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 rating at R-1 (low). The trend for all ratings is Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

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.

DBRS notes that over the past year, City National has taken the proper steps to cope with a very difficult operating environment. Specifically, the Company has increased capital, liquidity and loan loss reserves to keep the balance sheet strong and mitigate asset quality deterioration. Even with disciplined expense control, City National continues to opportunistically invest in the business, most recently with the acquisition of an investment management firm.

Year-to-date the Company has only earned $22.3 million, or only $5.8 million after paying preferred stock dividends, as higher provisioning requirements have muted earnings. DBRS notes that while reported earnings are down substantially from historically robust levels, City National has remained profitable every quarter since the start of the current recession even with a footprint concentrated in hard hit regions like California and Nevada. Most recently, the Company reported net income available to common shareholders of $2.5 million for the third quarter, up from $1.3 million in the previous quarter, but down from $16.6 million in Q3 2008.

Asset quality remains a challenge for the Company. Nonperforming assets (NPAs) reached 3.70% of total loans and OREO from 3.19% in the second quarter and from just 1.25% a year ago. Meanwhile, net charge-offs (NCOs) increased to 2.47% of average loans and leases (annualized) from 1.84% in the second quarter. City National’s most problematic portfolio remains the $1.0 billion construction portfolio, of which $306 million was related to residential homebuilders. Homebuilder loans comprised 41% of all construction non-accrual loans and 16% of Q3 2009 NCOs. While the worst of the residential builder issues are now behind, commercial construction has weakened along with other commercial real estate, which caused non-accruals to jump in the latest quarter. DBRS notes the $3.5 billion residential mortgage portfolio remains pristine. However, deterioration in the other loan portfolios seen in Q3 2009 caused the Company to provision $85 million for credit losses, an incremental increase of $15 million compared to Q2 2009. The provision did exceed NCOs by $8.1 million building the allowance for loan losses to a solid 2.18% of total loans and leases. Excluding the pristine residential mortgage portfolio given its conservative underwriting standards, the adjusted reserve would equate to 3.07% of total loans and leases. While credit costs should remain elevated into 2010, strong earnings capabilities should help City National earn its way through its asset quality issues.

The Company has yet to repay TARP funds, but has tapped the markets in recent quarters for both common equity and subordinated debt. Specifically, City National raised approximately $180 million in subordinated debt in Q3 2009, which counts as Tier 2 capital and $120 million in common equity in Q2 2009. As a result, capital metrics remain strong with a tangible common equity ratio of 7.10%.

The balance sheet remains very liquid. Indeed, average deposits grew a robust 5% during the third quarter to $14.8 billion. Even more impressive is that average core deposits have grown 29% over the past year and now comprise 92% of average deposits. The Company estimates that $1.6 billion of the $2.7 billion in average core deposit growth has come from new and existing clients with the balance coming from money market funds that were previously held at City National Asset Management.

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.