DBRS Comments on Q4 2008 Earnings of City National Corporation – Senior at “A”

DBRS has today commented on the Q4 2008 earnings of City National Corporation (City National or the Company), given the continued unsettled conditions in the financial markets and the recessionary U.S. economy. DBRS rates the Company’s Issuer & Senior Debt at “A” with a Stable trend. City National reported net income available to common shareholders of $6.5 million for the quarter, down from $16.6 million in the previous quarter and $46.9 million in Q4 2007. During the quarter, various impairment charges, higher credit costs, lower wealth management revenue, and net interest margin (NIM) contraction negatively impacted earnings, despite good expense control (excluding a $7.9 million intangible asset impairment) and solid loan and deposit growth. The $6.5 million gain equated to a return on assets of 0.22%. With the economy still deteriorating, credit costs are likely to remain high and pressure earnings. DBRS notes that City National remained profitable every quarter in a very challenging 2008 and expects it to continue to perform relatively better than many banks.

The majority of the asset quality issues remain related to the homebuilder portfolio. However, City National did see some deterioration in its commercial & industrial (C&I) portfolio, even from companies not related to the real estate development and construction industries. Overall, non-performing assets (NPAs) increased to 1.79% of loans and other NPAs from 1.25% in the previous quarter. Meanwhile, net charge-offs (NCOs) increased to 0.79% of average loans and leases, compared with 0.42% in Q3 2008. DBRS notes that loans to homebuilders represented 46% on all charge-offs, despite totaling just 3.6% of the total loan portfolio. Given the problematic economic outlook, the Company continued to build its loan loss reserve, which ended the quarter at a robust 1.80% of loans and leases. Within the securities portfolio, City National took $18.8 million in securities impairment charges related to pooled trust preferred and equity securities. Asset quality should continue to deteriorate, but DBRS notes that the Company remains well positioned to cope with the very difficult environment.

Positively, City National benefited from a flight to quality and the increase in FDIC protection, exhibited by average deposit growth of 8% during the quarter. Current clients increased balances and the Company was able to attract new clients as well. Despite solid deposit and loan growth, NIM contracted 14 basis points to 4.09% during the quarter as asset yields fell more than funding costs. Given the low interest rate environment and City National’s predominantly deposit-funded balance sheet, NIM should remain under pressure.

In light of the $400 million preferred shares investment by the U.S. Treasury, DBRS notes that holding company liquidity and regulatory capital ratios have been enhanced. The investment also provides an additional capital cushion to absorb future credit costs and to continue to lend, and allows the Company to continue to invest in the franchise. DBRS notes that the preferred dividend payments will cost $21.5 million a year after tax.

Given the Company’s excellent deposit franchise, enhanced capital, relatively solid overall asset quality and revenue diversification, DBRS expects City National to continue generating operating results and maintaining credit fundamentals that are in line with banks in its rating range.

Notes:
The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.

All figures are in U.S. dollars unless otherwise noted.