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

4




CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

 

 

 

 

 

 

Total

 

 

 

Shares

 

Common

 

paid-in

 

comprehensive

 

Retained

 

Deferred

 

Treasury

 

shareholders’

 

Dollars in thousands

 

 

 

issued

 

stock

 

capital

 

income

 

Earnings

 

Compensation

 

stock

 

equity

 

Balance, December 31, 2003

 

50,459,716

 

 

$

50,460

 

 

 

$

401,233

 

 

 

$

12,903

 

 

$

814,591

 

 

$

(6,699

)

 

$

(53,232

)

 

$

1,219,256

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

156,576

 

 

 

 

 

 

156,576

 

 

Other comprehensive income net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on securities available-for-sale, net of reclassification adjustment of $1.7 million of net gains included in net income

 

 

 

 

 

 

 

 

 

(5,602

)

 

 

 

 

 

 

 

(5,602

)

 

Net unrealized loss on cash flow hedges, net of reclassification of $3.9 million of net gains included in net income

 

 

 

 

 

 

 

 

 

(3,618

)

 

 

 

 

 

 

 

(3,618

)

 

Total other comprehensive income 

 

 

 

 

 

 

 

 

 

(9,220

)

 

156,576

 

 

 

 

 

 

147,356

 

 

Issuance of shares for stock options

 

 

 

 

 

 

(8,707

)

 

 

 

 

 

 

 

 

35,709

 

 

27,002

 

 

Restricted stock grants

 

125,485

 

 

125

 

 

 

8,304

 

 

 

 

 

 

 

(8,865

)

 

 

 

(436

)

 

Amortization of restricted stock grants

 

 

 

 

 

 

 

 

 

 

 

 

 

2,209

 

 

 

 

2,209

 

 

Tax benefit from stock options

 

 

 

 

 

 

8,767

 

 

 

 

 

 

 

 

 

 

 

8,767

 

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(47,101

)

 

 

 

 

 

(47,101

)

 

Repurchased shares, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43,826

)

 

(43,826

)

 

Balance, September 30, 2004

 

50,585,201

 

 

$

50,585

 

 

 

$

409,597

 

 

 

$

3,683

 

 

$

924,066

 

 

$

(13,355

)

 

$

(61,349

)

 

$

1,313,227

 

 

Balance, December 31, 2004

 

50,589,408

 

 

$

50,589

 

 

 

$

410,216

 

 

 

$

(1,352

)

 

$

957,987

 

 

$

(12,262

)

 

$

(56,643

)

 

$

1,348,535

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

172,978

 

 

 

 

 

 

172,978

 

 

Other comprehensive income net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on securities available-for-sale, net of reclassification adjustment of $4.0 million of net loss included in net income

 

 

 

 

 

 

 

 

 

(31,147

)

 

 

 

 

 

 

 

(31,147

)

 

Net unrealized loss on cash flow hedges, net of reclassification of $0.7 million of net gains included in net income

 

 

 

 

 

 

 

 

 

(4,380

)

 

 

 

 

 

 

 

(4,380

)

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

(35,527

)

 

172,978

 

 

 

 

 

 

137,451

 

 

Issuance of shares for stock options

 

(29,739

)

 

(29

)

 

 

(9,914

)

 

 

 

 

 

 

 

 

28,125

 

 

18,182

 

 

Restricted stock grants / vesting

 

41,274

 

 

41

 

 

 

6,538

 

 

 

 

 

 

 

(6,579

)

 

 

 

 

 

Amortization of restricted stock grants

 

 

 

 

 

 

 

 

 

 

 

 

 

3,057

 

 

 

 

3,057

 

 

Tax benefit from stock options

 

 

 

 

 

 

7,291

 

 

 

 

 

 

 

 

 

 

 

7,291

 

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(53,404

)

 

 

 

 

 

(53,404

)

 

Repurchased shares, net

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

(43,877

)

 

(43,935

)

 

Balance, September 30, 2005

 

50,600,943

 

 

$

50,601

 

 

 

$

414,073

 

 

 

$

(36,879

)

 

$

1,077,561

 

 

$

(15,784

)

 

$

(72,395

)

 

$

1,417,177

 

 

 

 

See accompanying Notes to 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). City National Bank delivers banking, trust and investment services through 55 offices in Southern California, the San Francisco Bay area and New York City. Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank together. As of July 15, 2005, the Corporation was approved to become a financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999 (the ‘GLB Act’). Subject to the GLB Act and related rules and regulations, a financial holding company may engage in activities that are financial in nature or are incidental to financial activity.

2.                 Our accounting and reporting policies conform with generally accepted accounting principles (‘GAAP’) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. The results of operations reflect any 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 periods 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, 2004. The results for the 2005 interim periods are not necessarily indicative of the results expected for the full year.

3.                 Trading account securities are stated at fair 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 reported as other comprehensive income, which is shown as a separate component of shareholders’ equity.

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

5.                 The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended September 30, 2005.

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

 

08/01/05 - 08/31/05

 

 

10,000

 

 

 

70.87

 

 

 

10,000

 

 

 

504,000

 

 

09/01/05 - 09/30/05

 

 

125,000

 

 

 

69.67

 

 

 

125,000

 

 

 

379,000

(2)

 

 

 

 

135,000

(3

)

 

69.76

 

 

 

135,000

(1)

 

 

 

 

 

 

(1)         During the third quarter of 2005, the Company repurchased 135,000 shares of its outstanding shares at an average price of $69.76. Through September 30, 2005 the Company has bought back 630,500 shares at an average price of $69.45.

(2)         Remaining shares available for repurchase pursuant to the program approved on May 24, 2004 by the Company’s Board of Directors. Unless terminated earlier by resolution of our Board of

6




CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Directors, the program will expire when we have repurchased all shares authorized for repurchase thereunder.

(3)         During the third quarter of 2005, no shares were received in payment for the exercise price of stock options.

Basic earnings per share are based on the weighted average shares of common stock outstanding less unvested restricted shares and units. Diluted earnings per share give effect to all dilutive potential common shares, which consist of stock options and restricted shares and units that were outstanding during the period. At September 30, 2005, 69,392 options were antidilutive compared to no  antidilutive options at September 30, 2004.

6.                 The Company applies APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for stock option plans and, accordingly, no compensation cost has been recognized for these 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 Company determined compensation cost based on the fair value of its stock options at the grant date(s) under SFAS No. 123 “Share-Based Payment” 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
September 30,

 

For the nine
months ended
September 30,

 

Dollars in thousands, except for per share amounts

 

 

 

2005

 

2004

 

2005

 

2004

 

Net Income, as reported

 

$

59,810

 

$

53,478

 

$

172,978

 

$

156,576

 

Total stock-based employee compensation expense under the fair-value method for all awards, net of tax

 

$

(1,146

)

$

(833

)

$

(3,919

)

$

(2,369

)

Proforma Net Income

 

58,664

 

52,645

 

169,059

 

154,207

 

Shares basic, as reported

 

49,198

 

49,076

 

49,133

 

48,868

 

Shares diluted, as reported

 

51,123

 

51,182

 

51,066

 

50,970

 

Net Income per share, basic, as reported

 

1.22

 

1.09

 

3.52

 

3.20

 

Proforma Net Income per share, basic

 

1.19

 

1.07

 

3.44

 

3.15

 

Net Income per share, diluted, as reported

 

1.17

 

1.04

 

3.39

 

3.07

 

Proforma Net Income per share, diluted

 

1.15

 

1.03

 

3.31

 

3.03

 

Percentage reduction in net income per share diluted

 

1.71

%

0.96

%

2.36

%

1.30

%

 

The Company recorded $1.1 million in expense for restricted stock awards in the third quarter of 2005 and $3.1 million for the first nine months of 2005 compared with $0.9 million and $2.2 million for the third quarter and first nine months of 2004, respectively.

The Black Scholes option-pricing model requires assumptions on the expected life of the options 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 weekly; the dividend yield and the 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

7




CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

grant date. The expected term is based on an historical analysis of exercise activity. 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.

On April 14, 2005 the Securities and Exchange Commission announced a new rule delaying the implementation of Statement of Financial Accounting Standards No. 123R, Share-Based Payment. The Commission’s new rule allows companies to implement Statement No. 123R at the start of their next fiscal year which begins after June 15, 2005. The Company will comply with the requirements of Statement No. 123R as of January 1, 2006. The current estimate of the full-year cost of complying with Statement No. 123R is $0.07 per share.

7.                 As part of its asset and liability management strategies, the Company uses interest rate swaps to reduce cash flow variability and to moderate changes in the fair value of long-term financial instruments. In accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133), the Company recognizes derivatives as assets or liabilities on the balance sheet at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction.

In accordance with SFAS No. 133, the Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating each derivative contract as either (i) a “fair value hedge” (a hedge of a recognized asset or liability), (ii) a “cash flow hedge” (a hedge of a forecasted transaction or of the variability of the cash flows to be received or paid related to a recognized asset or liability) or (iii) an “undesignated hedge” (a derivative instrument not designated as a hedging instrument whose change in fair value is recognized as a benefit for protection against changing interest rates). All derivatives designated as fair value or cash flow hedges are linked to specific assets and liabilities on the balance sheet. The Company has not had any undesignated hedges during 2005 or 2004.

Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as discussed in SFAS No. 133) in offsetting changes in either the fair value or cash flows of the hedged item. For cash flow hedges, in which derivatives hedge the variability of cash flows on loans that are indexed to U.S. dollar LIBOR or the Bank’s prime interest rate, the interest rate payment characteristics of LIBOR or prime-based loans are analyzed, and interest rate swaps are executed to match the key terms of the underlying loan transactions, thus ensuring the effectiveness at inception. At least quarterly, the LIBOR and prime loan portfolios are evaluated and compared to the related interest rate swap transactions to ensure continuing effectiveness. For fair value hedges, in which derivatives hedge the fair value of certain certificates of deposits, subordinated debt and other long-term debt, the interest rate swaps are structured so that all key terms of the swaps match those of the underlying debt transactions, therefore ensuring hedge effectiveness at inception. On a quarterly basis, fair value hedges are analyzed to ensure that the key terms of the hedged items and hedging instruments remain unchanged, and therefore that the hedges continue to be effective.

For fair value hedges, the effective portion of the changes in the fair value of derivatives is reflected in current earnings on the same line in the consolidated statement of income as the hedged items, i.e. included in interest expense on deposits, other long-term debt and subordinated debt. The ineffective portion of the changes in the fair value of these hedges (the difference between changes in the fair

8




CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

value of the interest rate swaps and the hedged items) is recognized in other non-interest income in the consolidated statement of income.

For cash flow hedges, the effective portion of the changes in the derivatives’ fair value is reported in other comprehensive income. When the cash flows associated with the hedged item are realized, the gain or loss included in other comprehensive income is recognized on the same line in the consolidated statement of income as the hedged item, i.e. included in the interest income on loans. The ineffective portion of the changes of fair value of cash flow hedges is recognized in other non-interest income in the consolidated statement of income.

Fair values are determined from verifiable third-party sources that have considerable experience with the interest rate swap market.

For both fair value and cash flow hedges, the periodic accrual of interest receivable or payable on interest rate swaps is recorded as an adjustment to net interest income for the hedged items.

The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) a derivative expires or is sold, terminated, or exercised, (iii) a derivative is de-designated as a hedge, because it is unlikely that a forecasted transaction will occur; (iv) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a derivative instrument in a fair value hedge is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged asset or liability are subsequently accounted for in the same manner as other components of the carrying amount of that asset or liability. For interest-earning assets and interest-bearing liabilities, such adjustments are amortized into earnings over the remaining life of the respective asset or liability. If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, related amounts reported in other comprehensive income are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.

8.                 As we previously reported, the California Franchise Tax Board has taken the position that certain real estate investment trust (‘REIT’) and registered investment company (‘RIC’) tax deductions shall be disallowed under California law. As of September 30, 2005, the Company maintains a $43.2 million state tax receivable for the years 2000, 2001 and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $28.1 million after giving effect to Federal tax benefits. Management is aggressively pursuing its claims for REIT and RIC refunds for the 2000 to 2002 tax years, however, no outcome can be predicted with certainty and an adverse outcome on the refund claims could result in a loss of all or a portion of the net $28.1 million state tax receivable.

9.                 The Corporation has a profit sharing retirement plan covering eligible employees. Contributions are made annually and are allocated to participants based on their salaries. For the third quarter of 2005, the Company recorded profit sharing contributions expense of $5.0 million and $12.8 million for the nine-month period ended September 30, 2005, compared to $4.2 million and $12.2 million for the third quarter of 2004 and the nine-month period ending September 30, 2004.

The Company has a Supplemental Executive Retirement Plan (‘SERP’) for one of its officers. At September 30, 2005, there was a $2.5 million unfunded pension liability and a $0.8 million intangible asset related to the SERP. The total expense for the third quarter of 2005 was $0.2 million, and $0.5 million for the nine-month period ended September 30, 2005, compared to $0.1 million for the third quarter 2004, and $0.4 million for the nine-month period ended September 30, 2004.

9




CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)

 

 

At or for the three months ended

 

Percentage change
September 30, 2005 from

 

 

 

September 30,

 

June 30,

 

September 30,

 

June 30,

 

September 30,

 

Dollars in thousands, except per share amounts

 

 

 

2005

 

2005

 

2004

 

2005

 

2004

 

For The Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

59,810

 

$

57,707

 

$

53,478

 

 

4

%

 

 

12

%

 

Net income per common share, diluted

 

1.17

 

1.13

 

1.04

 

 

4

 

 

 

13

 

 

Dividends, per common share

 

0.36

 

0.36

 

0.32

 

 

0

 

 

 

13

 

 

At Quarter End (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

14,429,444

 

$

14,475,598

 

$

13,981,400

 

 

(0

)

 

 

3

 

 

Securities

 

4,072,930

 

4,079,604

 

3,830,502

 

 

(0

)

 

 

6

 

 

Loans

 

9,026,905

 

8,886,266

 

8,174,137

 

 

2

 

 

 

10

 

 

Deposits

 

12,115,714

 

12,152,208

 

11,865,553

 

 

(0

)

 

 

2

 

 

Shareholders’ equity

 

1,417,177

 

1,400,888

 

1,313,227

 

 

1

 

 

 

8

 

 

Book value per share

 

28.85

 

28.51

 

26.73

 

 

1

 

 

 

8

 

 

Average Balances (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

14,255,721

 

$

14,040,591

 

$

13,612,389

 

 

2

 

 

 

5

 

 

Securities

 

4,066,635

 

4,071,516

 

3,676,953

 

 

(0

)

 

 

11

 

 

Loans

 

8,982,620

 

8,762,411

 

8,173,882

 

 

3

 

 

 

10

 

 

Deposits

 

11,858,540

 

11,678,544

 

11,496,659

 

 

2

 

 

 

3

 

 

Shareholders’ equity

 

1,417,566

 

1,358,941

 

1,266,651

 

 

4

 

 

 

12

 

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

1.66

%

1.65

%

1.56

%

 

1

 

 

 

6

 

 

Return on average shareholders’ equity (annualized)

 

16.74

 

17.03

 

16.80

 

 

(2

)

 

 

(0

)

 

Corporation’s tier 1 leverage

 

8.58

 

8.39

 

7.80

 

 

2

 

 

 

10

 

 

Corporation’s tier 1 risk-based capital

 

12.19

 

11.91

 

11.35

 

 

2

 

 

 

7

 

 

Corporation’s total risk-based capital

 

15.70

 

15.45

 

14.99

 

 

2

 

 

 

5

 

 

Average shareholders’ equity to average assets

 

9.94

 

9.68

 

9.31

 

 

3

 

 

 

7

 

 

Dividend payout ratio, per share

 

29.83

 

30.85

 

29.51

 

 

(3

)

 

 

1

 

 

Net interest margin

 

4.80

 

4.73

 

4.46

 

 

1

 

 

 

8

 

 

Efficiency ratio (2)

 

52.90

 

53.39

 

52.68

 

 

(1

)

 

 

0

 

 

Asset Quality Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

0.21

%

0.25

%

0.43

%

 

(16

)

 

 

(51

)

 

Nonaccrual loans and OREO to toal loans and OREO

 

0.21

 

0.25

 

0.43

 

 

(16

)

 

 

(51

)

 

Allowance for loan losses to total loans

 

1.69

 

1.66

 

1.81

 

 

2

 

 

 

(7

)

 

Allowance for loan losses to nonaccrual loans

 

824.19

 

667.52

 

419.79

 

 

23

 

 

 

96

 

 

Net recoveries/(charge-offs) to average
loans - annualized

 

0.25

 

0.05

 

(0.23

)

 

400

 

 

 

N/M

 

 


(1)          Certain prior period balances have been restated to conform to the current period presentation.

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

10




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 could be reported under different conditions or using different assumptions. These policies relate to the accounting for securities, allowance for credit losses, derivatives and hedging activities, and stock-based performance plans. The Company, with the concurrence of the Audit Committee and the Compensation, Nominating and Governance 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) of the Consolidated Financial Statements in the Company’s 2004 Form 10-K as of December 31, 2004.

Overview

City National Corporation is the parent company of City National Bank, the second largest independent bank headquartered in California. The Corporation offers a full complement of banking, trust and investment services through 55 offices, including 12 full-service regional centers, in Southern California, the San Francisco Bay Area and New York City.

The Corporation recorded net income of $59.8 million, or $1.17 per share, for the third quarter of 2005 compared with $53.5 million, or $1.04 per share, for the third quarter of 2004 and $57.7 million, or $1.13 per share, for the second quarter of 2005.

Highlights

·       Revenue for the third quarter of 2005 rose 13 percent over the third quarter of 2004.

·       Average loans grew to $9.0 billion, up 10 percent from the third quarter of 2004.

·       The net interest margin of 4.80 percent at September 30, 2005 represents a 7-basis-point increase from the June 30, 2005 net interest margin of 4.73 percent, and a 34-basis-point increase over the September 30, 2004 net interest margin of 4.46 percent.

·       Credit quality continued to be strong. Nonaccrual loans as of September 30, 2005 fell to $18.6 million, a 47 percent decline from September 30, 2004. The Corporation required no provision for credit losses, remaining adequately reserved at 1.69 percent of total loans.

·       Average deposits for the third quarter reached $11.9 billion, up 3 percent from the same period last year.

Outlook

As disclosed in the Company’s press release on third-quarter earnings, management expects earnings per share for 2005 to be 11 to 14 percent higher than earnings per share for 2004.  Based on current economic and business conditions, management now expects per share earnings to be at the upper end of that range.

11




Revenues

Third-quarter revenue (net interest income plus noninterest income) grew to $209.9 million, up 13 percent from the third quarter of 2004, and 4 percent from the second quarter of this year.

Net Interest Income

Fully taxable-equivalent net interest income reached $159.3 million in the third quarter of 2005, up 13 percent from $140.8 million for the same period last year. Compared to the second quarter of 2005, fully taxable-equivalent net interest income grew 4 percent from $152.7 million. Net interest income increases were primarily attributable to increases in average commercial and residential loans, while noninterest income grew as a result of increases in wealth management assets under management and administration and higher demand for international services.

The bank’s prime rate was 6.75 percent on September 30, 2005, up from 4.75 percent at the same time last year, and 6.25 percent on June 30, 2005.

 

 

For the three
months ended

 

 

 

For the three

 

 

 

 

 

September 30,

 

%

 

months ended

 

%

 

Dollars in millions

 

 

 

2005

 

2004

 

Change

 

June 30, 2005

 

Change

 

Average Loans

 

$

8,982.6

 

$

8,173.9

 

 

10

 

 

 

$

8,762.4

 

 

 

3

 

 

Average Securities

 

4,066.6

 

3,677.0

 

 

11

 

 

 

4,071.5

 

 

 

0

 

 

Average Earning Assets

 

13,155.0

 

12,549.2

 

 

5

 

 

 

12,950.3

 

 

 

2

 

 

Average Deposits

 

11,858.5

 

11,496.7

 

 

3

 

 

 

11,678.5

 

 

 

2

 

 

Average Core Deposits

 

10,784.5

 

10,685.8

 

 

1

 

 

 

10,781.6

 

 

 

0

 

 

Fully Taxable-Equivalent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

159.3

 

140.8

 

 

13

 

 

 

152.7

 

 

 

4

 

 

Net Interest Margin

 

4.80

%

4.46

%

 

8

 

 

 

4.73

%

 

 

1

 

 

 

Third-quarter average loan balances increased 10 percent over the same period last year. Commercial lending portfolio grew 14 percent over the third quarter of 2004 and 5 percent from the second quarter of 2005. Residential mortgage loans grew 15 percent from the third quarter of last year. Commercial real estate mortgage loans rose 1 percent, but real estate construction loans declined 5 percent, primarily as the result of accelerated repayments due to the fast pace of new home sales and early refinancing by income property developers taking advantage of low long-term interest rates.

In the first nine months of 2005, the Company’s average loan balances increased 9 percent over the first nine months of 2004. Total loan balances at September 30, 2005 were $140.6 million higher than they were at June 30, 2005, reflecting the strong growth in commercial and residential mortgage lending.

The Company’s average deposits reached $11.9 billion in the third quarter, up 3 percent from the same period last year and 2 percent from the second quarter of 2005. In the first nine months of 2005, the Company’s average deposits grew 6 percent over the first nine months of 2004. Period-end deposits totaled $12.1 billion, down $36.5 million from June 30 of this year.

As part of its long-standing asset-liability management strategy, the Company uses “plain vanilla” interest rate swaps to hedge loans, deposits, and borrowings. The notional value of these swaps was $1.5 billion at September 30, 2005, up $0.5 billion from the third quarter of last year, and up from $1.4 billion from the second quarter of this year. The swaps added $1.8 million to net interest income in the third quarter of 2005, compared with $3.3 million in the second quarter of 2005, and $7.0 million in the third quarter of 2004. These amounts included income in the amount of $2.2 million, $2.9 million, and $5.0 million, respectively, for interest rate swaps qualifying as fair value hedges. Income / (loss) from swaps qualifying as cash flow hedges was ($0.4 million) for the third quarter of 2005, compared with $0.4 million for the second quarter of 2005, and $2.0 million for the third quarter of 2004. Expense from existing swaps of loans qualifying as cash-flow hedges expected to be recorded in net interest expense within the next twelve months is $6.3 million.

12




The following table presents the components of net interest income on a fully taxable-equivalent basis for the three and nine months ended September 30, 2005 and 2004. 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.

Net Interest Income Summary

 

 

For the three months ended

 

For the three months ended

 

 

 

September 30, 2005

 

September 30, 2004

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

income/

 

interest

 

Average

 

income/

 

interest

 

Dollars in thousands

 

 

 

Balance

 

expense (2)

 

rate

 

Balance

 

expense (2)

 

rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$ 3,400,735

 

 

$ 53,208

 

 

 

6.21

%

 

$ 2,996,202

 

 

$ 39,936

 

 

 

5.30

%

 

Commercial real estate mortgages

 

1,803,907

 

 

31,389

 

 

 

6.90

 

 

1,785,287

 

 

28,098

 

 

 

6.26

 

 

Residential mortgages

 

2,508,410

 

 

35,561

 

 

 

5.67

 

 

2,188,276

 

 

29,510

 

 

 

5.39

 

 

Real estate construction

 

744,268

 

 

14,579

 

 

 

7.77

 

 

786,576

 

 

10,796

 

 

 

5.46

 

 

Equity lines of credit

 

309,942

 

 

4,762

 

 

 

6.10

 

 

221,104

 

 

2,462

 

 

 

4.43

 

 

Installment

 

215,358

 

 

3,825

 

 

 

7.05

 

 

196,437

 

 

3,061

 

 

 

6.20

 

 

Total loans(1)

 

8,982,620

 

 

143,324

 

 

 

6.33

 

 

8,173,882

 

 

113,863

 

 

 

5.54

 

 

Due from banks - interest bearing

 

41,054

 

 

150

 

 

 

1.45

 

 

38,992

 

 

84

 

 

 

0.86

 

 

Federal funds sold and securities purchased under resale agreements

 

64,685

 

 

604

 

 

 

3.70

 

 

659,368

 

 

2,450

 

 

 

1.48

 

 

Securities available-for-sale

 

4,029,717

 

 

43,262

 

 

 

4.26

 

 

3,641,294

 

 

39,390

 

 

 

4.30

 

 

Trading account securities

 

36,918

 

 

368

 

 

 

3.95

 

 

35,659

 

 

88

 

 

 

0.98

 

 

Total interest-earning assets

 

13,154,994

 

 

187,708

 

 

 

5.66

 

 

12,549,195

 

 

155,875

 

 

 

4.94

 

 

Allowance for loan losses

 

(151,228

)

 

 

 

 

 

 

 

 

(152,560

)

 

 

 

 

 

 

 

 

Cash and due from banks

 

441,018

 

 

 

 

 

 

 

 

 

431,497

 

 

 

 

 

 

 

 

 

Other non-earning assets

 

810,937

 

 

 

 

 

 

 

 

 

784,257

 

 

 

 

 

 

 

 

 

Total assets

 

$ 14,255,721

 

 

 

 

 

 

 

 

 

$ 13,612,389

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity