Beverly Hills based City National Corporation (NYSE: CYN) is the twenty-fourth largest bank in the US with total deposits of $11.82 billion and $58.5 billion in assets under management. City's services are not for the light of wallet. The company focuses on high net worth individuals, entrepreneurs, and small to mid-sized businesses, and its customer base includes 800,000 households with more than $1 million of investable assets and businesses with annual revenues of $1 million to $250 million.
Like most banks, City makes a substantial portion of its revenue in the form of net interest income, the difference between the interest that it pays on deposits such as CDs and savings accounts, and the interest that it receives from the loans that it makes. City differs from other banks, however, in that its customers tend to place a lot of their cash in non-interest bearing accounts. This means a higher net interest margin for City. City National's conservative lending practices and its focus on high net worth individuals have also helped the company weather the economic turmoil in 2008 comparatively better than other banks and financial institutions. In addition to avoiding subprime loans and option adjustable mortgages, City National has never foreclosed on a mortgage loan that they originated. Nevertheless, with 57 out of 77 bank branches and regional centers located in California, City National is heavily exposed to one of the worst real estate markets in the nation. Because several of the company's business lines rely on commercial and residential real estate markets, City National remains vulnerable to increases in nonperforming loans and falling loan demand. Additionally, turmoil from the ongoing credit crisis has the potential to mitigate investment returns. Because of the poor economic and financial conditions, City National projects its earnings per share will be 17% to 22% lower in 2008 than in 2007. City National has also been increasing its long run growth potential by expanding its market share in Nevada, one of the fastest growing regions and wealth centers in the nation.
|Annual income data, in millions||2003||2004||2005||2006||2007|
|Net Interest Income||$512.3||$543.7||$610.0||$605,910||$608.3|
|Loan Loss Provision||$0.0||$0.0||$0.0||($0.00061)||$0.02|
In addition to offering banking services, City has eight investment management affiliates, while holding minority interests in several others. City National is divided into three reportable segments: Commercial and Private Banking, Wealth Management, and Other.
|Return on Assets||1.54||1.54||1.66||1.59||1.45|
|Return on Equity||16.27||16.34||16.89||15.99||13.92|
|Net Interest Margin||4.74||4.54||4.79||4.58||4.45|
The Commercial and Private Banking segment operates branches in the regions of California, New York, and Nevada . City National offers its clients various banking products and services, including mortgage and commercial loans, lines of credit, deposits, cash management services, international trade finance and letters of credit used for international transactions
Revenue for City National's Commercial and Private Banking segment increased 6% from $730 million in 2006 to $771.7 million in 2007. The segment's revenue growth was primarily driven by increased demand for commercial and industrial and residential mortgage loans. Despite this, Commercial and Private Banking's net income in 2007 was $201.5 million, down from $208.8 million in 2006. The simultaneous rise in revenue and decline in net income was attributed to increased funding costs for deposits and a $20 million provision for loan losses in the fourth quarter of 2007.
Although the Wealth Management division covers all asset and investment styles, it primarily invests in fixed income securities. The Wealth Management segment's revenue in 2007 was $205.8 million, up from $158.0 million in 2006. This 30% increase was largely due to growth in the company's trust business and City National's acquisition of Convergent Wealth Asset Management in May 2007. Although noninterest expense also increased by 24%, City Nationals Wealth Management segment earned net income of $37.9 million in 2007 a 46% increase from 2006.
Although home prices in the company's primary market base of California have declined by more than 20% since last year, City National has been comparatively insulated from the housing market slowdown and the subprime crisis. City National does not make or buy subprime or options adjustable rate mortgage loans or securitize mortgages. Furthermore, because of City National's conservative lending practices, almost all residential mortgage borrowers had loan-to-value ratios over 50% at origination, which is higher than the loan-to-value ratios of the vast majority of borrowers from CYN's competitors. City National's high loan-to-value ratio ensured that the company never had to foreclose on any of their mortgages. On the other hand, oversupply in the housing market from large inventories and frequent foreclosures are adversely affecting City National's for-sale housing construction business which accounts for 5% of the company's revenue. City National also faces increasing downward pressure on earnings from softening commercial real estate, which accounts for 30% of the company's loan portfolio.
Changes in interest rates can have a significant impact on the net interest margin - the spread between interest received from interest earning assets and interest paid on interest bearing liabilities - of a company. The net interest margin is especially important for a bank like City National that obtains 70% of its revenue from interest expenses. As of the first quarter of 2008, City National has maintained an asset sensitive position - the bank currently has more assets repricing their interest rate than liabilities. Therefore, further rate cuts by the Federal Reserve to stimulate the economy will adversely affect City National by resulting in the repricing of 53% of its loans.
Because net interest income accounts for the majority of City National's revenues, further deterioration of economic conditions in the US will continue to mitigate the company's revenue growth. In fact, there is a strong possibility that a prolonged economic downturn would increase the number of delinquencies and defaults on customer loans. These delinquencies and defaults will not only reduce revenue, but will also increase costs by forcing City National to increase provisions for loan losses. As of the first quarter of 2008, City National has already made a $17 million loan loss provision to compensate for a corresponding rise in net charge-offs - impairments in value of poorly performing loans.
Considering Nevada has been the fastest growing state in America for 19 out of the last 20 years and has multiple connections with Californian individuals and businesses, City National Corporation's acquisition of Business Bank of Nevada in April 2007 presents ample opportunities for growth. Since opening its wealth management offices in Nevada at the end of 2007, the bank has acquired $50 million in managed assets with another $50 million expected by the end of 2008. In addition, City National has expanded upon the business model of Business Bank of Nevada by offering clients various international trade financing products and services. As of the first quarter of 2008, City National had nine bank branches in Nevada and two Wealth Management offices in Las Vegas and Reno.
Although City National runs a unique bank business model of serving high net worth clients, the company faces competition from commercial banks, money market mutual funds, credit unions, insurance companies and other financial service institutions. City National's main commercial banking competitors are UnionBanCal (UB) , Wells Fargo (WFC), and Bank of America (BAC). All three banks compete with City National by offering a wider array of financial products and services, such as credit card accounts, to a more diverse base of individuals and businesses. These companies are also more geographically diversified than City National, reducing their vulnerability to downturns in the Californian economy. Despite these shortcomings, City National competes against these banking institutions by generating high profit margins from premiums on personalized financial products and services. Additionally, the bank's affluent client base is inclined to deposit large sums of money into low interest bearing deposit accounts, which increases the net interest margins of the company. In fact, noninterest deposits account for about 50% of the bank's total deposits, compared to an industry average of 25%. City National's expansion in Nevada will also result in continued growth for the company, which as of 2007, was second only to Wells Fargo (WFC).
|Income Data, in millions USD||City National||Bank of America (BAC)||UnionBanCal (UB)||Wells Fargo (WFC)|
|Net interest income||$606||$608||$34,591||$34,437||$1,833||$1,274||$19,951||$20,974|
|Net income (profit)||$234||$223||$21,133||$14,982||$753||$608||$8,482||$8,057|
City National's relatively small and constant deposit market share in California, its most important geographic area, is largely explained by the company's focus on an exclusive, affluent client base.
|California Deposit Market Share (%)|
|Bank of America (BAC)||20.45||20.88||20.76||20.90|
|Wells Fargo (WFC)||14.34||14.02||12.60||12.84|