Edgar Filing: CITY NATIONAL CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-10521

CITY NATIONAL CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware		95-2568550
(State of Incorporation)		(I.R.S. Employer Identification No.)

City National Center

400 North Roxbury Drive, Beverly Hills, California, 90210

(Address of principal executive offices)(Zip Code)

(310) 888-6000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large Accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of November 1, 2007, there were 48,118,951 shares of Common Stock outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEET

	September 30,			December 31,			September 30,
Dollars in thousands, except per share amounts	2007			2006			2006
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	462,151		$	423,114		$	457,396
Due from banks - interest-bearing	95,047			60,940			65,323
Federal funds sold	—			127,000			3,300
Securities available-for-sale - cost $2,605,499; $3,018,190; and $3,248,003 at September 30, 2007, December 31, 2006 and September 30, 2006, respectively	2,565,754			2,954,372			3,175,230
Trading account securities	192,162			147,907			116,870
Loans and leases	11,190,080			10,386,005			10,020,358
Less allowance for loan and lease losses	152,018			155,342			159,063
Net loans	11,038,062			10,230,663			9,861,295
Premises and equipment, net	110,779			94,745			88,582
Deferred tax asset	125,824			125,992			117,055
Goodwill	428,308			249,641			255,340
Intangibles, net	89,088			37,920			43,131
Bank-owned life insurance	71,560			70,156			69,457
Affordable housing investments	67,891			65,800			63,660
Customers’ acceptance liability	7,983			3,877			4,124
Other assets	292,946			292,254			294,856
Total assets	$	15,547,555		$	14,884,381		$	14,615,619

Liabilities
Demand deposits	$	5,538,107		$	6,002,068		$	5,639,811
Interest checking deposits	769,112			755,098			722,976
Money market deposits	3,748,518			3,216,949			3,186,455
Savings deposits	142,742			153,417			159,382
Time deposits-under $100,000	227,981			198,329			192,860
Time deposits-$100,000 and over	1,754,054			1,846,955			1,990,533
Total deposits	12,180,514			12,172,816			11,892,017
Federal funds purchased and securities sold under repurchase agreements	664,970			422,903			506,962
Other short-term borrowings	326,041			97,525			72,426
Subordinated debt	270,066			269,848			270,522
Long-term debt	225,598			217,569			217,323
Reserve for off-balance sheet credit commitments	20,072			16,424			15,652
Other liabilities	189,246			164,079			159,970
Acceptances outstanding	7,983			3,877			4,124
Total liabilities	13,884,490			13,365,041			13,138,996
Minority interest in consolidated subsidiaries	29,148			28,425			28,578

Commitments and contingencies

Shareholders’ Equity
Preferred Stock authorized - 5,000,000; none outstanding	—			—			—
Common Stock-par value-$1.00; authorized - 75,000,000; Issued - 50,813,339; 50,718,794; and 50,728,705 shares at September 30, 2007, December 31, 2006 and September 30, 2006, respectively	50,813			50,719			50,729
Additional paid-in capital	421,755			412,248			404,163
Accumulated other comprehensive loss	(22,631		)	(41,386		)	(46,400		)
Retained earnings	1,345,337			1,264,697			1,225,784
Treasury shares, at cost - 2,349,903; 2,835,908; and 2,690,196 shares at September 30, 2007, December 31, 2006 and September 30, 2006, respectively	(161,357		)	(195,363		)	(186,231		)

Total shareholders’ equity	1,633,917			1,490,915			1,448,045

Total liabilities and shareholders’ equity	$	15,547,555		$	14,884,381		$	14,615,619

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
In thousands, except per share amounts	2007			2006			2007			2006

Interest Income
Loans and leases	$	197,468		$	172,408		$	570,494		$	494,297
Securities available-for-sale	30,647			34,993			94,747			115,105
Trading account	1,082			695			2,779			2,084
Due from banks - interest-bearing	770			280			1,781			620
Federal funds sold and securities purchased under resale agreements	136			56			639			799
Total interest income	230,103			208,432			670,440			612,905
Interest Expense
Deposits	58,288			46,394			166,046			110,375
Federal funds purchased and securities sold under repurchase agreements	8,458			5,320			22,204			20,969
Subordinated debt	4,094			4,057			12,166			11,255
Other long-term debt	3,759			2,820			11,077			9,345
Other short-term borrowings	1,741			1,034			4,740			5,673
Total interest expense	76,340			59,625			216,233			157,617
Net interest income	153,763			148,807			454,207			455,288
Provision for credit losses	—			—			—			(610		)
Net interest income after provision for credit losses	153,763			148,807			454,207			455,898
Noninterest Income
Trust and investment fees	37,488			30,002			102,565			76,685
Brokerage and mutual fund fees	15,546			13,096			43,284			37,049
Cash management and deposit transaction charges	8,801			7,967			25,744			23,722
International services	7,995			6,829			22,020			19,688
Bank-owned life insurance	645			685			2,030			2,296
Gain on sale of other assets	6,023			268			5,977			268
Loss on sale of securities	(2,516		)	(362		)	(1,381		)	(370		)
Other	7,251			6,218			20,630			18,806
Total noninterest income	81,233			64,703			220,869			178,144
Noninterest Expense
Salaries and employee benefits	84,057			75,318			242,945			220,652
Net occupancy of premises	11,837			10,207			31,657			28,679
Legal and professional fees	8,614			8,416			25,925			25,671
Information services	6,024			5,636			17,325			15,994
Depreciation and amortization	5,275			4,832			15,397			14,154
Marketing and advertising	5,079			4,495			14,860			13,501
Office services	3,287			2,623			8,972			7,863
Amortization of intangibles	2,852			(37		)	7,105			3,828
Equipment	867			514			2,382			1,769
Other operating	7,331			6,857			20,954			18,804
Total noninterest expense	135,223			118,861			387,522			350,915
Minority interest expense	2,211			1,808			6,612			4,249
Income before income taxes	97,562			92,841			280,942			278,878
Income taxes	37,469			33,847			105,151			103,911
Net income	$	60,093		$	58,994		$	175,791		$	174,967
Net income per share, basic	$	1.24		$	1.23		$	3.64		$	3.59
Net income per share, diluted	$	1.22		$	1.20		$	3.56		$	3.47
Shares used to compute income per share, basic	48,345			47,919			48,331			48,786
Shares used to compute income per share, diluted	49,408			49,318			49,447			50,424
Dividends per share	$	0.46		$	0.41		$	1.38		$	1.23

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	For the nine months ended
	September 30,
Dollars in thousands	2007			2006

Cash Flows From Operating Activities
Net income	$	175,791		$	174,967
Adjustments to net income:
Provision for credit losses	—			(610		)
Amortization of intangibles	7,105			3,828
Depreciation and amortization	15,397			14,154
Amortization of cost and discount on long-term debt	531			530
Stock-based employee compensation expense	10,520			9,162
Gain on sale of other assets	(5,977		)	(268		)
Loss on sales of securities	1,381			370
Other, net	7,323			12,187
Net change in:
Trading securities	(44,255		)	(57,526		)
Deferred income tax benefit	11,323			3,972
Other assets and other liabilities, net	(19,112		)	(36,470		)
Net cash provided by operating activities	160,027			124,296
Cash Flows From Investing Activities
Purchase of securities available-for-sale	(161,032		)	(133,171		)
Sales of securities available-for-sale	196,329			415,486
Maturities and paydowns of securities	442,126			498,107
Loan originations, net of principal collections	(420,611		)	(761,576		)
Purchase of premises and equipment	(24,083		)	(19,868		)
Acquisition of BBNV, net of cash acquired	(53,787		)	—
Acquisition of CWA, net of cash acquired	(101,283		)	—
Other investing activities	(6,714		)	(13,777		)
Net cash used by investing activities	(129,055		)	(14,799		)
Cash Flows From Financing Activities
Net decrease in deposits	(433,414		)	(246,455		)
Net increase in federal funds purchased and securities sold under repurchase agreements	242,067			316,772
Net increase (decrease) in short-term borrowings, net of transfers from long-term debt	228,516			(27,574		)
Net decrease in other borrowings	(61		)	(280		)
Proceeds from exercise of stock options	20,953			12,913
Tax benefit from exercise of stock options	7,201			3,877
Stock repurchases	(82,975		)	(145,269		)
Cash dividends paid	(67,115		)	(60,482		)
Net cash used by financing activities	(84,828		)	(146,498		)
Net decrease in cash and cash equivalents	(53,856		)	(37,001		)
Cash and cash equivalents at beginning of year	611,054			563,020
Cash and cash equivalents at end of period	$	557,198		$	526,019
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	230,220		$	148,727
Income taxes	59,595			113,243

See accompanying Notes to the Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

							Accumulated
				Additional			other									Total
	Shares	Common		paid-in			comprehensive			Retained			Treasury			shareholders’
Dollars in thousands	issued	stock		capital			income (loss)			Earnings			stock			equity

Balance, December 31, 2005	50,600,943	$	50,601	$	396,659		$	(51,551	)	$	1,121,474		$	(59,175	)	$	1,458,008
Adjustment to initially apply Staff Accounting Bulletin No. 108	—	—		—			—			(10,174		)	—			(10,174		)
Balance, January 1, 2006	50,600,943	50,601		396,659			(51,551		)	1,111,300			(59,175		)	1,447,834
Net income	—	—		—			—			174,967			—			174,967
Other comprehensive income net of tax:
Net unrealized gain on securities
available-for-sale, net of reclassification	—	—		—			—			—			—			—
of $3.2 million for net loss	—	—		—			—			—			—			—
included in net income	—	—		—			2,869			—			—			2,869
Net unrealized gain on
cash flow hedges, net of reclassification
of $4.6 million net loss
included in net income.	—	—		—			2,528			—			—			2,528
Other net unrealized loss	—	—		—			(246		)	—			—			(246		)
Total other comprehensive income	—	—		—			5,151			—			—			5,151
Issuance of shares for stock options	68,246	68		(5,368		)	—			—			18,213			12,913
Restricted stock grants, net of cancellations	59,516	60		(60		)	—			—			—			—
Stock-based employee compensation expense	—	—		9,055			—			—			—			9,055
Tax benefit from stock options	—	—		3,877			—			—			—			3,877
Cash dividends paid	—	—		—			—			(60,483		)	—			(60,483		)
Repurchased shares, net	—	—		—			—			—			(145,269		)	145,269
Balance, September 30, 2006	50,728,705	$	50,729	$	404,163		$	(46,400	)	$	1,225,784		$	(186,231	)	$	1,448,045

Balance, December 31, 2006	50,718,794	$	50,719	$	412,248		$	(41,386	)	$	1,264,697		$	(195,363	)	$	1,490,915
Adjustment to initially apply FASB Interpretation 48	—	—		—			—			(28,036		)	—			(28,036		)
Balance, January 1, 2007	50,718,794	50,719		412,248			(41,386		)	1,236,661			(195,363		)	1,462,879
Net income	—	—		—			—			175,791			—			175,791
Other comprehensive income net of tax:
Amortization of prior service cost	—	—		—			163			—			—			163
Net unrealized gain on securities
available-for-sale, net of reclassification	—	—		—			—			—			—			—
of $2.5 million for net loss	—	—		—			—			—			—			—
included in net income	—	—		—			13,866			—			—			13,866
Net unrealized gain on
cash flow hedges, net of reclassification
of $2.7 million net loss
included in net income	—	—		—			4,726			—			—			4,726
Total other comprehensive income	—	—		—			18,755			—			—			18,755
Issuance of shares for stock options	—	—		(15,924		)	—			—			36,877			20,953
Restricted stock grants, net of cancellations	94,545	94		(94		)	—			—			—			—
Stock-based employee compensation expense	—	—		10,413			—			—			—			10,413
Tax benefit from stock options	—	—		7,201			—			—			—			7,201
Cash dividends paid	—	—		—			—			(67,115		)	—			(67,115		)
Repurchased shares, net	—	—		—			—			—			(82,975		)	(82,975		)
Issuance of shares for acquisition	—	—		7,911									80,104			88,015
Balance, September 30, 2007	50,813,339	$	50,813	$	421,755		$	(22,631	)	$	1,345,337		$	(161,357	)	$	1,633,917

See accompanying Notes to Unaudited Consolidated Financial Statements.

CITY NATIONAL CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation - City National Corporation (the “Corporation”) is the holding company for City National Bank (the “Bank”). City National Bank delivers banking, trust and investment services through 62 offices in Southern California, the San Francisco Bay area, Nevada and New York City. As of September 30, 2007, the Corporation had a majority ownership interest in nine investment advisor subsidiaries and a minority interest in one other firm. The Corporation also has an unconsolidated subsidiary, Business Bancorp Capital Trust I. Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank together. The Corporation is approved as a financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999. The financial statements of the Company include the accounts of the Corporation, its non-bank subsidiaries, the Bank, and the Bank’s wholly-owned subsidiaries, after the elimination of all material intercompany transactions. Certain prior period balances have been reclassified to conform to the current period presentation.

2. Acquisitions - On February 28, 2007, the Company completed the acquisition of Business Bank Corporation, the parent of Business Bank of Nevada (“BBNV”) and an unconsolidated subsidiary, Business Bancorp Capital Trust I, in a cash and stock transaction valued at $167 million. BBNV operated as a wholly-owned subsidiary of City National Corporation until after the close of business on April 30, 2007, at which time it was merged into the Bank.

On May 1, 2007, the Corporation completed the acquisition of Lydian Wealth Management in an all-cash transaction. The investment advisory firm is headquartered in Rockville, Maryland and now manages or advises on client assets totaling $8.2 billion. Lydian Wealth Management changed its name to Convergent Wealth Advisors (“CWA”) and became a subsidiary of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003. All of the senior executives of CWA signed employment agreements and acquired a significant minority ownership interest in CWA.

3. Accounting Policies - Our accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) and practices in the financial services industry. The Company is on the accrual basis of accounting for income and expense. To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and income and expenses during the reporting period. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q, and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The results for the 2007 interim periods are not necessarily indicative of the results expected for the full year.

During the nine months ended September 30, 2007, the following significant accounting pronouncements were issued or became effective:

• The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 provides a single model for addressing uncertainty in tax positions and requires expanded annual disclosures about tax positions. Upon adoption, the Company recognized a cumulative effect adjustment as a charge to January 1, 2007 retained earnings and the contingent tax reserve of $28.0 million.

• On February 15, 2007 the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an irrevocable option to report eligible financial assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on instruments for which the fair value option has been elected will be reported in earnings at each subsequent reporting date. SFAS 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 will be effective for the Company as of January 1, 2008. The implementation may result in recognizing certain financial assets and liabilities (for which the fair value option was selected) at fair value, with the effect of the adoption recorded as a cumulative effect adjustment to beginning retained earnings. Additional disclosures will be required upon implementation. The Company is evaluating the guidance contained in SFAS 159 and has not yet determined which assets and liabilities, if any, will be selected for the fair value option under the statement.

• On April 30, 2007 the FASB issued Staff Position, (“FSP”) FIN 39-1, which amends certain aspects of FASB Interpretation Number 39, Offsetting of Amounts Related to Certain Contracts—an interpretation of APB Opinion No. 10 and FASB Statement No. 105 (“FIN 39”). The FSP amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts, including amounts that approximate fair value, recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Derivative instruments permitted to be netted for the purposes of the FSP include those instruments that meet the definition of a derivative in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, including those that are not included in the scope of Statement 133. The FSP only impacts the presentation of the derivative’s fair value and the related collateral on the balance sheet. The FSP will be effective for the Company as of January 1, 2008. The decision to apply the guidance in the FSP is an accounting policy decision that the Company is currently evaluating. The FSP is not expected to have a significant impact on the Company’s financial statements.

• EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” , ratified by the EITF on June 14, 2007, provides that realized income tax benefits from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options are to be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards are to be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. The EITF is effective for the Company as of January 1, 2008. The Company currently recognizes the tax benefit associated with dividend payments on unvested shares as a reduction of income tax expense. The EITF is not expected to have a significant impact on the Company’s financial statements.

In addition, there is one previously issued accounting pronouncement:

• On September 15, 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value for financial reporting purposes, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements where fair value is required or permitted. This statement is effective for the Company on January 1, 2008. The Company is currently evaluating the guidance contained in SFAS 157 to determine the effect of adoption on the Company’s financial statements.

4. Investment Securities - All securities other than trading securities are classified as available-for-sale and are valued at fair value. Unrealized gains or losses on securities available-for-sale are excluded from net income but are included as a separate component of other comprehensive income, net of taxes. Premiums or discounts on securities available-for-sale are amortized or accreted into income using the interest method over the expected lives of the individual securities. On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The value of securities is reduced when unrealized losses are considered other-than-temporary, and a new cost basis is established for the securities. Any other-than-temporary loss is included in net income. Realized gains or losses on sales of securities available-for-sale are recorded using the specific identification method. Trading securities are valued at fair value with any unrealized gains or losses included in net income.

5. Shareholders’ Equity - The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended September 30, 2007:

Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
07/1/07 - 07/31/07	295,000	$	72.86	295,000		483,200
08/1/07 - 08/31/07	510,000	$	70.78	510,000		973,200	(1)
09/1/07 - 09/30/07	53,400	$	69.43	53,400		919,800
	858,400	$	71.41	858,400	(1)	919,800	(1)

(1) On August 7, 2007, the Company’s Board of Directors authorized the Company to repurchase 1 million additional shares of the Company’s stock following completion of its previously approved initiative. Unless terminated earlier by resolution of our Board of Directors, the program will expire when the Company has repurchased all shares authorized for repurchase there under. During the third quarter of 2007, the Company repurchased an aggregate of 858,400 shares of our common stock pursuant to its repurchase programs and there are 919,800 shares remaining to be purchased. The Company received no shares in payment for the exercise price of stock options during the third quarter of 2007.

Basic earnings per share are based on the weighted average shares of common stock outstanding less unvested restricted shares and units. Diluted earnings per share give effect to all potential dilutive common shares, which consist of stock options and restricted shares and units that were outstanding during the period. At September 30, 2007, there were 858,606 antidilutive options compared to 922,987 antidilutive options at September 30, 2006.

6. Stock-Based Compensation - The Company applies FASB Statement No. 123 (revised), Share Based Payment, (“SFAS 123R”) in accounting for stock option plans. The Company uses a Black-Scholes model to determine the stock-based compensation expense for these plans. On September 30, 2007, the Company had one stock-based compensation plan, which provides for granting of stock options, restricted shares and restricted units. The compensation cost that has been charged against income for all stock-based awards was $3.4 million for the three months ended September 30, 2007, and $10.5 million for the nine months ended September 30, 2007, compared to $3.1 million and $9.2 million for the three and nine-month periods ended September 30, 2006, respectively. The Company received $21.0 million and $12.9 million in cash for the exercise of stock options during the nine month periods ended September 30, 2007 and September 30, 2006, respectively. These shares had a corresponding tax benefit of $7.2 million and $3.9 million for the nine month periods ended September 30, 2007 and September 30, 2006, respectively.

Plan Description

The City National Corporation Amended and Restated Omnibus Plan, (the “Plan”), approved by shareholders, permits the grant of stock options and restricted stock or restricted units to its employees. At September 30, 2007 there were 2.0 million shares available for future grants. The Company believes that such awards better align the interest of its employees with those of its shareholders. Employee option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. These awards vest in four years and have 10-year contractual terms. Restricted stock awards generally vest over five years, during which time the holder receives dividends and has full voting rights. Certain option and stock awards provide for accelerated vesting if there is a change in control (as defined in the Plan), or upon retirement, for options issued prior to January 31, 2006. All unexercised options expire 10 years from the grant date.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The Company evaluates exercise behavior and values options separately for executive and non-executive employees. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to predict option exercise and employee termination behavior. The expected term of options granted is derived from the historical exercise activity over the past 20 years and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is equal to the dividend yield of the Company’s stock at the time of the grant.

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Expected volatility	20.20	%	23.95	%	21.33	%	24.62	%
Weighted-average volatility	21.14	%	24.50	%	21.91	%	23.99	%
Expected dividends	2.66		2.59		2.56		2.24
Expected term (in years)	6.02		5.96		6.04		6.06
Risk-free rate	4.76	%	5.07	%	4.73	%	4.70	%

Using the Black-Scholes model, the weighted-average grant-date fair values of options granted during the nine-month periods ended September 30, 2007 and 2006 were $17.15 and $19.61, respectively. The total intrinsic values of options exercised during the nine-month periods ended September 30, 2007 and 2006 were $16.3 million, and $8.7 million, respectively.

A summary of option activity under the Plan during the nine-month period ended September 30, 2007 is presented below:

					Weighted-
			Weighted-		Average	Aggregate
			Average		Remaining	Intrinsic
			Exercise		Contractual	Value
Options	Shares		Price		Term	(In the Money)
	(000)					($ 000)

Outstanding at January 1, 2007	4,295		$	49.54	4.65	$	88,917
BBNV acquisition	109		10.77		3.81	6,431
Granted	497		74.54		9.43	1
Exercised	(535	)	39.12		3.23	(16,286		)
Forfeited or expired	(116	)	67.72		7.62	(534		)
Outstanding at September 30, 2007	4,250		$	52.28	5.28	$	78,529
Exercisable at September 30, 2007	3,149		$	45.16	4.14	$	76,675

A summary of the changes in the Company’s unvested options during the nine-month period ended September 30, 2007 is presented below:

			Weighted-Average
			Grant-Date
Unvested Shares	Shares (000)		Fair Value
Unvested at January 1, 2007	1,139		17.23
Granted	497		17.15
Vested	(424	)	14.96
Forfeited	(111	)	17.14
Unvested at September 30, 2007	1,101		17.55

The number of shares vested during the nine-month period ended September 30, 2007 was 424,235. The total fair value of shares vested during the nine-month period ended September 30, 2007 was $6.3 million. As of September 30, 2007, there was $27.3 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.2 years.

7. Interest Rate Risk Management - As part of its asset and liability management strategies, the Company uses interest-rate swaps to reduce cash flow variability and to moderate changes in the fair value of financial instruments. In accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), the Company recognizes derivatives as assets or liabilities on the balance sheet at their fair value. The treatment of changes in the fair value of derivatives depends on the character of the transaction.

In accordance with SFAS 133, the Company documents its hedge relationships, including identification of the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating each derivative contract as either (i) a “fair value hedge” which is a hedge of a recognized asset or liability, (ii) a “cash flow hedge” which hedges a forecasted transaction or the variability of the cash flows to be received or paid related to a recognized asset or liability or (iii) an “undesignated hedge”, a derivative instrument not designated as a hedging instrument whose change in fair value is recognized directly in the consolidated statement of income. All derivatives designated as fair value or cash flow hedges are linked to specific hedged items or to groups of specific assets and liabilities on the balance sheet. The Company did not have any significant undesignated hedges as of September 30, 2007 or during 2007 or 2006.

Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in SFAS 133) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the expectation that the hedge will remain effective prospectively.

For cash flow hedges, in which derivatives hedge the variability of cash flows (interest payments) on loans that are indexed to U.S. dollar LIBOR or the Bank’s prime interest rate, the effectiveness is assessed prospectively at the inception of the hedge, and prospectively and retrospectively at least quarterly thereafter. Ineffectiveness of the cash flow hedges is measured using the hypothetical derivative method described in Derivatives Implementation Group Issue G7. For cash flow hedges, the effective portion of the changes in the derivatives’ fair value is not included in current earnings but is reported as other comprehensive income. When the cash flows associated with the hedged item are realized, the gain or loss included in other comprehensive income is recognized on the same line in the consolidated statement of income as the hedged item, i.e., included in interest income on loans. Any ineffective portion of the changes of fair value of cash flow hedges is recognized immediately in other noninterest income in the consolidated statement of income.

For fair value hedges, the Company uses interest-rate swaps to hedge the fair value of certain certificates of deposits, subordinated debt and other long-term debt. The certificates of deposit are single maturity, fixed-rate, non-callable, negotiable certificates of deposit that pay interest only at maturity and contain no compounding features. The certificates cannot be redeemed early except in the case of the holder’s death. The interest-rate swaps are executed at the time the deposit transactions are negotiated. The subordinated debt and other long-term debt consists of City National Bank ten-year subordinated notes with a face value of $115.9 million due on January 15, 2008, City National Bank ten-year subordinated notes with a face value of $150.0 million due on September 1, 2011, and City National Corporation senior notes with a face value of $225.0 million due on February 15, 2013. Interest-rate swaps are structured so that all key terms of the swaps match those of the underlying deposit or debt transactions, therefore ensuring there is no hedge ineffectiveness at inception. The Company ensures that the interest-rate swaps meet the requirements for utilizing the short cut method in accordance with paragraph 68 of SFAS 133 and maintains appropriate documentation for each interest-rate swap. On a quarterly basis, fair value hedges are analyzed to ensure that the key terms of the hedged items and hedging instruments remain unchanged, and the hedging counterparties are evaluated to ensure that there are no adverse developments regarding counterparty default, thus ensuring continuous effectiveness. For these fair value hedges, the effective portion of the changes in the fair value of derivatives is reflected in current earnings, on the same line in the consolidated statement of income as the related hedged item.

The Company also offers various derivatives products to clients and enters into derivatives transactions in due course. These transactions are not linked to specific Company assets or liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. They are carried at fair value with changes in fair value recorded as part of other noninterest income in the income statement.

Fair values are determined from verifiable third-party sources that have considerable experience with the interest-rate swap market. For both fair value and cash flow hedges, the periodic accrual of interest receivable or payable on interest-rate swaps is recorded as an adjustment to net interest income for the hedged items.

The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item, (ii) a derivative expires or is sold, terminated or exercised, (iii) a derivative is un-designated as a hedge, because it is unlikely that a forecasted transaction will occur, or (iv) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a fair value hedge derivative instrument is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged asset or liability would be subsequently accounted for in the same manner as other components of the carrying amount of that asset or liability. For interest-earning assets and interest-bearing liabilities, such adjustments would be amortized into earnings over the remaining life of the respective asset or liability. If a cash flow hedge

derivative instrument is terminated or the hedge designation is removed, related amounts reported in other comprehensive income are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.

8. Income Taxes - The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”) on January 1, 2007. Upon adoption, the Company recognized a cumulative effect adjustment as a charge to January 1, 2007 retained earnings and a reduction to the contingent tax reserve of $28.0 million, net of taxes.

Although the Company reduced the state tax receivable balance to zero in connection with the adoption of FIN 48 management continues to aggressively pursue its claims with the Franchise Tax Board for the REIT and RIC refunds for the tax years 2000 through 2004. While an outcome from the claims cannot be predicted with certainty, a potentially adverse result will not have any material impact on the Company’s financial position.

The Company recognizes potential accrued interest and penalties relating to unrecognized tax benefits as an income tax expense. For the nine-month period ended September 30, 2007, the Company accrued approximately $0.9 million in potential interest and penalties associated with uncertain tax positions. In conjunction with the adoption of FIN 48, the Company reduced accrued interest and penalties by $4.5 million. The Company had approximately $5.9 million and $9.4 million of accrued interest and penalties as of September 30, 2007 and December 31, 2006, respectively.

The Company and its subsidiaries file a consolidated federal income tax return and also file income tax returns in various state jurisdictions. The Company is currently under examination by the Internal Revenue Service (“IRS”) for the tax years 2002 and 2003. The Company is currently in IRS appeals proceedings related to certain tax positions taken in these years. The Company does not expect the final settlement of these matters to materially vary from the Company's current tax accrual for these matters as of September 30, 2007.

The Company is also under examination by the Franchise Tax Board for the tax years 1998 through 2004. The Company expects the Franchise Tax Board to complete its examination for the years 1998 though 2003 within the next 12 months. The potential financial statement impact resulting from the completion of the audit is not determinable at this time.

9. Retirement Plans - The Company has a profit-sharing retirement plan with an Internal Revenue Code Section 401(k) feature covering eligible employees. Contributions are made annually into a trust fund and are allocated to participants based on their salaries. The Company recorded profit sharing contributions expense of $4.1 million and $12.1 million for the three-month and nine-month periods ended September 30, 2007, compared to $4.5 million and $13.2 million for the three-month and nine-month periods ended September 30, 2006, respectively.

The Company has a Supplemental Executive Retirement Plan (‘SERP’) for one of its executive officers. The SERP meets the definition of a pension plan per FASB Statement No. 87, Employers’ Accounting for Pensions. The Company applies FASB Statement No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”), in accounting for the SERP. At September 30, 2007, there was a $4.6 million unfunded pension liability related to the SERP. The total expense for both the third quarter of 2007 and the third quarter of 2006 was $0.2 million. The total expense was $0.6 million for both the nine-month periods ended September 30, 2007 and September 30, 2006.

The Company does not provide any other post-retirement benefits.

10. Guarantees - In connection with the liquidation of an investment acquired in a previous bank merger, the Company has an outstanding long-term guarantee. The maximum liability under the guarantee is $17.9 million, but the Company does not expect to make any payments under the terms of this guarantee, and accordingly has not accrued for any portion of this guarantee.

11. Variable Interest Entities -The Company holds variable interests in certain special-purpose entities formed to provide affordable housing. The Company is not required to consolidate these entities. The Company initially records its investment in these entities at cost, which approximates the maximum exposure to loss as a result of its involvement with these unconsolidated entities. Subsequently the carrying value is amortized over the stream of available tax credits and benefits. The Company expects to recover its investments over time, primarily through realization of federal low-income housing tax credits. The balance of the investments in these entities was $67.9 million, $65.8 million and $63.7 million at September 30, 2007, December 31, 2006, and September 30, 2006, respectively, is included in the affordable housing investments balance in the balance sheet. The Company also has

ownership interests in several private equity investment funds that are variable interest entities. The Company is not required to consolidate these variable interest entities. The Company carries its investment in these entities at cost, which approximates the maximum exposure to loss as a result of its involvement with these entities. The Company expects to recover its investments over time, primarily through the allocation of fund income or loss, gains or losses on the sale of fund assets, dividends, or interest income. The balance in these entities was $18.3 million, $11.8 million and $9.9 million at September 30, 2007, December 31, 2006, and September 30, 2006 respectively, and is included in the other assets balance in the balance sheet. In addition, CWA is the administrative manager of the Barlow Long-Short Equity Fund, a hedge fund which is a variable interest entity. CWA is not required to consolidate this entity.

12. Segment Reporting - The Company has one primary reportable segment, Commercial and Private Banking. All other subsidiaries, Wealth Management Services and the portion of corporate departments allocated to the operating segments other than Commercial and Private Banking are aggregated in a second reportable segment called Other. The factors considered in determining whether individual operating segments could be aggregated include that the operating segments: (i) offer the same products and services, (ii) offer services to the same types of clients, (iii) provide services in the same manner and (iv) operate in the same regulatory environment. The management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change.

The Commercial and Private Banking reportable segment is the aggregation of the Commercial and Private Banking, Real Estate, Entertainment and Core Banking operating segments. The Commercial and Private Banking segment provides banking products and services, including commercial and mortgage loans, lines of credit, deposits, cash management services, international trade finance and letters of credit to small and medium-sized businesses, entrepreneurs and affluent individuals. This segment primarily serves clients in California, New York and Nevada.

The Other segment includes the Bank’s Wealth Management Services division, all non-bank subsidiaries including the asset management affiliates, and the portion of corporate departments, including the Treasury Department and the Asset Liability Funding Center, that have not been allocated to Commercial and Private Banking.

Business segment earnings are the primary measure of the segment’s performance as evaluated by management. Business segment earnings include direct revenue and expenses of the segment as well as corporate and inter-unit allocations. Allocations of corporate expenses, such as data processing and human resources, are calculated based on estimated activity levels for the fiscal year. Inter-unit support groups, such as Operational Services, are allocated based on actual expenses incurred. Capital is allocated using a methodology similar to that used for federal regulatory risk-based capital purposes. If applicable, any provision for credit losses is allocated based on various credit factors, including but not limited to, credit risk ratings, ratings migration, charge-offs and recoveries and loan growth. Income taxes are charged on unit income at the Company’s statutory tax rate of 42 percent.

Exposure to market risk is managed in the Treasury department. Interest rate risk is removed from the units comprising the Commercial and Private Banking segment to the Funding Center through a fund transfer pricing (“FTP”) model. The FTP model records a cost of funds or credit for funds using a combination of matched maturity funding for most assets and liabilities and a blended rate based on various maturities for the remaining assets and liabilities.

The Bank’s investment portfolio and unallocated equity are included in the Other segment. Core deposit intangible amortization is charged to the affected operating segments.

Operating results for the Commercial and Private Banking reportable segment are discussed in the Segment Results section of Management’s Discussion and Analysis. Selected financial information for each segment is presented in the following tables.

CITY NATIONAL CORPORATION

Segment Results

	Commercial			Commercial
	& Private			& Private									Consolidated			Consolidated
	Banking			Banking			Other			Other			Company			Company
(Dollars in thousands)	2007			2006			2007			2006			2007			2006

Three months ended September 30,

Earnings Summary:
Net interest income	$	157,957		$	148,106		$	(4,194	)	$	701		$	153,763		$	148,807
Provision for credit losses	—			—			—			—			—			—
Noninterest income	18,011			16,465			63,222			48,238			81,233			64,703
Depreciation and amortization	1,685			1,474			3,590			3,358			5,275			4,832
Noninterest expense and minority interest	96,266			88,768			35,893			27,069			132,159			115,837
Income before income taxes	78,017			74,329			19,545			18,512			97,562			92,841
Income taxes	24,287			26,775			13,182			7,072			37,469			33,847
Net income	$	53,730		$	47,554		$	6,363		$	11,440		$	60,093		$	58,994

Selected Average Balances:
Loans and leases	$	11,074,554		$	9,908,404		$	116,563		$	104,705		$	11,191,117		$	10,013,109
Total Assets	11,466,378			10,336,468			4,128,604			4,208,136			15,594,982			14,544,604
Deposits	11,209,041			10,362,885			1,233,147			1,542,174			12,442,188			11,905,059

Performance measures:
Return on average assets (annualized)	1.9		%	1.8		%	0.6		%	1.1		%	1.5		%	1.6		%

CITY NATIONAL CORPORATION

Segment Results

	Commercial			Commercial
	& Private			& Private									Consolidated			Consolidated
	Banking			Banking			Other			Other			Company			Company
(Dollars in thousands)	2007			2006			2007			2006			2007			2006

Nine months ended September 30,
Earnings Summary:
Net interest income	$	463,001		$	445,429		$	(8,794	)	$	9,859		$	454,207		$	455,288
Provision for credit losses	—			(610		)	—			—			—			(610		)
Noninterest income	51,758			48,649			169,111			129,495			220,869			178,144
Depreciation and amortization	4,843			4,326			10,554			9,828			15,397			14,154
Noninterest expense and minority interest	282,920			267,718			95,817			73,292			378,737			341,010
Income before income taxes	226,996			222,644			53,946			56,234			280,942			278,878
Income taxes	77,158			82,146			27,993			21,765			105,151			103,911
Net income	$	149,838		$	140,498		$	25,953		$	34,469		$	175,791		$	174,967

Selected Average Balances:
Loans and leases	$	10,812,339		$	9,740,866		$	108,965		$	107,561		$	10,921,304		$	9,848,427
Total Assets	11,210,080			10,172,939			4,087,360			4,543,892			15,297,440			14,716,831
Deposits	11,081,793			10,504,583			1,229,612			1,304,463			12,311,405			11,809,046

Performance measures:
Return on average assets (annualized)	1.8		%	1.8		%	0.8		%	1.0		%	1.5		%	1.6		%

CITY NATIONAL CORPORATION

FINANCIAL HIGHLIGHTS

										Percent change
	At or for the three months ended									September 30, 2007 from
	September 30,			June 30,			September 30,			June 30,		September 30,
Dollars in thousands, except per share amounts	2007			2007			2006			2007		2006
	(Unaudited)						(Unaudited)

For The Quarter
Net income	$	60,093		$	59,153		$	58,994		2	%	2	%
Net income per common share, basic	1.24			1.22			1.23			2		1
Net income per common share, diluted	1.22			1.19			1.20			3		2
Dividends per common share	0.46			0.46			0.41			0		12

At Quarter End
Assets	$	15,547,555		$	15,796,096		$	14,615,619		(2	)	6
Securities	2,757,916			2,915,994			3,292,100			(5	)	(16	)
Loans and leases	11,190,080			11,018,834			10,020,358			2		12
Deposits	12,180,514			13,130,405			11,892,017			(7	)	2
Shareholders’ equity	1,633,917			1,621,450			1,448,045			1		13
Book value per common share	33.99			33.21			30.40			2		12

Average Balances
Assets	$	15,594,982		$	15,452,580		$	14,544,604		1		7
Securities	2,831,687			2,945,091			3,244,896			(4	)	(13	)
Loans and leases	11,191,117			11,010,860			10,013,109			2		12
Deposits	12,442,188			12,569,934			11,905,059			(1	)	5
Shareholders’ equity	1,622,962			1,603,837			1,435,998			1		13

Selected Ratios
Return on average assets (annualized)	1.53		%	1.54		%	1.61		%	(1	)	(5	)
Return on average shareholders’ equity (annualized)	14.69			14.79			16.30			(1	)	(10	)
Corporation’s tier 1 leverage	7.80			7.97			8.58			(2	)	(9	)
Corporation’s tier 1 risk-based capital	9.57			9.82			11.09			(3	)	(14	)
Corporation’s total risk-based capital	12.01			12.28			14.12			(2	)	(15	)
Period-end shareholders’ equity to period-end assets	10.51			10.26			9.91			2		6
Dividend payout ratio, per share	37.26			38.22			33.64			(3	)	11
Net interest margin	4.42			4.47			4.53			(1	)	(2	)
Efficiency ratio (1)	57.67			57.73			55.65			(0	)	4