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City National Corporation (NYSE:CYN)

Q1 FY08 Earnings Call

April 17, 2008, 5:00 PM ET

Executives

Cary Walker - Sr. VP and Manager of Corporate Communications

Russell Goldsmith - President and CEO

Christopher J. Carey - EVP and CFO

Analysts

Andrea Jao - Lehman Brothers

David Rochester - Friedman, Billings, Ramsey & Co.

Joe Morford - RBC Capital Markets

Todd Hagerman - Credit Suisse

Brett Rabatin - FTN Midwest

Robert Rutschow - Deutsche Bank Securities

Terry Maltese - Sandler O'Neill Asset Management

Salvatore DiMartino - Bear Sterns

Adam Barkstrom - Sterne, Agee Capital

Brent Christ - Fox-Pitt Kelton

Operator

Now I would turn this 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 of Corporate Communications

: Thank you, good afternoon. Here to discuss City National's first quarter highlight are Russell Goldsmith, our President and Chief Executive Officer and Chris Carey, our Chief Financial Officer. This call includes comments and forward-looking statements based on current plans, expectation, events and financial industry trends. It may affect the company's future operating results and financial position.

Those statements involve risks and uncertainties and future activities and results may differ materially from these expectations. The speakers on this claim the protection of the Safe Harbor Provisions contained in the Securities Litigation Reform Act of 1995. For a more complete discussion and risks and uncertainties that may cause actual results to differ materially from expected results, see the company's annual report on Form 10-K at year ended December 31, 2007. This afternoon City National issued a news release outlining its financial results for the first quarter of 2008. To obtain a copy please visit our website at www.cnb.com. After comments by management today, we'll open this call for your questions.

Now I'll turn the call over to our CEO Russell Goldsmith.

Russell Goldsmith - President and Chief Executive Officer

: Good afternoon. Thank you all for joining us again today. As you know a few minutes ago City National announced first quarter 2008 earnings $44 million or $0.91 a share. This is at the lower end of what we think we are first quarter earnings estimates that were out there, and they were driven download by a the sharp drop we saw on interest rates of the first quarter as well as additions to our credit reserves due primarily to the fore sale housing market.

Given the current state of the economy, we have lowered our full year earning per share guidance as well. Of course we are disappointed not be leading our originally stated objective of consistent quality earnings growth. And I have to revise our earnings guidance down a bit. But in this environment we're going to continue to deliver quality earnings, and I believe we will ultimately return to net income growth as the economy and interest rates improve.

Nonetheless, looking at the first quarter of 2008, it was quite profitable. Despite deteriorating national economic conditions that we are all well aware of, City National continued to add client relationships and post double-digit gains on loans and non-interest income. The company's performance in the first quarter underscores many of its important attributes. It is conservatively managed, well capitalized, profitable and growing. Its underlying businesses are good; its balance sheet remains strong; its deposit base is exceptional and its credit reserves are solid. The bottom line is that while not immune to the challenges of today's economic environment, City National is reasonably well positioned for this economy and can take some advantage of some of the attractive growth opportunities that will be there as conditions improve.

One reason for that is as I think all of you know City National has avoided most of the highly publicized problems, plaguing some in the financial services industry. City National didn't build its earnings stream by securitizing high risk mortgages or by buying them for brokers. We have no exposure to sub-prime lending or option arms, no CDOs, no SIVs and looking forward to the concerned that some have, City National has no concerns over auto loans, credit card debt, home-equity lending or even our money market funds.

City National remains a double A rated bank that puts us in the top of 1% of all U.S. banks, and we have a consistent long-term strategy. Our capital ratios remain strong. In the first quarter we purchased almost 200,000 shares of our stock and subject to market conditions in the second quarter we expect to continue to buyback a prudent number of shares. Our company has managed its capital in way that permits that while at the same time safeguarding liquidity and capital, preserving our growth opportunities and delivering long-term value to shareholders. Of course, every company in this environment has its own set of challenges and in a week economy with a particularly severe recession in the housing sector, the challenges City National is dealing with at this time continue to be principally liked to that sector of our client's businesses. Although the sharp drop in interest rates has also impacted our margin here in the quarter, and of course economy has reduced demand for borrowing. Altogether these things impact our ability to grow net income in 2008.

Average loans in the first quarter grew 11% from the first quarter of 2007 but just 2% from year end. That reflects both our continuing caution as a lender as well as the understandable and conservative wait and see approach taken by some of our clients. Here at City National, we have been in or vary a tune to the risk of recession. Of course that means we are very focused on credit quality as you would expect. First quarter non-performing assets were higher, but still quite modest given the environment and net loan charge-offs came to just 42 basis points of total loans. Over 80% of first quarter charge-offs and non-accruals came from our book of residential homebuilder loans. It's worth noting that this entire sector in our loan portfolio accounts for just about 5% of City National's total loans.

As we've said before, most of our home construction borrowers are long time clients who have been working constructively with the bank. Some are paying interest out of pocket, others are re-margining their loans. Nearly, all of our loans in this portfolio are guaranteed or supported by credit enhancements. As you would have imagined, our teams are paying very close attention to this portfolio. Every one of our homebuilder projects is been reappraised within just the last six months. Fortunately, most of our client's projects are in relatively more resilient and appealing parts of California. With the exception of this residential housing construction portfolio, City National's overall loan portfolio continues to perform well. Excluding residential housing construction, our other construction and commercial real estate loans amount to about $3 billion and none of those loans are non-accrual. It's a diverse book that includes industrial and owner occupied office facilities, shopping centers and apartment buildings.

We also make some conservatively underwritten and very well sponsored land loans. Our construction and commercial real estate loans generally are recourse credits, backed by guarantors and credit enhancements that help to limit our exposure with good ownership by established clients of City National. Obviously we are keeping a very close watch on our commercial real estate markets as well. The shortage of liquidity in that marketplace today obviously presents a risk that we believe will ultimately affect values and cap rates, and we do expect some manageable stress in our portfolio as the year unfolds. Even so it's worth noting that what we finance our infill projects in dynamic major metropolitan areas where we're still seeing low vacancies and strong demand for the right products. We expect most of these projects to holdup reasonably well even in this environment.

Our commercial lending portfolio continues to perform well and the company's single-family mortgage book, with homes located largely in the strongest areas of our markets with our private banking clients continues to do well. Their average loan to value ratio is we've been saying for years had origination is just over 50%. We've been building this home mortgage portfolio for private banking clients for many years now, and have yet to have a single foreclosure. Also, we do not do option ARMs. I suspect that some investors, particularly who read stories about California and companies like Golden West, don't necessarily know how conservatively underwritten City National's home mortgage portfolio really is, and may not have factored that into their concerns about the impact of mortgage and foreclosures to statistics in California and Nevada bank. In fact, in Nevada our home mortgage portfolio for clients consist of only four home mortgage loans for a total of less than $2 million and the average LTV at origination is 54%. Hopefully that prospective helps our investors think about that portfolio.

Our first quarter 2008 net income reflects a credit provision as I'm sure you saw in the release of $17 million. After four years of very benign [ph] credit quality and no need to make additions to our loan reserves, the return to provisioning which began in the fourth quarter of 2007 clearly makes a meaningful impact on year-over-year earnings comparisons. City National as always is committed to staying well reserved. At 143 basis points of total loans, our allowance for loan and lease losses is considerably higher than the industry average. Of course no bank is immune to challenging economic conditions, and we continue to maintain strong credit reserves and a conservative lending philosophy. We believe that is the specialty appropriate in light of current economic conditions that continue to be challenging, largely in the housing sector.

Turning to the economy here in California, the outlook continues to mirror that of the nation to a large degree. Slow growth at best in the second half of the year as the challenges associated with residential real estate slowly work their way through the economy. Taxable sales have declined for three straight quarters and the number of foreclosures is expected to grow significantly this year, but not in City National's portfolio for the reasons I've discussed. We expect unemployment to rise both in the country and in California and to remain at higher levels into the first half of 2009. The California's economy is very diversified, and most sectors other than for sale housing are holding up fairly well. Professional services, exports, tourism and trade related transportations especially exports are doing well; so is healthcare. The entertainment industry and technology industry are also holding their own.

Turning to Nevada, it is clearly being tested by the housing prices and the slowing economy yet the states longer term prospects in our view are still quite good. In southern Nevada alone, there is more than $24 billion worth of new hotel, casino and convention construction activity underway that will generate tens of thousands of new jobs. And that does not that number does not include a number of other tentative development projects worth billions more, many of which will also happen. We also feel very good about our business in New York. Our office there has grown steadily and significantly in its first five years and is continuing to do so this year, doing that by serving the entertainment industry, the legal profession and the growing number of affluent entrepreneurs. All of them seem to be doing fine. This year we are getting some added growth to New York from our new commercial banking team there as well.

As everybody on this call knows all too well bank stocks have been punished essentially across the board. And in my personal view, City National stock has been reduced more than this warranted as a result. However I am hopeful that eventually investors will come to appreciates City National's conservative philosophy, underwriting and growth prospects. Its focus is the premier private and business bank in three dynamics states. Its talented team of bankers and wealth mangers; its strong balance sheet, liquidity and reserves and some of the large problems that they read about that City National does not have. There is no question that today's economy presents challenges, but City National is in a good position going forward.

We've listed the housing crises, unprecedented turmoil in the credit markets and the rapid 200 basis point decline in short terms interest rates to remain quiet profitable, liquid and growing. The fact is the current prices in the financial services industry is altering the competitive landscape in ways that should work in City National's favor over the longer term. The market for securitize that is obviously receded very dramatically. Investors are demanding a more appropriate return for credit risk, and commercial borrowers are returning to banks as other sources of liquidity dry up. Over time we expect loans spreads to widen and credit structures to improve.

As always City National has taken a longer view and a more conservative approach. As a result our company has abundant liquidity and plenty of money to lend. At a time when some of our other lenders in financial service companies are scaling back, we are controlling costs but at the same time we are also investing prudently in our franchise for the long-term with smart, selective and strategic investments in our people, our products and our business capabilities. What's more we are still gaining, pertaining and expanding our all important client relationships.

Looking toward the rest of this year and into '09 we feel quite good about our company and its prospects even in this economy. In addition to a strong capital position and sound credit reserves we have an exceptional deposit base. Our markets are fundamentally solid and we will get to take advantage of the some attractive growth opportunities. I believe our team here at City National is better than ever and it continues to improve. Let me give you a couple of examples. Just in the past six months, we added two very skilled and experienced leaders to our executive committee, Michael Pagano and Rod Banks to better optimize and lead our private banking services and commercial banking services respectively. In addition as I mentioned we've invested in a new commercial banking team which is helping us to grow our New York office to better serve and expand that client base.

City National also continues to grow its fee based businesses. Non-interest income grew 21% in the first quarter, and now accounts for 35% of our company's total revenue. The biggest share of it comes from our wealth management businesses. Despite recent declines in the stock markets investment related fee incoming increased 22% from the previous year, thanks largely to the acquisition of Convergent Wealth Advisers, outstanding performance by City National Asset Management and strong contributions from our other wealth management affiliates. International and cash management fees also continue to grow. Fee income from foreign exchange and letters of credit grew 19% from the first quarter of '07. To some degree that reflects an increase in U.S. exports standing from the weaker dollar.

As you can see from the release, income from cash management and deposit transaction fees grew 31% due largely to falling short-term interest rates and growth in these product areas. There is a lot that's good going on here at City National, too much to cover in one phone call. But it all points to this. City National is strong, conservative, well capitalized, profitable and growing, very mindful of the economic environment that we're in, and pleased that we've essentially avoided the very costly and highly publicized problems standing from the sub-prime mortgage prices. We're continuing to carefully build through the future and we're encouraged by the progress we're making while being very mindful of the challenges, costs and complexities of the current turmoil in the economy and the capital markets, and their potential impact on City National and its clients.

Now, for more details on the first quarter numbers let me turn the phone over to our dynamic CFO, Chris Carey.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Thank you Russell and good afternoon all. I'd like to add a few words about deposit trends, the net interest margin, wealth management and expenses, and I'll also talk about our guidance for the year. Let's start with deposits, we typically see them run up in the fourth quarter and then subside a bit at the beginning of this year and then actually during taxes in early April they start increasing again. In the first quarter of 2008, average balances came to 11.5 billion, a little higher than expected, better than this is the core deposits grew 1% over the first quarter of last year.

Idle [ph] and extra deposits were off just slightly, despite the decline in home and financings and other demand deposits were pretty stable. In fact, excluding Tier 1 extra deposit and the acquisition of a business back in Nevada, TDA balances actually grew slightly up 22 million or so, and using that same measure, money market deposits are up a 150 million, or just over 5% from the first quarter of 2007. It's also worth noting that high cost units were up slightly as Russell said our company does have an exceptional deposit base, some 88% of its consistent core deposits that contribute to City National's relatively low cost of funds. Sound liquidity and strong balance sheet allow to effect to be [indiscernible]. We also hopeful that economic conditions and lower interest rate will encourage better core deposits from investors [ph] as the year goes on.

City National net interest margin averaged 226 basis points in the first quarter, still very strong and might have pressure created by short term interest rate reductions, loan growth and a slight decline of DDA balances from the forth quarter. Although we used planning in our hedges to probably protect our loan portfolio from interest rate movements, the company balance sheet is naturally asset sensitive. Roughly two-third of the loans on our books, we price on short term rates exchange and if you see what the difference it makes.

Loan yield in the first quarter were 55 basis points lower than they were at the end of the year. Deposit don't reprice as quickly and of course non interest bearing deposits, about 47% of our total average balances don't reprice at all. In our news release in the information provided you know is that trust and investment which grew at a very strong rate in the first quarter of the last year were actually down slightly from December 31. For the most part as a reflection of stock market volatility about 80% of the funds managed by our investment affiliates are held in U.S. and Asian equities it's no secret that many of these equities lost early in the first quarter.

City National assets management on the other hand is invested primarily in balance in other fixed income securities which performed much better. Asset under management administration are likely to move lower in the second quarter as the former owner of our institutional money manager complete the shift of funds to an in house manager. Nevertheless that's something we expected and factored into the purchase price of the acquisition.

Now I'd like to talk briefly about expenses, excluding acquisition of business back in Nevada and conversion wealth advisors which makes the numbers not very comparable, expenses were up about 8% from the first quarter of 2007.

Expense management is actually slightly better than planned, we are still making investments needed to grow the company. We continue to bring new revenue for this into the organization. Yesterday as Russell mentioned we announced the addition of the commercial banking team in New York assuming converting wealth advisors will remain the Managing Director of its new office here in L.A.

We're spending carefully but we have no intention of sacrificing our commitment to growth. Just to remind your, higher SCLC will begin to show up on our income statement in the second quarter. That alone will add about 1% to expense growth in 2008.

Now going to guidance as you can see from the news release, we are expecting earnings per share to be 17% to 22% lower this year than in 2007, but before I continue I need to say the obvious. It's difficult for the best of forecast earnings in environment as uncertain and as unprecedented as this one is. However, we believe we will help our investors if we give them our best estimate at this point in time of what we see coming through this year.

So with that said, the change to our initial guidance was based really on three general areas. First, our loan loss provision is likely to be higher than previously expected. We are now anticipating provisions in the range of 15 to 20 million per year through the end of the year, per quarter through the end of the year. We don't normally provide specific line item guidance but we don't consider this times are exactly normal, so we decided to provide a little bit more clarity here.

Our second item is the decline in short term interest rate, I think its probably historic that they declined over 200 basis points in less than two months period and that certainly has an impact on our net interest income and we also have a lot of slightly higher increase in non-performing loans.

And lastly the equity markets are down here today, the FCC alone is a strong with a 9% and that's has clearly put pressure on the value of our wealth management assets, which impacts non-interest income. Although on the plus side I will say that in general our wealth managers are meeting their respective benchmarks. This year is clearly a challenging one for the economy in general and the banking industry in particular. But as Russell said City Nationals in well prepared to weather the storm and resume our growth as the economy starts to recover.

We have a strong balance sheet, premier deposit base and a conservative approach to credit quality and capital management. We have the means to grow and taking advantage of the largely growing markets we serve. Now we will be happy to take your questions.

Question And Answer

Operator

At this time I would like to invite questions from analyst and investors [Operator Instructions]. Your first question will be from the line of Andrea Jao of Lehman Brothers. Please proceed.

Andrea Jao - Lehman Brothers

Andrea Jao of Lehman Brothers. Good afternoon, everyone.

Russell Goldsmith - President and Chief Executive Officer

Andrea, good to hear from you.

Andrea Jao - Lehman Brothers

Likewise, with respect to credit, I know that provisioning was higher this quarter and exceeding that charge-offs, but because of low growth the share of the loans that went down. Giving your guidance of 15 to 20 million in provisions for quarter, do you think you can build reserve and if so, what level roughly speaking would do you think it's reasonable in the current environment?

Russell Goldsmith - President and Chief Executive Officer

Well, we obviously think we are at a reasonable level right now at 143 basis points. And I think that we would anticipate that, obviously as Chris suggested there are lot of moving parts here including credit quality and loan growth. But I would believe that we will be at this level or perhaps a bit higher as the year unfolds. But as long as we are at this level we are one of the... I think we are one of the highest loan net loss in credit reserves among U.S. banks.

Andrea Jao - Lehman Brothers

Okay, fair enough. Then my follow-up questions with regard to the portfolio at housing portfolio, could you remind us how big that portfolio is, where the credits are located, what original FTPs were at year end. What the updated valuations were for it based on your... based on the survey you just finished.

Russell Goldsmith - President and Chief Executive Officer

Ithink that's about five questions Andrea. The portfolio is about 5% of our term loan adjusted around 600 million and the two largest areas of concentration are in Los Angeles County and San Diego County. And then I will try to give you one-third one. at origination the FTP in that area were about 57%, most banks don't as these projects are developing they are adding cost of them, come up with a competitive origination on the [indiscernible] we will hold them and assist them, what I have just said.

Andrea Jao - Lehman Brothers

Okay. Thank you so much.

Russell Goldsmith - President and Chief Executive Officer

Thank you.

Operator

Your next question will be from the line of David Rochester of FBR capital markets. Please proceed.

David Rochester - Friedman, Billings, Ramsey & Co.

Hi, Good afternoon, guys.

Russell Goldsmith - President and Chief Executive Officer

Hi, David.

David Rochester - Friedman, Billings, Ramsey & Co.

Just a real quick one on delinquencies, would you happen to have the 30 to 89 day delinquency figure in the other quarter.

Russell Goldsmith - President and Chief Executive Officer

No, I don't, actually I don't have that one, David.

David Rochester - Friedman, Billings, Ramsey & Co.

Okay, no problem. Could you give us some color in the increase in the home builder portfolio and net accruals, how many homes, where they were located.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Well I think I rather say, rather than trying where they are located I will give you a little color in that, our largest not performing in their is 27 million and it's relatively I think in $0.01 granular... I'm sorry, the large not performing its 14 million, the largest of force our housing loan is 27 million.

So we have 3 loans over 10 million in NPAs and I think that can give hopefully that can give you enough color, its relatively granular.

David Rochester - Friedman, Billings, Ramsey & Co.

Okay, and in terms of commercial credit, that appears to be pretty well contained so far, I do see charge offs out there a little bit in that category, could you provide some color on the increase in charge offs, there

Christopher J. Carey - Executive Vice President and Chief Financial Officer

No, I don't know, is there any thing specific I would say, I think I think we have said for quite a while we expected that to have regular charge off and it been very benign for a while, the good news at the moment is we aren't seeing any kind of specific systemic trend anywhere, and we will if the economy get a lot worse, the only time to effect that kind of portfolio more but its weathered very well.

David Rochester - Friedman, Billings, Ramsey & Co.

So at this point comments that you hearing from your small business customers don't appear to all that negative, there are no signs of stress systemically in that portfolio.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I think you know anecdotally and I have spent time with a number of client just in the last few weeks, I think once you get away from the foresaid housing sector and businesses that are really linked into that, generally speaking the client that I have met with across a pretty broad range of geography and businesses, business is doing within a band plus or minus of 5% maybe of what they did the year before. Obviously there exception to that, but I think generally speaking the economy for our clients is holding up as I try to say in my remarks, a whole bunch of sectors, are doing relatively well.

David Rochester - Friedman, Billings, Ramsey & Co.

Okay, and in terms of demand for commercial loan product, are you seeing that remain stable with last year as well, or are you seeing some customer holding off on expanding operation on that.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

No I think I think, you will see a mix, on the one side as the competitive landscape changes we are seeing opportunities to pick up business and expand business with existing clients as well as pick up business with new clients. At the same time all of us will read the economic news including all of our clients and it clearly is an environment where a lot of people are putting opportunities and commitments on hold until they see how the economy shapes out of it and that's why I think loan growth from yearend till the completion of the first quarter was lighter than it would normally be.

David Rochester - Friedman, Billings, Ramsey & Co.

Have utilization rates stayed relatively stable or have you seen these directionally move through the portfolio up or down?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I think those are mixed, but I think there is evident caution there, although there are certainly our people who are utilizing. But I think caution at the moment is overwhelming enthusiasm.

David Rochester - Friedman, Billings, Ramsey & Co.

Okay, one last one real quick, you mentioned the potential for loan spreads substantially improve, have you seen any improvement so far this year and what's your expectation there for the rest of the year?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

The answer of the first part of your question, Dave is yes, we've seen some examples of widening and we've seen some improvements. I think... what I try to suggest in my remarks, I mean, you think of some of the impact that this crisis has had on competitors that rather don't exist anymore or sources of funding that don't exist and as people come back to banks for liquidity and funding and some of the outlier kind of, if you will in some cases, irrationally exuberant competitors disappear, there is no question that that's going to improve spreads and improve structures. And I think over the long haul, a benefit conservative relationship oriented banks such as City National.

David Rochester - Friedman, Billings, Ramsey & Co.

Okay, thanks very much guys.

Russell Goldsmith - President and Chief Executive Officer

Thank you.

Operator

Your next question comes will be from there line Joe Morford of RBC Capital Markets. And please limit yourself to one question and a follow you. Thank you.

Joe Morford - RBC Capital Markets

Thanks, hey, Russell and Chris.

Russell Goldsmith - President and Chief Executive Officer

If you are right, I wouldn't limit you.

Joe Morford - RBC Capital Markets

All right,I appreciate. I guess first question just on the home builder portfolio again. Chris do you have the breakout of that by how much is land, how much is the acquisition development and how much is residential construction?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Yeah I mean its sort of 60, 20, 20.

Joe Morford - RBC Capital Markets

Okay, great. And Russell you talked about maybe expecting to see a little weakness on the commercial real estates side. I know a good chunk of your portfolios is industrial stuff, are you expecting that more on to the office, the retail and any specific markets at this point that you're watching closer?

Russell Goldsmith - President and Chief Executive Officer

Well we've talked a lot about this, our real estate guys are going through on an intensive review, but preliminarily I think at least so far the commercial real estate book has held up very well. I think logic suggests to us that as, this Joe as liquidity drying up out there, that's going create some opportunities for us as clients in some cases turned back to us for additional financing. At the same time I think as financing gets tougher, a lot of these controversy stuff are obviously gone. At some point we think that's got to put pressure on what kind of capital has to be a part of any purchase and that's going to reflect cap raise over the long term.

So obviously we also try to stay vigilant about what's happening nationally and obviously there are some signs and I'm sure your seeing some weakness in spots but you are right to point an awful lot of our portfolio easily in industrial area, it's in owner occupied industrial in LA County, I think have something like a 2% vacancy rate, I know I talked to clients recently there are still strong demand for that output, logistics also depends on pushing, these are clients, these are relationships, typically if it's in owner occupied we are looking not just to the building, but to the company.

So we are going to be very vigilant about that portfolio but at the same time because there are some product types that we stay out of, we don't do big speculative office towers, we don't do speculative hotels, we stay out of a lot of product types that we think can be trouble. So to some degree, again as I said about people some times lump us in with home mortgages in California. I don't think they should just lump us with all commercial real estate in the United States or in California, but look at where our commercial real estate is, what the product types are, who its with, how it's structured and how it's supported in? We are going to be very focused on it, but as we have said up to this minute it's... it's holding up quite well.

Joe Morford - RBC Capital Markets

Okay, fair enough. Thanks so much. Russ.

Russell Goldsmith - President and Chief Executive Officer

Good to hear from you, Joe. Sorry about those giants.

Operator

Your next question would be from the line of Todd Hagerman of Credit Suisse. Please proceed.

Todd Hagerman - Credit Suisse

Hi, good afternoon everybody. Chris and Russell just want to see if I could hear you explain on the comments for in terms of wealth management you need, I think Chris, you talked a little bit about some of the movement in terms of the assets under administration. Just wondering if you could kind of reconcile that particular relationship with your outlook in the sense that you mentioned that your affiliate managers are expected to hit their or are at least currently hitting your benchmark and really a lot of the pressure's coming from the recent decline in the equity markets. But I am just wondering if you just expand upon that in terms of net new relationships, customer inflows and just give us a better sense of where the break out is between the fees and the actual performance in the market, as away from that decline.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Well I think, there are so many different of moving parts there, parts that you can't summarize that in one terms. So the way I try to summarize is that it's overwhelmingly still equity based and the absentee [ph] was down, I think a little bit of 9% and typically right or wrong, we start out the year assuming the market part of it goes up 5%, historically or at least for last three years that was relatively conservative. So we are not saying we don't have any clients attrition, and we have some particularly in one area, but in general that's not the driver out there, it's really the market that's driving and its... we are still bringing in a amount of new business and in particular I would say our bank business and convergence of advisors has seen very strong growth.

Todd Hagerman - Credit Suisse

Okay, again you just ... is there a particular relationship that you can talk about just in terms of where the momentum is, just get a better feel for where the underlying trends are going in the sense that you made a number of acquisition that you mentioned, fees income has been quite robust and we have been under a little bit pressure here in the beginning part of the year, but I am just trying to better sense of again where you getting momentum and where exactly or more specifically you are seeing some of the pressure.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Well, let me try and I will try one more time to give you a little bit more color, so I think some of you know that we are pretty happy to be owners of a minority share of [indiscernible] which is Asia fund manager and that business has grown phenomenally. But that market is up 12% to 14% and that's put some meaningful pressure on our revenue side. It doesn't show up in our total assets under management. I would say our sort of bank-based business here has had very strong growth and frankly a part of it is a clearly flight to quality. And where we have our niche here that has a very conservative more fixed income audit manager. And we have certainly been a beneficiary of that. When you try to go through all these affiliates there is a little bit of a different story with all of them. One of them, one institutional advisor having some part... some loss of funds but the rest of them are generally pretty well.

Todd Hagerman - Credit Suisse

Terrific. Thanks for that clarification.

Russell Goldsmith - President and Chief Executive Officer

Welcome.

Operator

Your next question will be from the line of Brett Rabatin of FTN Midwest. Please proceed.

Brett Rabatin - FTN Midwest

Good afternoon gentlemen.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Hey Brett, how are you?

Brett Rabatin - FTN Midwest

Good. I wanted to just follow-up on some things from the 10-K. One I was curious, I know that there was an $8.4 million allocated reserve specific to the portfolio at the end of the year. I know you had an update number for that Chris.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Yes, you are saying an allocated reserve for --

Brett Rabatin - FTN Midwest

For specifics, for the portfolio... for the NPAs or impaired loans however you want to...

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Yes we'll have an update for that when we throw our Q out, as of right now.

Brett Rabatin - FTN Midwest

Okay, and then obviously NPAs did not move up that much relative to... there was also some commentary in the K million about 68 million of loans to 24 borrowers that, we are not placing them on accrual status. But it sounds like they might be tended that way. Did some of those for [indiscernible]? It looks to me like you could almost say the credit quality hadn't... your credit quality situation hasn't really changed much from the 10-K perspective which for many banks it's obviously getting worse. I'm just curious what happened to those borrowers and kind of how you see some of those impaired loans migrating back and forth?

Russell Goldsmith - President and Chief Executive Officer

Let me just maybe for the group there is a SEC requirement that you put in loans, you put a disclosure in for loans, full disclosure in your Q and K for loans that are not non-performing but could be a problem. They're not a problem yet but there are some issues and your concern that maybe they will be the next NPA. We have been disclosing this forever and it hasn't been a very good predictor of what happens to NPAs because in good economies most of them never become NPAs at least at our company. In a bad economy, it's a little bit more predictive. And ending short story is that we try up, we put that out at the end of the quarter. And we like to wait till right before we file the Qs. So we want the number out. It isn't always predictive, and I think that the first time we put it out, we did when the economy started turning, it ended up being a more predictive. But I would tell everyone you can't always rely [indiscernible] to fuel your NPA pipeline, usually a good portion of them becomes gateways out favorably for us.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Let me just say to you, I think your question of direction and trend in credit, I think what we've tried to communicate in, what hopefully the numbers communicate is that the challenges in credit quality in the first quarter have really stayed within the same area we talked about in the forth quarter which was for sale housing construction. And there I think you would have a wrong impression if you thought that it was... but it hadn't been affected at all

Brett Rabatin - FTN Midwest

Right.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Clearly we've raised our provision and we said we're going to be providing somewhat more for the year than we originally expected. So I think and there has been some downgrades and some movement. But I think as you reach the bottom-line conclusion that in the aggregate the company is still quite profitable, still has strong reserves and still should have a solid year.

Brett Rabatin - FTN Midwest

Okay. And then just one last follow up if I can... land exposure which was 100 and I think 65 million at the end of the year. Would that be more of your concern than just to quote fore sale housing piece? And then also have you seen any stress in shopping centers and the condo construction?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

You really can't break it out by which tightening of credit it is in the for sale housing because each loan... I mean sometimes you have a land loan that's guaranteed by somebody with enormous liquidity and financial strength. So I don't think you can generalize from it. I think the... if you look at what we are saying about our reserves and our provision and you get a sense of what we think the magnitude of the challenges as best we can [indiscernible] and we think it's manageable.

Brett Rabatin - FTN Midwest

Okay great. Thank you.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question will be from the line of Robert Rutschow, of Deutsche Bank. Please proceed.

Robert Rutschow - Deutsche Bank Securities

Hey good afternoon guys.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Hi, how are you?

Russell Goldsmith - President and Chief Executive Officer

Hi good afternoon.

Robert Rutschow - Deutsche Bank Securities

I was hoping to get a little bit more color on your outlook generally. You've obviously got it to higher provisions throughout the year. And you've talked about recovery being pushed out until 2009. So I'm curious as to whether you think the bulk of deterioration occurs in the next quarter, are we looking at the second half this may be a little bit worse as well.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I think that we try to do a lot of things around here precise economic forecast [indiscernible] quarter is not something that we try to do. I think you are as aware as we are of national trends. And what we said is we think this is essentially in the aggregate stagnant but it varies by sector as I mentioned in my remarks. And many of the sectors of the California economy are growing a little or doing okay, in fact, most of the market. And obviously you've got the stimulus package and the impact of rate cuts of the Federal Reserve that will help the economy in the second half. I think there are clearly a lot of moving parts in the housing sector, and I don't think we're trying to make a specific prognostication as to exactly when and where that turns up.

Robert Rutschow - Deutsche Bank Securities

Okay. I guess the reason I asked is that it appears that based on the data I've looked at that, LA has seen a fairly sharp decline in housing prices more recently. And so I am wondering if that's... if you feel like that's fully reflected at this point or and if you are projecting further declines there.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I think it's a mix of things. I personally think that the declines in housing values will continue to some degree. At the same time I also think you could be misled by looking at me and numbers and aggregate numbers and then trying to impose, superimpose that on our portfolio since whether it's in our single family mortgage portfolio, those are private clients with LTVs around 50% at origination over a long period of time. And they tend to be in very good, very strong areas. So price depreciation in Brentwood or Burlingame is going to be a lot different than Bakersfield. And we don't have... I don't think we have anything in Bakersfield. We've got [ph] lot in Brentwood and Bellaire and Beverly Hills.

So you've got a... if you're trying to figure us out, you've got to recognize that it's not... our portfolio is not like peanut butter spread evenly across the state of California and it's hardy at all in Nevada. So I think we're... we think we're generally in good areas. Obviously we're anticipating some further weakness in the fore-sale housing construction book which we've referenced and tried to provide for. And we anticipate some further decline in housing values but have not ventured to guess as to when or where they bottom but they will and values will get restored at some point.

Robert Rutschow - Deutsche Bank Securities

Okay. And if I could follow up. On the loan book, you talked about potentially taking share, in particular in the real estate construction and residential mortgage area and commercial real estate as well. Does that mean a higher aggregate level of loans going forward? Or should we expect, maybe more flattish to down in those categories?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I think you can safely assume we are not building our fore-sale housing construction book, and haven't been for quite sometime. I think I was speaking more generally about the opportunity. I mean as recently as this morning a client was talking to me, traditionally had a very large book, a business with City National here and has put that with one of other bank, and now he is interested in bringing most of the rest of it to City National, having to do with some of the turmoil and so I think it's that kind of thing that we see happening. Our wealth management business is growing and attracting people to City National, the fact that in the CNI space, we are open for business and can do things and we are doing prudently very, very carefully some additional financing in the real estate sector, but subject to very careful valuations and strong liquidity balance sheet. In support we are not expanding in the fore sale housing in current scenario for sure.

Robert Rutschow - Deutsche Bank Securities

Okay. Thank you.

Operator

Your next question will be from the line of Terry Maltese of Sandler O'Neill Asset Management. Please proceed

Terry Maltese - Sandler O'Neill Asset Management

Hi. Good afternoon guys.

Russell Goldsmith - President and Chief Executive Officer

Hi Terry.

Terry Maltese - Sandler O'Neill Asset Management

Two sort of connected questions, one is did you say that you've reappraised most of the fore sale housing construction loans in the last six months?

Russell Goldsmith - President and Chief Executive Officer

Yes.

Terry Maltese - Sandler O'Neill Asset Management

Okay. So, can you give us a sense of using the dated appraisals, what sought of average LTVs to that portfolio would be and what sort of the ranges again using the more updated appraisals?

Russell Goldsmith - President and Chief Executive Officer

We don't really break that down and even if we did, I mean we break it down internally; we don't break it down publicly. But even that's misleading because you can have a very high LTV but guarantor's support that backs you up, or the offices. So, obvious I think it's you would already know is what everybody else, that our loan that was, let's say originated 18 months ago and generally speaking as I think Chris mentioned our construction loans at origination had learned to value ratios in the 50% to 60% range, averaging 57%. But clearly values have come down and so that ratio would have moved up pretty significantly.

Terry Maltese - Sandler O'Neill Asset Management

Okay.Could you give us a sense then of sort of the average fees you guys got from do to appraisals original to most recent?

Russell Goldsmith - President and Chief Executive Officer

I really don't have that here Terry. I would just say in general, it's clear that the appraisal values have come down. I mean even though a number of our projects in the fore sales phase even there tend to be as Chris mentioned in LA County and San Diego County which are two of the certainly LA counties held up better than some of the other parts of the state. And then they tend to for the most part better parts of those two counties but it's going to really vary.

Terry Maltese - Sandler O'Neill Asset Management

Okay, thanks.

Russell Goldsmith - President and Chief Executive Officer

Thanks.

Operator

Your next question is a follow-up from the line Andrea Jao from Lehman Brothers. Please proceed.

Andrea Jao - Lehman Brothers

Hello again. With respect to expenses, marketing and professional expenses decreased link quarter, was wondering what goes behind that, and if the lower run rate is something good these going forward?

Russell Goldsmith - President and Chief Executive Officer

Well, I think that it really when you look at that you're really looking at a timing factor from the prior year Andrea. So, that's why I've asked you to think about it. So, it was marketing is up from prior year and which was a low number and down slightly. So it's probably a reasonable run rate kind of number to use is that's one of your questions.

Andrea Jao - Lehman Brothers

Okay. Great, thank you so much.

Russell Goldsmith - President and Chief Executive Officer

Welcome.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question will be from the line [indiscernible] of KBW. Please proceed.

Russell Goldsmith - President and Chief Executive Officer

Hello, Ann.

Operator

And we see that Ann has move herself from the queue. So, your next question will from the line of Sal DiMartino. Please proceed.

Salvatore DiMartino - Bear Sterns

Hi, everyone.

Russell Goldsmith - President and Chief Executive Officer

Hi Sal.

Salvatore DiMartino - Bear Sterns

Chris I missed your comments on the wealth management business. I think you said one of your affiliates will be taking the assets in-house. Can you just?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

What I said Sal was the former owner of one of our affiliate is taking assets in-house which is what we had built into actually the deal price as eventually happened.

Salvatore DiMartino - Bear Sterns

Okay. And will that have a significant impact on AUM?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

It will have impacts on AUM, and it will have less of a significant impact on earnings.

Salvatore DiMartino - Bear Sterns

Okay, that's what I wanted to know. Thank you.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Welcome.

Operator

Your next question will be from the line Adam Barkstrom of Sterne, Agee Capital. Please proceed.

Adam Barkstrom - Sterne, Agee Capital

Hi everybody. Good afternoon.

Russell Goldsmith - President and Chief Executive Officer

Hi Adam.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Good to hear from you.

Adam Barkstrom - Sterne, Agee Capital

We want to follow-up on Joe's question, I think quite message the 60, 20-20 and in front of us laying the portfolio, what categories were those attributed to?

Christopher J. Carey - Executive Vice President and Chief Financial Officer

The 60 is related to the actual homes that are being constructed and then the 20-20 is to the land and the land demand gates.

Adam Barkstrom - Sterne, Agee Capital

Okay. Great, thanks. I'm curious service charges were up pretty noticeably linked to quarter, just wonder if you could give us some color on that and then if you could also talk about the [indiscernible], what that book of deposit totals now, what are they doing in the quarter.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

All banks are decreasing in this low rate environments their earning credit rates and that in general the low rate environment is a big factor in driving up that growth I would, I am expecting that you have seen that at lot of other banks. We also have consistently been successful selling and cross selling it and we... that's part of it, but a certainly a bigger factor in that kind of growth is the rate environment.

Finally [indiscernible] business is doing well frankly and in my mind it that it was one about a billion in balances, was slightly below the fourth quarter and this historically some times has been a very weak quarter. And so we are feeling very good about that business.

Adam Barkstrom - Sterne, Agee Capital

Okay, thank you

Christopher J. Carey - Executive Vice President and Chief Financial Officer

Welcome.

Operator

Your next question comes from line of Brent Christ of Fox-Pitt please proceed.

Brent Christ - Fox-Pitt Kelton

Good afternoon, a couple of questions I guess first in terms of that net interest margin, could you give us sense of how that progressed over the course of the quarter, maybe where it was in March relative to their full quarter average.

Christopher J. Carey - Executive Vice President and Chief Financial Officer

I am sad to say that it progressed down, but I think that just we have seen some nice compression which we are not that happy about, but and we have a view on rates, that rates are going to go down another 50 basis points. I think that's unless we were wrong there and we certainly could be wrong and it could be lower, we see some compression but not at the same pace that we saw in from the fourth quarter to the first quarter, remembering of course the fourth quarter is usually a higher spread quarter for us as we typically have and I think we did couple of hundred million more in demand balances from the seasonal run up.

Brent Christ - Fox-Pitt Kelton

Got you. And then separately I mean you mentioned in the release expenses tracking more favorably than you originally anticipated and obviously the FCIC premiums they are going to kick in this quarter. Is there any thing additional flexibility that you guys have to kind of reduce costs further with that more temper about revenue outlook.

Russell Goldsmith - President and Chief Executive Officer

We would like to think that we are careful managers who control costs, certainly as we went through the budget process in the fourth quarter during up for 'O8, there was a lot of pressure on the organization to contain costs and we are taking a fresh look at expenses to see if there are some other opportunities for some twigging on the expense side. But in general we think we have run pretty lean, we believe in paying our people competitively and as we said we continue to invest selectively and carefully, but where there are some terrific talent opportunities, last year we... with the acquisition of Business Bank in Nevada and a couple of de novos are linked to that, as well as some expansion in California, we had 11 new offices this year in California. For example we have just opened one new office. So we are trying to be careful about expense growth, but we don't want to fail to fund appropriately people and performance and opportunities.

Brent Christ - Fox-Pitt Kelton

And then last question, you guys have taken about $37 million of provisioning over the past two quarters. I am assuming that the vast majority of that is allocated to the for-sale housing portfolio. But could you give us a sense of what the reserves up against that portfolio, are currently?

Russell Goldsmith - President and Chief Executive Officer

Brent, I'll just say that the first statement you made is correct and we often really provide reserves by portfolio but it is to correct assume that a big chunk of what we put-up in last two quarters, we made at the for-sale housing.

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 - President and Chief Executive Officer

Operator, thank you very much and thank you all for joining our call today and for taking more time to understand City National and its performance. Of course we appreciate your interest, we appreciate those of you who own stock in City National and look forward to talking with you again at the end of the second quarter. In the mean time, if you have further questions, please feel free to give me or Chris Carey, a phone call. 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. Q1 2008 Earnings Call Transcript
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