City National Corp., the parent of City National Bank, has proudly noted over the last year that it never got involved in subprime mortgages.
But the Los Angeles-based firm's second-quarter earnings report showed growing trouble in the bank's bread-and-butter commercial-loan portfolios, including loans to small businesses and to builders.
City National's shares slumped $1.63, or 4.6%, to $34.02 on Friday -- while the broad market rose -- as investors reacted to the earnings report issued after the stock market closed Thursday.
The company earned just $1.3 million, or 2 cents a share, in the three months ended June 30, down from $35.5 million, or 73 cents, a year earlier. Wall Street had expected a profit of 10 cents a share.
Results were depressed as City National set aside $70 million more for potential loan losses. The bank's troubled loans rose to $396 million as of June 30, up from $115 million a year earlier. The new total amounts to 3.2% of the firm's $12.4-billion loan portfolio.
It's no surprise that commercial loan delinquencies are worsening as the recession bears down on businesses, but City National's results still disappointed some analysts.
David Rochester, an analyst at FBR Capital Markets, reiterated his "sell" rating on the stock, saying that "we believe it is clear from management's guidance . . . that more meaningful credit deterioration is expected" in the second half of this year.
"Short sellers," who borrow stock and sell it, expecting the price to drop, have boosted their bets against City National in the last two months, anticipating more bad news. The number of shares sold short rose to 9.7 million in mid-July, or about 19% of the company's total shares outstanding, from 7.4 million in mid-May.
Still, the bank's investor fans like its long-term prospects, given the firm's business-lending niche in California and its $30-billion wealth-management unit. City National also benefits from a low-cost deposit base, analysts note. Deposits totaled $14 billion at the end of the second quarter, up a strong 9% from the first quarter.
During a conference call with analysts Thursday, City National Chief Executive Russell Goldsmith was asked when the company might repay the $395-million capital infusion it got under the U.S. Treasury's Troubled Asset Relief Program late last year.
He wouldn't commit to a timetable, but said, "We certainly do think we can do it this year."
Although Goldsmith didn't say so, Wall Street understands that City National would probably prefer to hold on to the money if loan losses worsened significantly.