City National Corporation (CYN)

CYN 
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City National Corp. (CYN)

Q3 2008 Earnings Call

October 23, 2008 4:00 pm ET

Executives

Cary Walker – Senior Vice President, Manager of Corporate Communications

Russell Goldsmith – President, Chief Executive Officer

Christopher J. Carey – Chief Financial Officer

Analysts

Andrea Jao – Barclays Capital

David Rochester – Friedman, Billings, Ramsey & Co.

Brett Rabatin – FTN Midwest Securities Corp.

James Ellman – Seacliff Capital

Brian Klock – KBW

Brian Foran – Goldman Sachs

Presentation

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation’s financial results for the third quarter of 2008. My name is [Jodi] and I will be your coordinator for today. (Operator Instructions) Now I will turn this call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.

Cary Walker

Thank you. Good afternoon. Here to discuss City National’s third quarter highlights are Russell Goldsmith, our President and Chief Executive Officer and Chris Carey, our Chief Financial Officer.

This call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the company’s future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the safe harbor provisions contained in the Securities Litigation Reform Act of 1995.

For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from expected results, see the company’s annual report on Form 10-K for the year ended December 31, 2007.

This afternoon City National issued a news release outlining its financial results for the third quarter of 2008 and year-to-date. To obtain a copy please visit our website at www.cnb.com. After comments by management today, we’ll open this call to your questions. Now I’ll turn it over to our CEO, Russell Goldsmith.

Russell Goldsmith

Good afternoon. Thank you all for joining us again. A few minutes ago City National announced year-to-date earnings of $96 million on revenue of more than $$660 million. Third quarter earnings came to $16.6 million or $0.34 a share after taking $19.6 million in after tax impairment charges, stemming largely from the previously disclosed write down that we incurred due to the blow up in value of Fannie Mae and Freddie Mac preferred securities earlier in the quarter.

Excluding those unusual charges, City National’s third quarter earnings totaled $36.2 million or $0.74 a share. The company also declared its regular quarterly cash dividend of $0.48 per share. City National remains profitable, well capitalized and well reserved. All in all it’s fair to say that City National’s third quarter operating results reflect real strength in our ongoing business.

Let me get into a little more detail. Average loans in the third quarter grew to a record

$12.2 billion, up 9% from the prior year and up 1% from the previous quarter. Most of the linked quarter to quarter growth came from mortgage loans to our private banking clients. I think it’s worth noting in this environment, and it’s indicative of City National, that our mortgage portfolio of today does not have a single delinquency anywhere in the entire mortgage portfolio that we’ve originated. And of course, as I think you know, we have no sub-prime mortgages and City National has never bought brokered mortgages.

Our mortgage borrowers are principally our private banking clients. In the quarter, our commercial loans also grew slightly, but construction and commercial real estate lending together were essentially unchanged on a combined basis from the second quarter.

Regarding deposits, there’s no question that economic uncertainty has produced a flight to quality in the third quarter and City National as a result has benefited from that by adding a larger than usual number of new clients and new funds from existing clients. As evidenced by the addition in this quarter of approximately $1 billion of additional funds here at City National in clients, securities, deposits, and money market investments.

We added a net total of $271 million out of that $1 billion in deposits. And this is in spite of the fact that City National is not a retail bank and we are not out there in our markets promoting high price CD’s like some of our competitors. Overall, City National’s credit quality has remained sound. Non-accrual loans are up as you can see, but two-thirds of them still involve home construction, which has shrunk to less than 4% of our company’s $12 billion loan portfolio.

The good news is that third quarter net charge offs fell 32% from the second quarter of this year. While we do anticipate further write downs in our home construction portfolio, we believe they will remain manageable. Most of our home builder borrowers are long term clients, and nearly all of these loans to them are guaranteed or are supported by some form of credit enhancement.

It’s also worth noting, given all the publicity that California and Nevada get, that the projects in our portfolio are concentrated largely in greater Los Angeles, as well as in the San Francisco Bay area, two geographies in these two states that have held up relatively well.

As has been the case for the past year, away from residential housing, City National’s loan portfolio continues to perform satisfactorily. Despite a stagnant economy, our CNI portfolio also continues to perform reasonably well. Our loan loss reserve remains strong and as of this quarter is now even stronger. We’ve taken the conservative approach of continuing to build our loan loss reserve, both to accommodate our loan growth and to provide a cushion against further economic deterioration, which we anticipate.

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