By Howard Fine
Rising interest rates and the softening housing market have taken some wind out of the sails of City National Corp., the region’s largest independent bank operator.
Shares of City National, which runs City National Bank, are off nearly 15% from the spring after two earnings warnings.
The company counted a market value of $3.2 billion as of last week.
Rising interest rates have upped costs at City National and spurred some customers to chase better rates on savings accounts, sometimes at other banks.
In a recent conference call with analysts and investors, City National Chief Executive Russell Goldsmith characterized the developments as a short-term cyclical dip.
“At City National, we are very aware that we are not growing net income as strongly as we would like, but we are not running this company for just a quarter or two,” he said. “City National is in this for the long term. We are aggressively marketing our deposit products, hiring some new sales people and adding clients.”
OC Ties
The moves are part of a strategy to expand City National beyond its base clientele of small and midsize local companies and entertainment industry players, such as talent agencies, law firms and wealthy people.
The latter earned City National the nickname “bank of the stars.”
Beverly Hills-based City National has deep ties in Orange County.
City National ranks No. 12 here among the largest banks doing business here, according to the Business Journal’s list of commercial banks earlier this year.
The bank counts $580 million in OC deposits at seven local branches. Last year, City National opened three OC branches.
Goldsmith has ties to the area that go back to his childhood.
“I learned to sail here,” he told the Business Journal earlier this year.
Goldsmith said he honed his boating skills at Newport Beach Harbor, where he keeps a speedboat and sailboat.
Lido Village Home
The executive also has a home in Lido Village along with his primary address in Los Angeles.
Fashion Island, where City National opened a branch last year, was a spot Goldsmith said he had had his eye on for years. He said he’s shopped at the mall since he was a teen.
The bank came to OC 31 years ago when it opened a Lido Village office in Newport Beach Harbor to cater to the wealthy.
The branch had a one-of-a-kind teller window that boaters could sail up to do their banking right on the water. It closed in 1984.
Bumps Ahead
Some Wall Street analysts see more bumps in the road before City National can move out of the current doldrums.
Last month, City National reported third-quarter profits of $59 million, on the down side of flat from a year earlier.
Revenue was up 2% to $214 million.
After the results, Houston-based Friedman Billings Ramsey downgraded City National to “underperform,” recommending that investors sell some of their holdings.
Analyst Gary Townsend said he expects more deterioration in City National’s core non-interest-bearing deposits in checking and other accounts, which comprise nearly half of the bank’s total deposits.
“This adverse mix shift is unlikely to abate soon and will continue to pressure margins,” Townsend said. “We expect City National’s earnings performance to disappoint over the next few quarters.”
Deposit growth could tick up slightly in the current quarter, according to Christopher Carey, City National’s chief financial officer, now that the Federal Reserve Board has “apparently decided to take a breather” with regard to interest rate hikes.
Adding to the potential downside is City National’s relatively heavy exposure to real estate. According to Goldsmith, home mortgages now account for a third of loans, while commercial real estate loans are about 28%. Most of the rest are business loans.
The commercial real estate side is strong with office and other construction, according to Goldsmith.
Strategy
City National is looking to counter the housing downturn by focusing more on its fee income business from private banking and wealth management services, Goldsmith said.
Trust and fee income revenue in the third quarter was up 46% in the same period last year, boosted by the recent acquisition of wealth management firm Independence Investments, which increased assets under management to $27 billion.
In addition, City National has expanded its international business, setting up a working capital guarantee program to help export clients access capital while trying to fill overseas orders and offering medium- and long-term loans to exporters.
Going after trade business is new for City National as it attempts to capitalize on the ever-increasing money and trade flows between California and Asia.
Goldsmith noted that City National’s income tied to foreign exchange and letters of credit has grown at double-digit year-over-year rates for the past six quarters.
Competition
Analysts and Goldsmith agree that the biggest challenge, especially in the long term, is fending off competitors eager to encroach on City National’s turf in the private banking and commercial markets in California and New York.
“The economies and concentrations of wealth in both markets have attracted both regional and national institutions, some of which have greater resources and hold key relationships within the communities,” said Jacqueline Reeves, research analyst with Florham Park, N.J.-based Ryan Beck & Co.
Goldsmith addressed this concern in his conference call, saying that “while more people are knocking on doors everywhere and trying to take business away from other people,” competitors aren’t undercutting City National with lower prices and fees for their products.
“The pricing seems to have stabilized there, and I think that’s good,” he said.
Fine is a staff writer with the Los Angeles Business Journal.
_________________________________________________________
Analysts Upbeat on IndyMac
Shares of Pasadena-based IndyMac Bancorp Inc., which has its mortgage division in Irvine, have bounced back since falling short of third-quarter profit estimates earlier this month.
IndyMac’s stock is up about 5% after falling Nov. 2 on its quarterly results. The company counted a recent market value of about $3 billion.
Wall Street seems to have come around to the notion that IndyMac could benefit from a shakeout.
President Richard Wohl said the company has made an effort to gain market share while the industry has been hit with a slowdown prompted by rising interest rates.
“IndyMac will likely grow its business in 2006 by picking up market share,” said Stuart Plesser, an analyst with Standard & Poor’s, a unit of the McGraw Hill Cos.
The lender isn’t big on riskier subprime loans and option adjustable rate mortgages. Borrowers with these loans could be more likely to run into trouble as the housing market slows.
IndyMac has no subprime loans. About 15% of its loans are option ARMs.
Analysts generally are bullish on IndyMac’s profits.
“Continued market share gains should sustain EPS growth,” said Friedman Billings Ramsey analyst Paul Miller in a summary report on IndyMac.
The risk for IndyMac: the prospect of a steeper-than-expected decline in home loans.
Also, as long-term mortgage rates have slipped in recent weeks, analysts have been predicting a rise in refinancings.
If that doesn’t materialize to offset a drop in home loans, the industry could face an adverse impact.
Another risk factor is increased competition in the secondary loan market, which could hurt what has been a profitable segment of IndyMac’s business.
,Howard Fine
