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U.S. boosts local bank's finances

Treasury will invest $395 million in City National. CEO may use 'fortress balance sheet' to buy rivals.

October 27, 2008|Michael A. Hiltzik | Hiltzik is a Times staff writer.

In a harbinger of what may be a flood of similar disclosures, City National Bank in Beverly Hills said Sunday that it would receive a $395-million capital infusion from the U.S. Treasury as part of the government's $250-billion bailout program.

The bank said it had no "explicit or implicit understanding" with federal regulators about how it would use the money -- whether to increase lending in the community or acquire a specific bank.

But Russell Goldsmith, chief executive of the bank's parent company, City National Corp., said the investment "clearly enhances our financial capacity to make acquisitions and . . . to lend to a larger degree."

With $12.2 billion in deposits, City National is the largest bank based in Los Angeles County and second-largest independent bank in California.

The government's investment will raise the bank's Tier 1 capital, the fundamental measure of a bank's financial health, to 12% from 9.1% of risk-weighted assets, creating what Goldsmith called a "fortress balance sheet that will reassure our clients and attract new clients."

He said the Treasury's purchase is close to 3% of the bank's risk-weighted assets, which is the maximum it can give any bank under the program rules. In bank accounting, some assets are deemed riskier than others and must be backed by more capital.

Treasury officials originally said they would release on Friday a list of 20 institutions receiving a new wave of disbursements from the Troubled Assets Relief Program, or TARP, the financial bailout Congress approved this month. They later decided to leave it up to the recipient banks to make the announcements.

A rush of disclosures could come as early as today on the theory that recipient banks have an incentive to make the investments public before their shares open for trading -- if only to defuse suspicion that they've been turned down by Treasury officials.

Given that Treasury has indicated its investments are designed to strengthen strong banks, not shore up impaired or failing banks, Goldsmith said the capital infusion "should be seen as a positive" for City National. "It's a vote of confidence."

Under TARP, the government will buy $250 billion in preferred shares and equity warrants from banks and other financial institutions. The goal is to restore the stability of the financial system, which has become clogged with worthless or undervalued loans, especially home mortgages.

Treasury Secretary Henry M. Paulson has said he preferred that the capital be deployed to increase banks' lending in their communities. Because of the logjam in approving credit, conventional lending has slowed to a trickle. The financial community as well as policymakers fear that a lack of credit, the essential lubricant of economic activity, will deepen an expected U.S. recession.

It is also understood that the government may use the offer of capital to broker the acquisition of weak banks by stronger institutions. The idea is that such arrangements will prevent some bank failures, reducing the government's costs in the process, and that a strengthening of the industry will ultimately restore confidence to the financial system.

Paulson launched the bank investment program two weeks ago with $125 billion in investments in nine leading banks, including Bank of America Corp. and Wells Fargo & Co. Other institutions were given until Nov. 14 to apply for the investments through their primary regulatory agency, although Treasury would make the final decision in each case.

City National is among several banks to disclose a Treasury investment by late Sunday.

On Friday, First Horizon National Corp. in Memphis said it would sell $866 million in preferred shares to the government. It said it would use the money to add to its cushion against the weakening economy and make "targeted" acquisitions in its region. And Regions Financial Corp. of Birmingham, Ala., said it would receive an investment of $3.5 billion "to expand lending and step up acquisitions."

Also Friday, Pittsburgh-based PNC Financial Services Group said it would acquire National City Corp., an ailing Cleveland bank holding company, in a shotgun marriage brokered by federal regulators and greased by a $7.7-billion capital injection from TARP.

The City National investment appears to be on more conventional terms. Goldsmith said its regulator, the Office of the Comptroller of the Currency, did not specifically instruct it to apply for the money.

Instead, he said, "we were told that if this was something we wanted to do, we were encouraged to apply at this time because Treasury was interested in moving broadly to the second wave."

Goldsmith said City National had reached no understanding with the government that it will operate its business differently from before. He said the bank's capital base had not prevented it from funding any loans but added that the additional capital would allow it to pursue unspecified "opportunities in this environment," including "acquisitions that make sense."

Although City National has been an aggressive buyer of regional banks, acquiring eight in Northern and Southern California and one in Nevada over the last dozen years, he said, "there's nothing on our plate at the moment."



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