City National repays half of TARP funds
When City National Corp. accepted a $400-million investment from the U.S. Treasury during last year’s economic free fall, the regional bank said it was well capitalized and didn’t really need the money.
And as the economy stabilized this year, the parent of City National Bank raised $550 million in additional capital by selling stock and bonds, with Chief Executive Russell Goldsmith expressing eagerness to repay the debt.
On Wednesday, regulators granted half of City National’s wish, allowing it to repurchase $200 million of the preferred stock it had sold to the Treasury. The bank, the largest based in Los Angeles, said it expected to repay the remaining $200 million next year.
Until recently, regulators had been focused on approving repayment by the country’s biggest banks of the billions of dollars they each received under the Troubled Asset Relief Program, Goldsmith said.
With that objective accomplished, “In the last few weeks they have turned to regional banks,” he said. “And in our case they were comfortable with $200 million, and we’re very happy to repay it and be one of the first regional banks to do that.”
Goldsmith declined to say exactly what caused the regulators to OK repayment of only half the $400 million.
Although City National appears on track to emerge as a strong survivor from the financial industry’s near-meltdown, analysts say questions remain about the bank’s exposure to the weak California economy and, in particular, the shaky commercial real estate market.
“The regulators are taking an extremely cautious approach these days, so it’s not entirely surprising to see this,” said Aaron Deer, an analyst at securities firm Sandler O’Neill.
“They are definitely in a position to repay it all,” said RBC Capital Markets analyst Joe Morford. He said the company might be cleared to repay the rest of the TARP infusion in the first half of next year if California’s job picture improves.
In a vote of confidence for City National, regulators approved its takeover of failed Imperial Capital Bank this month, a deal that sent City National’s shares up 15% on Dec. 21, the first trading day after the announcement. Yet that development also “probably made understanding us a little more complicated,” Goldsmith said.
Unlike the giant “too big to fail” banks that were required to participate in the Treasury Department’s bailout program in the fall of 2008, City National and other smaller banks were supposed to get TARP money because they already were financially stable.
The idea at that point was to stimulate lending by healthy banks to help the economy, and receiving TARP funds initially was regarded as a positive sign for regional banks. But TARP, which was used to help bail out automakers and insurer American International Group Inc. as well as banks, became increasingly unpopular, and participation in the program became more of a badge of dishonor in the public’s mind.
Soon after City National, known in part for its celebrity clientele and until recently based in Beverly Hills, received its infusion in November 2008, a Treasury Department inspector general launched a review of how this “bank to the stars” was awarded the money. The review turned up nothing amiss.
With the repayment last week of $45 billion in TARP money by Wells Fargo & Co. and Citigroup Inc., the Treasury Department said its total bank investments of $245 billion, initially projected to cost taxpayers $76 billion, were now expected to earn a profit after payments to the government of dividends and interest as well as repayments of principal.
The Treasury retains warrants it received as part of its investment giving it the right to buy 1.1 million shares of City National stock for $53.16 apiece. The warrants aren’t currently worth exercising because the stock closed Wednesday at $46 a share, down $1.25.
The announcement of the $200-million repayment was made after the stock market closed Wednesday.