DBRS Comments on the Q1 2009 Earnings of City National Corporation – Senior at “A”

DBRS has today commented on the Q1 2009 earnings of City National Corporation (City National or the Company). DBRS rates the Company’s Issuer & Senior Debt at “A” with a Stable trend. City National reported net income available to common shareholders of $2.0 million for the first quarter, down from $6.5 million in the previous quarter and from $44.0 million in Q1 2008. On a sequential quarter basis, significantly lower brokerage and mutual fund fees, margin compression, higher FDIC expenses, a full quarter’s worth of preferred dividends and incremental loan loss provisioning of $10 million more than offset excellent expense control and lower impairments on securities. Excluding securities losses, net income available to common shareholders would have been $13.2 million. Positively, deposit growth was solid as City National continues to benefit from a flight to quality.

Both non-performing assets (NPAs) and net charge-offs (NCOs) increased during the quarter as the recession continues to take its toll on asset quality. Specifically, NPAs increased to 2.65% of loans and other REO from 1.79% in the previous quarter and 1.00% a year ago. All loan categories showed increased non-accruals with real estate construction still the largest component of the increase. While the Company believes the worst is behind them in regards to the residential construction portfolio, the softness in the economy is likely to pressure other construction projects as well as commercial and industrial (C&I) loans. Meanwhile, NCOs increased to 1.10% of average loans and leases, compared with 0.79% in Q4 2009 and 0.42% a year ago. C&I and construction loans accounted for almost all of the quarterly charge-offs as the commercial real estate portfolio outside of construction continues to perform well. DBRS notes that about half of the C&I NCOs were related to the home building industry. Management believes that home prices are near a bottom in California, so losses may begin to stabilize. With unemployment still increasing and a still very weak housing market, however, DBRS expects credit costs, NPAs and NCOs to remain elevated for the remainder of the year.

Similar to the fourth quarter, City National incurred $15 million in losses and impairments on bank income notes, equity securities and mutual funds. DBRS notes that total exposure to the previously mentioned securities is a small $13.5 million and management does not expect securities losses to be material if any at all. Brokerage and mutual fund fees declined 45% from the fourth quarter as lower market valuations, interest rates and less trading activity dampened revenues.

Positively, the Company was very successful at controlling expenses despite higher FDIC premiums. Indeed, expenses actually declined 17% from last quarter as the Company lowered personnel costs, professional fees and marketing costs.

Despite the weaker financial results, capital metrics remain strong, especially regulatory ratios following the $400 million TARP investment in Q4 2008. Tangible common equity is very solid as well at 7.35%, up 1 basis point from Q4 2008. To further protect capital in light of the recession, City National cut its dividend to 10 cents per share from 25 cents per share.

Given the Company’s excellent deposit franchise, enhanced capital, adequate loan loss reserves and revenue diversification, DBRS expects City National to continue generating positive operating results and maintaining credit fundamentals that are in line with banks in its rating range.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.