With the Detroit-based Comerica Bank’s recent acquisition of Imperial Bancorp of Los Angeles, eyes have turned to City National Corp., essentially the last Southland-based independent banking survivor of significant size.
So is City National next to go on the selling block?
Not likely, according to the company’s chief executive, Russell Goldsmith. Goldsmith’s family, which helped start the bank in 1954, controls roughly 17% of the stock. Russell took over the chief executive spot from his father, bank chairman Bram Goldsmith.
“Our actions are the actions of a company that believes in its future as an independent company,” Goldsmith said. “We’ve seen City National (become) the largest independent bank in Southern California. We are building on that platform and opportunity to become the premier private and business bank in California.”
There’s no doubt that in many ways City National is as attractive a takeover target as can be. The bank built its sterling reputation as a private bank for the well-to-do residents of Los Angeles and Orange counties while also serving the entertainment community as a lender for various projects. But it has expanded beyond that to become a well-respected lender to small and medium-sized businesses in the area.
In January, City National consolidated some of its OC operations with the opening of a new South Orange County banking center at Irvine’s Lakeshore Towers development near John Wayne Airport.
The new banking center includes a branch banking office, a commercial banking center, a private banking office and an investment services office, all relocated from nearby locations.
“We were outgrowing our spaces at the other locations,” said Dallas Haun, executive vice president for City National’s South Coast Region.
The Irvine branch, private banking office and investment services office replace units in Newport Beach and a previous Irvine facility, where a branch still is open.
City National also has expanded into San Francisco, and has begun to compete with the likes of Silicon Valley Bank for the business of cutting-edge technology companies. It continues to grow its wealth management business, having recently acquired a local asset management firm. Strategic acquisitions have built City National’s assets in the past five years to $8.9 billion.
“There’s no institution out there to buy with any stature except City National,” said banking analyst Campbell Chaney at Sutro & Co. “Every time there’s another merger, I hear comments about the bank, with people saying this bank would be perfect for a takeover. Which is true until you look at how the bank is controlled. The board is going more or less to follow what the family wants. If the family wants to stay independent, that’s what’s going to happen.”
Chaney and other industry observers praise the bank for expanding its business carefully, and cite its lending strengths, which include real estate, international trade and,recently,agriculture loans. The recent acquisition of Reed, Conner & Birdwell, a local asset management firm that will continue to operate under its own name, boosted City National’s assets under management to just under $18 billion.
Like City National, which claims around 20 of the 50 wealthiest Angelenos as customers, Reed, Conner targets high-net-worth individuals. “(The acquisition) brings another billion or $2 billion under management,” Chaney said. “More importantly, it’s a fee-generating business. Loans with baby boomers are tapering off as baby boomers concentrate on managing their wealth. No matter what the interest rate cycle is, people pay fees for wealth management.”
The bank’s foray into the emerging-growth area, going after high-tech companies that may have few deposits now but could grow exponentially, is a trickier business, observers note. City National paid more than $150 million last year for San Francisco’s Pacific Bank, and just opened up its first Silicon Valley office, but it could find tough going competing with the likes of Silicon Valley Bank and Imperial Bank.
“California has a major presence in tech, which is why they’re expanding into San Francisco,” said Derek Derman, a bank analyst at Wedbush Morgan Securities. “I’m not sure how aggressive they’re going to be on the lending side. They’ll probably go slow, particularly now that some of the shine has come off of the (tech) sector.”
Goldsmith himself, while stressing that his bank intends to compete in that area, notes that it is a nascent business for City National. “It’s still a small part of our lending,” he said. “Over the long term, it will be an important part.”
There are other hurdles for the bank. Like other mid-sized financial institutions, City National has been working to get rid of nationally syndicated loans, which showed promise when the tech sector was booming but have dragged on earnings of late. In the third quarter, City National sold $103 million in syndicated loans, and has reduced its holdings in such loans to about 5% of its portfolio, down from almost 10% at the end of last year.
Writing off those loans, however, pushed its loan loss reserves down to 2.17% of total assets as of the end of the third quarter, even with the bank setting aside additional cash. While reserves of over 2% is considered solid, the level is down from 2.69% a year ago.
“It gets harder to continue to grow (earnings) as you set aside cash,” Wedbush Morgan’s Derman said. “If there was any real hiccup in asset quality that we’re not expecting, it would be harder to maintain double-digit income growth. I’m not saying they can’t, though.”
One obvious way of growing earnings is through acquisitions, and Goldsmith sounds as if he’s still looking for strategic options.
“I see us continuing to grow in the future through attracting clients internally, (and) we will continue to look on a selected basis for banks and assess how they might fit,” he said.
Some business may come from the fallout of the Imperial-Comerica deal, as Imperial customers and perhaps executives seek to jump ship to City National. While making it clear that he is not actively soliciting Imperial customers, he also acknowledges the possible benefits for his bank. “Every time an LA bank of consequence is bought by an out-of-state bank, it creates change,” he said. “And as the Chinese proverb says, change creates opportunity.”
That same change also focuses the spotlight on City National’s prospects. And its growth makes the bank all the more appealing to a larger institution, which would rather swallow one medium-sized fish than lots of little ones. n
Brinsley is a staff writer with the Los Angeles Business Journal.
