Banking on a New Model

City National Bank (No. 8 on the BE BANKS list with $358.43 million in assets) is a Newark, New Jersey, institution that has flourished during boom and bust cycles for nearly four decades. But just as its headquarters rests on the intersection of Broad and Green streets, just a few feet away from City Hall, the bank itself is at a crossroads.

The longtime commercial real estate lender aspires to transform itself from a bank that generates revenues primarily from commercial real estate loans to one that offers a suite of higher-quality consumer and small business loans. But this transformation isn’t just about boosting the bottom line–it’s about fundamentally changing the bank’s business model so the institution can survive in an environment where the old rules no longer apply.

The last few years have been unforgiving for many community banks, and City National is no exception. The bank, which has seven branches and several ATMs, didn’t get caught up in the trading of mortgage-backed derivatives that devastated a slew of commercial banking giants, but it was heavily exposed to the real estate downturn by way of loans to churches and local commercial properties, areas at the core of City National’s business. As mainstream America fretted over the stock market, foreclosures and business bankruptcies skyrocketed in inner cities.

“Real estate values tumbled all over the country and even more so in urban markets, where we were a big lender,” says President and CEO Preston D. Pinkett III. “Well, in low-income communities borrowers are stretched thin–there isn’t as much of a cushion. So, the bank had to absorb a lot of the economic shock.” The bank was forced to foreclose on roughly 7% of its properties across both residential and commercial loans, and those non-performing assets weighed down the books.

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As a result, 2008 was the last year the bank posted a profit, of $1 million. Non-performing assets contributed to losses for three straight years: -$7.8 million in 2009, -$7.5 million in 2010, and -$3.5 million in 2011. With those losses came compliance and capitalization issues with the Office of the Comptroller of the Currency, a federal regulatory agency and the bank’s primary regulator. “The things that we need to do now are different,” says Pinkett, who graduated from Cornell University and earned an M.B.A. from the University of Pennsylvania’s Wharton Business School.

Something clearly had to change. “The regulators encouraged major and sustained improvement in policies, procedures, and practices within the bank,” says Pinkett, who was a board member before he assumed the presidency when predecessor Louis E. Prezeau retired in March 2011.  Now, Pinkett, a former PNC Bank senior vice president, looks to return City National to profitability in the next two years or so by rebranding, refocusing, and redefining the 39-year-old institution.

Sign of the Times
City National Bank was established in 1973 when a group of African American community leaders sought to create an institution that would be sensitive to the financial needs of minority residents who had limited access to credit and banking services. Charles L. Whigham, a prominent local businessman (who later became the bank’s first president), organized the efforts to raise $1.2 million mainly through church groups and individuals selling stock door-to-door. Some 1,800 shareholders purchased 60,000 shares. Over the years, City National Bank grew to comprise branches in Newark and Paterson in New Jersey, as well as in Harlem, Brooklyn, and Long Island in New York.

But recent years have seen more changes in the banking industry than the previous three decades combined. With interest rates at historic lows, institutions of all sizes needed to develop revenue streams beyond accepting deposits and lending capital. “A bank has to pay depositors for the money it takes in from them, and we have to turn around and either invest or

lend that money out at spreads sufficient enough to cover the cost in addition to the overhead,” says Edward R. Wright, the bank’s senior vice president and CFO. “So, as long as rates are held down we don’t have the same opportunities that we had in the past. The overhead doesn’t go down. It goes up. Yet the difference between what we earn and what we pay on our interest on the assets goes down. So, we’re squeezed there as well.”

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Capital is a bank’s lifeblood. But during the throes of the Great Recession, capital dried up as unemployment rose. This meant fewer loans to small businesses and less funding for economic development. “They’re in the urban core and they’re providing financial services and products for people right in their community,” says Michael A. Grant, president of the National Bankers Association. “The banks are doing a great job, they’re doing what the regulators are requiring them to do and they want to do more lending, but they need capital to do that. They can always use more deposits and more capital.”

Driven By Customers
Responding to those challenges, City National’s management developed a plan to land that much-needed capital by transitioning away from serving primarily as a real estate lender and moving toward serving as a community-focused provider of an array of financial services. “That could be debt, equity, technical assistance, or intellectual capital,” says Walter Bond, the bank’s senior vice president and chief administrative officer. “We’re looking to bring capital to the marketplace that’s needed to turn around communities, and we’re also looking to do it in a way that employs better risk management practices than you would [typically] have at a small or mid-sized bank.”

To that end, City National’s board and management team took the following steps to rebrand the bank and increase its appeal to consumers:

– Updated the corporate logo.

“We looked at the legacy branding, which was good branding in its time, but banking itself has changed,” says Pinkett. “So we started a rebranding process with the launch of a more inclusive branding and logo.”

– Introduced online banking. The bank previously had a static website that provided basic information. It’s now fully functional (www.citynatbank.com/). Customers can create and manage their accounts online. Online checking, savings, and budgeting were the first product introductions, which will soon be followed by personal finance tools, retirement planning, insurance, and annuities.

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– Developed plans to use social media. The bank plans to keep customers up to date with new products and services as they’re rolled out. Social media platforms will also provide a two-way conduit through which the bank can engage the community.

The team hopes its rebranding efforts will help them land additional retail clients, an area overlooked by many of the larger banks. “We see a very appealing market-based opportunity there, because the larger financial institutions are pretty much ignoring that aspect of the market,” says Wright. “According to them, it costs as much money to make a $10 million loan as a $1 million loan, so they focus on the higher loan balances. That opens up a market for us.”

The bank also joined the Kasasa network, a national network of 130 community financial institutions representing $2.25 billion in deposits. Through Kasasa (an invented word), City National is able to offer value-added and reward services to its customers, including free checking that rewards customers with cash back on debit card purchases. According to Patricia Nelson, vice president of retail banking, “well over” 400 Kasasa accounts have been added since the bank joined the network in January.

Renewed Focus on Small Business
Pinkett realizes that small businesses make up an important part of the communities that City National serves, and as a federally certified community development

financial institution, the bank has a social mission aspect to its lending. To serve small businesses while mitigating risk, the bank is planning a rollout of a suite of small business products that includes payroll processing, as well as providing SBA-backed small business loans. “We want to do more in small business lending with businesses and nonprofits that have a recurring revenue stream, that have operations, and that are not dependent on donations for their income,” says Pinkett, who is only the third president in the bank’s history.

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City National is also in the process of acquiring a Small Business Investment Company license from the Small Business Administration. The SBIC license would enable the bank to provide investment capital and technical assistance to entrepreneurs. “We want to be a better partner with the small business customer and help them better manage their business.”

But to accomplish all this, the bank must first move bad assets off its books as quickly as possible to stem further losses. To that end, management has increased personnel in its recovery and workout area to focus on collection-related transactions while looking for opportunities to sell foreclosed properties to hedge funds and other investors that buy distressed assets. “We want to reduce the number of non-performing loans to a minimum,” says Pinkett, “and get back into the business of looking for opportunities where we can make good loans to small businesses, to operating companies, to nonprofits that are improving communities, but doing it using what we learned in 2007—2008.”

While the bank is preparing for additional write-downs that will negatively affect the bottom line, Pinkett believes the bank will soon return to profitability. “We’re turning the corner–as much as we can see around the corner–but we still have a little bit more work to do before we can get back on a path of normalcy and profitability.”