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Executives

Cary Walker – Senior Vice President, Manager of Corporate Communications

Russell Goldsmith – President, Chief Executive Officer

Christopher J. Carey – Chief Financial Officer

Analysts

Andrea Jao – Barclays Capital

David Rochester – Friedman, Billings, Ramsey & Co.

Brett Rabatin – FTN Midwest Securities Corp.

James Ellman – Seacliff Capital

Brian Klock – KBW

Brian Foran – Goldman Sachs

City National Corp. (CYN) Q3 2008 Earnings Call October 23, 2008 4:00 PM ET

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation’s financial results for the third quarter of 2008. My name is [Jodi] and I will be your coordinator for today. (Operator Instructions) Now I will turn this call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.

Cary Walker

Thank you. Good afternoon. Here to discuss City National’s third quarter highlights are Russell Goldsmith, our President and Chief Executive Officer and Chris Carey, our Chief Financial Officer.

This call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the company’s future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the safe harbor provisions contained in the Securities Litigation Reform Act of 1995.

For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from expected results, see the company’s annual report on Form 10-K for the year ended December 31, 2007.

This afternoon City National issued a news release outlining its financial results for the third quarter of 2008 and year-to-date. To obtain a copy please visit our website at www.cnb.com. After comments by management today, we’ll open this call to your questions. Now I’ll turn it over to our CEO, Russell Goldsmith.

Russell Goldsmith

Good afternoon. Thank you all for joining us again. A few minutes ago City National announced year-to-date earnings of $96 million on revenue of more than $$660 million. Third quarter earnings came to $16.6 million or $0.34 a share after taking $19.6 million in after tax impairment charges, stemming largely from the previously disclosed write down that we incurred due to the blow up in value of Fannie Mae and Freddie Mac preferred securities earlier in the quarter.

Excluding those unusual charges, City National’s third quarter earnings totaled $36.2 million or $0.74 a share. The company also declared its regular quarterly cash dividend of $0.48 per share. City National remains profitable, well capitalized and well reserved. All in all it’s fair to say that City National’s third quarter operating results reflect real strength in our ongoing business.

Let me get into a little more detail. Average loans in the third quarter grew to a record

$12.2 billion, up 9% from the prior year and up 1% from the previous quarter. Most of the linked quarter to quarter growth came from mortgage loans to our private banking clients. I think it’s worth noting in this environment, and it’s indicative of City National, that our mortgage portfolio of today does not have a single delinquency anywhere in the entire mortgage portfolio that we’ve originated. And of course, as I think you know, we have no sub-prime mortgages and City National has never bought brokered mortgages.

Our mortgage borrowers are principally our private banking clients. In the quarter, our commercial loans also grew slightly, but construction and commercial real estate lending together were essentially unchanged on a combined basis from the second quarter.

Regarding deposits, there’s no question that economic uncertainty has produced a flight to quality in the third quarter and City National as a result has benefited from that by adding a larger than usual number of new clients and new funds from existing clients. As evidenced by the addition in this quarter of approximately $1 billion of additional funds here at City National in clients, securities, deposits, and money market investments.

We added a net total of $271 million out of that $1 billion in deposits. And this is in spite of the fact that City National is not a retail bank and we are not out there in our markets promoting high price CD’s like some of our competitors. Overall, City National’s credit quality has remained sound. Non-accrual loans are up as you can see, but two-thirds of them still involve home construction, which has shrunk to less than 4% of our company’s $12 billion loan portfolio.

The good news is that third quarter net charge offs fell 32% from the second quarter of this year. While we do anticipate further write downs in our home construction portfolio, we believe they will remain manageable. Most of our home builder borrowers are long term clients, and nearly all of these loans to them are guaranteed or are supported by some form of credit enhancement.

It’s also worth noting, given all the publicity that California and Nevada get, that the projects in our portfolio are concentrated largely in greater Los Angeles, as well as in the San Francisco Bay area, two geographies in these two states that have held up relatively well.

As has been the case for the past year, away from residential housing, City National’s loan portfolio continues to perform satisfactorily. Despite a stagnant economy, our CNI portfolio also continues to perform reasonably well. Our loan loss reserve remains strong and as of this quarter is now even stronger. We’ve taken the conservative approach of continuing to build our loan loss reserve, both to accommodate our loan growth and to provide a cushion against further economic deterioration, which we anticipate.

Year-to-date after charge-offs, we’ve added a net total of $43 million to our allowance, bringing it to 169 basis points of total loans. Obviously that’s had a real impact on our earnings, particularly in the year-over-year comparison when you consider the fact that City National did not need a provision during the first nine months of 2007. So this is the last year-over-year quarter where we are comparing ourselves against a zero provision.

Credit quality and capital strength remain paramount, and City National is strong on both fronts. We intend to stay that way. Let me reiterate that City National has avoided many of the highly publicized problems afflicting other financial institutions. We have no sub-prime loans, no brokered or option adjustable rate mortgages. We have no credit default swaps and no sub-prime based CDO’s, no auto loans, and we have no issues in our modest credit card portfolio, which we have for some of our private banking clients.

In this third quarter, City National opened a new banking office in the affluent Los Angeles suburb of Manhattan Beach, California. We also relocated and upgraded our South Orange County office to new space in one of Southern California’s premier business corridors. We expanded our commercial banking team with a few new key people in our San Francisco Bay region in the office we have in Fremont, and we also announced plans to open a second banking office in San Francisco’s financial district early next year.

Convergent wealth advisors, the most recent addition to City National’s family of investment affiliates, hired two outstanding teams of well known, ultra high net worth advisors who fit perfectly within the convergent wealth advisor value proposition and business model. And they are already making meaningful contributions to the growth of CWA.

Following the official launch of our preferred banking program in our retail branch system, which is a high end banking system, we’re making good progress we believe in our efforts to capture more of the emerging wealth market. Clearly today’s economic conditions are challenging. We all know that. And they’re likely to deteriorate further over the next six to 12 months. At City National we’re very focused on that and have been for quite some time, and remain vigilant about credit quality and costs.

At the same time, we feel good about City National and its outlook. In addition to a strong capital position and strong credit reserves, City National has an exceptional deposit base with 90% of our deposits in core deposits. Our markets remain some of the best in the world, and we are very focused upon taking advantage of many attractive, long term opportunities in those markets. As I think everyone knows, City National is a conservative bank that knows and understands its clients.

A bank that has succeeded by virtue of a long tradition of exceptional client service combined with outstanding state of the art products, technology, capabilities, investment performance, prudent underwriting standards, responsible balance sheet management, an outstanding team of people in this organization, who together have avoided most of the mistakes that everyone is understandably concerned about when the subject of banks comes up today.

City National remains profitable, well reserved and well capitalized. Our liquidity is strong. We’re adding clients and carefully and strategically investing for the future. I’m actually encouraged by the progress that we’re making even in these difficult and volatile economic times.

Speaking of that, let me cover one last timely subject, the federal government’s key economic stabilization plans and how as we see it today they stand to affect City National Bank. There are five key programs I’d like to just touch on quickly.

First, the Troubled Asset Relief Program, so-called TARP. Fortunately, City National does not have any assets that we would anticipate would be participating in this program.

Second, the FDIC’s Temporary Liquidity Guarantee Program. We do intend to purchase insurance coverage of non-interest bearing deposit transaction accounts exceeding $250,000 when the current 30-day coverage expires.

Third, the Money Market Guarantee Program. City National has applied and been approved for this program.

Fourth, the Money Market Investor Funding Facility. City National also intends to take advantage of this program, which provides liquidity support to money market funds by purchasing assets issued by a select group of highly rated issuers. Our money market funds I might add have held up extremely well and are in very sound shape.

Fifth, the treasury capital purchase program. Fortunately as you know and I’ve said City National is well capitalized. This appears to be a very good program and we’re taking a close look at it but really can’t comment on it beyond that.

Let me turn to our dynamic CFO, Chris Carey, for some more detail on our third quarter results.

Christopher J. Carey

Thank you Russell and good afternoon all. I want to add a few words about the margin, deposit trends, non-interest income and expense control. I’ll also talk briefly about our guidance for the remainder of the year.

City National’s net interest margin remains stable, averaging 423 basis points in the third quarter. It’s held up very well in spite of lower, short-term rates and reasonable loan grow. We’re seeing better loan pricing virtually in all of our markets now but unfortunately deposit pricing is still very competitive and that appears to reflect the premium that the industry in general is placing on liquidity.

Looking at deposits in the third quarter of 2008, our core deposit balances came to $10.5 million and as Russell mentioned - $10.5 billion and as Russell mentioned, 90% of these are core and that goes a long way to explaining our strong liquidity and low cost of funds. Title and escrow deposits were down $209 million from third quarter 2007 and $25 million from the second quarter. Overall, though, this business has been stable this year and should increase deposit balances over the long term.

We’ve also seen signs that today’s economic conditions, coupled with lower interest rates, may be encouraging deposit formation. Obviously that’s something we expect to continue to take advantage in the coming quarters.

Now turning to non-interest income, that unfortunately declined significantly in the third quarter due to the conditions in the financial markets. These conditions produced several impairment charges. One was the previously disclosed $21.9 million write down of Fannie Mae and Freddie Mac.

We also took a $7.2 million impairment charge related to a discreet portfolio bank trust preferred full securities. This portfolio’s remaining book value is $25 million. We also recorded charges of

$3.5 million principally for the impairment of securities that are held in a $55 million equity portfolio.

Over the years our company has consistently invested in the strategies of its banks and affiliated wealth management businesses and at times we have seeded new products. Both of these areas are small components of City National’s $2.2 billion investment portfolio, which has held up reasonably well overall.

Financial turmoil also took its toll on our wealth management business in some respects. Trust and investment management fee revenue fell 11% from the third quarter last year and 2% from the second quarter of this year. The good news is City National asset management captured additional assets from conservative clients looking to move money into money market funds and fixed income accounts.

At the same time, however, one of our affiliates that permanently manages equity for institutional clients lost some more of its assets to a former owner. Much of that was expected as we told you last quarter but it helped to bring down assets under management.

All in all, investment fees income was stable from the previous year thanks largely to an increase in our brokerage and mutual fund fees. Cash management and international fees also continued to grow. As you can see from the release, income from cash management and deposit transaction fees grew 41% in the third quarter of ’07. That was largely due to falling short term interest rates and the income on deposit balances that many of our business clients use to pay for services, along with increased product sales.

Let’s turn to expenses. They were up 6% from the third quarter of ’07 and just 4% excluding higher FDIC costs that started this year, and we also had a $1.6 million for a legal settlement involving a patent infringement dispute that targeted most of the nation’s top 50 banks, a number of which have already settled and some for some fairly large amounts. Overall expenses should remain well under control during the remainder of the year.

Turning to the guidance, excluding impairment charges we outlined today we expect earnings per share between $3.05 and $3.15 in 2008. The change to the previous guidance reflects our expectations for lower short-term interest rates, weakness in the equity markets and subdued loan growth due to a slow economy.

Looking further ahead, we are confident in our business and our prospects for growth when the economy recovers as it eventually will. In conclusion, City National’s underlying business is very good. We have a strong balance sheet, a premier deposit base and a conservative approach to credit quality and capital management. We are investing in our businesses. We have the means to grow as economic conditions improve.

That concludes our report on City National’s financial results. Now Russell and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrea Jao – Barclays Capital.

Andrea Jao – Barclays Capital

Going straight to the components of guidance, I believe last quarter you’d mentioned that loan loss provision in the back half of ’08 would roughly be equivalent to loan loss provision in the first half of ’08. So is this still valid or – because this implies that loan loss provisioning should start to decline by the fourth quarter?

Russell Goldsmith

I think what we tried to convey to people on last quarter’s call that we had a $35 million provision in the second quarter and we thought we’d have a similar provision in the third and fourth quarter. And while it’s very difficult to predict, I mean, that’s our general thinking right now as to where we’ll be this year.

Andrea Jao – Barclays Capital

So just to make sure I’m not misunderstanding, fourth quarter provisioning relatively steady versus – on the quarterly basis versus the second and the third?

Russell Goldsmith

Correct.

Andrea Jao – Barclays Capital

And my follow-up question is could you share with us your – the underlying assumptions that you’re using in terms of what the operating environment will be?

Russell Goldsmith

Well I’ll just tell you that the two large macro events are that interest rates went down 50 basis points and the forward curve suggests they’re going to go down again. And that rapid of a decline is generally negative of banks with all the core deposits we have, in the short run in particular. The equity markets have also done particularly poorly in October and we’re not able to predict that they’re going to recover. Hopefully they recover somewhat. So we look at that and that turns our viewpoint a little bit negative. Those are the two biggest issues really.

Operator

Your next question comes from David Rochester – Friedman, Billings, Ramsey & Co.

David Rochester – Friedman, Billings, Ramsey & Co.

Just a couple quick ones on the credit side and going through some of the line by line credit data for product type, taking a look at the CNI side of things could you provide a little color as to what you’re seeing in terms of the MPA increase? What that was? What industries that reflects and is that more small business or maybe small middle market?

Russell Goldsmith

Well, I guess we’ll both take a run at that. I think – you know, the nature of our client base you’re going to get some lumpiness in these numbers. And I think there’s not really a particular trend that I would draw out of the fact that MPA’s have gone up. They’re still in good shape, relative to the total portfolio. And our clients tend to, depending on how you want to define small business, they tend not to be as small as you might think.

So I don’t think you can detect a trend. I do think, given the state of the economy, that you’re going to see some pressure across both segments that you reference. But I think it would be wrong to draw any stark conclusions from these numbers.

Christopher J. Carey

Yes I would just add that they’re – you know there’s a middle market element of it and some small business. There is no particular trend. There’s been some ins and outs and I think, frankly, we’re pretty happy that our numbers have stayed so low for so long. So we’re not surprised at all in this economy that our commercial MPAs are ticking up a little bit.

David Rochester – Friedman, Billings, Ramsey & Co.

Are those reflective of companies that are operating in the industries that are linked to the home building industry? Or are you seeing that in other industries as well?

Christopher J. Carey

There’s only one in there that has – there’s a $3 million piece of that that has a component of that and the rest of them – in the MPAs the rest of them are pretty unrelated.

David Rochester – Friedman, Billings, Ramsey & Co.

And in terms of the charge offs, could you give some color there as to what those consist of in terms of industry exposure?

Christopher J. Carey

Yes. The charge offs frankly the major charge off in commercial – I mean the number’s still small and it’s not much different than last quarter. The biggest component of a little over

$3 million is really real estate related. A very strong person with a lot of liquidity that had some small projects and just went sideways. And that’s in commercial. And as you know we have a very small component of commercial, but it’s real estate related. So we still haven’t seen meaningful and in the last quarter we had a little bit of that also, and I guess a private banking loan was in there.

So we really haven’t seen any overall meaningful commercial charge offs yet. But in a weak economy, we’ll certainly have some.

David Rochester – Friedman, Billings, Ramsey & Co.

And just one last one. You talked to that build in the reserve to account for future potential economic deterioration. I was wondering if you could perhaps give us some numbers for the reserve on the CNI portfolio itself for the third quarter and maybe also tell us where it was in the second quarter, just to get a sense for what you’re preparing for there.

Russell Goldsmith

It really isn’t broken out that way.

Operator

Your next question comes from Brett Rabatin – FTN Midwest Securities Corp.

Brett Rabatin – FTN Midwest Securities Corp.

First I’ll ask on the construction side, it sounds like you indicated that there’d still be some charge offs on the real estate construction going forward but if I’m reading it right, maybe your past the worst of it? Is that a fair assessment of your language there?

Christopher J. Carey

I don’t know. It’s a little early for that. I think the bigger question is what’s going to happen with housing prices and I think that there’s probably still some room. I think there are some people that think that housing prices will probably bottom out in the first or second quarter of next year. So I don’t know that we’d want to make a commitment.

Russell Goldsmith

You know, because you don’t know exactly where it goes, it’s hard to exactly say that. But I think we do feel like we have absorbed a fair chunk of this and that it’s manageable but we have our arms around it, and that we can certainly handle it.

Brett Rabatin – FTN Midwest Securities Corp.

And then I was hoping for some color on you indicated $480 of total on the construction. Is a third of that still land? And then I was curious if you had any detail on what the shopping center and condo apartment numbers might be for balances.

Christopher J. Carey

The land I’d say the land component of that $480 has come down a little bit now. It’s, what did you say a third of it, it’s probably a little bit below that now.

Brett Rabatin – FTN Midwest Securities Corp.

And then any color on the balances for shopping center, condos and I guess also the C&D related businesses in the CNI portfolio?

Christopher J. Carey

Yes, I mean I’m sure the shopping center component is about $130 million if that helps you with that. What was your last question on condos?

Brett Rabatin – FTN Midwest Securities Corp.

Yes condo apartments and then just borrowers related to the construction development business and the CNI portfolio not “secured” by real estate I guess is how you classify it.

Christopher J. Carey

That component is $96 million.

Russell Goldsmith

We do need to move on but I would just point out that typically most of these loans shouldn’t be looked at just strictly in isolation by the product type. I mean, we work with developers who for the most part we have longstanding relationships with who do provide other support or based either on recourse or other collateral so that there’s more to these credits than just simply a simplistic statement that it’s a shopping center loan or it’s a this or it’s a that.

Operator

Also we ask that you please limit your questions to one and one follow-up question. Your next question comes from James Ellman – Seacliff Capital.

James Ellman – Seacliff Capital

Can you comment on the drop in deposits you’ve had year on year if it was a drop of about 5%? Could you give us a little color as to why you think you are losing deposits and why clients are uncomfortable leaving deposits with City National on an overnight basis?

Russell Goldsmith

Let’s quash that right now. We’re not losing deposits and they’re not uncomfortable. What we’re not doing is racing around out there for high cost CD deposits. So part of what you’re seeing is as we’ve let CDs from the bank we purchased in Nevada, which were higher priced than what we normally price deposits at, we’ve let those as they mature we bring the rates down to what we think are fairer rates. And some of that runs off. We’ve not chosen to go out there aggressively after CDs.

If you look at core deposits they’re actually up. If you look at new clients they’re up. If you look at the $700 million of additional funds that have gone into City National’s securities, you’ve seen a lot of people in this environment move money into treasury bills, typically not from City National Bank accounts but from other places like WaMu and Lehman Brothers and so forth. So I want to take exception to the premise of your question because it’s simply not true.

James Ellman – Seacliff Capital

So the 5% decline in deposits year on year is that primarily due to CD runoff in the Nevada bank?

Christopher J. Carey

No it’s not. I’d say one of the biggest component is that there’s a part of the higher cost CDs and a small component. The big component is in the previous year we did go out when it was relatively inexpensive and did some funding via brokerage CDs. When the market turmoil came out, we rolled out of the brokerage CDs and have almost none of it now. And that has been responsible for the biggest decline. That’s close to $500 million I think right there.

Operator

Your next question comes from Brian Klock – KBW.

Brian Klock – KBW

Just talking about I guess what to expect in the overall loan portfolio growth going forward. Should we expect to see the same sort of rundown in the construction book with good commercial real estate growth as sort of offset that?

Russell Goldsmith

Well clearly you’re going to continue to see rundown in construction. I think that the real estate side depends to some degree on the take out environment that has been pretty well locked down. But as that starts to re-liquefy, I think you’ll see some of that come down as well.

Brian Klock – KBW

Can you comment a little bit on the – either by geography or collateral type, the strong CRE growth you did have in the quarter?

Christopher J. Carey

I wouldn’t – I don’t have at the tip of my hand by geography or collateral type, but I would add one thing to Russell’s comments. There’s – just in for example what went from construction to CRE this quarter, $24 million of it already financed out and another $26 million is in the process of financing out. So I think overall you’ll see like most banks commercial real estate coming down.

Brian Klock – KBW

And then Chris I guess with the DSE, OTTI charge you took? Is there any tax credit we’ll see roll through to the fourth quarter? Or is that –

Christopher J. Carey

No, that’ll be – it’s all reflected in this quarter.

Operator

Your next question comes from Brian Foran – Goldman Sachs.

Brian Foran – Goldman Sachs

I guess we’ve spent a lot of time talking about defensive type positioning in credit and all that. You do have a big capital base, so is there any context to kind of some offensive things you’re thinking about over the next year or two? Be they acquisitions or I guess stealth banks don’t make as much sense for you guys because of the difference in businesses, but just you know you’ve come through this with a bigger capital base than most. How are you thinking about using it going forward?

Russell Goldsmith

Thank you for that question because we do think about that as well. And what I tried to suggest is in my comments very quickly, Brian, was that while this is an environment where we’re very focused on credit quality and cost control, at the same time it’s an environment where we’re able opportunistically to attract some terrifically talented people to City National, as well as clients. So we continue to invest appropriately in advertising and client outreach and prospect outreach.

As I mentioned we’ve opened a couple of new offices and we’re going to open at least one more next year. We do keep our eyes and ears open for acquisition opportunities that might make sense and while we have a very jaundiced eye and obviously haven’t done anything on the bank side in almost two years, we think there may be some opportunities over the next couple of years if they’re priced right and they fit and make sense.

We as you know worked with our convergent wealth advisors affiliate as I mentioned to bring in two terrific groups of people into that, and we look to see other opportunities in our wealth management business. So across our platforms we are looking for opportunities to grow organically and through personnel strategically selected. There may be some larger, more interesting opportunities, but we’re going to be while looking and keeping our eyes open, we’re going to be careful at the same time.

Brian Foran – Goldman Sachs

And then just a follow-up. I mean if you were in a position to where you decided to apply to the TARP and you received capital, is that more about strengthening ratios or is that more about maybe accelerating some of the growth opportunities or acquisition opportunities you would see out there?

Russell Goldsmith

I think that that has the ability to potentially, and we’re still giving it serious consideration, to be helpful across a broad array of opportunities and needs.

Operator

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

Russell Goldsmith

Well I want to thank all of you for joining our call today and for again taking time to understand City National’s performance. We appreciate your interest very much and look forward to talking with you again at the end of the year. Meanwhile of course feel free to call Chris Carey or me if you develop further questions. Thank you. Thank you very much.

Operator

Thank you. This concludes today’s City National Corporation’s financial results for the third quarter of 2008. You may now disconnect.

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