City National Plummets 21.8% in Two Weeks
City National Corp. has seen its stock price fall more than 20% in the past two weeks, and the bottom may not yet be in sight.
At the end of August, the bank in Beverly Hills, Calif., announced it would suspended its dividend and put more than $30 million in reserves against mounting losses from real estate loans. The surprise announcement sent the stock tumbling on high volume to $12, from $14.50 the previous day.
Chairman Bram Goldsmith couched adverse developments as part of the larger picture beyond City National's control.
"We are all adversely affected by the state of the economy," Mr. Goldsmith said. "We have always conservatively made loans, but some borrowers are just taking longer to pay the debt."
Staking Out the Stock
In the past 10 days, the stock price has plummeted 21.8%. Only Continental Bank in Chicago has experienced a bigger drop in price. City National was up 25 cents from the opening, to $11.875, in late Wednesday trading.
Taking note of developing problems at the $4.7 billion-asset bank, short sellers have been staking out the stock for the past six months.
In a recent article in Barron's, City National was mentioned as one of eight short-selling candidates, along with Citicorp, Chase Manhattan, and Wells Fargo & Co.
Real Estate Loans Hit Hard
The bank's downfall has been real estate loans. With roughly a third of its loans in construction and real estate, the midsize City National was hit hard by the economic downturn in the Los Angeles market. So have some of its peers, such as Union Bank in San Francisco.
But bank analysts said Mr. Goldsmith had underestimated the weakness of the real estate loans portfolio when he told them last year that the first bad loans that came to light were a one-time problem.
City National set aside reserves at the end of 1990, and again in the first and second quarters this year. In the third quarter, the bank took more drastic steps to protect earnings.
"They suspended the dividend and boosted the reserves," said Norman Jaffe at Fox-Pitt Kelton. "But before that, they suggested that California real estate was not a problem."
Dividend on Hold
Mr. Goldsmith said the performance is to be expected, given the state of the economy. He took the big step of suspending the dividend when he realized that the end of the recession was nowhere in sight.
But the bank, he insists, is not in trouble. He points to his bank's otherwise solid performance as evidence of its strength. Tier 1 capital is 9.3%, more than double the requirements that take effect next year. Even with the addition to reserves, the banking company has no debt. Mr. Goldsmith said he has not lost deposits or customers as a result of the bak real estate loans.
Some of that strength remains evident in the stock price. Even with the recent fall, the bank stock still trades at a slight multiple to book price. Mr. Jaffe said the book value is around $10 a share.
Still, that's much less than a few years ago, when City National was among the highest performers in the industry. Back then the stock traded at as much as three times book value. And the bank, which caters to middle-market and affluent individuals, reported annual return on equity as high as 23%. Credit quality was a strong point.
The stock's premium price also reflected the belief of investors that City National's strength made it a prime takeover target. With BankAmerica and Security Pacific tied together, and Wells Fargo & Co. and First Interstate working through their own lending problems, City National may not receive an offer for quite a while. Mr. Goldsmith said he is not seeking an acquirer.
Nonperforming loans at the Beverly Hills bank have spiraled 300% over the past three quarters. During the second quarter, they jumped to $145.3 million - or about 5% of loans, including $65 million of real estate loans. For the first six months of 1991, net interest income after provisions for loan losses fell 25% from the previous year, to $66 million. Overall, net earnings dropped to $10.7 million from $27.9 million.
Currently, reserves cover 45% of loans - compared with an average of about 70% for its peers; so another round of reserves may be in order.