Rising interest rates in recent months and a softening housing sector have taken some wind out of the sails of Beverly Hills-based City National Corp., the largest independent bank company in the L.A. area.


Indeed, City National in June revised its earnings outlook for 2006 to between $4.65 to $4.78 per share, down from earlier outlooks in the low-$5 range.


The company, which owns City National Bank, cited rising short-term interest rates, which both raised borrowing costs and prompted business customers to shift funds from core non-interest bearing deposits to higher-yield accounts and instruments, some of which are not managed by City National.


That announcement prompted City National's stock price to plummet 11 percent to $64 per share. In April, the stock similarly dropped after another earnings warning. Since June, earnings have been in line with the company's revised guidelines, while the stock has hovered in the mid-$60 range.


In a recent earnings conference call, City National President and Chief Executive Russell Goldsmith characterized these developments as a short-term cyclical dip, saying his focus was on long-term sustainability.


"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. City National is in this for the long-term," Goldsmith said. "We are aggressively marketing our deposit products, hiring some new sales people and adding clients."


This is part of a strategy to expand City National beyond its base clientele of small and mid-sized local companies and of entertainment industry players, such as talent agencies, law firms and deep-pocketed individuals. (City National is still known as the "bank of the stars.")


But some Wall Street analysts still see more bumps in the road before City National can move out of the current doldrums. Last month, City National reported third quarter net income of $59 million, down from $59.9 million for the same period a year ago. However, on a per share basis net income grew 3 cents to $1.23 due to some recent share buybacks. Revenues were up 2 percent to $214 million.


One week later, Houston-based equity research firm Friedman Billings Ramsey downgraded City National to "underperform," recommending that investors sell some of their holdings.


In issuing the "sell" recommendation, analyst Gary Townsend said he expects more deterioration in City National's core non-interest-bearing deposits, which comprise nearly half of the bank's total deposits.

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