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City National Corporation (NYSE:CYN)

Q4 FY07 Earnings Call

January 24, 2008, 10:00 AM ET

Executives

Cary Walker - Sr. VP and Manager

Russell Goldsmith - Chairman of the Board and CEO

Christopher J. Carey - EVP and CFO City National Bank and City National Corporation

Analysts

Brett Rabatin - FTN Midwest Research

Andrea Jao - Lehman Brothers

Terry Maltese - Sandler O’Neill Asset Management

Lana Chan - BMO Capital Markets

Todd Hagerman - Credit Suisse

Brent Christ - Fox-Pitt Kelton

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation’s year-end and fourth quarter 2007 financial results. My name is Antoine and I will be your coordinator for today. At this time all participants are in listen-only mode. After the speakers remarks there will be a question-and-answer period for analysts and investors. [Operator Instructions] This call is being recorded and will be available shortly after it is completed on City National web site at www.CNB.com.

Now I would turn the call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.

Cary Walker - Senior Vice President and Manager

Thank you. Good afternoon. Here to discuss City National’s year-end and fourth 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 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 can differ materially from these expectations. The speakers on this call claim the protection of the safe harbor provision 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, year ended December 31, 2006. This afternoon, City National issued a news release outlining its 2007 financial results. To obtain a copy, please visit our web site at www.CNB.com. After comments by management today, we’ll open this call to your questions. Now I’ll turn the call over to our CEO, Russell Goldsmith.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you very much. Good afternoon. And thank you for joining us. Few minutes ago, as you know, City National reported 2007 earnings per share of $4.52. We earned $223 million last year, on record revenue of over $900 million. Fourth quarter net income amounted to $47 million or $0.96 a share. Given today's challenging economic environment, I believe that 2007 was a solid year for City National. Our company grew assets, revenue, loans, deposits, fee income, and assets under management. We added to our banking and wealth management businesses with two very important and successful acquisitions. We attracted some talented and dedicated new colleagues and made great progress in a number of areas in our company.

I was particularly encouraged by our loan growth in the fourth quarter. At the same time, City National avoided the highly publicized problems facing the financial services industry today. City National has no exposure to sub-prime lending or sub-prime CDOs and has no concerns about auto loans, credit card debt, home equity lending or our money market funds. That's not to say that we are fully satisfied with our performance. Obviously, we want to grow earnings and in my tenure we have had consistent quality earnings growth. But economic conditions, as everyone on had this call knows, are challenging and the housing industry in particular has been hit very hard. The credit markets obviously have been very volatile.

We do take some comfort in relative performance in the fact that it looks like City National’s earnings per share growth is likely to end up being at or near the top quartile of the nation's top 50 banks. I think this underscores the long-term value of our conservative approach to credit and our balance sheet. We do try to position our company to weather economic downturns, to deliver earnings and shareholder value that grow over the long term. No business is immune to changes in the economy and like banks everywhere, City National and its clients are affected by a weakening economy and the sharp housing market downturn. For the first time since 2003, as you saw in our release in the fourth quarter, we added to our credit reserves but continue to maintain a strong balance sheet, backed by a funded capital and liquidity. I might add that during the past four years, when we have had no additions to our loan loss provision, City National’s loan portfolio has grown by $3.7 billion, which was another factor in that decision.

As you also saw in our release, the Board of Directors decided to, for the 15th year in a row, raise our dividend by 4%, and I think this reflects the… our view of the strength of our balance sheet liquidity and capital position that we have as a company. In addition, obviously we have augmented our stock repurchase capabilities for obvious reasons based on those facts. In 2007, loan growth at City National was strong in every major category. Average loans grew to $11.1 billion, led by a 14% increase in commercial loans. Commercial real estate and construction loans together were up 10%, while residential lending to our private banking clients rose 9%. As most of you know I hope, City National does not make and does not buy sub-prime or option adjustable rate mortgage loans.

Now, let me touch on credit quality. Clearly, the for-sale housing construction business across the country continued to weaken in the fourth quarter and its challenges are directly linked to problems in the mortgage and housing industries. However, as we have said before, City National's for-sale housing portfolio accounts for roughly just 5% of City National’s total loans. And while I know a lot of people worry about California, I think it is worth noting that the vast, vast majority of our for-sale housing construction loans and land loans are in nine of California's strongest and most prosperous counties. Non-accrual loans increased in the fourth quarter to 65 basis points of total loans and net loan charge offs were at $8.5 million as compared to net recoveries in '06. Again, most of this was related to our for-sale housing portfolio and Chris Carey will provide some more color on that shortly. Our other real estate related portfolio, home mortgages, remains very well positioned. In fact, in all of the years that City National has been originating mortgage loans we have never had a foreclosure. With an average loan-to-value ratio of just over 50% at origination and with private banking clients as our borrowers, we feel very good about these loans.

We also feel very good about City National’s continuing growth of non-interest income. It grew 25% year-over-year and now accounts for one-third of our company’s total revenue. Wealth management is still the primary driver of non-interest income growth contributing more than two-thirds of the total. Asset management fee income increased 31% from the previous year due to a number of factors. The acquisition of what's now called Convergent Wealth Advisors, the continuing success of City National Asset Management and City National Securities. The continuing contributions of our eight other majority owned investment management affiliates and our minority interest in Matthews International. Our wealth management business has built some very solid and strong momentum that I believe will carry over into 2008.

Today City National manages or administers assets of more than $59 billion. That's a 22% increase over 2006. And if you look just at our assets under management, which total $37.8 billion, that’s an increase of 37%. On the international side of our business, fee income from foreign exchange on letters of credit grew 16%, which is the third consecutive year that this business has achieved double-digit growth. It reflects California in particular, California's strong position here on the Pacific, reaching out to Asia and the enormous amount of trade that flows from Asia through California. Cash management also is making a big contribution to City National. As you can see from the press release income from cash management and deposit transaction fees grew 11% over '06. I think it is interesting to note that increased sales of our remote deposit capabilities, City National E-Deposit, which we introduced just over a year and a half ago is now processing deposits of more than $1.5 billion each month.

Let me take a few moments to discuss the economy, which is on everybody's mind these days. There is little doubt that many repercussions from the sub-prime mortgage melt down, which let me say one more time, we are not a part of that. But they have caused large housing inventories and increasing number of foreclosures and will continue to drive the downturn in the housing market across the nation further into this year. When you add in higher oil prices and rising unemployment, in our view, the U.S. economy appears headed either for a very slow growth or even possibly a recession in 2008. In either event, an economy growing or not growing at those levels is going to affect business in '08. California's economic forecast is essentially a mirror image of that for the United States with maybe a bit lower lows and higher highs.

It’s certainly quite possible that the Federal Reserve’s interest rate cuts, this new Federal government’s stimulus package, continued strength in exports fueled by strong foreign demand and a weak dollar, a still growing global economy including those huge trade links between Asia and California, low levels of business inventories and the fact that many industries in the states in which we do business are continuing to do fine. That combination, I think will in the end temper the down side risk for the entire nation including California, Nevada and Manhattan. So far, at least the housing issues and capital crunch have not really spilled over in a significant way into other areas of the economy and into other parts of our client base. California's economy is remarkably diverse in a number of sectors including trade, technology, agriculture and commercial real-estate are holding up reasonably well.

In Nevada we are seeing thousands of new hotel rooms that are starting to come online and each hotel room creates jobs which means thousands of new jobs in Nevada. Despite today's challenging economy, City National continues to be open for business. And you can see that in the loan growth and deposit growth over the fourth quarter. There was a recent article in the Wall Street Journal on the commercial real-estate industry, and I thought it was interesting that Los Angeles was noted as one economists top markets for investors who want to buy commercial real-estate in 2008. Prices for commercial property have held up reasonably well here while they may be softening in some other places. Thanks in part to the lack of available land, the difficulties of getting entitlement and hence the slow pace of new construction as well as our continuing job and population growth.

Turning back to City National itself, I believe the growth, size and focus of City National, plus the skill with which our organization of almost 3,000 people delivers our capabilities to our clients everyday, that combination has enabled us to position ourselves reasonably well for 2008 and has positioned us to continue to develop new products and services, add talent and open new offices in '07 which will also help our performance in 2008. Last year we added 11 new banking offices, notably with the acquisition of Business Bank of Nevada and the opening of new offices in Century City and Ontario, California.

Most recently we opened a new full service regional center in Summerlin Nevada, which is part of greater Las Vegas, bringing our total number of Nevada offices to nine. We are very encouraged by the progress of what is now City National Bank in Nevada and by Convergent Wealth Advisors, which we acquired last year and has been growing dynamically and which has opened an office here in Los Angeles. We are just recently introducing City National Visa Rewards, a highly selective and somewhat innovative premium rewards program. This is a new thing actually for us with our clients, and we are introducing as we usually do, two new innovative state of the art cash management products. We are also enhancing what we can do through our branch system which is now 62 offices with a new City National Preferred Banking program that more effectively targets the 800,000 so-called mass effluent households in the 11 California counties that we serve.

We have just hired two outstanding proven senior executives, Michael Pagano to head private banking and Rod Banks to head commercial banking, which we believe will enhance our effectiveness and our growth in these two key areas of City National Bank.

Finally I would like to mention that City National's successful New York office just last month celebrated its fifth anniversary and added a new commercial banking team last year. Manhattan office now serves not only the banks by costal entertainment and law firm clients and firms, but also is growing very nicely with New York based businesses and individuals. We are very pleased with our New York bank. So while there are some cost elements and economic elements that will clearly slow our earnings growth in 2008, and there are a number of positives that will produce a quite profitable 2008, and we believe build a strong base for 2009.

Now, to go in more depth on our performance in the fourth quarter, and what we expect to see in 2008, let me turn this over to our dynamic CFO, Chris Carey.

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Thank you, Russell. Good afternoon, all. I guess first to all of those New York Giant fans, congrats and good luck on the game coming up. We all knew they would be in the Super Bowl this year at the start of the season. As Russell noted earlier, fourth quarter net income amounted to $47 million or $0.96 a share. Fourth quarter 2000 [ph] net income reflects a provision of $20 million or $0.24 a share. It also reflects $0.5 million or $0.01 a share related to the visa reorganization which we totally expect to recover when Visa goes public.

Here is some highlight from the quarter. Strong revenue growth, up 10% to $237 million, DBA [ph] balances grew significantly, which we were pleased to see and [inaudible] escrow which we are worried about a little bit with what went on in the credit market has actually held up very well in the fourth and we think the performance in the quarter and the year on a relative basis was very strong. Average loans reached an all-time high of $11.5 billion, up 12% from the same period of 2006 and up very strongly from the third quarter of '07. The margin, I think was another bright spot at 4.42%, unchanged from the third quarter. And non-interest income was up very strongly, up 28% from the same period in '06.

Now, as promised, a little more on credit quality. At City National, non-performing loans amounted to slightly more than $75 million or 65 basis points of total loans end of the year. This is up from 23 basis points in the third quarter. I know that most of you have been following us. We have said the level of NPAs was unsustainable and it has finally moved up a bit. But I think it still compares very well to our peer group and the majority of the non-accruals and the increase in non-accruals comes from for-sale housing business and principally in southern California. As we said before, most of our for-sale housing construction loans were made to long-term clients who have been working constructively with the bank. Some are paying interest out of pocket, others are re-margining. We expect to work through these issues this year. There are no national homebuilder credits on non-accrual and outstandings for the national homebuilder program are down to 15 million.

It is worth noting that other proper types, industrial, office, retail and so forth appear to be holding up well. We have not seen any significant deterioration, cap rates have increased but properties are cash flowing. As Russell mentioned earlier, we recorded a provision for the first time in four years. I do want to point out that net charge-offs were only 3.9 million or 13 basis points of total loans. Most of it, $3.2 million approximately, in fact relates to three for-sale housing construction loans to developers in California. We also thought it was appropriate to strengthen our loan loss allowance and increased it to $168 million or 145 basis points of total loans which also, I think compares very favorably to our peer group.

Now, I would like to talk briefly about Spences [ph] City National continued to invest for the future in 2007, but we are going about in a disciplined way, excluding the impact of acquisitions, our expenses grew about 5% from the fourth quarter of '06. Now, a few comments on share repurchase activity. We bought back a substantial amount of shares, 350,000 in the fourth quarter, bringing the number of shares we purchased during the year to nearly 1.5 million. As you have seen from the press release, we have a new authorization from our Board of Directors that enables us to buy back more than 1.5 million additional shares. Particularly at today’s prices we think City National is a very attractive long-term investment.

Now let's turn to 2008 and our outlook. There is no question that says operating environment and economic conditions present more challenge than we have seen in quite a while. With these things in mind, we are taking a cautious and conservative outlook on the current year. That reflects the general approach of many of our clients who also will be more measured until the economy starts to stabilize. We expect earnings per share this year to be 7% to 12% lower than 2007, and that assumes little or no economic growth in 2008. However, we still expect, as Russell mentioned, strong growth in wealth management and do like most banks have to overcome higher FDIC expenses this year and perhaps for the next couple of years. All in all we anticipate moderate growth in loans and deposits, some pretty good growth in non-interest income, slightly lower growth in expenses. We do expect to make additional credit provisions this year, more than we did in 2007 and lower interest rates will likely place continuing pressure on the net interest margin. The bottom line, we do anticipate good earnings in 2008, but somewhat lower due to the challenging environment. But as Russell and I have said repeatedly, we positioned City National to weather the times of economic downturn we are seeing today. We are here for the long-term and assuming a return to stability, we expect to return to more normal earnings growth in 2009.

With that said we would be glad to take your questions.

Question and Answer

Operator

At this time I would like to invite questions from analysts and investors. [Operator Instructions] Your first question comes from Brett Rabatin with FTN Midwest. Please proceed with your question.

Brett Rabatin - FTN Midwest Research

Good afternoon Russell and Chris.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Brett how are you today.

Brett Rabatin - FTN Midwest Research

I’m doing well, thanks. How are you guys doing.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Good. Thank you.

Brett Rabatin - FTN Midwest Research

Wanted to first ask on the provision this quarter of $20 million, can you help us with a breakdown there in terms of how much of that was an a reflection of allocation to the construction loans and how much might have been sort of an economic factor and just any general thoughts on provisioning, level in the fourth quarter?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

I think that we saw somewhat, you can see by their change in our NPAs somewhat of a meaningful change in non performing loans driven by the for-sale housing environment. I would say that’s a factor but we also had very substantial loan growth. More than we anticipated. We are pleased with it. There is really a variety of different factors. Our outlook on the economy from where we were at the end of the third quarter changed meaningfully. I mean it was… we weren’t totally positive then but it certainly became more negative. So there is a lot of factors in it but I think those were the key ones.

Brett Rabatin - FTN Midwest Research

Okay. And you indicated, I appreciate the conservative comments about the economy is soft and you are not sure if there will be a recession or slow growth this year. But you indicated you hadn’t seen yet any stresses in any other pieces of the portfolio aside from the for-sale housing. So note, none of the other portfolios have shown any increase in watch list or delinquent loans or what have you.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, I would say there is no meaningful. There is always some migration as you grow your portfolio, but we aren’t seeing any patterns in any particular area. I do continue to comment that in the CNI category, over time you are going to have just some portion of your loans migrate into lower grades. It is just statistical. Our mortgage category, we don’t expect to see that and having it at all, but commercial real estate has been very strong out here in our markets. And that’s not an area that unless there is a really weak economy that you do expect to see migration. So I would say, we don’t see anything, but in general don’t forget that CNI usually statistically has some migration down.

Brett Rabatin - FTN Midwest Research

Okay. And then just lastly on the positive side, I’m curious to hear, I know one of the things you guys have struggled with is competitors being aggressive on pricing. And so I’m just curious to hear if the books of business so to speak are not as, there is not as much competition and people trying to steal market share with a pull bark in credit terms and that sort of thing or what the environment was presently?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, we are in a lot of markets and have a lot of different competitors. Obviously we have fewer competitors today than we had 12 months ago, in some of those markets and in some of those product types. And I think that some of the more aggressive lenders have either pulled back or disappeared, which is good. But there are still a number of competitors in all of our markets and it still a competitive business.

Brett Rabatin - FTN Midwest Research

Okay. Great. Thank you.

Operator

Your next question comes from Andrea Jao with Lehman Brothers. Please proceed with your question.

Andrea Jao - Lehman Brothers

Andrea Jao, good afternoon gentlemen.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Andrea, how are you? Nice to hear from you.

Andrea Jao - Lehman Brothers

Pretty good. Okay. So back to the margin first, how much of pressure in 2008 do you expect and what would be the drivers? And how much of funding from your securities book can you use as an offset?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, I would say right now, Andrea, the change in interest rates and the expectation of lower rates has been pretty dramatic in the last month. And so, I would say that’s probably the biggest driver perhaps. I wouldn’t want to quantify that. Loan growth tends to suppress the margin, growing core deposits tends to improve the margin. We do expect more moderate growth in loans, but probably the biggest factor is the interest rate environment.

Andrea Jao - Lehman Brothers

Okay. Okay. Any more cash flow from the securities book that could help --?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Yes, we will still be running down our securities portfolio for a good part of the year.

Andrea Jao - Lehman Brothers

Do you have a number in mind at this point that you could share?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Yes, I would say probably at least $300 million or $400 million.

Andrea Jao - Lehman Brothers

Okay. That’s, that’s a nice number. Now, on the provisioning side, can we expect that to double in 2008 versus the $20 million in ‘07?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

We are not… we thought the prudent thing to do was to continue to give guidance for EPS growth. But we have not given guidance for the elements underneath that obviously. We have indicated that we think the provision is going to be higher in all likelihood, then it was in 2007. But, clearly there are a number of factors that go into that, so we are not really going to be more specific.

Andrea Jao - Lehman Brothers

Okay. Maybe I can approach the question this way. How much of a ramp up on losses are you seeing at this point?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, as you could see from our numbers, Andrea, the actual charge-off number $3.8 million out of $11.6 billion, I wouldn’t call that a ramp up.

Andrea Jao - Lehman Brothers

I mean yes, no I realize that. They are very modest. So for 2008, what are you preparing for in terms of losses.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

We are not projecting charge offs. I think that’s a dangerous game.

Andrea Jao - Lehman Brothers

Fair enough.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

But, we think that in ‘08 our conservative credit and underwriting standards will continue to serve us well. But we are not immune to the economy and how it affects some of our clients. But as we have said, so far at least, the impact that we have seen has been largely restricted to our for-sale housing clients and as Chris noted, they have been working with us cooperatively and constructively. So we’ll see. I think we’ll have to go on to the next questioner.

Andrea Jao - Lehman Brothers

Okay. Thank you so much.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Terry Maltese with Sandler O’Neill Asset Management. Please proceed.

Terry Maltese - Sandler O’Neill Asset Management

Hi. Good afternoon, guys.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Hi, Terry.

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Terry, hi.

Terry Maltese - Sandler O’Neill Asset Management

I have a few questions. First just to be clear, the down 7% to 12%, you are talking about, that’s off the 452 number, is that correct?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Yes. That’s correct.

Terry Maltese - Sandler O’Neill Asset Management

Okay. All right. And then secondly, you talk in the press release, you say that loan loss provisions are returning to more normal levels. What is a normal level for City National?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, that’s a hard to answer. We tried… you know I think you have to just think about our portfolio. Probably talked about this many times over the last three-and-a-half years. We have one part of our portfolio that we don’t expect to have losses on, the mortgage portfolio, though we could. We have had another part of our portfolio that we didn’t have losses on for almost 15 years, commercial real estate. And then we have the largest part, over 35% in CNI where we expect to normally have some losses and it’s been pretty benign. So, we don’t give out what we think normal is. We try to help people predict it in a… by telling or giving how we think about those three areas. One of them obviously, commercial real estate in general for-sale housing in specific is under some stress. But it’s, it is a very difficult area to predict. And I would try to answer in a different way and say that we position the bank to be more at lower volatility than we think our peers in both good and bad times. So we would… you would probably expect a more normal provision for us to be a little bit lower than our peers may be. Now, in a recession, I think everybody is going to have a lot more volatility. And it is hard to predict what that will end up being

Terry Maltese - Sandler O’Neill Asset Management

I guess what we are trying to understand is the guidance basically suggests 398 to 420. And we are having a hard time seeing how the earnings could be down that much. So when you go back and look historically at what your provision has been over the last eight or nine years, it doesn’t look like it is anything anywhere near 50 basis points. So, I guess that’s why you talk about normal but it seems like you have to almost have greater than normal if, when you say normal you mean normal relative to what you have had over sort of over the last decade, so that’s what we are trying to understand.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Let me try to come at it this way, Terry. I think what we are trying to say is that there are a number of factors that are going to diminish our ability to grow earnings in ‘08. Chris mentioned the spike in the FDIC insurance. Obviously interest rates coming down dramatically are going to affect the revenue side. We’ve got costs that, not only the people that we have on board but we anticipate adding some additional personnels, we continue to build the company for the long term. So there are a number of reductions in, on the revenue side and increases on the expense side, in addition to a higher level of provision than you are seeing for ‘07. But when we use a phrase like ‘more normal levels’ that I think the other side of that is, it’s a reasonable level. It is not a level of provision. We don’t expect an alarming level of provision if that’s what you are thinking about.

Terry Maltese - Sandler O’Neill Asset Management

Okay. All right. And should we assume that the provision will roughly match charge offs?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, I think what you saw this year is that the provision was dramatically greater.

Terry Maltese - Sandler O’Neill Asset Management

Right but now… clearly that’s in anticipation of rising charge offs. So if you had to guess in ‘08 would you assume that the provision would roughly match charge offs?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

I wouldn’t guess.

Terry Maltese - Sandler O’Neill Asset Management

Okay. All right. All right. And then just one last question. You mentioned, Chris higher rates… lower rates a few times. Is City National, because you have talked in the past about being close to rate neutral as a result of the swaps, bringing asset sensitivity down. Are we basically saying that City National is asset sensitive at this point and not close to rate neutral?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Well, what was said is we are naturally asset sensitive and we try to get ourselves as neutral as possible. But the reality is, we are, if you look at any of the disclosure where we are somewhat neutral to 100 basis point move. But as the rates move down more severely and more rapidly, I would, almost like most banks like us, then it gets very magnified and you are less neutral. So we’ve seen very rapid shift downward in rates, I think most people are well, there was some surprise on Tuesday based on what happened in the Asian markets on Monday. We weren’t so surprised. But, still, it was a pre-emptive move. So it is really, it really gets magnified when it is dramatic and sharp like that.

Terry Maltese - Sandler O’Neill Asset Management

Okay. All right. Thank you.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the Lana Chen with BMO Capital Markets. Please proceed with your question.

Lana Chan - BMO Capital Markets

Hi, good afternoon.

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Hi, how are you.

Lana Chan - BMO Capital Markets

I had a couple of questions on the for-sale housing construction loans. I just was wondering if you could give us some of the characteristics of that particular loan portfolio in terms of LTV’s average loan sizes and the increase that you saw in NPA this quarter primarily from that portfolio. What are you seeing with the pricing on the reappraisals of those loans?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Let me try, it is hard in a conference call to give you all of that color. Let me try to deal with some of what you are looking for, Lana. To give out an LTV on the portfolio, it’s a moving target, number one, particularly when you are doing construction projects. I think first and foremost I would guide you to the disclosure we put in the 10-K every year. But just, if you start with a pure land loan they typically, unless you are making it to Warren Buffett, and he is not a client of ours, you start at 50% LTV. If you go into construction [inaudible] it can go up higher depending upon the project but when we look at our overall commercial real estate book [ph] 55%. That’s about the best I can do on the LTV for you really. Loan sizes, there is no fair amount of variance in loan sizes from a couple of million to certainly anywhere from $20 million to $40 million. But I don’t know there is a sweet spot there.

Lana Chan - BMO Capital Markets

And so the increase in NPAs this quarter was at a couple of larger credits?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

I think it was… I think it was five or six months [ph].

Lana Chan - BMO Capital Markets

Okay. And --

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

The part is related to for-sale housing I think it was six months or so.

Lana Chan - BMO Capital Markets

Okay. And then I guess given the trends that you are seeing in the construction portfolio, kind of surprised to see construction loan growth pretty healthy this quarter. Where is that coming from, and is it still, is it commercial or residential related?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

It’s primarily commercial of course. We are not bringing on new clients in the for-sale housing.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

We have not been making commitments for new for-sale housing projects for quite some time. But as Chris said, there are a number of perfectly healthy good commercial construction projects underway. And there are some continuing commitments in the for-sale housing area, not a lot, with very, very solid borrowers. So I think it is easy to lose perspective on what’s going on and there are a lot of positives in the real estate markets out here.

Lana Chan - BMO Capital Markets

Okay. Thank you for the color.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from Todd Hagerman with Credit Suisse. Please proceed with your question.

Todd Hagerman - Credit Suisse

Good afternoon everybody. A couple of quick questions. Just Chris, just on the reserve, I don’t know if you mentioned this before, of the $168 million roughly, how much of that is unallocated at this time?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

I don’t even know the number right now. Todd, we usually put something once a year in our K so --

Todd Hagerman - Credit Suisse

2% or 3%?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Personally I don’t know that unallocated is exactly the right way to describe it but I defer until we finalize that number for our 10-K in the next [inaudible].

Todd Hagerman - Credit Suisse

Okay. Fair enough. And then just secondly the FDIC assessment that you referenced, can you give us again, just a sense of the order of magnitude, the kind of increase that you are expecting here for ‘08?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Yes, I think it is about $4.5 million to $5 million.

Todd Hagerman - Credit Suisse

For the year.

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

For the year.

Todd Hagerman - Credit Suisse

Okay. And then just finally, again just in terms of the loan market, notably the secondary loan market, could you give us an update just in terms of the investor appetite what you are seeing in Southern California just in terms of distressed properties. Is there an active market these days in terms of secondary loan sales? Is that something you have utilized at all?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

We don’t really participate in that in terms of [inaudible] loans that we make that we would sell, which I don’t --

Todd Hagerman - Credit Suisse

No I’m talking about work out credit, problem credits, just in terms of distressed loans that you may look to, exit at some stage.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, there is obviously lots of people, a lot of bottom feeders walking around now with lots of money trying to go do that. It is a little early but we are not… we are not in a position that we even need to talk to anybody like that frankly.

Todd Hagerman - Credit Suisse

Okay so --

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Overall, NPAs are still really frankly very low. Even though they have gone up a lot but still a low number.

Todd Hagerman - Credit Suisse

No I recognize that. But I am just I guess I am coming at it from a standpoint of just kind of a workout strategy or an exit strategy for those few problems that you have if that’s something that’s under consideration that just at the end of the day you look at the value, whether or not, is it in the best interest to keep this on the books for an extended period of time as opposed to perhaps getting it out of the company sooner rather than later.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Well, I think if I understand your question obviously we are in conversation with clients typically long before it gets to that stage. And we either try to improve the structure or in some cases encourage clients to go somewhere else and keep it, keep those problems out of our balance sheet.

Todd Hagerman - Credit Suisse

Okay. And then just finally, just switching gears, just Russell, could you give me a sense of in the Wealth Management, the Mathews investments, just to kind of update us in terms of the relative performance there, give us kind of a sense of the contribution that it has been making. I’m assuming it’s done tremendously well and I’m just trying to update myself in terms of where that investment stands and the contribution that it is making to the company.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

They finished the year north of $12 billion in assets under management. They had another very strong year, Mathews is obviously one of the finest firms investing in Asia. I have obviously don’t know what their January numbers are. I am sure that’s a little more interesting. But any kind of longer-term view, this has been a fabulous investment for City National and our clients who have invested with Mathews and done extremely well. So as a minority shareholder, obviously, as the asset values have gone up and that’s what I was alluding to, our share of the earnings has had a nice growth rate as well.

Todd Hagerman - Credit Suisse

And you haven’t changed your ownership interest, have you? It is still the same.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

No. It is exactly the same.

Todd Hagerman - Credit Suisse

Terrific. Thanks very much.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from Brent Christ with Fox-Pitt please proceed with your question.

Brent Christ - Fox-Pitt Kelton

Good afternoon. A couple of quick questions. I guess first could you give us a sense of how much in reserves you have specifically allocated to that for-sale housing portfolio?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

We don’t really break out our reserves by portfolio. I mean we do some breakout on a broader basis in the 10-K, but we don’t break it out by portfolio. And I wouldn’t know that number exactly off the top of my head anyway.

Brent Christ - Fox-Pitt Kelton

Okay. I’m assuming most of the reduction or the increase this quarter was related to that, is that a fair assumption?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

Well as we said earlier, I mean we did have pretty strong loan growth. So by definition, when you have loan growth you increase your reserves, unless the credit quality is migrating the other way. It can offset it. So some of it clearly has to go to the new loan growth.

Brent Christ - Fox-Pitt Kelton

Okay. And then secondly, did interest accrual reversals on the new non-performers have any impact on the margin this quarter and if so could you quantify that?

Christopher J. Carey - Executive Vice President and Chief Financial Officer City National Bank and City National Corporation

No, no it was de minimus.

Brent Christ - Fox-Pitt Kelton

Okay. And then last quickie. Could you… you mentioned the title [ph] and escrow deposits were relatively stable, could you give us a sense of where they stood at the end of the quarter relative to the end of the third quarter?

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

I don’t… I think the average number are reasonably representative, it was pretty stable in the whole quarter. So I think that the number that is in the press release, which is down a little bit. I mean just to remind everybody, the normal trend is they go down in the first quarter. I’m not saying they will or they won’t. But that’s the normal trend. But they were 1.18… 1.11 in the fourth quarter and they were probably very similar to that, maybe slightly down at the end of the year, but they are very close to that range.

Brent Christ - Fox-Pitt Kelton

Okay. Thank you.

Operator

At this time there are no more questions in the audio queue. So I would like to turn the call back over to Mr. Goldsmith.

Russell Goldsmith - Chairman of the Board and Chief Executive Officer

Thank you very much. I want to thank you all for joining our call today and for taking the time to try to understand our company’s performance. As I said, I think we had a very solid performance in 2007 and while we see earnings growth being affected by the environment and a number of factors, we think 2008 will be another very profitable and solid year for City National as we build long-term shareholder value and earnings growth for the long term. We appreciate your interest. And look forward to talking with you again at the end of the first quarter. If there are other questions of course feel free to call Chris or myself. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: City National Corp. Q4 2007 Earnings Call Transcript

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