City National Grows Into L.A.'s Largest Independent

Staff Reporter

City National Corp. has had no shortage of suitors over the years. The Beverly Hills-based parent of City National Bank is an attractive target. It has a widely coveted roster of wealthy clients, a niche market serving Hollywood's elite, and it's grown rapidly in the past decade.

Yet while almost every major bank in California has been gobbled up in a mega-merger Security Pacific National Bank, First Interstate Bank, Union Bank of California and Home Savings of America, to name a few City National is still standing on its own.

Indeed, City National has done its own gobbling, albeit in smaller bites. It has made 11 acquisitions since 1995, when Vice Chairman and Chief Executive Russell Goldsmith took over from his father, Bram, who remains chairman.

City National is now the largest independent bank in Los Angeles, where it has been doing business for half a century no small feat in a town where careers can be marked by days, rather than decades.

City National has managed to survive, analysts say, by concentrating in its early years on several niche industries, notably entertainment and real estate, and by having a family management team with a significant stake in the business and no intention of selling at least for now.

It's no secret that U.S. Bancorp openly pined to buy City National several years ago and even bought a five percent stake in an effort to prod a purchase. But it and other would-be suitors went away empty-handed. U.S. Bancorp now owns less than half of one percent of City National's stock.

"It would cause a feeding frenzy among larger banks if City National were to become available," said Brock Vandervliet, an analyst with Lehman Brothers. "I don't think it's something that management has really any intention of doing."

Goldsmith, 53, won't even comment on the concept of a sale.

The Goldsmith family owns 17 percent of the company's stock, and the management team as a whole owns more than 19 percent, according to the most recent proxy filing with the Securities and Exchange Commission. Bram Goldsmith was an early advocate of granting stock options to executives, which may have helped the company stay independent. Executives who are also shareholders and owners, the thinking goes, will work harder to retain control of the firm.

Building a bigger bank

The bank was founded in 1954 to serve the real estate and entertainment industries. Alfred Hart, a director at Columbia Pictures, was joined by a group of investors that included Ben Maltz, a grandfather of Russell Goldsmith. The bank immediately became known in entertainment circles through Hart's relationships with Frank Sinatra and Danny Kaye, among others.

The Goldsmith family, while involved in the bank since its inception, didn't take a management role until the early 1970s, when Bram Goldsmith bought out the ailing Hart's stake for about $3.6 million. Bram Goldsmith became chief executive in 1975, but up until that point had been an investor mostly in real estate. Russell Goldsmith was on the board for 17 years while his dad ran the company, but he also went his own way, to law school and then as an entertainment industry executive before becoming CEO in 1995.

Not only has City National thrived in cutthroat Hollywood, but the bank has changed dramatically over the past decade under the leadership of the younger Goldsmith, an entertainment lawyer and former chief executive at Republic Pictures.

The bank's assets have quadrupled to $12 billion from $3 billion in 1995, and the number of employees has doubled to 2,200, from 1,100 in the same period. Recently, it has concentrated its acquisitions on asset management firms, and expanding into the San Francisco area. Last year, the bank opened its first office in New York.

Perhaps more importantly, throughout this period of consolidation, City National has been savvy enough to scoop up executive talent who were cast off in mergers, or didn't want to leave Los Angeles for, say, Charlotte, N.C.

Of the top 20 executives, 16 hail from larger banks that had recently merged and whose headquarters were now out of state. They include George Benter, City National's president and chief operating officer who was the former vice chairman at Security Pacific Bank, and Frank Pekny, chief financial officer, who held the same title at Security Pacific.

"It has been one of the great drafts of banking talent for us," Goldsmith said. "We've been able over a 10 year period to cherry-pick some of the most talented people in the industry."

With the new talent in place, City National has aggressively targeted small and medium-sized businesses in Southern California, still the largest "middle market" city in the nation. Entertainment lending accounts for 15 percent of the $3.6 billion commercial loan portfolio. But other commercial lending categories have increased dramatically, including services, now at 22 percent, wholesale trade at 11 percent and manufacturing, at 10 percent.

The total loan portfolio which includes commercial loans, real estate and residential first mortgages, real estate construction and installment loans now stands at $8 billion.

Broadening outside of entertainment and real estate, the bank has developed expertise in other industries, and now supplies financial services to dairy farmers, apparel manufacturers, law firms and medical practices.

But by far the area of greatest expansion has been wealth management.

Last month, the company bought Convergent Capital Management, a large money manager that brought its total assets under management or administration to $26 billion. Prior to the purchase, City National had $19.5 billion under management, including assets from the 2000 acquisition of Reed, Conner & Birdwell of Los Angeles. Prior to those acquisitions, City National had $16.7 billion in assets under management.

Five years ago, City National came up with an attractive new logo a blue ladder with the words on "the way up" a nod to its efforts to aid in "wealth building."

"There is a kind of life cycle for entrepreneurs," Goldsmith said. "They need credit, they need a jumbo mortgage, online cash management and investment capabilities they need someone who they can trust and get some advice, not just a broker who can push a hot stock, but someone who understands them, knows they have kids, knows their industry and comes up with solutions for building their net worth."

Growing pains

That's not to say there haven't been problems.

City National's forays into Northern California have led to some erosion of its credit quality.

The company has taken write-downs in the past on syndicated loan portfolios to media and telecommunications companies. But now it sees broader problems in its loan portfolios in Northern California.

"What's new is that we're now seeing pressure within their core portfolio in both Southern California as well as in the banks they've acquired in and around San Francisco," said Vandervliet.

In the first quarter, City National reported a $27.9 million increase in nonperforming loans, of which one-third came from loans in Northern California, one-third from purchased syndicated media and telecommunications loans and another one-third from other borrowers.

"The level of problem credits is increasing very rapidly," Vandervliet said, adding that the bank may have trouble selling off portions of the portfolio quickly.

Goldsmith admits getting dinged on some telecom and media loans, and acknowledges some challenges in the area of credit quality and soft loan production demand.

But he maintains he's running the bank for the long term and that means lowering expectations about growth in light of "real world" requirements.

It's a luxury he might not have if City National were owned by a larger bank.

City National History

1954: City National Bank is founded to serve the entertainment and real estate industries in Southern California.

1964: Future CEO Bram Goldsmith is elected to the board.

1967: City National opens its 24-story Pershing Square office building in downtown Los Angeles.

1975: Bram Goldsmith is named chairman and chief executive.

1978: Russell Goldsmith is elected to the board.

1979: Assets top $1 billion.

1990: City National stock begins trading on the New York Stock Exchange.

1995: Russell Goldsmith is named chairman and chief executive. The company makes it first major acquisition, of First Los Angeles Bank.

1997: The company acquires Riverside National Bank, Frontier Bank and Ventura County National Bancorp.

1999: City National buys American Pacific State Bank.

2000: The company buys Pacific Bank in Northern California and purchases Reed Conner & Birdwell, an L.A.-based investment management firm.

2003: The company acquires Convergent Capital Management LLC, bringing assets under management to $26 billion.

2003: The bank now has total assets of $12 billion and 54 offices.

Source: City National Corp.

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