DBRS Comments on the Q2 2009 Earnings of City National Corporation – Senior at “A”

DBRS has today commented on the Q2 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 $1.3 million for the second quarter, down from $2.0 million in the previous quarter and from $35.5 million in Q2 2008. On a sequential quarter basis, incremental loan loss provisioning of $20 million, higher FDIC assessments and lower brokerage and mutual fund fees more than offset net interest income expansion, securities gains rather than losses and an increase in other income. Excluding the FDIC special assessment and the securities gains, core net income available to common shareholders would have been $5.8 million compared to $13.2 million last quarter. Other highlights of the quarter include a $120 million common equity raise and continued strong deposit growth and expense control. While financial performance has declined from previously robust levels during the recession, the Company’s balance sheet remains strong and was further solidified by the common equity raise.

During the quarter, City National saw non-accrual loans increase across all loan categories with commercial and commerce RE mortgages accounting for the majority of the increase. Nonperforming assets (NPAs) now represent 3.19% of loans and foreclosed assets, up from 2.65% in the previous quarter and 0.95% a year ago. While elevated and reflecting the difficult economic conditions in California and Nevada, DBRS notes that approximately 1/3 of the loan portfolio is comprised of jumbo prime mortgages and home equity lines made to affluent clients. The loans have very low LTVs and loss content has been immaterial and should remain that way. The construction portfolio remains the most problematic, however there have been some promising housing signs recently of increased sales and values, which could point to recovery in housing. However, stress in the homebuilder portfolio is being replaced by non-residential construction and is where the majority of new non-accruals have come from. Net charge-offs (NCOs) continue to increase as well and reached 1.84% of average loans and leases from 1.10% in Q1 2009. DBRS notes that CRE outside of construction continues to perform very well with no charge-offs this year. The provision exceeded NCOs by $13.3 million resulting in a reserve build to a solid 2.06% of total loans and leases. 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.

Average deposits grew another 9% during the second quarter as the Company continues to benefit from a flight to quality. With loan demand tepid, the deposits were invested into securities, which helped grow net interest income despite modest net interest margin compression of 3 basis points (bps) to 3.98%.

During the quarter, the Company announced the acquisition of Lee Munder Capital Group, a Boston-based investment firm that manages assets for corporations, pensions, endowments and affluent households. The acquisition adds more investment capabilities to clients. While wealth management fees have been under pressure recently from valuation declines, low interest rates and reduced client activity, DBRS believes revenues will improve and remain an important component of revenues.

Capital levels remain a strength for the Company. Already a recipient of $400 million from TARP, City National raised another $120 million in common equity during the quarter, which has augmented the Company’s already solid loss absorption capacity. Indeed, tangible common equity to tangible assets is a robust 7.35%, an increase of 44 bps from the first quarter. Additionally, the Company recently issued $50 million in subordinated debt, which augmented Tier 2 capital. Management plans to repay the TARP funds later this year, most likely in Q4 2009.

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.