Edgar Filing: CITY NATIONAL CORP

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 June 30, 2004

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

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

YES

Number of shares of common stock outstanding at July 31, 2004: 49,055,585

PART 1 - FINANCIAL INFORMATON

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited)

Dollars in thousands, except per share amounts	June 30, 2004			December 31, 2003			June 30, 2003
Assets
Cash and due from banks	$	485,208		$	461,443		$	451,291
Federal funds sold	595,000			240,000			650,000
Due from banks - interest bearing	76,890			405,747			30,402
Securities available-for-sale - cost $3,586,185; $3,350,632 and $2,935,401 at June 30, 2004, December 31, 2003 and June 30, 2003, respectively	3,518,757			3,365,654			2,992,686
Trading account securities	28,893			91,535			57,633
Loans	8,125,496			7,882,742			7,590,226
Less allowance for credit losses	165,117			165,986			170,927
Net loans	7,960,379			7,716,756			7,419,299

Premises and equipment, net	60,488			62,719			64,966
Deferred tax asset	127,991			65,913			50,488
Goodwill	253,736			253,824			254,627
Intangibles	44,360			47,879			48,597
Bank owned life insurance	64,012			62,799			61,554
Affordable housing investments	65,174			66,480			66,532
Other assets	187,296			171,785			200,613
Customers’ acceptance liability	5,716			5,708			6,145

Total assets	$	13,473,900		$	13,018,242		$	12,354,833

Liabilities
Demand deposits	$	5,809,241		$	5,486,668		$	4,916,678
Interest checking deposits	861,987			840,659			689,658
Money market deposits	3,601,658			3,260,959			3,140,203
Savings deposits	199,650			208,701			211,010
Time deposits-under $100,000	191,250			199,875			210,333
Time deposits-$100,000 and over	791,133			940,201			998,924

Total deposits	11,454,919			10,937,063			10,166,806
Federal funds purchased and securities sold under repurchase agreements	94,898			111,713			167,084
Other short-term borrowings	50,125			65,135			115,125
Subordinated debt	286,896			295,723			318,282
Long-term debt	224,488			230,555			283,954
Other liabilities	101,869			127,045			126,703
Acceptances outstanding	5,716			5,708			6,145

Total liabilities	12,218,911			11,772,942			11,184,099
Minority interest in consolidated subsidiaries	27,180			26,044			26,044

Commitments and contingencies

Shareholders’ Equity
Preferred Stock authorized - 5,000,000 : none outstanding	—			—			—
Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,578,256; 50,459,716 and 50,455,363 shares at June 30, 2004, December 31, 2003 and June 30, 2003, respectively	50,578			50,460			50,455
Additional paid-in capital	408,463			401,233			404,741
Accumulated other comprehensive income (loss)	(38,418		)	12,903			39,781
Retained earnings	886,367			814,591			745,017
Deferred equity compensation	(13,343		)	(6,699		)	(7,595		)
Treasury shares, at cost - 1,268,452; 1,255,569; and 2,027,574 shares at June 30, 2004, December 31, 2003 and June 30, 2003, respectively	(65,838		)	(53,232		)	(87,709		)
Total shareholders’ equity	1,227,809			1,219,256			1,144,690
Total liabilities and shareholders’ equity	$	13,473,900		$	13,018,242		$	12,354,833

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

	For the three months ended June 30,				For the six months ended June 30,
In thousands, except per share amounts	2004		2003		2004		2003

Interest Income
Loans	$	106,448	$	111,176	$	212,434	$	226,912
Securities available-for-sale	37,486		32,292		74,687		61,723
Federal funds sold and securities purchased under resale agreements	1,116		771		1,548		1,182
Due from bank - interest bearing	92		35		232		84
Trading account	36		59		74		108
Total interest income	145,178		144,333		288,975		290,009
Interest Expense
Deposits	9,838		12,548		19,590		26,022
Subordinated debt	1,232		1,349		2,449		2,763
Other long-term debt	1,419		2,342		2,858		3,694
Federal funds purchased and securities sold under repurchase agreements	269		414		513		1,039
Other short-term borrowings	145		556		318		1,150
Total interest expense	12,903		17,209		25,728		34,668
Net interest income	132,275		127,124		263,247		255,341
Provision for credit losses	—		11,500		—		29,000
Net interest income after provision for credit losses	132,275		115,624		263,247		226,341
Non interest Income
Trust and investment fees	16,664		12,192		32,252		18,730
Brokerage and mutual fund fees	9,367		9,313		18,093		18,255
Cash management and deposit transaction charges	10,942		10,876		22,040		21,983
International services	5,042		5,019		10,168		9,347
Bank owned life insurance	715		731		1,546		1,445
Gain on sale of loans and assets	—		—		—		102
Gain on sale of securities	871		1,272		1,500		2,502
Other	4,665		5,649		9,237		11,664
Total noninterest income.	48,266		45,052		94,836		84,028
Noninterest Expense
Salaries and employee benefits	59,306		54,516		118,982		106,321
Net occupancy of premises	7,649		7,862		14,957		14,831
Professional fees	6,730		6,769		12,836		13,205
Information services	4,588		4,302		9,110		8,555
Depreciation	3,274		3,019		6,502		6,138
Marketing and advertising	3,812		3,553		7,319		6,665
Office services	2,487		2,398		4,906		4,968
Amortization of intangibles	1,760		2,227		3,519		4,203
Equipment	636		638		1,401		1,304
Other operating	5,413		6,032		10,654		10,538
Total noninterest expense	95,655		91,316		190,186		176,728
Minority interest in net income of consolidated subsidiaries	1,306		1,065		2,906		1,540
Income before income taxes	83,580		68,295		164,991		132,101
Income taxes	31,380		22,214		61,893		42,365
Net income	$	52,200	$	46,081	$	103,098	$	89,736

Net income per share, basic	$	1.07	$	0.95	$	2.11	$	1.85

Net income per share, diluted	$	1.03	$	0.93	$	2.03	$	1.80

Shares used to compute income per share, basic	48,796		48,308		48,764		48,543

Shares used to compute income per share, diluted	50,925		49,524		50,864		49,824
Dividends per share	$	0.320	$	0.205	$	0.640	$	0.410

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	For the six months ended June 30,
Dollars in thousands	2004			2003

Cash Flows From Operating Activities
Net income	$	103,098		$	89,736
Adjustments to net income:
Provision for credit losses	—			29,000
Amortization of restricted stock awards	1,265			129
Amortization of intangibles	3,519			4,203
Depreciation	6,502			6,138
Deferred income tax benefit	(62,078		)	(13,434		)
Gain on sales of loans and assets	—			(102		)
Gain on sales of securities	(1,500		)	(2,502		)
Net decrease (increase) in other assets	(19,240		)	10,399
Net decrease in trading securities	62,642			69,166
Other, net	10,319			8,980
Net cash provided by operating activities	104,527			201,713

Cash Flows From Investing Activities
Purchase of securities	(704,411		)	(1,602,880		)
Sales of securities available-for-sale	61,322			111,240
Maturities and paydowns of securities	403,592			722,869
Loan principal collections (originations), net	(242,754		)	380,151
Purchase of premises and equipment	(6,183		)	(10,906		)
Net cash for acquisitions	—			(39,907		)
Other, net	(5		)	(3		)
Net cash used by investing activities.	(488,439		)	(439,436		)

Cash Flows From Financing Activities
Net increase in deposits	517,856			327,108
Net decrease in federal funds purchased and securities sold under repurchase agreements	(16,815		)	(99,643		)
Net decrease in short-term borrowings, net of transfers from long-term debt	(15,010		)	(25,000		)
Repayment of long-term debt	—			(1,367		)
Net proceeds of issuance of senior debt	—			221,749
Proceeds from exercise of stock options	22,937			9,015
Stock repurchases	(43,826		)	(45,217		)
Cash dividends paid	(31,322		)	(19,914		)
Net cash provided by financing activities	433,820			366,731

Net increase in cash and cash equivalents	49,908			129,008
Cash and cash equivalents at beginning of year	1,107,190			1,002,685
Cash and cash equivalents at end of period	$	1,157,098		$	1,131,693

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	26,142		$	31,309
Income taxes	66,500			44,000

Non-cash investing activities:
Transfer from long-term debt to short-term borrowings	$	—		$	15,000

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

Dollars in thousands	Shares issued	Common stock		Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained Earnings			Deferred Compensation			Treasury stock			Total shareholders’ equity

Balances, December 31, 2002	50,282,743	$	50,283	$	400,866		$	40,400		$	675,195		$	—		$	(56,785	)	$	1,109,959
Net income	—	—		—			—			89,736			—			—			89,736
Other comprehensive income net of tax
Net unrealized gain on securities available-for-sale, net of relassification adjustment of $0.5 million of net losses included in net income	—	—		—			39			—			—			—			39
Net unrealized loss on cash flow hedges, net of reclassification of $3.1 million of net gains included in net income	—	—		—			(658		)	—			—			—			(658		)
Total comprehensive income																			89,117
Issuance of shares for stock options	—	1		(5,279		)	—			—			—			14,293			9,015
Restricted stock grants	172,620	171		7,553			—			—			(7,724		)	—			—
Amortization of restricted stock grants	—	—		—			—			—			129			—			129
Tax benefit from stock options	—	—		1,601			—			—			—			—			1,601
Cash dividends	—	—		—			—			(19,914		)	—			—			(19,914		)
Repurchased shares, net	—	—		—			—			—			—			(45,217		)	(45,217		)
Balance, June 30, 2003	50,455,363	$	50,455	$	404,741		$	39,781		$	745,017		$	(7,595	)	$	(87,709	)	$	1,144,690

Balance, December 31, 2003	50,459,716	$	50,460	$	401,233		$	12,903		$	814,591		$	(6,699	)	$	(53,232	)	$	1,219,256
Net income	—	—		—			—			103,098			—			—			103,098
Other comprehensive income net of tax
Net unrealized loss on securities available-for-sale, net of relassification adjustment of $0.8 million of net gains included in net income	—	—		—			(47,789		)	—			—			—			(47,789		)
Net unrealized loss on cash flow hedges, net of reclassification of $2.8 million of net gains included in net income	—	—		—			(3,532		)	—			—			—			(3,532		)
Total comprehensive income										—			—						51,777
Issuance of shares for stock options	—	—		(8,283		)	—			—			—			31,220			22,937
Restricted stock grants	118,540	118		7,791			—			—			(7,909		)	—			—
Amortization of restricted stock grants	—	—		—			—			—			1,265			—			1,265
Tax benefit from stock options	—	—		7,722			—			—			—			—			7,722
Cash dividends	—	—		—			—			(31,322		)	—			—			(31,322		)
Repurchased shares, net	—	—		—			—			—			—			(43,826		)	(43,826		)
Balances, June 30, 2004	50,578,256	$	50,578	$	408,463		$	(38,418	)	$	886,367		$	(13,343	)	$	(65,838	)	$	1,227,809

See accompanying Notes to Consolidated Financial Statements.

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 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 purchase price adjustments for the February 29, 2000 acquisition of The Pacific Bank N.A. and for the February 28, 2002 acquisition of Civic BanCorp of $0.6 million for exit costs relating to surplus space remain as of June 30, 2004.

6. The following table provides information about purchases by the Company during the quarter ended June 30, 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
04/01/04 - 04/30/04	2,752		$	60.81	—	1,016,900
05/01/04 - 05/31/04	7,949		60.07		7,400	1,009,500	(2)
	10,701	(1)	$	60.26	7,400	1,009,500

(1) We repurchased an aggregate of 7,400 shares of our common stock pursuant to a repurchase program that we publicly announced on July 15, 2003 (the “Program”) and we received 3,301 shares in payment of the exercise price of stock options.

(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 Program 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 June 30, 2004, no stock options were antidilutive compared with 1,189,835 antidilutive stock options at June 30, 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 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 June 30,						For the six months ended June 30,
Dollars in thousands, except for per share amounts	2004			2003			2004			2003
Net income, as reported	$	52,200		$	46,081		$	103,098		$	89,736
Proforma net income	51,387			44,529			101,562			86,717
Net income per share, basic, as reported	1.07			0.95			2.11			1.85
Proforma net income per share, basic	1.05			0.92			2.08			1.79
Net income per share, diluted, as reported	1.03			0.93			2.03			1.80
Proforma net income per share, diluted	1.01			0.90			2.00			1.74
Percentage reduction in net income per share, diluted	1.94		%	3.23		%	1.48		%	3.33		%

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 $757,000 in expense for restricted stock awards in the second quarter of 2004 and $1,265,000 for the first six months of 2004 compared with $129,000 and $129,000 for the quarter and first six months of 2003. 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 $8.9 billion as of June 30, 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 (“FTB”) has taken the position that certain REIT and registered investment company (“RIC”) tax deductions will be disallowed consistent with notices issued by the State of California that stipulate that the RIC and REIT are listed transactions under California tax shelter legislation. While management continues to believe that the tax benefits realized in previous years were appropriate, the Company deemed it prudent to participate in the statutory Voluntary Compliance Initiative-Option 2, 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. 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 its refund claims for taxes and interest. As of June 30, 2004, the Company reflected a $36.4 million net 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 $23.7 million after giving effect to Federal tax benefits. Although management intends to aggressively pursue its claims for REIT and RIC refunds for the 2000 to 2003 tax years, 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 $23.7 million net state tax receivable after giving effect to Federal tax benefits.

CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

(Unaudited)

	At or for the three months ended									Percentage change June 30, 2004 from
Dollars in thousands, except per share amounts	June 30, 2004			March 31, 2004			June 30, 2003			March 31, 2004		June 30, 2003

For The Quarter
Net income	$	52,200		$	50,898		$	46,081		3	%	13	%
Net income per common share, diluted	1.03			1.00			0.93			3		11
Dividends, per common share	0.320			0.320			0.205			0		56

At Quarter End
Assets	$	13,473,900		$	13,220,524		$	12,354,833		2		9
Deposits	11,454,919			11,134,677			10,166,806			3		13
Loans	8,125,496			7,967,639			7,590,226			2		7
Securities	3,518,757			3,612,173			2,992,686			(3	)	18
Shareholders’ equity	1,227,809			1,239,930			1,144,690			(1	)	7
Book value per share	25.05			25.54			23.77			(2	)	5

Average Balances
Assets	$	13,211,551		$	12,606,754		$	11,914,869		5		11
Deposits	11,121,541			10,533,471			9,774,905			6		14
Loans	8,053,916			7,886,333			7,793,863			2		3
Securities	3,600,997			3,462,547			2,873,831			4		25
Shareholders’ equity	1,230,167			1,222,017			1,131,682			1		9

Selected Ratios
Return on average assets	1.59		%	1.62		%	1.55		%	(2	)	3
Return on average shareholders’ equity	17.07			16.75			16.33			2		5
Corporation’s tier 1 leverage	7.69			7.61			7.17			1		7
Corporation’s tier 1 risk-based capital	11.11			10.67			10.21			4		9
Corporation’s total risk-based capital	14.81			14.43			14.45			3		2
Average shareholders’ equity to average assets	9.31			9.69			9.50			(4	)	(2	)
Dividend payout ratio, per share	30.06			30.71			21.51			(2	)	40
Net interest margin	4.49			4.66			4.79			(4	)	(6	)
Efficiency ratio *	52.72			53.39			52.53			(1	)	0

Asset Quality Ratios
Nonaccrual loans to total loans	0.51		%	0.54		%	0.91		%	(6	)	(44	)
Nonaccrual loans and ORE to toal loans and ORE	0.51			0.54			0.92			(6	)	(45	)
Allowance for credit losses to total loans	2.03			2.07			2.25			(2	)	(10	)
Allowance for credit losses to nonaccrual loans	394.71			386.29			246.37			2		60
Net charge-offs to average loans - annualized	—			(0.05		)	(0.52		)	(100	)	(100	)

* 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).

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 $52.2 million, or $1.03 per common share, for the second quarter of 2004, compared with net income of $46.1 million, or $0.93 per share, for the second quarter of 2003.

Highlights

• Average deposits were up 14 percent with average core deposits up 18 percent for the second quarter of 2004 from the second quarter a year ago due to growth throughout the bank.

• Second-quarter average loans surpassed $8.0 billion for the first time, up 3 percent from the same period last year. Period-end loan balances at June 30, 2004 of $8.1 billion increased $242.8 million, or 3 percent from $7.9 billion at December 31, 2003 net of payoffs of $98.7 million in dairy loans as a result of the Company exiting this industry as previously announced.

• No provision for credit losses was recorded for the second quarter of 2004, a result of continued strong credit quality and an adequate current level of allowance for credit losses. Recoveries slightly exceeded charge-offs for the quarter. Nonaccrual loans as of June 30, 2004, were $41.8 million, down 40 percent from June 30, 2003, and down 2 percent from March 31, 2004.

• Average securities for the second quarter of 2004 were up 25 percent from the same period a year ago due to deposit growth outpacing loan growth. Second-quarter average securities were up 4 percent from the first quarter of 2004 but period-end securities declined $104.1 million from March 31, 2004 to June 30, 2004.

• Noninterest income for the second quarter of 2004 rose 7 percent over the same period a year ago due primarily to higher trust and investment fees.

Dollars in millions,	For the three months ended June 30,						%	For the three months ended			%
except per share	2004			2003			Change	March 31, 2004			Change
Earnings Per Share	$	1.03		$	0.93		11	$	1.00		3
Net Income	52.2			46.1			13	50.9			3
Average Assets	13,211.6			11,914.9			11	12,606.8			5
Return on Average Assets	1.59		%	1.55		%	3	1.62		%	(2	)
Return on Average Equity	17.07			16.33			5	16.75			2

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”). Second-quarter 2003 results included $2.7 million in net income, or $0.05 per share, from tax benefits of the Company’s two REITS.

Outlook

As disclosed in the Company’s press release on second-quarter earnings, management continues to expect the growth of net income per share for 2004 to be approximately 8 to 10 percent higher than net income per share for 2003. This is based on current economic conditions and the current outlook for the remainder of 2004, the 25 basis point increase in interest rates effective June 30, 2004, and the updated business indicators below:

•	Average loan growth	4 to 6 percent
•	Average deposit growth	7 to 10 percent
•	Net interest margin	4.50 to 4.70 percent
•	Provision for credit losses	$0 million to $10 million
•	Noninterest income growth	6 to 8 percent
•	Noninterest expense growth	6 to 8 percent
•	Effective tax rate	36 to 38 percent

Revenues

Revenues (net interest income plus noninterest income) for the second quarter of 2004 increased 5 percent to $180.5 million compared with $172.2 million for the second quarter of 2003 due to higher net interest income and trust and investment fees. Revenues were up 2 percent from the first quarter of 2004.

Net Interest Income

Fully taxable-equivalent net interest income for the second quarter of 2004 was $135.6 million, compared with $130.8 million for the second quarter of 2003 and $134.3 million for the first quarter of 2004. The net interest margin was 17 basis points lower than the first quarter of 2004 due primarily to investing in lower yielding, shorter term securities.

	For the three months ended June 30,						%		For the three months ended			%
Dollars in millions	2004			2003			Change		March 31, 2004			Change
Average Loans	$	8,053.9		$	7,793.9		3		$	7,886.3		2
Average Securities	3,601.0			2,873.8			25		3,462.5			4
Average Deposits	11,121.5			9,774.9			14		10,533.5			6
Average Core Deposits	10,310.7			8,763.1			18		9,621.2			7
Fully Taxable-Equivalent Net Interest Income	135.6			130.8			4		134.3			1
Net Interest Margin	4.49		%	4.79		%	(6	)	4.66		%	(4	)

Compared with the prior-year second-quarter averages, equity lines of credit rose 19 percent, residential mortgage loans rose 18 percent, commercial real estate mortgage loans rose 4 percent, real estate construction loans rose 15 percent, and commercial loans decreased 8 percent partially due to payoffs of dairy loans. Compared with the prior quarter, all categories increased except commercial loans.

Period-end June 30, 2004 loans increased $157.9 million from March 31, 2004, reflecting growth in residential mortgage, commercial real estate mortgage, and real estate construction loans.

Average securities increased 25 percent for the second quarter of 2004 compared with the same period for 2003 primarily due to deposit growth outpacing loan growth. Average securities were 4 percent higher than the first quarter of 2004. As of June 30, 2004, unrealized net loss on securities available-for-sale was $67.4 million. The average duration of total available-for-sale securities at June 30, 2004 was 3.8 years compared with 3.4 years at December 31, 2003 and 2.3 years at June 30, 2003. The increase in duration is attributable to an increase in long and medium term interest rates.

Average deposits during the second quarter of 2004 increased 14 percent over the same period last year and were up 6 percent from the first quarter of 2004. Average core deposits represented 93 percent of the total average deposit base for the second quarter of 2004, compared with 90 percent for the second quarter of 2003 and 91 percent for the first quarter of 2004. New clients and higher client balances maintained as deposits to pay for services contributed to the year-over-year growth of deposits.

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 $8.0 million to net interest income in the second quarter of 2004, compared with $7.5 million in the second quarter of 2003 and $8.3 million in the first quarter of 2004. These amounts included $5.5 million, $5.2 million, and $6.0 million, respectively, for interest rate swaps qualifying as fair value hedges. Income from swaps qualifying as cash-flow hedges was $2.5 million for the second quarter of 2004, compared with $2.3 million for the second quarter of 2003, and $2.3 million for the first quarter of 2004. 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 $3.4 million.

Interest recovered on nonaccrual and charged-off loans included in net interest income for the second quarter of 2004 was $0.3 million, compared with $0.4 million for the second quarter of 2003, and $0.7 million for the first quarter of 2004.

The Bank’s prime rate was 4.25 percent as of June 30, 2004, an increase of 25 basis points over last year. However, the increase became effective on June 30, 2004 and did not impact 2004 second-quarter results.

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

Net Interest Income Summary

	For the three months ended June 30, 2004							For the three months ended June 30, 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	$	3,130,129		$	38,954	5.01	%	$	3,402,342		$	44,309	5.22	%
Commercial real estate mortgages	1,813,126			27,456		6.09		1,736,168			29,268		6.76
Residential mortgages	2,036,426			27,414		5.41		1,733,015			26,737		6.19
Real estate construction	779,349			9,880		5.10		679,541			8,903		5.25
Equity lines of credit	203,647			2,300		4.54		170,827			2,029		4.76
Installment	91,239			1,620		7.14		71,970			1,409		7.85
Total loans(1)	8,053,916			107,624		5.37		7,793,863			112,655		5.80
Due from banks - interest bearing	42,961			92		0.86		26,954			35		0.52
Securities available-for-sale	3,568,919			39,671		4.47		2,844,001			34,440		4.86
Federal funds sold and securities purchased under resale agreements	439,402			1,116		1.02		246,559			771		1.25
Trading account securities	32,078			38		0.48		29,830			62		0.83
Total interest-earning assets	12,137,276			148,541		4.92		10,941,207			147,963		5.42
Allowance for credit losses	(167,184		)					(174,270		)
Cash and due from banks	445,898							429,788
Other nonearning assets	795,561							718,144
Total assets	$	13,211,551						$	11,914,869

Liabilities and Shareholders’ Equity
Interest-bearing deposits
Interest checking accounts	$	824,567		174		0.08		$	711,609		304		0.17
Money market accounts	3,648,952			6,163		0.68		3,097,697			7,257		0.94
Savings deposits	212,559			143		0.27		205,378			239		0.47
Time deposits - under $100,000	193,624			667		1.39		212,060			931		1.76
Time deposits - $100,000 and over	810,830			2,691		1.33		1,011,850			3,817		1.51
Total interest - bearing deposits	5,690,532			9,838		0.70		5,238,594			12,548		0.96

Federal funds purchased and securities sold under repurchase agreements	121,903			269		0.89		146,000			414		1.14
Other borrowings	589,991			2,796		1.91		709,391			4,247		2.40
Total interest - bearing liabilities	6,402,426			12,903		0.81		6,093,985			17,209		1.13
Noninterest - bearing deposits	5,431,009							4,536,311
Other liabilities	147,949							152,891
Shareholders’ equity	1,230,167							1,131,682
Total liabilities and shareholders’ equity	$	13,211,551						$	11,914,869
Net interest spread						4.11	%						4.29	%
Fully taxable-equivalent net interest income				$	135,638						$	130,754
Net interest margin						4.49	%						4.79	%

(1) Includes average nonaccrual loans of $41,187 and $79,818 for 2004 and 2003, respectively.

(2) Loan income includes loan fees of $5,025 and $5,620 for 2004 and 2003, respectively.

Net Interest Income Summary

	For the six months ended June 30, 2004							For the six months ended June 30, 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	$	3,151,138		$	79,096	5.05	%	$	3,480,938		$	91,499	5.30	%
Commercial real estate mortgages	1,810,337			55,473		6.16		1,737,889			58,944		6.84
Residential mortgages	1,994,365			54,215		5.47		1,744,861			54,901		6.35
Real estate construction	728,914			18,451		5.09		671,791			17,743		5.33
Equity lines of credit	198,916			4,497		4.55		169,881			4,005		4.75
Installment	86,453			3,052		7.10		73,267			2,909		8.01
Total loans(1)	7,970,123			214,784		5.42		7,878,627			230,001		5.89
Due from banks - interest bearing	60,655			232		0.77		26,891			84		0.63
Securities available-for-sale	3,500,655			79,061		4.54		2,616,060			65,900		5.08
Federal funds sold and securities purchased under resale agreements	307,025			1,548		1.01		190,088			1,182		1.25
Trading account securities	31,117			77		0.50		29,610			114		0.78
Total interest-earning assets	11,869,575			295,702		5.01		10,741,276			297,281		5.58
Allowance for credit losses	(166,922		)					(171,860		)
Cash and due from banks	446,559							435,402
Other nonearning assets	759,939							694,130
Total assets	$	12,909,151						$	11,698,948

Liabilities and Shareholders’ Equity
Interest-bearing deposits
Interest checking accounts	$	813,573		340		0.08		$	693,311		641		0.19
Money market accounts	3,527,490			11,982		0.68		3,043,562			14,830		0.98
Savings deposits	216,136			276		0.26		201,856			501		0.50
Time deposits - under $100,000	195,642			1,378		1.42		213,865			1,941		1.83
Time deposits - $100,000 and over	861,573			5,614		1.31		1,029,504			8,109		1.59
Total interest - bearing deposits	5,614,414			19,590		0.70		5,182,098			26,022		1.01

Federal funds purchased and securities sold under repurchase agreements	116,834			513		0.88		182,556			1,039		1.15
Other borrowings	584,489			5,625		1.94		662,676			7,607		2.31
Total interest - bearing liabilities	6,315,737			25,728		0.82		6,027,330			34,668		1.16
Noninterest - bearing deposits	5,213,094							4,393,383
Other liabilities	154,228							153,568
Shareholders’ equity	1,226,092							1,124,667
Total liabilities and shareholders’ equity	$	12,909,151						$	11,698,948
Net interest spread						4.19	%						4.42	%
Fully taxable-equivalent net interest income				$	269,974						$	262,613
Net interest margin						4.57	%						4.93	%

(1) Includes average nonaccrual loans of $41,233 and $81,428 for 2004 and 2003, respectively.

(2) Loan income includes loan fees of $10,353 and $11,048 for 2004 and 2003, respectively.

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 second quarter and first six months of 2004 and the second quarter and first six months of 2003, as well as between the second quarter and first six months of 2003 and the second quarter and first six months of 2002.

Changes In Net Interest Income

For the three months ended June 30,
2004 vs 2003

For the three months ended June 30,
2003 vs 2002

Increase (decrease)
due to

Net
increase

Increase (decrease)
due to

Net
increase

Dollars in thousands

Volume

Rate

(decrease)

Volume

Rate

(decrease)

Interest earned on: