UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(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

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

     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 50,730,166 shares of Common Stock outstanding.

 

 

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.

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.

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.

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.

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.

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)

		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.

		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

		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

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.

		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.

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.

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	%

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

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.