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 September 30, 2003

 

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)

 

 

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.

 

 

 

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

 

 

Number of shares of common stock outstanding at October 31, 2003:  48,953,252

 

 

PART 1 - FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

 

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

Dollars in thousands, except per share amounts		September 30, 2003			December 31, 2002			September 30, 2002
Assets
Cash and due from banks		$	497,392		$	497,273		$	480,884
Federal funds sold		717,200			460,000			268,000
Securities available-for-sale - cost $3,381,676; $2,169,444 and $1,925,814 at September 30, 2003, December 31, 2002 and September 30, 2002, respectively		3,409,374			2,226,656			1,979,439
Trading account securities		92,024			172,211			66,581
Loans		7,542,147			7,999,470			7,966,801
Less allowance for credit losses		166,209			164,502			159,173
Net loans		7,375,938			7,834,968			7,807,628
Premises and equipment, net		64,403			61,208			59,990
Deferred tax asset		68,404			36,578			25,177
Goodwill		251,038			229,834			229,658
Intangibles		46,233			27,007			28,983
Bank owned life insurance		62,324			60,119			59,583
Affordable housing investments		65,609			68,848			53,688
Other assets		172,672			186,766			204,896
Customers’ acceptance liability		7,917			8,924			9,260
Total assets		$	12,830,528		$	11,870,392		$	11,273,767
Liabilities
Demand deposits		$	5,365,335		$	4,764,234		$	4,200,997
Interest checking deposits		729,892			692,261			627,765
Money market deposits		3,303,615			2,929,501			2,757,585
Savings deposits		212,688			198,288			219,968
Time deposits-under $100,000		205,625			218,447			221,601
Time deposits-$100,000 and over		968,546			1,036,967			1,098,806
Total deposits		10,785,701			9,839,698			9,126,722
Federal funds purchased and securities sold under repurchase agreements		103,346			266,727			231,389
Other short-term borrowings		15,125			125,125			294,125
Subordinated debt		299,898			303,795			301,917
Long-term debt		282,159			68,682			68,897
Other liabilities		126,539			126,303			102,137
Acceptances outstanding		7,917			8,924			9,260
Total liabilities		11,620,685			10,739,254			10,134,447
Minority interest in consolidated subsidiaries		26,044			21,179			13,465
Commitments and contingencies
Shareholders’ Equity
Preferred Stock authorized - 5,000,000 : none outstanding		—			—			—
Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,454,249; 50,282,743 and 50,275,643 shares at September 30, 2003, December 31, 2002 and September 30, 2002, respectively		50,454			50,283			50,276
Additional paid-in capital		401,612			400,866			400,994
Accumulated other comprehensive income		21,446			40,400			39,122
Retained earnings		783,902			675,195			640,563
Deferred equity compensation		(7,158		)	—			—
Treasury shares, at cost - 1,545,450; 1,299,312; and 112,338 shares at September 30, 2003, December, 31, 2002 and September 30, 2002, respectively		(66,457		)	(56,785		)	(5,100		)
Total shareholders’ equity		1,183,799			1,109,959			1,125,855
Total liabilities and shareholders’ equity		$	12,830,528		$	11,870,392		$	11,273,767

 

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 September 30,						For the nine months ended September 30,
In thousands, except per share amounts		2003			2002			2003			2002
Interest Income
Loans		$	107,515		$	127,682		$	334,427		$	375,004
Securities available-for-sale		33,162			26,235			94,885			81,186
Federal funds sold and securities purchased under resale agreements		1,511			540			2,693			1,751
Trading account		173			159			365			544
Total interest income		142,361			154,616			432,370			458,485
Interest Expense
Deposits		10,045			17,766			36,067			54,877
Subordinated debt		1,232			1,711			3,995			5,629
Other long-term debt		1,788			807			5,482			3,037
Federal funds purchased and securities sold under repurchase agreements		292			845			1,331			2,430
Other short-term borrowings		343			1,963			1,493			8,719
Total interest expense		13,700			23,092			48,368			74,692
Net interest income		128,661			131,524			384,002			383,793
Provision for credit losses		—			20,500			29,000			49,500
Net interest income after provision for credit losses		128,661			111,024			355,002			334,293
Noninterest Income
Trust fees and investment fee revenue		23,412			15,287			60,397			45,297
Cash management and deposit transaction charges		10,661			9,929			32,238			30,323
International services		4,845			4,747			14,192			13,257
Bank owned life insurance		747			737			2,192			2,129
Gain (loss) on sale of loans and assets		16			(3,756		)	118			(757		)
Gain on sale of securities		36			1,206			2,538			2,078
Other		5,551			6,028			17,621			16,532
Total noninterest income		45,268			34,178			129,296			108,859
Noninterest Expense
Salaries and employee benefits		55,261			49,109			161,582			146,221
Net occupancy of premises		8,142			6,837			22,973			19,512
Professional fees		6,821			5,418			20,026			15,829
Information services		4,749			4,200			13,304			13,221
Depreciation		3,315			3,268			9,453			9,996
Marketing and advertising		3,060			3,259			9,725			9,358
Office services		2,504			2,231			7,472			7,060
Amortization of intangibles		2,365			1,976			6,568			5,547
Equipment		528			599			1,832			1,870
Other operating		5,588			5,258			16,126			15,116
Total noninterest expense		92,333			82,155			269,061			243,730
Minority interest in net income of consolidated subsidiaries		1,717			217			3,257			374
Income before income taxes		79,879			62,830			211,980			199,048
Income taxes		27,376			14,145			69,741			60,367
Net income		52,503			48,685			142,239			138,681
Other comprehensive income
Unrealized gain (loss) on securities available-for-sale		(29,393		)	22,600			(31,828		)	50,843
Unrealized gain (loss) on cash flow hedges		(1,191		)	1,593			(706		)	(342		)
Less reclassification adjustment for gain included in net income		1,055			988			169			1,413
Income taxes (benefit)		(13,304		)	9,756			(13,749		)	20,640
Other comprehensive income (loss)		(18,335		)	13,449			(18,954		)	28,448
Comprehensive income		$	34,168		$	62,134		$	123,285		$	167,129
Net income per share, basic		$	1.08		$	0.97		$	2.93		$	2.80
Net income per share, diluted		$	1.05		$	0.94		$	2.85		$	2.69
Shares used to compute income per share, basic		48,537			50,107			48,541			49,587
Shares used to compute income per share, diluted		50,177			51,899			49,942			51,595
Dividends per share		$	0.280		$	0.195		$	0.690		$	0.585

 

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		2003			2002
Cash Flows From Operating Activities
Net income		$	142,239		$	138,681
Adjustments to net income:
Provision for credit losses		29,000			49,500
Amortization of intangibles		6,568			5,547
Depreciation		9,453			9,996
Deferred income tax (benefit)		(18,065		)	31,693
(Gain) loss on sales of loans and assets		(118		)	757
Gain on sales of securities		(2,538		)	(2,078		)
Net decrease (increase) in other assets		20,554			(46,128		)
Net decrease in trading securities		80,187			11,685
Other, net		1,623			(5,419		)
Net cash provided by operating activities		268,903			194,234
Cash Flows From Investing Activities
Purchase of securities		(2,588,462		)	(688,468		)
Sales of securities available-for-sale		188,525			164,205
Maturities and paydowns of securities		1,181,395			440,974
Sales of loans		11,744			12,531
Loan principal collections (originations), net		432,375			(486,057		)
Purchase of premises and equipment		(14,628		)	(6,715		)
Net cash from (for) acquisitions		(39,907		)	35,633
Other, net		(2		)	4
Net cash used by investing activities		(828,960		)	(527,893		)
Cash Flows From Financing Activities
Net increase in deposits		946,003			557,057
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements		(163,381		)	59,858
Net decrease in short-term borrowings, net of transfers from long-term debt		(125,000		)	(246,000		)
Repayment of long-term debt		(6,575		)	—
Net proceeds of issuance of senior debt		221,749			—
Proceeds from exercise of stock options		23,728			24,088
Stock repurchases		(45,616		)	(6,629		)
Cash dividends paid		(33,532		)	(28,849		)
Net cash provided by financing activities		817,376			359,525
Net increase in cash and cash equivalents		257,319			25,866
Cash and cash equivalents at beginning of year		957,273			723,018
Cash and cash equivalents at end of period		$	1,214,592		$	748,884
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest		$	52,643		$	51,029
Income taxes		64,000			43,500
Non-cash investing activities:
Transfer from loans to foreclosed assets		$	—		$	1,664
Transfer from long-term debt to short-term borrowings		15,000			125,000

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

4

 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

		For the nine months ended September 30,
Dollars in thousands		2003			2002
Common Stock
Balance, beginning of period		$	50,283		$	48,150
Stock issued for acquisitions		—			1,208
Stock options exercised		—			918
Restricted stock and units issued		171			—
Balance, end of period		50,454			50,276
Additional paid-in capital
Balance, beginning of period		400,866			301,022
Tax benefit from stock options		5,465			9,552
Stock options exercised		(12,216		)	21,642
Restricted stock and units issued		7,497			—
Excess of market value of shares issued for acquisitions over historical cost		—			68,778
Balance, end of period		401,612			400,994
Accumulated other comprehensive income (loss)
Balance, beginning of period		40,400			10,674
Other comprehensive income (loss) net of income taxes		(18,954		)	28,448
Balance, end of period		21,446			39,122
Retained earnings
Balance, beginning of period		675,195			530,731
Net income		142,239			138,681
Dividends paid		(33,532		)	(28,849		)
Balance, end of period		783,902			640,563
Deferred equity compensation
Balance, beginning of period		—			—
Restricted stock and units issued		(7,668		)	—
Amortization of restricted stock awards		510
Balance, end of period		(7,158		)	—
Treasury shares
Balance, beginning of period		(56,785		)	—
Purchase of shares		(45,616		)	(6,629		)
Issuance of shares for stock options		35,944			1,529
Balance, end of period		(66,457		)	(5,100		)
Total shareholders’ equity		$	1,183,799		$	1,125,855

 

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, 2002.  The results for the 2003 interim periods 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 $0.9 million for exit costs relating to surplus space remain as of September 30, 2003.  Reserves established as a purchase price adjustment for the February 28, 2002 acquisition of Civic BanCorp of $0.6 million for exit costs relating to surplus space remain as of September 30, 2003.

 

6.               On February 13, 2003, the Corporation issued $225 million of 5.125 percent Senior Notes due 2013 in a private placement.  A like amount of exchange notes were subsequently registered pursuant to the Securities Act of 1933 in April 2003 and 100 percent of the Senior Notes were exchanged for the registered notes in an exchange offering with the Senior Notes which closed on May 29, 2003.

 

7.               On January 22, 2003, the Board of Directors authorized a 1 million-share stock buyback program.  No shares were repurchased during the third quarter of 2003.  A total number of 750,100 shares have been repurchased under this program at an average price of $42.47 per share leaving 249,900 shares available for repurchase.  Shares will be repurchased on a selective basis from time to time in open market transactions.  The shares purchased under the buyback programs may be reissued for acquisitions, upon the exercise of stock options, or for other general corporate purposes. There were 1,545,450 treasury shares at September 30, 2003.

 

On July 15, 2003, the Board of Directors authorized the repurchase of 500,000 additional shares of City National Corporation stock, following completion of the Company’s current buyback initiative.

 

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 September 30, 2003, 50,950 stock options were antidilutive.

 

8.               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 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:

 

6

 

		For the three months ended September 30,						For the nine months ended September 30,
Dollars in thousands, except for per share amounts		2003			2002			2003			2002
Net income, as reported		$	52,503		$	48,685		$	142,239		$	138,681
Proforma net income		50,807			46,143			137,524			131,057
Net income per share, basic, as reported		1.08			0.97			2.93			2.80
Proforma net income per share, basic		1.05			0.92			2.83			2.64
Net income per share, diluted, as reported		1.05			0.94			2.85			2.69
Proforma net income per share, diluted		1.01			0.89			2.75			2.54
Percentage reduction in net income per share, diluted		3.81		%	5.32		%	3.51		%	5.58		%

 

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 Company recorded $381,000 in expense for restricted stock awards in the third quarter of 2003 and $510,000 for the first nine months of 2003 out of the original $7,668,000 grant.

 

9.               In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.  The recognition and measurement provisions of this Interpretation are effective for newly created VIEs formed after January 31, 2003.  On October 9, 2003, the FASB issued FIN 46-6 which delayed the recognition and measurement provisions of FIN 46 for existing VIEs to the first interim or annual reporting period ending after December 15, 2003.  The Company adopted the disclosure provisions of FIN 46 effective December 31, 2002.  The Company adopted the recognition and measurement provisions of FIN 46 for newly formed VIEs effective February 1, 2003, which did not have a material effect on the Company’s financial statements. The Company intends to adopt the recognition and measurement provisions of FIN 46 for existing VIEs on December 31, 2003.  The Company does not expect that the adoption of FIN 46 will have a material effect on the Company’s financial statements.

 

10.         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 $7.3 billion as of September 30, 2003.  The purchase price was $49.0 million, comprised of cash and the assumption of approximately $7.5 million of debt.  The acquisition preliminarily resulted in $25.8 million in customer contract intangibles, which is being amortized over 20 years, and $21.5 million in goodwill.

 

7

 

CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

(Unaudited)

 

		At or for the three months ended									Percentage change September 30, 2003 from
Dollars in thousands, except per share amounts		September 30, 2003			June 30, 2003			September 30, 2002			June 30, 2003		September 30, 2002
For The Quarter
Net income		$	52,503		$	46,081		$	48,685		14	%	8	%
Net income per common share, basic		1.08			0.95			0.97			14		11
Net income per common share, diluted		1.05			0.93			0.94			13		12
Dividends, per common share		0.280			0.205			0.195			37		44
At Quarter End
Assets		$	12,830,528		$	12,354,833		$	11,273,767		4		14
Deposits		10,785,701			10,166,806			9,126,722			6		18
Loans		7,542,147			7,590,226			7,966,801			(1	)	(5	)
Securities		3,501,398			3,080,721			2,046,020			14		71
Shareholders’ equity		1,183,799			1,144,690			1,125,855			3		5
Book value per share		24.29			23.77			22.44			2		8
Average Balances
Assets		$	12,418,660		$	11,914,869		$	10,964,142		4		13
Deposits		10,320,828			9,774,905			8,772,826			6		18
Loans		7,558,799			7,793,863			7,958,258			(3	)	(5	)
Securities		3,247,019			2,900,785			1,936,582			12		68
Shareholders’ equity		1,139,440			1,131,682			1,094,381			1		4
Selected Ratios
Return on average assets		1.68		%	1.55		%	1.76		%	8		(5	)
Return on average shareholders’ equity		18.28			16.33			17.65			12		4
Corporation’s tier 1 leverage		7.37			7.17			7.88			3		(6	)
Corporation’s tier 1 risk-based capital		10.76			10.21			10.16			5		6
Corporation’s total risk-based capital		14.94			14.45			14.61			3		2
Dividend payout ratio, per share		25.94			21.51			20.03			21		30
Net interest margin		4.61			4.79			5.35			(4	)	(14	)
Efficiency ratio *		52.92			52.53			48.65			1		9
Asset Quality Ratios
Nonaccrual loans to total loans		0.72		%	0.91		%	0.63		%	(21	)	14
Nonaccrual loans and ORE to toal loans and ORE		0.72			0.92			0.64			(22	)	13
Allowance for credit losses to total loans		2.20			2.25			2.00			(2	)	10
Allowance for credit losses to non accrual loans		304.08			246.37			317.25			23		(4	)
Net charge-offs to average loans - annualized		(0.25		)	(0.52		)	(0.95		)	(52	)	(74	)

 

* 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 Financial Statements in the Company’s 2002 Form 10-K.

 

Overview

 

The Corporation recorded net income of $52.5 million, or $1.05 per common share, for the third quarter of 2003, compared with net income of $48.7 million, or $0.94 per share, for the third quarter of 2002 on fewer common shares outstanding this year.

 

For the first nine months of 2003, City National Corporation recorded net income of $142.2 million, or $2.85 per share, compared with net income of $138.7 million, or $2.69 per share, reported for the first nine months of 2002.

 

HIGHLIGHTS

 

•                  In light of improved credit quality, no provision for credit losses was recorded in the third quarter of 2003 compared with $20.5 million in the prior year as nonaccrual loans declined 21 percent; selected higher-risk credits were paid, charged off or sold; charge-offs were lower and recoveries were higher than expected; and loans declined by 1 percent from the end of the prior quarter.  The year-to-date provision for credit losses was $29.0 million compared with $49.5 million for the first nine months of 2002. The allowance for credit losses to total loans was 2.20 percent at September 30, 2003.

 

•                  Average core deposits for the first nine months were up 23 percent from the same period last year.  Third-quarter average core deposits were up 23 percent from a year ago and 6 percent from the prior quarter.

 

•                  Average securities for the first nine months were up 46 percent from the same period last year due to significantly higher deposit balances and modest loan demand.  The average duration of total available-for-sale securities at September 30, 2003 was 3.2 years.  Average loans for the first nine months were essentially unchanged from the same period last year and period-end loan balances were down  $48.1 million from the last quarter.

 

•                  Net interest income for the first nine months of 2003 increased slightly over the first nine months of 2002, but was 2 percent lower in the third quarter compared with the same period last year.  This decline is consistent with the 18-basis-point compression in the net interest margin to 4.61 percent during the third quarter of 2003.

 

9

 

•                  Noninterest income excluding gains on sale of loans, assets and securities rose 18 percent for the first nine months over the same period last year.  This continued increase was primarily due to the acquisition of Convergent Capital Management (“CCM”) on April 1, 2003.  Third-quarter noninterest income, excluding gains on the sale of loans, assets and securities, was 23 percent higher than the third quarter of 2002 and 3 percent higher than the second quarter of 2003.

 

•                  Exposure to syndicated non-relationship commercial and purchased media and telecommunication loans declined 40 percent from June 30, 2003 to $31.2 million at September 30, 2003 out of a total loan portfolio of $7.5 billion.

 

Dollars in millions, except per share		For the three months ended September 30,						% Change		For the three months ended June 30, 2003			For the nine months ended September 30,						% Change
		2003			2002								2003			2002
Earnings Per Share		$	1.05		$	0.94		12		$	0.93		$	2.85		$	2.69		6
Net Income		52.5			48.7			8		46.1			142.2			138.7			3
Average Assets		12,418.7			10,964.1			13		11,914.9			11,941.5			10,749.8			11
Return on Average Assets		1.68		%	1.76		%	(5	)	1.55		%	1.59		%	1.72		%	(8	)
Return on Average Equity		18.28			17.65			4		16.33			16.83			18.01			(7	)

 

Return on average assets for the third quarter and the first nine months of 2003 declined compared with the same periods last year due to an increase in average assets, primarily lower-yielding securities.  The lower return on average shareholders’ equity for the first nine months was due primarily to a higher level of shareholders’ equity from retained net income and from the exercise of stock options, net of treasury share repurchases.

 

Outlook

 

Consistent with its October 15, 2003 third quarter earnings release, management currently expects net income per diluted common share for 2003 to be approximately 8 to 10 percent higher than net income per diluted common share for 2002 based on the business indicators below:

 

•	Average loan growth		flat to 2 percent
•	Average deposit growth		13 to 16 percent
•	Net interest margin		4.75 to 4.85 percent
•	Provision for credit losses		$29 million to $35 million
•	Noninterest income growth		18 to 21 percent
•	Noninterest expense growth		9 to 12 percent
•	Effective tax rate		32 to 34 percent

 

Revenues

 

Revenues (net interest income plus noninterest income) for the first nine months of 2003, increased 4 percent to $513.3 million compared with $492.7 million for the first nine months of 2002, primarily due to the acquisition of CCM.  Third-quarter revenues increased 5 percent to $173.9 million from $165.7 million in the third quarter of 2002.  Revenues increased 1 percent from the second quarter of 2003.

 

Net Interest Income

 

Fully taxable-equivalent net interest income for the first nine months of 2003 was $395.0 million compared with $394.9 million for the first nine months of 2002.  Net interest income for the third quarter of 2003 was $132.4 million on a fully taxable-equivalent basis, a 2 percent decrease from $135.2 million in the third quarter of 2002 due to lower interest rates and lower commercial loan demand.

 

10

 

 

Dollars  in millions		For the three months ended September 30,						% Change		For the three months ended June 30, 2003			For the nine months ended September 30,						% Change
		2003			2002								2003			2002
Average Loans		$	7,558.8		$	7,958.3		(5	)	$	7,793.9		$	7,770.8		$	7,772.7		0
Average Securities		3,247.0			1,936.6			68		2,900.8			2,866.2			1,963.7			46
Average Deposits		10,320.8			8,772.8			18		9,774.9			9,826.7			8,422.3			17
Average Core Deposits		9,323.5			7,565.7			23		8,763.1			8,808.0			7,138.6			23
Fully Taxable-Equivalent Net Interest Income		132.4			135.2			(2	)	130.8			395.0			394.9			0
Net Interest Margin		4.61		%	5.35		%	(14	)	4.79		%	4.82		%	5.35		%	(10	)

 

Average loans for the first nine months of 2003 were just slightly lower than the same period last year.  However, average loans for the third quarter of 2003 declined 5 percent compared with the same period last year and 3 percent from the prior quarter, due to continued modest loan demand. Compared with the first nine months of 2002 averages, commercial loans decreased 5 percent, residential first mortgage loans rose 3 percent, real estate mortgage loans rose 5 percent, and real estate construction loans rose 5 percent.  Compared with the prior-year third-quarter averages, commercial loans declined 11 percent, residential first mortgage loans rose 1 percent, real estate mortgage loans declined 1 percent, and real estate construction loans declined 3 percent due to payoffs on completed construction projects.  Compared with the prior quarter, average residential first mortgage loans and installment loans increased while all other loan categories decreased.

 

Period-end September 30, 2003 loans declined $48.1 million from June 30, 2003, representing a slowing in the decline in the total loan portfolio and the modest growth seen in certain areas, compared with the $242.6 million decline between June 30, 2003 and March 31, 2003.

 

Average securities, principally with low current yields and short maturities, for the first nine months and third quarter of 2003 increased 46 percent and 68 percent over the same periods last year due to higher deposit balances and modest loan demand.  As of September 30, 2003, unrealized gains on securities available-for-sale were $27.7 million.  In addition, the average duration of total available-for-sale securities at September 30, 2003 was 3.2 years compared to 2.3 years at June 30, 2003, consistent with our expectations given the change in interest rates from June to September.

 

Average deposits continued to increase over the prior-year periods as well as from the prior quarter.  Average core deposits represented 90 percent of the total average deposit base for the third quarter of 2003, compared with 86 percent for the third quarter of 2002 and 90 percent for the second quarter of 2003.  New clients and higher client balances maintained as deposits to pay for services contributed to the continued growth of deposits.

 

The net interest margin narrowed due to prepayment and refinancing activity and low interest rates.

 

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 $1,051.4 million, added $8.1 million to net interest income in the third quarter of 2003.  That compared with $8.2 million in the third quarter of 2002 and $7.5 million for the second quarter of 2003.  These net interest income amounts included $5.8 million, $3.7 million and $5.2 million, respectively, for interest swaps qualifying as fair-value hedges.  Income from swaps qualifying as cash-flow hedges was $2.3 million for the third quarter of 2003, compared with $4.5 million for the third quarter of 2002 and $2.3 million for the second quarter of 2003.  For the first nine months of 2003, interest rate swaps added $23.1 million to net interest income, compared with $24.6 million for the first nine months of 2002.  These amounts included $15.5 million and $10.6 million, respectively, for interest swaps qualifying as fair value hedges.  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 $7.8 million.

 

Interest recovered on nonaccrual and charged-off loans included in net interest income for the first nine months of 2003 was $2.3 million compared with $1.4 million for the first nine months of 2002.  Interest income

 

11

 

recovered was $1.3 million for the third quarter of 2003, compared with $0.4 million for the third quarter of 2002 and $0.4 million for the second quarter of 2003, respectively.

 

The Bank’s prime rate was 4.00 percent as of September 30, 2003, compared with 4.75 percent a year earlier.

 

The following tables present the components of net interest income on a fully taxable-equivalent basis for the three and nine months ended September 30, 2003 and 2002.  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.

 

12

 

Net Interest Income Summary

 

			For the three months ended September 30, 2003								For the three months ended September 30, 2002
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			$	3,191,405		$	42,658		5.30	%	$	3,598,795		$	54,422		6.00	%
Real estate mortgages			1,890,996			30,582			6.42		1,900,612			34,481			7.20
Residential first mortgages			1,754,877			26,383			5.96		1,733,693			29,454			6.74
Real estate construction			634,300			7,925			4.96		651,174			9,254			5.64
Installment			87,221			1,579			7.18		73,984			1,602			8.59
Total loans	(1)		7,558,799			109,127			5.73		7,958,258			129,213			6.44
Securities available-for-sale			3,146,971			35,268			4.45		1,882,231			28,350			5.98
Federal funds sold and securities purchased under resale agreements			584,552			1,511			1.03		120,279			540			1.78
Trading account securities			100,048			175			0.69		54,351			163			1.19
Total interest-earning assets			11,390,370			146,081			5.09		10,015,119			158,266			6.27
Allowance for credit losses			(173,822		)						(160,026		)
Cash and due from banks			438,968								440,226
Other nonearning assets			763,144								668,823
Total assets			$	12,418,660							$	10,964,142
Liabilities and Shareholders’ Equity
Interest-bearing deposits
Interest checking accounts			$	750,513		292			0.15		$	626,469		408			0.26
Money market accounts			3,289,234			5,541			0.67		2,680,730			9,128			1.35
Savings deposits			211,623			71			0.13		221,227			441			0.79
Time deposits - under $100,000			207,362			819			1.57		223,853			1,277			2.26
Time deposits - $100,000 and over			997,287			3,322			1.32		1,207,127			6,512			2.14
Total interest - bearing deposits			5,456,019			10,045			0.73		4,959,406			17,766			1.42
Federal funds purchased and securities sold under repurchase agreements			132,731			292			0.87		211,321			845			1.59
Other borrowings			660,830			3,363			2.02		750,319			4,481			2.37
Total interest - bearing liabilities			6,249,580			13,700			0.87		5,921,046			23,092			1.55
Noninterest - bearing deposits			4,864,809								3,813,420
Other liabilities			164,831								135,295
Shareholders’ equity			1,139,440								1,094,381
Total liabilities and shareholders' equity			$	12,418,660							$	10,964,142
Net interest spread									4.22	%							4.72	%
Fully taxable-equivalent net interest income						$	132,381							$	135,174
Net interest margin									4.61	%							5.35	%

 

(1)   Includes average nonaccrual loans of $59,319 and $57,025 for 2003 and 2002, respectively.

(2)   Loan income includes loan fees of $5,899 and $6,486 for 2003 and 2002, respectively.

 

13

 

Net Interest Income Summary

 

			For the nine months ended September 30, 2003								For the nine months ended September 30, 2002
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			$	3,383,367		$	134,157		5.30	%	$	3,573,657		$	163,287		6.11	%
Real estate mortgages			1,902,117			93,531			6.57		1,803,924			98,029			7.27
Residential first mortgages			1,748,237			81,284			6.22		1,695,501			87,201			6.88
Real estate construction			659,157			25,668			5.21		628,239			26,428			5.62
Installment			77,970			4,488			7.70		71,382			4,767			8.93
Total loans	(1)		7,770,848			339,128			5.83		7,772,703			379,712			6.53
Securities available-for-sale			2,794,975			101,168			4.84		1,908,674			87,583			6.14
Federal funds sold and securities purchased under resale agreements			323,021			2,693			1.11		133,042			1,751			1.76
Trading account securities			71,175			373			0.70		54,992			555			1.35
Total interest-earning assets			10,960,019			443,362			5.41		9,869,411			469,601			6.36
Allowance for credit losses			(172,522		)						(157,022		)
Cash and due from banks			436,605								426,203
Other nonearning assets			717,387								611,190
Total assets			$	11,941,489							$	10,749,782
Liabilities and Shareholders’ Equity
Interest-bearing deposits
Interest checking accounts			$	712,588		933			0.18		$	606,326		1,166			0.26
Money market accounts			3,126,353			20,371			0.87		2,403,092			25,387			1.41
Savings deposits			205,147			572			0.37		231,216			1,672			0.97
Time deposits - under $100,000			211,673			2,760			1.74		228,059			4,214			2.47
Time deposits - $100,000 and over			1,018,647			11,431			1.50		1,283,647			22,438			2.34
Total interest - bearing deposits			5,274,408			36,067			0.91		4,752,340			54,877			1.54
Federal funds purchased and securities sold under repurchase agreements			165,765			1,331			1.07		204,712			2,430			1.59
Other borrowings			662,054			10,970			2.22		974,785			17,385			2.38
Total interest - bearing liabilities			6,102,227			48,368			1.06		5,931,837			74,692			1.68
Noninterest - bearing deposits			4,552,251								3,669,914
Other liabilities			157,366								118,420
Shareholders’ equity			1,129,645								1,029,611
Total liabilities and shareholders’ equity			$	11,941,489							$	10,749,782
Net interest spread									4.35	%							4.68	%
Fully taxable-equivalent net interest income						$	394,994							$	394,909
Net interest margin									4.82	%							5.35	%

 

(1)          Includes average nonaccrual loans of $74,058 and $52,942 for 2003 and 2002, respectively.

(2)          Loan income includes loan fees of $16,985 and $18,377 for 2003 and 2002, respectively.

 

14

 

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 third quarter and the first nine months of 2003 and the third quarter and the first nine months of 2002, as well as between the third quarter and the first nine months of 2002 and the third quarter and the first nine months of 2001.

 

Changes In Net Interest Income

 

		For the three months ended September 30, 2003 vs 2002									For the three months ended September 30, 2002 vs 2001
Dollars in thousands		Increase (decrease) due to						Net increase (decrease)			Increase (decrease) due to						Net increase (decrease)
		Volume			Rate						Volume			Rate
Interest earned on:		$	(6,284	)	$	(13,802	)	$	(20,086	)	$	21,193		$	(22,323	)	$	(1,130	)
Securities available-for-sale		15,524			(8,606		)	6,918			2,315			(2,746		)	(431		)
Federal funds sold and securities pruchased under resale agreements		1,285			(314		)	971			266			(280		)	(14		)
Trading account securities		99			(87		)	12			52			(267		)	(215		)
Total interest-earning assets		10,624			(22,809		)	(12,185		)	23,826			(25,616		)	(1,790		)
Interest paid on:
Interest checking deposits		74			(190		)	(116		)	87			(209		)	(122		)
Money market deposits		1,741			(5,328		)	(3,587		)	5,538			(7,485		)	(1,947		)
Savings deposits		(18		)	(352		)	(370		)	(163		)	(1,008		)	(1,171		)
Other time deposits		(1,092		)	(2,556		)	(3,648		)	(1,828		)	(7,491		)	(9,319		)
Other borrowings		(851		)	(820		)	(1,671		)	(4,448		)	(5,288		)	(9,736		)
Total interest-bearing liabilities		(146		)	(9,246		)	(9,392		)	(814		)	(21,481		)	(22,295		)
		$	10,770		$	(13,563	)	$	(2,793	)	$	24,640		$	(4,135	)	$	20,505
		For the nine months ended September 30, 2003 vs 2002									For the nine months ended September 30, 2002 vs 2001
Dollars in thousands		Increase (decrease) due to						Net increase (decrease)			Increase (decrease) due to						Net increase (decrease)
		Volume			Rate						Volume			Rate
Interest earned on:
Loans		$	(91	)	$	(40,493	)	$	(40,584	)	$	64,420		$	(86,266	)	$	(21,846	)
Securities		34,824			(21,239		)	13,585			13,859			(8,234		)	5,625
Federal funds sold and securities purchased under resale agreements		1,776			(834		)	942			1,356			(1,630		)	(274		)
Trading account securities		133			(315		)	(182		)	(160		)	(1,058		)	(1,218		)
Total interest-earning assets		36,642			(62,881		)	(26,239		)	79,475			(97,188		)	(17,713		)
Interest paid on: