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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
     
 
þ   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended September 30, 2006
     
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 þ 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 þ      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 þ No
     As of November 1, 2006, there were 47,590,642 shares of Common Stock outstanding.
 
 

 


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EXPLANATORY NOTE
     Amended for a change to the shares of Common Stock outstanding as of November 1, 2006 as presented on page 1.

 


TABLE OF CONTENTS

PART 1 — FINANCIAL INFORMATON
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROL AND PROCEDURES
PART II.
ITEM 1A — RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.0


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PART 1 — 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   2006     2005     2005  
    (Unaudited)             (Unaudited)  
Assets
                       
Cash and due from banks
  $ 457,396     $ 365,217     $ 438,786  
Due from banks — interest-bearing
    65,323       40,803       39,485  
Federal funds sold
    3,300       157,000       185,000  
Securities available-for-sale — cost $3,248,003; $4,076,984; and $4,084,366 at September 30, 2006, December 31, 2005 and September 30, 2005, respectively
    3,175,230       3,999,261       4,030,296  
Trading account securities
    116,870       59,344       42,634  
Loans
    10,020,358       9,265,602       9,004,881  
Less allowance for loan and lease losses
    (159,063 )     (153,983 )     (152,920 )
 
                 
Net loans
    9,861,295       9,111,619       8,851,961  
 
                       
Premises and equipment, net
    88,582       82,868       76,754  
Deferred tax asset
    121,203       125,175       121,384  
Goodwill
    255,340       247,708       248,373  
Intangibles
    43,131       36,416       37,181  
Bank-owned life insurance
    69,457       67,774       67,266  
Affordable housing investments
    63,660       67,508       67,148  
Customers’ acceptance liability
    4,124       3,232       3,262  
Other assets
    291,847       217,935       219,914  
 
                 
Total assets
  $ 14,616,758     $ 14,581,860     $ 14,429,444  
 
                 
 
                       
Liabilities
                       
Demand deposits
  $ 5,639,811     $ 6,562,038     $ 6,345,907  
Interest checking deposits
    722,976       867,509       779,319  
Money market deposits
    3,186,455       3,296,260       3,396,777  
Savings deposits
    159,382       177,874       188,345  
Time deposits-under $100,000
    192,860       177,230       180,776  
Time deposits-$100,000 and over
    1,990,533       1,057,561       1,224,590  
 
                 
Total deposits
    11,892,017       12,138,472       12,115,714  
Federal funds purchased and securities sold under repurchase agreements
    506,962       190,190       191,036  
Other short-term borrowings
    72,426       100,000       26,197  
Subordinated debt
    270,522       275,682       278,076  
Long-term debt
    217,323       219,445       221,168  
Reserve for off-balance sheet credit commitments
    15,652       15,596       14,563  
Other liabilities
    150,934       156,884       137,395  
Acceptances outstanding
    4,124       3,232       3,262  
 
                 
Total liabilities
    13,129,960       13,099,501       12,987,411  
Minority interest in consolidated subsidiaries
    28,578       24,351       24,856  
 
                       
Commitments and contingencies
                       
 
                       
Shareholders’ Equity
                       
Preferred Stock authorized - 5,000,000; none outstanding
                 
Common Stock-par value-$1.00; authorized - 75,000,000; Issued — 50,728,705; 50,600,943; and 50,600,943 shares at September 30, 2006, December 31, 2005 and September 30, 2005, respectively
    50,729       50,601       50,601  
Additional paid-in capital
    404,163       396,659       398,289  
Accumulated other comprehensive loss
    (46,400 )     (51,551 )     (36,879 )
Retained earnings
    1,235,959       1,121,474       1,077,561  
Treasury shares, at cost - 2,690,196; 887,304; and 1,107,734 shares at September 30, 2006, December 31, 2005 and September 30, 2005, respectively
    (186,231 )     (59,175 )     (72,395 )
 
                 
Total shareholders’ equity
    1,458,220       1,458,008       1,417,177  
 
                 
Total liabilities and shareholders’ equity
  $ 14,616,758     $ 14,581,860     $ 14,429,444  
 
                 
See accompanying Notes to the Unaudited Consolidated Financial Statements.

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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   2006     2005     2006     2005  
Interest Income
                               
Loans
  $ 172,323     $ 142,251     $ 494,135     $ 400,129  
Securities available-for-sale
    34,881       41,345       114,852       123,786  
Trading account
    695       360       2,084       869  
Due from banks — interest-bearing
    392       150       873       479  
Federal funds sold and securities purchased under resale agreements
    56       604       799       1,362  
 
                       
Total interest income
    208,347       184,710       612,743       526,625  
 
                       
Interest Expense
                               
Deposits
    46,394       20,622       110,375       53,247  
Federal funds purchased and securities sold under repurchase agreements
    5,320       2,100       20,969       5,821  
Subordinated debt
    4,057       2,848       11,255       7,500  
Other long-term debt
    2,820       2,597       9,345       7,337  
Other short-term borrowings
    1,034       229       5,673       334  
 
                       
Total interest expense
    59,625       28,396       157,617       74,239  
 
                       
Net interest income
    148,722       156,314       455,126       452,386  
Provision for credit losses
                (610 )      
 
                       
Net interest income after provision for credit losses
    148,722       156,314       455,736       452,386  
 
                       
Noninterest Income
                               
Trust and investment fees
    30,002       20,494       76,685       60,457  
Brokerage and mutual fund fees
    13,096       10,946       37,049       30,754  
Cash management and deposit transaction charges
    7,967       8,370       23,722       26,254  
International services
    6,829       6,107       19,688       16,903  
Bank-owned life insurance
    685       1,017       2,296       2,533  
Gain on sale of loans and other assets
    268       801       268       986  
(Loss) gain on sale of securities
    (362 )     241       (370 )     1,340  
Other
    6,303       5,573       18,968       16,039  
 
                       
Total noninterest income
    64,788       53,549       178,306       155,266  
 
                       
Noninterest Expense
                               
Salaries and employee benefits
    75,318       66,467       220,652       196,938  
Net occupancy of premises
    10,207       8,666       28,679       25,009  
Legal and professional fees
    9,120       10,672       27,706       30,177  
Depreciation and amortization
    4,832       4,551       14,154       13,656  
Information services
    4,932       4,471       13,959       12,697  
Marketing and advertising
    4,495       4,182       13,501       11,699  
Office services
    2,623       2,578       7,863       7,755  
Amortization of intangibles
    (37 )     1,852       3,828       4,734  
Equipment
    514       578       1,769       1,773  
Other operating
    6,857       6,862       18,804       20,366  
 
                       
Total noninterest expense
    118,861       110,879       350,915       324,804  
Minority interest expense
    1,808       1,761       4,249       5,104  
 
                       
Income before income taxes
    92,841       97,223       278,878       277,744  
Income taxes
    33,847       37,413       103,911       104,766  
 
                       
Net income
  $ 58,994     $ 59,810     $ 174,967     $ 172,978  
 
                       
 
                               
Net income per share, basic
  $ 1.23     $ 1.22     $ 3.59     $ 3.52  
 
                       
 
                               
Net income per share, diluted
  $ 1.20     $ 1.17     $ 3.47     $ 3.39  
 
                       
 
                               
Shares used to compute income per share, basic
    47,919       49,198       48,786       49,133  
 
                       
 
                               
Shares used to compute income per share, diluted
    49,318       51,123       50,424       51,066  
 
                       
 
                               
Dividends per share
  $ 0.41     $ 0.36     $ 1.23     $ 1.08  
 
                       
See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
                 
    For the nine months ended  
    September 30,  
Dollars in thousands   2006     2005  
Cash Flows From Operating Activities
               
Net income
  $ 174,967     $ 172,978  
Adjustments to net income:
               
Provision for credit losses
    (610 )      
Amortization of restricted stock grants
    3,878       3,057  
Amortization/writedown of intangibles
    3,828       4,734  
Depreciation and software amortization
    14,154       13,656  
Amortization of cost and discount on long-term debt
    530       531  
Stock-based employee compensation expense
    5,177        
Net change in deferred income tax benefit
    3,972       (19,188 )
Gain on sale of loans and assets
    (268 )     (986 )
Loss (gain) on sales of securities
    370       (1,340 )
Net change in other assets and other liabilities
    (36,678 )     (3,211 )
Other, net
    (51,294 )     54,481  
 
           
 
               
Net cash provided by operating activities
    118,026       224,712  
 
           
 
               
Cash Flows From Investing Activities
               
Purchase of securities available-for-sale
    (133,171 )     (626,328 )
Sales of securities available-for-sale
    415,486       89,580  
Maturities and paydowns of securities
    498,107       564,797  
Loan originations, net of principal collections
    (754,756 )     (532,718 )
Purchase of premises and equipment
    (19,868 )     (21,786 )
Other investing activities
    (14,327 )     (5,659 )
 
           
 
               
Net cash used by investing activities
    (8,529 )     (532,114 )
 
           
 
               
Cash Flows From Financing Activities
               
Net (decrease) increase in deposits
    (246,455 )     128,799  
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements
    316,772       (13,618 )
Net (decrease) increase in short-term borrowings, net of transfers from long-term debt
    (27,574 )     26,072  
Net decrease in other borrowings
    (280 )     (2,568 )
Proceeds from exercise of stock options
    12,026       18,182  
Tax benefit from exercise of stock options
    3,877       7,291  
Stock repurchases
    (144,382 )     (43,935 )
Cash dividends paid
    (60,482 )     (53,404 )
 
           
 
               
Net cash (used) provided by financing activities
    (146,498 )     66,819  
 
           
 
               
Net decrease in cash and cash equivalents
    (37,001 )     (240,583 )
Cash and cash equivalents at beginning of year
    563,020       903,854  
 
           
 
               
Cash and cash equivalents at end of period
  $ 526,019     $ 663,271  
 
           
 
               
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
  $ 148,727     $ 78,772  
Income taxes
    113,243       80,537  
 
               
Non-cash investing activities:
               
Restructuring of investment
          943  
See accompanying Notes to the Unaudited Consolidated Financial Statements.

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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, 2004
    50,589,408     $ 50,589     $ 397,954     $ (1,352 )   $ 957,987     $ (56,643 )   $ 1,348,535  
Net income
                            172,978             172,978  
Other comprehensive loss net of tax
                                                       
Net unrealized loss on securities available-for-sale, net of reclassification adjustment of $4.0 million net loss included in net income
                      (31,147 )                 (31,147 )
Net unrealized loss on cash flow hedges, net of reclassification of $0.7 million net gain included in net income
                      (4,380 )                 (4,380 )
 
                                         
Total other comprehensive loss
                      (35,527 )                 (35,527 )
Issuance of shares for stock options
    (29,739 )     (29 )     (9,914 )                 28,125       18,182  
Restricted stock grants / vesting
    41,274       41       (41 )                        
Stock-based employee compensation expense
                3,057                         3,057  
Tax benefit from stock options
                7,291                         7,291  
Cash dividends paid
                            (53,404 )           (53,404 )
Repurchased shares, net
                (58 )                 (43,877 )     (43,935 )
 
                                         
 
                                                       
Balance, September 30, 2005
    50,600,943     $ 50,601     $ 398,289     $ (36,879 )   $ 1,077,561     $ (72,395 )   $ 1,417,177  
 
                                         
 
                                                       
Balance, December 31, 2005
    50,600,943     $ 50,601     $ 396,659     $ (51,551 )   $ 1,121,474     $ (59,175 )   $ 1,458,008  
Net income
                            174,967             174,967  
Other comprehensive loss net of tax
                                                       
Net unrealized gain on securities available-for-sale, net of reclassification adjustment of $3.2 million 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 )                 17,326       12,026  
Restricted stock grants / vesting
    59,516       60       (60 )                        
Tax benefit from stock options
                3,877                         3,877  
Stock-based employee compensation expense
                9,055                         9,055  
Cash dividends paid
                            (60,482 )           (60,482 )
Repurchased shares, net
                                  (144,382 )     (144,382 )
 
                                         
 
                                                       
Balance, September 30, 2006
    50,728,705     $ 50,729     $ 404,163     $ (46,400 )   $ 1,235,959     $ (186,231 )   $ 1,458,220  
 
                                         
See accompanying Notes to Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.   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 54 offices in Southern California, the San Francisco Bay area and New York City. The Corporation has a majority ownership interest in nine asset management affiliates and minority interests in one other. 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.
2.   Our accounting and reporting policies conform with generally accepted accounting principles (‘GAAP’) and practices in the financial services industry. 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 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, 2005. The results for the 2006 interim periods are not necessarily indicative of the results expected for the full year.
 
    During the nine months ended September 30, 2006, the following accounting pronouncements were issued:
    FASB Staff Position (“FSP”) 115-1 became effective on January 1, 2006. The Company adopted FSP 115-1 as of that date and determined that there was no impact on its financial statements as of September 30, 2006.
 
    The FASB issued Interpretation No 48, Accounting for Uncertainty in Income Taxes (FIN 48), on July 13, 2006. FIN 48 provides a single model for addressing uncertainty in tax positions and requires expanded annual disclosures about tax positions. It becomes effective for the Company as of January 1, 2007. The Company is evaluating its tax positions to determine if any changes in the measurement or recognition of tax benefits are needed.
 
    On September 13, 2006 the SEC staff published Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 addresses quantifying the financial statement effects of misstatements, and how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The Company will assess the effects of SAB 108 and determine what adjustments, if any, would be made to its December 31, 2006 financial statements.
 
    On September 15, 2006 the FASB issued FASB Statement No. 157, Fair Value Measurements. SFAS No. 157 provides guidance for determining the fair value of assets and liabilities. This statement, which is effective for the Company on January 1, 2008, clarifies the application of fair value measurement, but it does not change the methodology used by the Company. The statement is not expected to have any impact on the Company’s financial statements.
 
    On September 29, 2006 the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement has applicability to the Company’s Supplemental Executive Retirement Plan, described in Footnote 9, and becomes effective for the Company as of December 31, 2006. The Company is evaluating the effect of this change on the Company’s balance sheet at December 31, 2006.
3.   All securities other than trading securities are classified as available-for-sale and are stated 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. The value of securities is reduced when unrealized losses are considered other-than-temporary and a new cost basis is established for the securities. The estimated loss for other-than-temporary impairment is included in net income for the period. Realized gains or losses on sales of securities available-for-sale are recorded using the specific identification method. Trading securities are valued at market value with any unrealized gains or losses included in net income.
4.   Certain prior period balances have been reclassified to conform to current period presentation.

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5.   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, 2006:
                                 
                    Total number of Shares (or Units)   Maximum Number of Shares
    Total Number of Shares   Average Price Paid per   Purchased as Part of Publicly   that May Yet Be Purchased
Period   (or Units) Purchased   Share (or Unit)   Announced Plans or Programs   Under the Plans or Programs
07/01/06 — 07/31/06
    40,000     65.80       40,000       1,806,200  
08/01/06 — 08/31/06
    343,800       66.38       343,800       1,462,400  
09/01/06 — 09/30/06
    163,100       65.80       163,100       1,299,300  
 
                               
 
    546,900  (1)     66.16       546,900       1,299,300  (2)
 
                               
 
(1)   During the third quarter of 2006, the Company repurchased an aggregate 346,200 shares of common stock pursuant to a repurchase program that we publicly announced on April 26, 2006, and there are no shares remaining to be purchased under this plan. During the third quarter of 2006, the Company also repurchased an aggregate of 200,700 shares of our common stock pursuant to a repurchase program that we publicly announced on July 6, 2006, (the “Program”) and there are 1,299,300 shares remaining to be purchased. We received no shares in payment for the exercise price of stock options.
 
(2)   On July 6, 2006, the Company’s Board of Directors authorized the Company to repurchase 1.5 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 thereunder.
    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, 2006, there were 922,987 antidilutive options compared to 69,392 antidilutive options at September 30, 2005.
 
6.   The Company adopted Statement of Financial Accounting Standards No. 123 (revised) “Share Based Payment”, (SFAS 123R) effective January 1, 2006. The Company previously applied APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for stock option plans and accordingly, no compensation cost had been recognized for these plans in the prior period financial statements. The Company has applied the Modified Prospective Application (MPA) in its implementation of the new accounting standard to determine the stock-based compensation expense for these plans in the current period. Prior period amounts have not been restated. As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the nine-month period ended September 30, 2006, are $5.2 million and $3.0 million lower, respectively, than if it had continued to account for stock-based compensation under APB Opinion 25. Basic and diluted earnings per share for the nine-month period ended September 30, 2006 are both $0.06 lower than if the Company had continued to account for stock-based compensation under APB Opinion 25.
 
    On September 30, 2006, 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 $3.1 million for the three months ended September 30, 2006, and $9.2 million for the nine months ended September 30, 2006, compared to $1.1 million and $3.1 million for the three and nine-month periods ending September 30, 2005, respectively. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $1.3 million for the three months ended September 30, 2006, and $3.8 million for the nine months ended September 30, 2006, compared to $0.5 million and $1.3 million for the three and nine month periods ending September 30, 2005, respectively. Prior year amounts include expense for restricted shares and restricted units, but do not include expense for stock options issued at market value. See the table below for a comparison of actual and pro-forma net income in 2006 and 2005, respectively.

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    For the three months ended   For the nine months ended
    September 30,   September 30,
Dollars in thousands, except for per share amounts   2006   2005   2006   2005
Net income, as reported
  $ 58,994     $ 59,810     $ 174,967     $ 172,978  
Add: Stock-based compensation included in reported net income, net of tax
    1,779       647       5,314       1,818  
Less: Stock-based employee compensation expense determined under the fair-value method for all awards, net of tax
    (1,779 )     (1,793 )     (5,314 )     (5,737 )
 
                               
Pro forma net income
    58,994       58,664       174,967       169,059  
Net income per share, basic, as reported
    1.23       1.22       3.59       3.52  
Pro forma net income per share, basic
    N/A       1.19       N/A       3.44  
Net income per share, diluted, as reported
    1.20       1.17       3.47       3.39  
Pro forma net income per share, diluted
    N/A       1.15       N/A       3.31  
 
    Stock Option Plan
 
    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 not to exceed 3.9 million shares of common stock. The Company believes that such awards better align the interest of its employees with those of its shareholders. Employee option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. These awards vest in 4 years and have 10-year contractual terms. Restricted stock awards generally vest over 5 years. 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.
 
    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,
    2006   2005   2006   2005
Expected volatility
    23.95 %     25.06 %     24.62 %     24.82 %
Weighted-average volatility
    24.50 %     25.40 %     23.99 %     24.68 %
Expected dividends
    2.59       2.14       2.24       2.14  
Expected term (in years)
    5.96       5.96       6.06       7.00  
Risk-free rate
    5.07       4.04       4.70       4.05  

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A summary of option activity under the Plan as of September 30, 2006 and changes during the nine-month period then ended are presented below:
                                 
                    Weighted-    
            Weighted-   Average   Aggregate
            Average   Remaining   Intrinsic
    Shares   Exercise   Contractual   Value
Options   (000)   Price   Term   ($000)
Outstanding at January 1, 2006
    4,375     $ 45.98       5.60     $ 92,213  
Granted
    476       75.57       9.50       (4,046 )
Exercised
    (322 )     40.05       4.09       (8,689 )
Forfeited or expired
    (64 )     61.46       7.60       (360 )
 
                               
Outstanding at September 30, 2006
    4,465       49.34       5.62       79,119  
Exercisable at September 30, 2006
    3,295       42.76       4.58       80,058  
The weighted-average grant-date fair value of options granted during the nine-month periods ended September 30, 2006 and 2005 was $19.61 and $16.96, respectively. The total intrinsic value of options exercised during the nine-month periods ended September 30, 2006 and 2005 was $8.7 million, and $12.6 million, respectively.
A summary of the status of the Company’s unvested options as of September 30, 2006 and changes during the nine-month period then ended are presented below:
                 
            Weighted-Average
            Grant-Date
Unvested Shares   Shares (000)   Fair Value
Unvested at January 1, 2006
    1,332     $ 19.23  
Granted
    476       19.57  
Vested
    (580 )     13.58  
Forfeited
    (58 )     14.46  
 
               
Unvested at September 30, 2006
    1,170       17.24  
 
               
    The number of shares vested during the nine-month period ended September 30, 2006 was 579,614. As of September 30, 2006, there was $16.6 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 2.3 years.
 
7.   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 Statement of Financial Accounting Standards 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 hedging instruments and 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. Effectiveness is measured retrospectively and prospectively, and the Company expects that the hedges will continue to be effective in the future. The Company did not have any significant undesignated hedges during 2006 or 2005.
 
    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 continued expectation that the hedge will remain effective prospectively.

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    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 on a quarterly basis using the hypothetical derivative method. 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 would be recognized immediately in other noninterest income in the consolidated statement of income.
 
    For fair value hedges, in which derivatives hedge the fair value of certain certificates of deposits, subordinated debt and other long-term debt, the interest rate swaps are structured so that all key terms of the swaps match those of the underlying debt transactions, therefore ensuring hedge effectiveness at inception. 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, therefore ensuring continuing effectiveness. For 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 ineffective portion, if any, of the changes in the fair value of these hedges (the differences between changes in the fair value of the interest rate swaps and the hedged items) would be recognized in other noninterest income in the consolidated statement of income.
 
    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 derivative instrument in a fair value hedge 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 derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, related amounts reported in other comprehensive income would be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.
 
8.   As previously reported the California Franchise Tax Board has taken the position that certain real estate investment trust (‘REIT’) and registered investment company (‘RIC’) tax deductions shall be disallowed under California law. As of September 30, 2006, the Company has recorded a $43.1 million state tax receivable for the years 2000, 2001 and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $28.1 million after giving effect to Federal tax benefits. Management is aggressively pursuing its claims for REIT and RIC refunds for the 2000 to 2004 tax years, however, no outcome can be predicted with certainty and an adverse outcome on the refund claims could result in a loss of all or some portion of the $28.1 million net state tax receivable.
 
9.   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 $4.5 million and $13.2 million for the three-month and nine-month periods ended September 30, 2006, compared to $5.0 million and $12.8 million for the three-month and nine-month periods ending September 30, 2005, respectively.
 
    The Company has a Supplemental Executive Retirement Plan (‘SERP’) for one of its executive officers. At September 30, 2006, there was a $3.2 million unfunded pension liability and a $0.8 million intangible asset related to the SERP. The total expense for the third quarter of 2006 was $0.2 million, and $0.6 million for the nine-month period ended September 30, 2006, compared to $0.2 million and $0.5 million for the third quarter of 2005 and the nine-month period ended September 30, 2005, respectively.
 
    The Company does not provide any other post-retirement benefits.

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10.   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 grouped together in a second reportable segment called Other.
 
    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 and New York.
 
    The Other segment includes the Bank’s Wealth Management Services division, all non-bank subsidiaries 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 an economic capital methodology. 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 overall statutory tax rate of 42%.
 
    Exposure to market risk is managed in the Treasury department. In order to allocate interest rate risk to the units comprising the Commercial and Private Banking segment, a fund transfer pricing (FTP) model is used. 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.

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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 table.
CITY NATIONAL CORPORATION
                                                 
Segment Results  
    Commercial     Commercial                              
    & Private     & Private                     Consolidated     Consolidated  
(Dollars in thousands)   Banking     Banking     Other     Other     Company     Company  
Three months ended September 30,   2006     2005     2006     2005     2006     2005  
Earnings Summary:
                                               
Net interest income
  $ 138,313     $ 138,041     $ 10,409     $ 18,273     $ 148,722     $ 156,314  
Provision for credit losses
                                   
Noninterest income
    16,538       16,542       48,250       37,007       64,788       53,549  
Depreciation and amortization
    1,474       1,263       3,358       3,288       4,832       4,551  
Noninterest expense
    88,807       87,333       27,030       20,756       115,837       108,089  
 
                                   
Income before income taxes
    64,570       65,987       28,271       31,236       92,841       97,223  
Provision for income taxes
    23,186       25,302       10,661       12,111       33,847       37,413  
 
                                   
Net income
  $ 41,384     $ 40,685     $ 17,610     $ 19,125     $ 58,994     $ 59,810  
 
                                   
 
                                               
Selected Average Balances:
                                               
Loans
  $ 9,806,132     $ 8,761,492     $ 206,977     $ 201,820     $ 10,013,109     $ 8,963,312  
Total Assets
    10,900,223       9,178,747       3,644,381       5,076,974       14,544,604       14,255,721  
Deposits
    10,411,638       11,143,522       1,493,421       715,018       11,905,059       11,858,540  
 
Performance measures:
                                               
Return on average assets
    1.5 %     1.8 %     1.9 %     1.5 %     1.6 %     1.7 %
                                                 
    Commercial     Commercial                              
    & Private     & Private                     Consolidated     Consolidated  
(Dollars in thousands)   Banking     Banking     Other     Other     Company     Company  
Nine months ended September 30,   2006     2005     2006     2005     2006     2005  
Earnings Summary:
                                               
Net interest income
  $ 409,558     $ 386,765     $ 45,568     $ 65,621     $ 455,126     $ 452,386  
Provision for credit losses
    (610 )                       (610 )      
Noninterest income
    48,779       49,273       129,527       105,993       178,306       155,266  
Depreciation and amortization
    4,326       3,885       9,828       9,771       14,154       13,656  
Noninterest expense
    267,950       253,138       73,060       63,114       341,010       316,252  
 
                                   
Income before income taxes
    186,671       179,015       92,207       98,729       278,878       277,744  
Provision for income taxes
    68,682       67,309       35,229       37,457       103,911       104,766  
 
                                   
Net income
  $ 117,989     $ 111,706     $ 56,978     $ 61,272     $ 174,967     $ 172,978  
 
                                   
 
                                               
Selected Average Balances:
                                               
Loans
  $ 9,640,644     $ 8,556,484     $ 207,783     $ 206,034     $ 9,848,427     $ 8,762,518  
Total Assets
    10,068,759       8,971,752       4,648,072       5,086,216       14,716,831       14,057,968  
Deposits
    10,567,403       11,016,938       1,241,643       687,272       11,809,046       11,704,210  
 
Performance measures:
                                               
Return on average assets
    1.6 %     1.7 %     1.6 %     1.6 %     1.6 %     1.7 %

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CITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
                                         
                            Percent change
    At or for the three months ended   from
    September 30,   June 30,   September 30,   June 30,   September 30,
Dollars in thousands, except per share amounts (1)   2006   2006   2005   2006   2005
    (Unaudited)   (Unaudited)   (Unaudited)                
For The Quarter
                                       
Net income
  $ 58,994     $ 58,741     $ 59,810       0 %     (1 )%
Net income per common share, basic
    1.23       1.20       1.22       3       1  
Net income per common share, diluted
    1.20       1.16       1.17       3       3  
Dividends, per common share
    0.41       0.41       0.36       0       14  
 
                                       
At Quarter End
                                       
Assets
  $ 14,616,758     $ 14,477,067     $ 14,429,444       1       1  
Securities
    3,292,100       3,335,008       4,072,930       (1 )     (19 )
Loans
    10,020,358       9,821,755       9,004,881       2       11  
Deposits
    11,892,017       11,978,830       12,115,714       (1 )     (2 )
Shareholders’ equity
    1,458,220       1,408,065       1,417,177       4       3  
Book value per common share
    30.61       29.26       28.85       5       6  
 
                                       
Average Balances
                                       
Assets
  $ 14,544,604     $ 14,782,469     $ 14,255,721       (2 )     2  
Securities
    3,244,896       3,581,206       4,066,635       (9 )     (20 )
Loans
    10,013,109       9,902,893       8,963,312       1       12  
Deposits
    11,905,059       11,930,729       11,858,540       (0 )     0  
Shareholders’ equity
    1,435,998       1,454,175       1,417,566       (1 )     1  
 
                                       
Selected Ratios
                                       
Return on average assets (annualized)
    1.61 %     1.59 %     1.66 %     1       (3 )
Return on average shareholders’ equity (annualized)
    16.30       16.20       16.74       1       (3 )
Corporation’s tier 1 leverage
    8.66       8.45       8.58       2       1  
Corporation’s tier 1 risk-based capital
    11.18       11.29       12.19       (1 )     (8 )
Corporation’s total risk-based capital
    14.22       14.36       15.70       (1 )     (9 )
Period-end shareholders’ equity to period-end assets
    9.98       9.73       9.82       3       2  
Dividend payout ratio, per share
    33.64       34.43       29.82       (2 )     13  
Net interest margin
    4.53       4.65       4.80       (3 )     (6 )
Efficiency ratio (2)
    55.65       55.20       52.90       1       5  
 
                                       
Asset Quality Ratios
                                       
Nonaccrual loans to total loans
    0.19 %     0.15 %     0.21 %     27       (10 )
Nonaccrual loans and OREO to total loans and OREO
    0.19       0.15       0.21       27       (10 )
Allowance for loan and lease losses to total loans
    1.59       1.60       1.70       (1 )     (6 )
Allowance for loan and lease losses to nonaccrual loans
    847.03       1,050.47       824.19       (19 )     3  
Net recoveries/(charge-offs) to average loans (annualized)
    0.08       0.05       0.25       60       (68 )
 
                                       
At Quarter End
                                       
Assets under management (3)
  $ 27,380,640     $ 26,852,922     $ 18,365,551       2       49  
Assets under management or administration (3)
    48,488,384       47,199,024       38,784,014       3       25  
 
(1)   Certain prior period balances have been restated to conform to the current period presentation.
 
(2)   The efficiency ratio is defined as noninterest expense excluding OREO expense divided by total revenue (net interest income on a tax-equivalent basis and noninterest income).
 
(3)   Excludes $7.8 billion, $9.3 billion, and $6.5 billion of assets under management for the investment affiliates in which the Company held minority ownership interests as of September 30, 2006, June 30, 2006, and September 30, 2005, respectively.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” below relating to “forward-looking” statements included in this report.
RESULTS OF OPERATIONS
Critical Accounting Policies
     The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified four policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These policies relate to the accounting for securities, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, derivatives and hedging activities, and stock-based performance plans. The Company, with the concurrence of the Audit & Risk Committee and the Compensation, Nominating and Governance Committee, has reviewed and approved these critical accounting policies, which are further described in Management’s Discussion and Analysis and Note 1 (Summary of Significant Accounting Policies) of the Notes to The Consolidated Financial Statements in the Company’s Form 10-K as of December 31, 2005.
Overview
     City National Corporation is the parent company of City National Bank, the second largest independent bank headquartered in California. The Corporation offers a full complement of banking, trust and investment services through 54 offices, including 12 full-service regional centers, in Southern California, the San Francisco Bay Area and New York City. The Corporation has a majority ownership interest in nine asset management affiliates and minority interests in one other.
     The Corporation recorded net income of $59.0 million, or $1.20 per share, for the third quarter of 2006 compared with $59.8 million or $1.17 per share, for the third quarter of 2005 and $58.7 million, or $1.16 per share, for the second quarter of 2006. Income for the quarter included the impact of a $1.6 million, or $0.02 per share after tax, adjustment to the way the Company had been amortizing goodwill as a result of the restructuring of its investment in one of its asset management affiliates in the third quarter of 2005.
Recent Developments
     On November 1, 2006, City National Corporation announced a definitive agreement to acquire Business Bank Corporation, the parent of Business Bank of Nevada (BBNV), in a cash and stock transaction currently valued at $161 million. Founded in 1995, BBNV had assets of $489.7 million, loans of $380.3 million and deposits of $427.6 million as of September 30, 2006. BBNV operates seven branch offices in Nevada as well as loan production offices in South Lake Tahoe and Scottsdale, Arizona. The acquisition is expected to close in the first quarter of 2007, subject to approval by banking regulators and Business Bank Corporation’s shareholders as well as the satisfaction of other customary closing conditions. It is expected to be neutral to earnings per share in 2007 and modestly accretive to earnings per share in 2008.
Highlights
  §   Revenue of $213.5 million represented a 2 percent increase from the third quarter of 2005.
 
  §   Average loans grew to $10.0 billion, up 12 percent from the third quarter of 2005. Lending rose in all major categories, and average loan balances reached $10.0 billion for the first time.
 
  §   Loan recoveries again exceeded charge-offs. Nonaccrual loans amounted to $18.8 million, up $0.2 million from the third quarter of 2005, and $3.8 million from the second quarter of this year.
 
  §   Average deposits of $11.9 billion were stable; essentially unchanged from both the third quarter of 2005 and the second quarter of this year.

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  §   Noninterest income grew to $64.8 million, up 21 percent from the third quarter of 2005, and 11 percent higher than the second quarter of this year. The increase was led by the growth of City National’s wealth management and international services fee revenue.
Outlook
     As disclosed in the Company’s press release on third-quarter earnings, management expects earnings per share this year to grow at a rate of between 1 percent and 4 percent as compared with 2005.
Net Interest Income
     Fully taxable-equivalent net interest income reached $152.0 million in the third quarter of 2006, down 5 percent from $159.3 million for the same period last year. Fully taxable-equivalent net interest income in the second quarter of 2006 was $157.3 million. Interest income increases, primarily attributable to increases in average commercial and residential mortgage loans, were more than offset by higher funding costs in the third quarter of 2006.
     The Company’s yield on earning assets reached 6.30 percent up from 5.67 percent in the third quarter of 2005 and 6.19 percent in the second quarter of 2006. The bank’s prime rate was 8.25 percent on September 30, 2006, unchanged from June 30, 2006, and up from 6.75 percent on September 30, 2005.
                                         
    For the three months ended           For the three    
    September 30,   %   months ended   %
Dollars in millions   2006   2005   Change   June 30, 2006   Change
Average Loans
  $ 10,013.1     $ 8,963.3       12     $ 9,902.9       1  
Average Total Securities
    3,244.9       4,066.6       (20 )     3,581.2       (9 )
Average Earning Assets
    13,322.5       13,135.7       1       13,581.2       (2 )
Average Deposits
    11,905.1       11,858.5       0       11,930.8       (0 )
Average Core Deposits
    9,905.7       10,784.5       (8 )     10,278.7       (4 )
Fully Taxable-Equivalent Net Interest Income
    152.0       159.3       (5 )     157.3       (3 )
Net Interest Margin
    4.53 %     4.80 %     (6 )     4.65 %     (3 )
     Third-quarter average loan balances reached $10.0 billion, up 12 percent over the same period last year and 1 percent from the second quarter of 2006. The commercial lending portfolio grew 13 percent over the third quarter of 2005, but fell 3 percent from the second quarter of 2006. Residential mortgage loans grew 11 percent from the third quarter of last year and 2 percent from the second quarter of 2006. Commercial real estate mortgage loans were 12 and 6 percent higher than the third quarter of 2005 and second quarter of 2006, respectively. Real estate construction loans increased 5 percent from the same period a year ago, and 2 percent from the second quarter of 2006.
     The Company’s average deposits totaled $11.9 billion in the third quarter of 2006, essentially unchanged from both the third quarter of 2005 and the second quarter of 2006.
     As part of its long-standing asset/liability management strategy, the Company uses “plain vanilla” interest rate swaps to hedge loans, deposits, and borrowings. The notional value of these swaps was $1.4 billion at September 30, 2006, down $0.1 billion from the third quarter of 2005, and slightly lower than the second quarter of this year. The swaps reduced net interest income by $3.3 million in the third quarter of 2006, compared with a $2.2 million reduction to net interest income in the second quarter of 2006, and $1.8 million addition to net interest income in the third quarter of 2005. These amounts included expense of $0.2 million, and income of $0.4 million, and $2.1 million, respectively, for interest rate swaps qualifying as fair value hedges. The income/(expense) from swaps qualifying as cash flow hedges was ($3.1 million) for the third quarter of 2006, compared with ($2.7 million) for the second quarter of 2006, and ($0.4 million) for the third quarter of 2005. The income (expense) from existing swaps of loans qualifying as cash-flow hedges expected to be recorded in net interest income within the next 12 months is ($6.7 million). Both the expense for the quarter and the projected expense for the next 12 months should be viewed in context with the benefit the Company has and will receive from the increases in interest rates.

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     Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. The following table presents the components of net interest income on a fully taxable-equivalent basis for the three and nine months ended September 30, 2006 and 2005.
Net Interest Income Summary
                                                 
    For the three months ended     For the three months ended  
    September 30, 2006     September 30, 2005  
            Interest     Average             Interest     Average  
    Average     income/     interest     Average     income/     interest  
Dollars in thousands   Balance     expense (2)     rate     Balance     expense (2)     rate  
Assets
                                               
Interest-earning assets
                                               
Loans
                                               
Commercial
  $ 3,827,157     $ 67,995       7.05 %   $ 3,375,856     $ 52,864       6.21 %
Commercial real estate mortgages
    2,054,808       38,751       7.48       1,828,786       34,437       7.47  
Residential mortgages
    2,801,163       37,653       5.38       2,519,033       33,046       5.25  
Real estate construction
    761,273       17,975       9.37       724,960       14,579       7.98  
Equity lines of credit
    374,863       7,469       7.91       309,942       4,762       6.10  
Installment
    193,845       3,703       7.58       204,735       3,636       7.05  
 
                                       
Total loans (1)
    10,013,109       173,546       6.88       8,963,312       143,324       6.34  
Due from banks — interest-bearing
    61,358       394       2.55       41,054       150       1.45  
Federal funds sold and securities purchased under resale agreements
    3,135       56       7.13       64,685       604       3.70  
Securities available-for-sale
    3,190,583       36,962       4.63       4,029,717       43,262       4.26  
Trading account securities
    54,313       715       5.22       36,918       368       3.95  
 
                                       
Total interest-earning assets
    13,322,498       211,673       6.30       13,135,686       187,708       5.67  
 
                                           
Allowance for loan losses
    (158,487 )                     (151,228 )                
Cash and due from banks
    427,543                       441,018                  
Other non-earning assets
    953,050                       830,245                  
 
                                           
Total assets
  $ 14,544,604                     $ 14,255,721                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity
                                               
Interest-bearing deposits
                                               
Interest checking accounts
  $ 705,647     $ 638       0.36     $ 794,758     $ 272       0.14  
Money market accounts
    3,223,908       20,892       2.57       3,505,532       11,503       1.30  
Savings deposits
    163,178       168       0.41       196,356       142       0.29  
Time deposits — under $100,000
    183,576       1,789       3.87       183,460       940       2.03  
Time deposits — $100,000 and over
    1,999,406       22,907       4.55       1,074,061       7,765       2.87  
 
                                       
Total interest-bearing deposits
    6,275,715       46,394       2.93       5,754,167       20,622       1.42  
 
                                               
Federal funds purchased and securities sold under repurchase agreements
    401,396       5,320       5.26       256,366       2,100       3.25  
Other borrowings
    557,504       7,911       5.63       544,638       5,674       4.13  
 
                                       
Total interest-bearing liabilities
    7,234,615       59,625       3.27       6,555,171       28,396       1.72  
 
                                           
Noninterest-bearing deposits
    5,629,344                       6,104,373                  
Other liabilities
    244,647                       178,611                  
Shareholders’ equity
    1,435,998                       1,417,566                  
 
                                           
Total liabilities and shareholders’ equity
  $ 14,544,604                     $ 14,255,721                  
 
                                           
Net interest spread
                    3.03 %                     3.95 %
Fully taxable-equivalent net interest income
          $ 152,048                     $ 159,312          
 
                                           
Net interest margin
                    4.53 %                     4.80 %
 
                                           
 
(1)   Includes average nonaccrual loans of $16,016 and $19,420 for 2006 and 2005, respectively.
 
(2)   Loan income includes loan fees of $3,324 and $6,897 for 2006 and 2005, respectively.

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Net Interest Income Summary
                                                 
    For the nine months ended     For the nine months ended  
    September 30, 2006     September 30, 2005  
            Interest     Average             Interest     Average  
    Average     income/     interest     Average     income/     interest  
Dollars in thousands   Balance     expense (2)     rate     Balance     expense (2)     rate  
Assets
                                               
Interest-earning assets
                                               
Loans
                                               
Commercial
  $ 3,857,919     $ 197,371       6.84 %   $ 3,235,232     $ 145,169       6.00 %
Commercial real estate mortgages
    1,957,074       109,403       7.47       1,834,576       98,328       7.17  
Residential mortgages
    2,735,238       109,106       5.32       2,439,783       95,266       5.21  
Real estate construction
    749,126       50,627       9.04       756,180       41,528       7.34  
Equity lines of credit
    353,878       20,077       7.59       290,900       12,531       5.76  
Installment
    195,192       11,051       7.57       205,847       10,541       6.85  
 
                                       
Total loans (1)
    9,848,427       497,635       6.76       8,762,518       403,363       6.15  
Due from banks — interest-bearing
    50,541       873       2.31       47,553       479       1.35  
Federal funds sold and securities purchased under resale agreements
    22,286       799       4.79       59,166       1,362       3.08  
Securities available-for-sale
    3,545,977       121,031       4.55       4,047,173       130,045       4.30  
Trading account securities
    50,212       2,141       5.70       37,162       891       3.21  
 
                                       
Total interest-earning assets
    13,517,443       622,479       6.16       12,953,572       536,140       5.53  
 
                                           
Allowance for loan losses
    (156,806 )                     (149,244 )                
Cash and due from banks
    436,236                       441,415                  
Other non-earning assets
    919,958                       812,225                  
 
                                           
Total assets
  $ 14,716,831                     $ 14,057,968                  
 
                                           
 
                                               
Liabilities and Shareholders’ Equity
                                               
Interest-bearing deposits
                                               
Interest checking accounts
  $ 756,773     $ 1,600       0.28     $ 833,782     $ 631       0.10  
Money market accounts
    3,320,617       53,779       2.17       3,586,856       30,867       1.15  
Savings deposits
    171,856       494       0.38       200,153       403       0.27  
Time deposits — under $100,000
    179,767       4,250       3.16       182,085       1,977       1.45  
Time deposits — $100,000 and over
    1,637,776       50,252       4.10       972,182       19,369       2.66  
 
                                       
Total interest-bearing deposits
    6,066,789       110,375       2.43       5,775,058       53,247       1.23  
 
                                               
Federal funds purchased and securities sold under repurchase agreements
    583,943       20,969       4.80       275,135       5,821       2.83  
Other borrowings
    652,173       26,273       5.39       527,580       15,171       3.84  
 
                                       
Total interest-bearing liabilities
    7,302,905       157,617       2.89       6,577,773       74,239       1.51  
 
                                           
Noninterest-bearing deposits
    5,742,257                       5,929,152                  
Other liabilities
    214,933                       174,479                  
Shareholders’ equity
    1,456,736                       1,376,564                  
 
                                           
Total liabilities and shareholders’ equity
  $ 14,716,831                     $ 14,057,968                  
 
                                           
Net interest spread
                    3.27 %                     4.02 %
Fully taxable-equivalent net interest income
          $ 464,862                     $ 461,901          
 
                                           
Net interest margin
                    4.60 %                     4.76 %
 
                                           
 
(1)   Includes average nonaccrual loans of $14,574 and $25,434 for 2006 and 2005, respectively.
 
(2)   Loan income includes loan fees of $12,541 and $18,640 for 2006 and 2005, respectively.

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     Net interest income is impacted by the volume (changes in volume multiplied by prior rate), rate (changes in rate multiplied by prior volume), and mix of interest-earning assets and interest-bearing liabilities. The following table shows changes in net interest income on a fully taxable-equivalent basis between the third quarter and first nine months of 2006 and the third quarter and first nine months of 2005, as well as between the third quarter and first nine months of 2005 and the third quarter and first nine months of 2004.
Changes In Net Interest Income
                                                 
    For the three months ended September 30,     For the three months ended September 30,  
Dollars in thousands   2006 vs 2005     2005 vs 2004  
    Increase (decrease)     Net     Increase (decrease)     Net  
    due to     increase     due to     increase  
    Volume     Rate     (decrease)     Volume     Rate     (decrease)  
Interest earned on:
                                               
Loans
  $ 17,497     $ 12,724     $ 30,221     $ 11,706     $ 17,755     $ 29,461  
Due from banks — interest-bearing
    96       148       244       4       62       66  
Securities available-for-sale
    (9,749 )     3,450       (6,299 )     4,236       (364 )     3,872  
Federal funds sold and securities purchased under resale agreements
    (844 )     296       (548 )     (3,462 )     1,616       (1,846 )
Trading account securities
    206       141       347       3       277       280  
 
                                   
Total interest-earning assets
    7,206       16,759       23,965       12,487       19,346       31,833  
 
                                   
 
                                               
Interest paid on:
                                               
Interest checking deposits
    (34 )     400       366       (9 )     105       96  
Money market deposits
    (992 )     10,381       9,389       (768 )     4,878       4,110  
Savings deposits
    (27 )     53       26       (7 )     21       14  
Time deposits
    8,599       7,392       15,991       1,165       3,808       4,973  
Other borrowings
    1,741       3,716       5,457       675       3,438       4,113  
 
                                   
Total interest-bearing liabilities
    9,287       21,942       31,229       1,056       12,250       13,306  
 
                                   
 
  $ (2,081 )   $ (5,183 )   $ (7,264 )   $ 11,431     $ 7,096     $ 18,527  
 
                                   
                                                 
    For the nine months ended September 30,     For the nine months ended September 30,  
Dollars in thousands   2006 vs 2005     2005 vs 2004  
    Increase (decrease)     Net     Increase (decrease)     Net  
    due to     increase     due to     increase  
    Volume     Rate     (decrease)     Volume     Rate     (decrease)  
Interest earned on:
                                               
Loans
  $ 52,363     $ 41,909     $ 94,272     $ 31,389     $ 43,327     $ 74,716  
Due from banks — interest-bearing
    32       362       394       (38 )     201       163  
Securities available-for-sale
    (16,434 )     7,420       (9,014 )     16,009       (4,415 )     11,594  
Federal funds sold and securities purchased under resale agreements
    (1,098 )     535       (563 )     (5,310 )     2,674       (2,636 )
Trading account securities
    389       861       1,250       26       700       726  
 
                                   
Total interest-earning assets
    35,252       51,087       86,339       42,076       42,487       84,563  
 
                                   
 
                                               
Interest paid on:
                                               
Interest checking deposits
    (62 )     1,031       969       7       108       115  
Money market deposits
    (2,457 )     25,369       22,912       (316 )     11,808       11,492  
Savings deposits
    (61 )     152       91       (29 )     28       (1 )
Time deposits
    15,902       17,254       33,156       1,320       9,302       10,622  
Other borrowings
    14,174       12,076       26,250       1,667       9,526       11,193  
 
                                   
Total interest-bearing liabilities
    27,496       55,882       83,378       2,649       30,772       33,421  
 
                                   
 
  $ 7,756     $ (4,795 )   $ 2,961     $ 39,427     $ 11,715     $ 51,142  
 
                                   
     The impact of interest rate swaps, which affect interest income on loans, and interest expense on deposits and borrowings, is included in rate changes.

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Provision for Credit Losses
     The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses and provision for credit losses. The provision is the expense recognized in the income statement to adjust the allowance and the reserve for off-balance sheet credit commitments to the levels deemed appropriate by management, as determined through application of the Company’s allowance methodology procedures. (See “Critical Accounting Policies” on page 26 of the Company’s Form 10-K for the year ended December 31, 2005.)
     The provision for credit losses primarily reflects management’s ongoing assessment of the credit quality and growth of the loan and commitment portfolios as well as the levels of net loan charge-offs/recoveries, nonaccrual loans, and changes in the economic environment during the period. For the three months ended September 30, 2006, December 31, 2005, and September 30, 2005, net recoveries totaled $1.9 million, $2.1 million, and $5.7 million, respectively. For these periods, nonaccrual loans at period end totaled $18.8 million, $14.4 million, and $18.6 million, respectively.
Noninterest Income
     Third-quarter 2006 noninterest income of $64.8 million was 21 percent higher than the third quarter of 2005 due primarily to continuing growth of the Company’s wealth management and international services revenue. Noninterest income was 30 percent of total revenue in the third quarter of 2006, compared to 26 percent for the third quarter of 2005 and 28 percent for the second quarter of 2006.
Wealth Management
     Trust and investment fees increased 46 percent over the third quarter of 2005, primarily due to an increase in assets under management or administration. Assets under direct management grew 49 percent from the same period last year, largely as the result of the acquisition of Independence Investments, new business, a strong relative investment performance and higher market values. Increases in market values are reflected in fee income primarily on a trailing-quarter basis. Not including the acquisition of Independence, the Company’s trust and investment fee income in the third quarter of 2006 grew 12 percent from the same period last year. Total noninterest income for the quarter grew 8 percent from last year, excluding the acquisition of Independence Investments.
                                         
    At or for the           At or for the    
    three months ended           three months    
    September 30,   %   ended   %
Dollars in millions   2006   2005   Change   June 30, 2006   Change
Trust and Investment Fee Revenue
  $ 30.0     $ 20.5       46     $ 24.9       20  
Brokerage and Mutual Fund Fees
    13.1       10.9       20       12.3       7  
Assets Under Management (1)
    27,380.6       18,365.6       49       26,852.9       2  
Assets Under Management or Administration (1)
    48,488.4       38,784.0       25       47,199.0       3  
 
(1)   Excludes $7.8 billion, $6.5 billion, and $9.3 billion of assets under management for the investment affiliates in which City National held minority ownership interests as of September 30, 2006, September 30, 2005, and June 30, 2006, respectively.
Other Noninterest Income
     Third-quarter cash management and deposit transaction fees fell 5 percent from the same period last year but grew 4 percent from the second quarter of 2006.
     International service fees for the third quarter of 2006 grew 12 percent from the same period last year but fell 1 percent from the second quarter of this year. International services income includes foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection and other fee income. International services fees are recognized when earned, except for the fees on commercial and standby letters of credit, which are deferred and recognized in income over the terms of the letters of credit.

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     Other noninterest income for the third quarter of 2006 amounted to $6.3 million, up 13 percent, or $0.7 million, from the same period one year ago.
Noninterest Expense
     Third-quarter 2006 noninterest expense amounted to $120.7 million, up 7 percent from the same period last year and 1 percent from the second quarter of 2006. Amortization of intangibles was down $1.9 million from the third quarter of 2005 and $2.0 million from the second quarter of this year, reflecting a $1.6 million, or $0.02 per share after tax, adjustment to the way the Company had been amortizing goodwill as a result of the restructuring of its investment in one of its asset management affiliates in the third quarter of 2005. Approximately $0.8 million of the adjustment relates to amortization recorded in 2005. Excluding this adjustment, the acquisition of Independence Investments and the expensing of stock options, noninterest expense grew 2 percent from the third quarter of last year.
     Staffing expenses for the quarter amounted to $75.3 million, up 13 percent from one year ago largely due to the acquisition of Independence Investments and stock option expense of $1.7 million.
     Legal and professional fees fell 15 percent from the third quarter of 2005, and 1 percent from the second quarter of 2006 as the outside expenses to strengthen compliance with the Bank Secrecy Act and the USA Patriot Act were substantially incurred before the end of 2005.
     The Company’s third-quarter efficiency ratio was 55.65 percent compared with 52.90 percent for the third quarter of 2005, and 55.20 percent for the second quarter of 2006.
Stock-Based Compensation Expense
     The Company adopted Statement of Financial Accounting Standards No. 123 (revised) “Share Based Payment”, (SFAS 123R) effective January 1, 2006. The Company previously applied APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for stock option plans, and accordingly, no compensation cost had been recognized for these plans in the prior period financial statements. The Company has applied the Modified Prospective Application (MPA) in its implementation of the new accounting standard. As such, the Company has recognized stock-based compensation expense for stock options, restricted stock and restricted unit dividends in the current year only. Prior period amounts have not been restated. The compensation cost for all stock-based compensation awards for the three and nine-month periods ended September 30, 2006 was $3.1 million and $9.2 million, respectively. If the Company had accounted for stock option expense under SFAS 123R during the prior year, the expense recognized in income would have been $3.1 million and $9.9 million for the three and nine-month periods ended September 30, 2005, respectively. The total income tax benefit recognized in the income statement related to stock-based compensation was $1.3 million and $3.8 million for the three and nine-month periods ended September 30, 2006, respectively. The total income tax benefit for stock-based compensation arrangements that would have been recognized in the income statement, for the three and nine-month periods ended September 30, 2005 had the Company accounted for stock option expense under SFAS 123R would have been $1.3 million and $4.2 million, respectively. See the disclosures in footnote 6 for a presentation of prior year amounts with the stock option expense that would have been recognized had the Company adopted the new standard in these periods.
     The Company did not make any modifications to outstanding stock options prior to the adoption of SFAS 123R.
     As of September 30, 2006 there was $16.6 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 2.3 years. The total number of shares vested during the nine months ended September 30, 2006 was 579,614.
Minority Interest
     Minority interest expense consists of preferred stock dividends on the Bank’s real estate investment trust subsidiaries as well as the minority ownership share of earnings of the Corporation’s majority-owned asset management firms.

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Segment Results
     Our reportable segments are Commercial and Private Banking and Other. For a more complete description of our segments, including summary financial information, see Note 10 to the Unaudited Financial Statements.
Commercial and Private Banking
     Net income for the Commercial and Private Banking segment rose 2 percent to $41.4 million for the third quarter of 2006 compared to the third quarter of 2005. For the first nine months of 2006, net income increased 6 percent over 2005 to $118.0 million. Total revenue of $154.9 million in the third quarter of 2006 was unchanged from the $154.6 million recorded in the third quarter of 2005. Year-to-date (YTD), revenue for the Commercial and Private Banking segment increased 5 percent to $458.3 million. The increase in revenue for the quarter and YTD was driven by strong loan growth, primarily in commercial and industrial and residential mortgage loans, offset by higher funding costs due to a change in the mix of deposits and an overall increase in deposit rates. Average loans were $9.8 billion in the third quarter of 2006, up 12 percent from $8.8 billion in the third quarter of 2005. Average deposits were $10.4 billion in the third quarter of 2006, a decline of 7 percent from the prior year. Noninterest income was unchanged in the third quarter of 2006 compared to the third quarter of 2005, and decreased slightly for the first nine months of 2006 compared to the first nine months of 2005. Noninterest expense was 2 percent, or $1.5 million, higher in the third quarter of 2006 compared to the prior year. YTD, noninterest expense was 6 percent higher in 2006 than in 2005, due to the expenses associated with the three new branches opened in 2005, new online products and services and higher salary and benefits costs, including the expense for unvested stock options.
Other
     Net income for the Other segment declined $1.5 million, or 8 percent, in the third quarter of 2006, and $4.3 million, or 7 percent, YTD, compared to the prior year. Although we had strong revenue and earnings growth in our Wealth Management and asset management affiliates, including the impact of the acquisition of Independence Investments in the second quarter of 2006, it was more than offset by activity related to the Asset Liability Funding Center, particularly lower prepayment fees and higher interest expense on interest rate swaps, and lower earnings on average unallocated equity. Total revenue for the Other segment rose 6 percent for the third quarter of 2006 compared to the third quarter of 2005, to $58.7 million. YTD, total revenue increased 2 percent in 2006 to $175.1 million. Total noninterest expense increased 26 percent for the third quarter of 2006 compared to the third quarter of 2005, and 14 percent YTD, related to the acquisition of Independence Investments, increases in staff and the expensing of stock options. Total noninterest expense includes the previously mentioned $1.6 million adjustment to goodwill amortization for one of the asset management affiliates, of which $0.8 million relates to the prior year.
Income Taxes
     The third-quarter 2006 effective tax rate was 36.5 percent, compared with 38.5 percent in the third quarter of last year. The lower rate is a result of changes in estimates and a true-up of prior year tax adjustments. The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including tax-exempt income, interest on bank-owned life insurance and affordable housing investments.
     The Company’s tax returns are being audited by the Internal Revenue Service for the years 2002-2003, and by the California Franchise Tax Board for the years 1998-2004. From time to time, there may be differences in opinions with respect to the tax treatment accorded transactions. If a tax position which was previously recognized on the financial statements is no longer “more likely than not” to be sustained upon a challenge from the taxing authorities, the tax benefit from the tax position will be derecognized. As of September 30, 2006, the Company does not have any tax positions which dropped below a “more likely than not” threshold.
     As previously reported the California Franchise Tax Board has taken the position that certain real estate investment trust (‘REIT’) and registered investment company (‘RIC’) tax deductions should be disallowed under California law. While management continues to believe that the tax benefits realized in previous years are appropriate, the Company deemed it prudent to participate in the statutory Voluntary Compliance Initiative–Option 2, requiring payment of all California taxes and interest on potential tax exposures from the 2000- 2002 tax years. The Company may then claim a refund for the taxes paid while avoiding potential penalties. The Company has elected to proceed with its claim for refund as allowed by law. As of September 30, 2006, the Company had a $43.1 million state tax receivable for the years 2000, 2001 and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $28.1 million after giving effect to Federal tax benefits. Although management is aggressively pursuing its claims for REIT and RIC refunds for the 2000 to 2004 tax years, no outcome can be predicted with certainty and an adverse outcome on the refund claims could result in a loss of all or a portion of the net $28.1 million state tax receivable.

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BALANCE SHEET ANALYSIS
     Total assets were $14.6 billion at September 30, 2006 compared to $14.4 billion at September 30, 2005, and $14.5 billion at June 30, 2006. Average assets for the third quarter of 2006 were 2 percent higher than the third quarter of 2005, primarily due to the increase in average loans.
     Total average interest-earning assets for the third quarter of 2006 were $13.3 billion, an increase of 1 percent over average interest-earning assets for the third quarter of 2005 of $13.1 billion and a decrease of 2 percent from average interest-earning assets for the second quarter of 2006 of $13.6 billion.
Securities
     Comparative period-end securities portfolio balances are presented below:
Securities Available-for-Sale
                                                 
    September 30,     December 31,     September 30,  
    2006     2005     2005  
Dollars in thousands   Cost     Fair Value     Cost     Fair Value     Cost     Fair Value  
U.S. Treasury
  $ 35,664     $ 35,591     $ 92,127     $ 91,147     $ 92,395     $ 91,215  
Federal Agency
    363,216       356,383       724,728       710,178       728,446       716,030  
CMO’s
    1,364,080       1,328,037       1,578,948       1,543,068       1,532,400       1,507,752  
Mortgage-backed
    1,061,761       1,025,646       1,258,433       1,224,400       1,304,966       1,279,751  
State and Municipal
    343,104       347,390       325,630       327,882       321,602       326,095  
 
                                   
Total debt securities
    3,167,825       3,093,047       3,979,866       3,896,675       3,979,809       3,920,843  
Equity securities
    80,178       82,183       97,118       102,586       104,557       109,453  
 
                                   
Total securities
  $ 3,248,003     $ 3,175,230     $ 4,076,984     $ 3,999,261     $ 4,084,366     $ 4,030,296  
 
                                   
     At September 30, 2006, securities available-for-sale totaled $3.2 billion, a decrease of $0.9 billion compared with holdings at September 30, 2005. At September 30, 2006, the portfolio had a net unrealized loss of $72.8 million compared with net unrealized losses of $77.7 million at December 31, 2005 and $54.1 million at September 30, 2005. There is no other-than-temporary impairment as the unrealized losses are due to changes in interest rates and the Company has the ability and intent to hold the securities until their maturities. The average duration of total available-for-sale securities at September 30, 2006 was 3.3 years. This duration compares with 3.0 years at both December 31, 2005 and at September 30, 2005. Duration provides a measure of fair value sensitivity to changes in interest rates. The average duration is within the investment guidelines set by the Company’s Asset/Liability Committee and the interest-rate risk guidelines set by the Board of Directors. See “Asset/Liability Management” for a discussion of the Company’s interest rate position.
     The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities included in the securities portfolio as of September 30, 2006, except for mortgage-backed securities which are allocated according to final maturities. Final maturities will differ from contractual maturities because mortgage debt issuers may have the right to repay obligations prior to contractual maturity. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent.

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Debt Securities Available-for-Sale
                                                                                 
    One year     Over 1 year     Over 5 years              
    or less     thru 5 years     thru 10 years     Over 10 years     Total  
            Yield             Yield             Yield             Yield             Yield  
Dollars in thousands   Amount     (%)     Amount     (%)     Amount     (%)     Amount     (%)     Amount     (%)  
U.S. Treasury
  $ 35,591       3.26                                                       35,591       3.26  
                                                                                 
Federal Agency
    110,705       3.45       245,678       3.58                               356,383       3.54  
                                                                                 
Mortgage-backed
    143,589       4.16       66,396       4.18       256,562       4.25       1,887,137       4.51       2,353,684       4.45  
                                                                                 
State and Municipal
    21,812       4.11       96,220       4.14       140,947       3.87       88,410       3.95       347,389       3.99  
 
                                                                     
                                                                                 
Total debt securities
  $ 311,697       3.43     $ 408,294       3.82     $ 397,509       4.11     $ 1,975,547       4.49     $ 3,093,047       4.25  
 
                                                                     
 
                                                                               
Amortized cost
  $ 316,698             $ 415,021             $ 402,841             $ 2,033,265             $ 3,167,825          
 
                                                                     
     Dividend income included in interest income on securities in the Unaudited Consolidated Statements of Income for the third quarter of 2006 and 2005 was $1.5 million and $0.8 million, respectively.
Loan Portfolio
     A comparative period-end loan table is presented below:
Loans
                         
    September 30,     December 31,     September 30,  
Dollars in thousands   2006     2005     2005  
Commercial
  $ 3,609,149     $ 3,388,640     $ 3,254,863  
                         
Commercial real estate mortgages
    2,066,373       1,860,262       1,841,111  
                         
Residential mortgages
    2,830,761       2,644,030       2,571,537  
                         
Real estate construction
    757,742       721,890       711,755  
                         
Equity lines of credit
    384,830       333,548       317,703  
                         
Installment
    197,871       200,296       195,168  
                         
Lease financing
    173,632       116,936       112,744  
 
                 
                         
Total loans, gross
    10,020,358       9,265,602       9,004,881  
                         
Less allowance for loan and lease losses
    (159,063 )     (153,983 )     (152,920 )
 
                 
                         
Total loans, net
  $ 9,861,295     $ 9,111,619     $ 8,851,961  
 
                 
     Total gross loans at September 30, 2006 were 8 percent and 11 percent higher than at December 31, 2005 and September 30, 2005, respectively.
     The following table presents information concerning nonaccrual loans, OREO, loans which are contractually past due 90 days or more as to interest or principal payments and still accruing, and restructured loans. Company policy requires that a loan be placed on nonaccrual status if (1) either principal or interest payments are 90 days past due, unless the loan is both well secured and in process of collection, (2) full collection of interest or principal becomes uncertain, regardless of the time period involved or (3) regulators’ ratings of credits suggest that the loan be placed on nonaccrual.

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    September 30     December 31,     September 30  
Dollars in thousands   2006     2005     2005  
Nonaccrual loans:
                       
Commercial
  $ 10,416     $ 5,141     $ 14,917  
Commercial real estate morgtages
    8,094       923       955  
Residential mortgages
          294       2,259  
Real estate construction
          7,650        
Equity lines of credit
          21       22  
Installment
    269       371       401  
 
                 
Total
    18,779       14,400       18,554  
OREO
                 
 
                 
Total nonaccrual loans and OREO
  $ 18,779     $ 14,400     $ 18,554  
 
                 
 
                       
Total nonaccrual loans as a percentage of total loans
    0.19 %     0.16 %     0.21 %
Total nonaccrual loans and OREO as a percentage of total loans and OREO
    0.19       0.16       0.21  
Allowance for loan and lease losses to total loans
    1.59       1.66       1.70  
Allowance for loan and lease losses to nonaccrual loans
    847.03       1,069.33       824.19  
 
                       
Loans past due 90 days or more on accrual status:
                       
Other
  $ 27     $     $  
 
                 
Total
  $ 27     $     $  
 
                 
     At September 30, 2006, there were $16.6 million of impaired loans included in nonaccrual loans, with an allowance allocation of $4.0 million. On a comparable basis, at December 31, 2005, there were $12.3 million of impaired loans, which had an allowance allocation of $1.0 million, while at September 30, 2005, impaired loans were $16.6 million with an allowance allocation of $2.6 million. The assessment for impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market price of the debt may be used to assess impairment. Additionally, some impaired loans with commitments of less than $500,000 are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement.
     If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment allowance is recognized by creating or adjusting an existing allocation of the allowance for loan and lease losses. The Company’s policy is to record cash receipts on impaired loans first as reductions in principal and then as interest income.
     The following table summarizes the changes in nonaccrual loans for the three and nine months ending September 30, 2006 and 2005.
Changes in Nonaccrual Loans
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
Dollars in thousands   2006     2005     2006     2005  
Balance, beginning of period
  $ 15,001     $ 22,161     $ 14,400     $ 34,638  
Loans placed on nonaccrual
    10,299       2,287       19,870       13,272  
Charge-offs
    (326 )     (1,526 )     (954 )     (5,945 )
Loans returned to accrual status
    (220 )     (154 )     (701 )     (4,333 )
Repayments (including interest applied to principal)
    (5,975 )     (4,214 )     (13,836 )     (19,078 )
 
                       
Balance, end of period
  $ 18,779     $ 18,554     $ 18,779     $ 18,554  
 
                       

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     In addition to loans in nonaccrual status disclosed above, management has also identified $8.9 million of credits to four borrowers where the ability to comply with the present loan repayment terms in the future is questionable. However, the inability of the borrowers to comply with repayment terms was not sufficiently probable to place the loans on nonaccrual status at September 30, 2006. This amount was determined based on analysis of information known to management about the borrowers’ financial condition and current economic conditions.
     Management’s classification of credits as nonaccrual or problems does not necessarily indicate that the principal is uncollectible in whole or in part.
Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments
     At September 30, 2006, the allowance for loan and lease losses was $159.1 million or 1.59 percent of outstanding loans and the reserve for off-balance sheet credit commitments was $15.7 million. The process used in the determination of the adequacy of the reserve for off-balance sheet credit commitments is consistent with the process for the allowance for loan and lease losses.

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The following tables summarize the changes in the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments for the three and nine months ended September 30, 2006 and 2005.
Changes in Allowance for Loan and Lease Losses
                                 
    For the three months ended     For the nine months ended  
    September 30     September 30  
Dollars in thousands   2006     2005     2006     2005  
Loans outstanding
  $ 10,020,358     $ 9,004,881     $ 10,020,358     $ 9,004,881  
 
                       
Average amount of loans outstanding
  $ 10,013,109     $ 8,963,312     $ 9,848,427     $ 8,762,518  
 
                       
Balance of allowance for loan and lease losses, beginning of period
  $ 157,580     $ 147,930     $ 153,983     $ 148,568  
Loans charged off:
                               
Commercial
    (430 )     (2,203 )     (2,239 )     (5,570 )
Real estate and other
                (94 )     (1,898 )
Equity lines of credit
    (11 )           (11 )      
Installment
    (24 )     (9 )     (62 )     (65 )
 
                       
Total loans charged off
    (465 )     (2,212 )     (2,406 )     (7,533 )
 
                       
Less recoveries of loans previously charged off:
                               
Commercial
    2,342       6,416       7,066       12,967  
Real estate and other
    18       1,516       999       1,666  
Equity lines of credit
                       
Installment
    34       22       87       64  
 
                       
Total recoveries
    2,394       7,954       8,152       14,697  
 
                       
Net loans recovered / (charged off)
    1,929       5,742       5,746       7,164  
Provision for credit losses
                (610 )      
Transfers to reserve for off-balance sheet credit commitments
    (446 )     (752 )     (56 )     (2,812 )
 
                       
Balance, end of period
  $ 159,063     $ 152,920     $ 159,063     $ 152,920  
 
                       
 
                               
Total net (charge-offs) recoveries to average loans (annualized)
    0.08 %     0.25 %     0.08 %     0.11  
 
                       
 
                               
Ratio of allowance for loan and lease losses to total period end loans
    1.59 %     1.70 %     1.59 %     1.70 %
 
                       
Changes in Reserve for Off-balance Sheet Credit Commitments
                                 
    For the three months ended     For the nine months ended  
    September 30,     September 30,  
Dollars in thousands   2006     2005     2006     2005  
Balance at beginning of period
  $ 15,206     $ 13,811     $ 15,596     $ 11,751  
Provision for credit losses/transfers
    446       752       56       2,812  
 
                       
Balance at end of period
  $ 15,652     $ 14,563     $ 15,652     $ 14,563  
 
                       

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Other Assets
     Other assets included the following:
                         
            Other Assets        
    September 30,     December 31,     September 30,  
Dollars in thousands   2006     2005     2005  
Accrued interest receivable
  $ 72,494     $ 64,958     $ 61,182  
Claim in receivership and other assets
    11,042       11,042       11,467  
Deferred Compensation Fund assets
    33,963       28,949       27,302  
Income tax refund
    43,133       43,178       43,178  
PML loans
    16,740       11,513       22,024  
Other
    114,475       58,295       54,761  
 
                 
Total other assets
  $ 291,847     $ 217,935     $ 219,914  
 
                 
     See “Income Taxes” for a discussion of income tax refund receivable of $43.1 million.
Deposits
     Deposits totaled $11.9 billion at September 30, 2006, a decrease of 2 percent compared with $12.1 billion at both September 30, 2005, and December 31, 2005.
     Core deposits, which continued to provide substantial benefits to the Bank’s cost of funds, were 83 percent of total deposits at September 30, 2006, but declined $1.2 billion since December 31, 2005. Included in core deposits are Specialty Deposits. Average Specialty Deposits, primarily from title and escrow companies, were $1.2 billion for the three-month period ended September 30, 2006, compared with $1.5 billion for the three months ended December 31, 2005 and $1.7 billion for the three months ended September 30, 2005. These deposits fluctuate with conditions in the real estate market. These deposits declined more than usual this year because of a general slowdown in transaction volumes for residential housing. At September 30, 2006 quarterly average Specialty Deposits accounted for 10 percent of total quarterly average deposits.
Borrowings
     Borrowings of $1.1 billion at September 30, 2006 reflect an increase of $351 million from September 30, 2005, and an increase of $282 million from December 31, 2005 as a result of loans growing faster than deposits. The increase is primarily in Federal Funds Purchased and other short-term borrowings.
Off Balance Sheet
     In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the consolidated balance sheet. Commitments to extend credit are agreements to lend to a client, as long as there is no violation of certain conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case-by-case basis.
     The Company had off-balance sheet credit commitments aggregating $4.9 billion at September 30, 2006, compared with $4.6 billion at December 31, 2005 and $4.3 billion at September 30, 2005. In addition, the Company had $674.7 million outstanding in bankers’ acceptances and letters of credit of which $657.7 million related to standby letters of credit at September 30, 2006. At December 31, 2005, the Company had $498.7 million in outstanding bankers’ acceptances and letters of credit of which $480.7 million related to standby letters of credit. Substantially all of the Company’s loan commitments are on a variable rate basis and are comprised of real estate and commercial loan commitments.
     As of September 30, 2006, the Company had private equity fund commitments of $44.7 million, of which $13.9 million was funded. As of December 31, 2005 and September 30, 2005, the Company had private equity fund commitments of $40.7 million and $16.7 million, respectively, of which $11.1 million and $9.6 million was funded. In addition, the Company had unfunded Affordable Housing Fund commitments of $32.8 million, $36.3 million, and $33.1 million as of September 30, 2006, December 31, 2005, and September 30, 2005, respectively.

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CAPITAL ADEQUACY REQUIREMENT
     The following table presents the regulatory standards for well-capitalized institutions and the capital ratios for the Corporation and the Bank at September 30, 2006, December 31, 2005, and September 30, 2005.
                                 
    Regulatory            
    Well-Capitalized   September 30,   December 31,   September 30,
    Standards   2006   2005   2005
     
City National Corporation
                               
Tier 1 leverage
    N/A %     8.66 %     8.82 %     8.58 %
Tier 1 risk-based capital
    6.00       11.18       12.33       12.19  
Total risk-based capital
    10.00       14.22       15.53       15.70  
 
                               
City National Bank
                               
Tier 1 leverage
    5.00       9.13       9.26       9.08  
Tier 1 risk-based capital
    6.00       11.75       12.86       12.86  
Total risk-based capital
    10.00       14.78       16.05       16.35  
     Tier 1 capital ratios include the impact of $25.4 million of preferred stock issued by real estate investment trust subsidiaries of the Bank, which is included in minority interest in consolidated subsidiaries.
     Shareholders’ equity to assets as of September 30, 2006 was 10.0 percent, compared with 9.8 percent at September 30, 2005 and was 10.0 percent as of December 31, 2005.
     The accumulated other comprehensive loss on available-for-sale securities and interest rate swaps at September 30, 2006 was $46.4 million compared with $36.9 million at September 30, 2005 and $51.6 million at December 31, 2005.
     The following table provides information about purchases by the Company during the nine months ended September 30, 2006 of equity securities that are registered by the Company pursuant of Section 12 of the Exchange Act.
                                 
                    Total number of Shares    
    Total Number of   Average   (or Units) Purchased as   Maximum Number of
    Shares (or   Price   Part of Publicly   Shares that May Yet
    Units)   Paid per Share   Announced Plans or   Be Purchased Under
Period   Purchased   (or Unit)   Programs   the Plans or Programs
02/01/06 - 02/28/06
    41,200     $ 73.64       41,200       337,800  
04/01/06 - 04/30/06
    150,000       70.53       150,000       1,687,800  
05/01/06 - 05/31/06
    880,600       73.18       880,600       807,200  
06/01/06 - 06/30/06
    461,000       64.82       461,000       346,200  
07/01/06 - 07/31/06
    40,000       65.80       40,000       1,806,200  
08/01/06 - 08/31/06
    343,800       66.38       343,800       1,462,400  
09/01/06 - 09/30/06
    163,100       65.80       163,100       1,299,300  
 
    2,079,700       69.30       2,079,700  (1)     1,299,300  (2)
 
                               
 
(1)   No shares were received in payment of the exercise price of stock options.
 
(2)   Remaining shares available for repurchase as of September 30, 2006, pursuant to the program approved on July 6, 2006 by the Company’s Board of Directors. Unless terminated earlier by resolution of our Board of Directors, the program will expire when the Company has repurchased all shares authorized for repurchase thereunder.

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LIQUIDITY MANAGEMENT
     The Company continues to manage its liquidity through the combination of core deposits, federal funds purchased, repurchase agreements, collateralized borrowing lines at the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco and a portfolio of securities available-for-sale. Liquidity is also provided by maturing securities and loans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
     Market risk results from the variability of future cash flows and earnings due to changes in the financial markets. These changes may also impact the fair values of loans, securities and borrowings. The values of financial instruments may change because of interest rate changes, foreign currency exchange rate changes or other market changes. The Company’s asset/liability management process entails the evaluation, measurement and management of interest rate risk, market risk and liquidity risk. The principal objective of asset/liability management is to optimize net interest income subject to margin volatility and liquidity constraints over the long term. Margin volatility results when the rate reset (or repricing) characteristics of assets are materially different from those of the Company’s liabilities. The Board of Directors approves asset/liability policies and sets limits within which the risks must be managed. The Asset/Liability Management Committee (“ALCO”), which is comprised of senior management and key risk management individuals, sets risk management guidelines within the broader limits approved by the Board, monitors the risks and periodically reports results to the Board.
     A quantitative and qualitative discussion about market risk is included on pages 41 to 45 of the Corporation’s Form 10-K for the year ended December 31, 2005.
     Net Interest Simulation: As part of its overall interest rate risk management process, the Company performs stress tests on net interest income projections based on a variety of factors, including interest rate levels, changes in the relationship between the prime rate and short-term interest rates, and the shape of the yield curve. The Company uses a simulation model to estimate the severity of this risk and to develop mitigation strategies, including interest rate hedges. The magnitude of the change is determined from historical volatility analysis. The assumptions used in the model are updated periodically and reviewed and approved by the Asset Liability Management Committee (“ALCO”). In addition, the Board of Directors has adopted limits within which interest rate exposure must be contained. Within these broader limits, ALCO sets management guidelines to further contain interest rate risk exposure.
     The Company has a large portfolio of rate-sensitive commercial loans that are funded in part by rate-stable core deposits. As a result, the net interest margin increases when interest rates increase and decreases when interest rates decrease. The Company mitigates this risk using on and off-balance sheet hedging vehicles. Over time, as interest rates have risen, the Company has moved to a more neutral position. Increased reliance on wholesale funding sources and other changes in the mix of the balance sheet have also moved the Company to a more neutral position. Based on the balance sheet at September 30, 2006, the Company’s net interest income simulation model indicates that net interest income would be slightly impacted by changes in interest rates. Assuming a static balance sheet, a gradual 100-basis-point parallel decline in the yield curve over a twelve-month horizon would result in a decrease in projected net interest income of approximately 0.1 percent. This compares to decreases in projected net interest income of 0.8 percent and 0.5 percent at December 31, 2005 and September 30, 2005, respectively. A gradual 100-basis-point parallel increase in the yield curve over the next twelve-month period would result in an increase in projected net interest income of approximately 0.6 percent. This compares to increases in projected net interest income of 0.7 percent at December 31, 2005 and 0.2 percent at September 30, 2005.
     Present Value of Equity: The simulation model indicates that the Present Value of Equity (PVE) is impacted by a sudden and substantial increase in interest rates. As of September 30, 2006, a 200-basis-point increase in interest rates results in a 2.7 percent decline in PVE. This compares to declines of 3.7 percent and 3.9 percent at December 31, 2005 and September 30, 2005, respectively.

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     The following table presents the notional amount and fair value of the Company’s interest rate swap agreements according to the specific asset or liability hedged:
                                                                         
    September 30, 2006     December 31, 2005     September 30, 2005  
    Notional     Fair             Notional     Fair             Notional     Fair        
Dollars in millions   Amount     Value     Duration     Amount     Value     Duration     Amount     Value     Duration  
Fair Value Hedge Receive
                                                                       
Fixed Interest Rate Swap
                                                                       
Certificates of deposit
  $ 175.0     $ (0.2 )     0.4     $ 15.0     $       0.6     $ 15.0     $ 0.1       0.5  
Long-term and subordinated debt
    490.9       (1.9 )     3.9       490.9       5.7       4.5       490.9       10.5       4.7  
 
                                                           
Total fair value hedge swaps
    665.9       (2.1 )     3.0       505.9       5.7       4.4       505.9       10.6       4.6  
 
                                                                       
Cash Flow Hedge Receive
                                                                       
Fixed Interest Rate Swaps
                                                                       
US Dollar LIBOR-based loans
    350.0       (3.3 )     0.4       600.0       (7.9 )     0.8       675.0       (7.9 )     0.9  
Prime based loans
    425.0       (3.6 )     0.8       425.0       (3.3 )     1.7       325.0       (1.7 )     1.9  
 
                                                           
Total cash flow hedge swaps
    775.0       (6.9 )     0.6       1,025.0       (11.2 )     1.2       1,000.0       (9.6 )     1.2  
 
                                                           
Fair Value and Cash Flow
                                                                       
Interest Rate Swaps (1)
  $ 1,440.9     $ (9.0 )     1.7     $ 1,530.9     $ (5.5 )     2.2     $ 1,505.9     $ 1.0       2.4  
 
                                                           
 
(1)   Net fair value is the estimated net gain (loss) to settle derivative contracts. The net fair value is the sum of the mark-to-market asset (if applicable) and mark-to-market liablity.
     Credit exposure represents the cost to replace, on a present value basis and at current market rates, the net positive value of all contracts for the Company and its subsidiaries with each counterparty that were outstanding at the end of the period, taking into consideration legal right of offset. In the normal course of business, the Company’s swap agreements require collateral to mitigate the amount of credit risk if certain market value thresholds are exceeded. At September 30, 2006 the Bank had delivered securities with a market value of $3.1 million as margin for swaps with a negative replacement value of $0.2 million. For the same period, the Corporation had delivered securities with market value of $12.3 million as margin for swaps with a negative replacement value of $8.0 million.
ITEM 4. CONTROL AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
     Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a – 15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
     There was no change in the Company’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
     We have made forward-looking statements in this document that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of our management, and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business and earnings outlook and statements preceded by, followed by, or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
     Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on the forward-looking statements, since they are based on current expectations. Actual results may differ materially from those currently expected or anticipated.
     Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Many of the factors described below that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.
     Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur as of the date the statements are made or to update earnings guidance including the factors that influence earnings.
     A number of factors, some of which are beyond the Company’s ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. These factors include (1) changes in interest rates, (2) significant changes in banking laws or regulations, (3) increased competition in the Company’s markets, (4) other-than-expected credit losses due to business losses, real estate cycles or other economic events, (5) earthquake or other natural disasters affecting the condition of real estate collateral, (6) the effect of acquisitions and integration of acquired businesses and de novo branching efforts, (7) the impact of changes in regulatory, judicial or legislative tax treatment of business transactions, (8) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies, and (9) general business and economic conditions, including movements in interest rates, the slope of the yield curve and changes in business formation and growth, commercial real estate development and real estate prices. Additional factors that may cause future results to differ materially from forward-looking statements are discussed in Part I, Item 1A – Risk Factors in the Company’s Annual Report on Form 10-K as of December 31, 2005, to which reference is hereby made. There is no assurance that any list of risks and uncertainties or risk factors is complete.

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PART II.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described under Item 1A of the Company’s 2005 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     (c) Purchase of Equity Securities by the Issuer and Affiliated Purchaser.
     The information required by subsection (c) of this item regarding purchases by the Company during the quarter ended September 30, 2006 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act is incorporated by reference from that portion of Part I, Item 1 of the report under Note 5.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     None

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ITEM 6. EXHIBITS
     
No.    
 
31.1
  Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.0
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CITY NATIONAL CORPORATION
(Registrant)
 
 
DATE: November 13, 2006        /s/ Christopher J. Carey    
 
  CHRISTOPHER J. CAREY   
  Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer) 
 

34