DBRS Confirms City National Corporation at “A”; Trend Stable

DBRS has today confirmed the ratings of City National Corporation (City National or the Company) and its operating bank subsidiary, City National Bank (the Bank), including City National’s Issuer & Senior Debt rating at “A” and Short-Term Instruments at R-1 (low). The trend for all ratings is Stable. The rating action follows the Company’s FDIC-assisted acquisition of certain assets and liabilities of Imperial Capital Bank (Imperial).

City National’s ratings reflect its strong banking franchise that is underpinned by a robust deposit base and a diversified revenue stream. The ratings also consider a deteriorating loan portfolio that is concentrated in the harder hit states of California and Nevada, which has contributed to significantly weaker earnings. Nonetheless, the Stable trend reflects DBRS’s belief that the Company’s franchise strength remains intact as evidenced by superior deposit growth over the past year and that City National remains well-positioned to benefit from an economic rebound. However, further erosion in the Company’s tangible common equity ratio below 6% could have negative rating implications.

With the loss sharing agreement with the FDIC, DBRS views the transaction as lower risk and one that makes sense strategically. Furthermore, the transaction will be immediately accretive to earnings and City National will maintain solid capital metrics, particularly on a risk-adjusted basis. DBRS notes that the Company does not plan to issue any equity as part of the transaction and remains interested in additional FDIC-assisted transactions as long as the deal would meet City National’s criteria of fit, focus and price.

The Imperial acquisition adds 9 branches, of which all but one are in the Company’s current footprint, $3.4 billion in assets, $2.2 billion in deposits and a loss sharing agreement with the FDIC regarding Imperial’s $2.6 billion loan portfolio. The fair value mark on the loan portfolio is expected to come in at around 25%. In total, management expects a gain on the transaction of $10 to $20 million. Under the loss sharing agreement, the FDIC is responsible for 80% of the losses on the first $649 million in losses and 95% of any additional losses. The acquired loan portfolio is mostly multi-family (62% of Imperial’s total loans) as well as commercial mortgage (23%) and construction loans (15%). DBRS notes that over $2 billion of the loan portfolio is performing and that the loss sharing agreement mitigates the majority of the credit risk in the transaction.

While the transaction is by far the largest in City National’s history at approximately $3.4 billion in assets, or 18% of total assets, which raises execution risk, the Company has a demonstrated track record of successfully integrating acquisitions with 9 bank deals executed over the last 14 years. Positively, most of Imperial’s footprint is within City National’s and both companies’ loan and deposit systems are similar, which should help with integration and result in significant cost savings. Lastly, Imperial had a similar focus on business banking clients, not retail customers, so the acquisition makes sense strategically as well. Imperial’s customers should benefit from working with a stronger bank that offers a more diverse product set. DBRS notes that the Baltimore, MD branch was in the process of being closed by Imperial and that City National will continue to work with the regulators to ensure a smooth branch closing.

DBRS estimates the Company’s tangible common equity remains above 6% following the transaction, which is considerably lower than recent historical standards given strong balance sheet growth. Positively, on a risk-adjusted basis, capital ratios remain very strong. Already very liquid with excess deposit funding, DBRS sees no liquidity concerns for City National even if the vast majority of Imperial’s deposits do run off.

City National Corporation, a bank holding company headquartered in Beverly Hills, California, reported $18.4 billion in assets at September 30, 2009.

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.