City National mounts effort to assuage regulator fear.

Sale of assets looks to be one way to raise capital

City National Corp. officials are considering selling assets and will hire a lending consultant to address concerns raised by regulators from the Officer of the Comptroller of the Currency, Steven Broidy, vice chairman and chief administrative officer of City National, said last week.

In the formal agreement that the Beverly Hills-based commercial bank entered into with the OCC on Nov. 18, the bank is ordered to inject $65 million in capital, adopt a new business plan, adopt a new budgeting process, provide additional training for lending officers and revise the bank's computerized loan information systems.

City National Corp., parent of City National Bank, which with $3.9 billion in assets is the second largest bank headquartered in Los Angeles County, lost $60.2 million in the first nine months of 1992.

The bank has lost money this year primarily because it was forced to make a provision for future loan losses of $107 million, Broidy said.

City National's directors will invest $10 million of their own funds to meet the capital requirement, Broidy said.

First Boston Corp., a New York based investment banking firm, has been hired to help City National find ways to come up with the other $55 million it is required to add to capital reserves by June 30, 1993, Broidy said.

Broidy said that the firm would, among other things, look at selling assets of the 23-branch bank.

However, Frank Pekny, chief financial officer, said the bank would not consider selling any of its core business to raise capital, such as City National's loans and deposits tied to the entertainment industry.

The bank was also ordered to "adopt a comprehensive training program" for employees and to "ensure that the bank's lending and credit administration function is adequately staffed."

Two lending assessment firms, H.A.I. Credit Diagnostic Ltd. and Omega Inc., have been evaluating the banks' employees this month, and City National officials will hire one of the firms to do more comprehensive work in assessing lending officers' skills and providing training, City National officials said.

Before City National entered into the formal agreement this month, the bank was operating under another agreement, a memorandum of understanding which the OCC had issued in June of 1991.

The purpose of an MOU, like a formal agreement, is to require bank officials to agree to take specific actions in order to correct problems at the bank.

Unlike a formal agreement, an MOU is not a public document, said Ellen Stockdale, spokeswoman for the OCC.

A formal agreement is considered "an escalation" in the array of enforcement actions regulators take against banks for safety and soundness issues, Stockdale said. A formal agreement is more severe than an MOU, but not as severe as a cease-and-desist order, she said.

Broidy acknowledged that a shake-up in City National's management over the last year was due, in part, to the receipt of the MOU last summer.

George H. Benter Jr., a former vice chairman of Security Pacific National Bank, was named president of City National in April, at the same time that Broidy, formerly an executive vice president with Union Bank, was named CAO.

In October, Charles D. Kenny, formerly general counsel at Union Bank, was hired as City National's general counsel. Pekny, also formerly a vice chairman of Security Pacific, was hired as City National's CFO in October.

Broidy said the formal agreement came about, not because the bank wasn't trying to comply with the MOU, but because the economy has gotten worse and losses have mounted at the bank.

"The economy in Southern California is a little more rugged than it was one year ago when we entered into the MOU," Broidy said.

Stockdale of the OCC said, "Looking at this document, it is not dissimilar to a lot of documents we did in the Northeast," where because of economic downturn, a number of banks entered into agreements with the OCC in the last few years, Stockdale said.

The City National agreement is the latest in a spate of safety and soundness agreements between Southern California banks and the OCC and the Federal Deposit Insurance Corp., the regulator of state-chartered banks.

Among the Southern California banks that have entered into agreements with federal regulators this year are Pasadena-based Community Bank, Encino-based California United Bank, Marathon National Bank of Los Angeles, and Premier Bank of Northridge.

The number of formal orders issued against banks in California by the OCC, the regulator of national banks, tripled in the first nine months of 1992, compared to the like period in 1991.

The California Bankers Association estimates that about one-third of all banks are under either a formal or informal agreement issued by federal regulators.

The fact that the bank has entered into an agreement with the OCC does not mean that the bank will fail, Stockdale said.

In a study of banks which entered into agreements with the OCC done several years ago, "we found most banks we entered into enforcement actions with...successfully corrected the problems and got better," Stockdale said.