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City National Corporation’s (NYSE:CYN)

Q3 2007 Earnings Call

October 17, 2007 5:00 PM ET

Executives

Cary Walker - Senior VP and Manager ofCorporation Communications

Russell Goldsmith - president andCEO

Chris Carey - CFO

Analysts

Andrea Jao - Lehman Brothers

Joe Morford - RBC Capital Markets

Gary Townsend - FBR CapitalMarkets

Heather Wolf - Merrill Lynch

Brett Rabatin - FTN Midwest

Manuel Ramirez - KBW

Operator

Good afternoon. I would like towelcome everyone to the discussion of City National Corporation's FinancialResults for the Third Quarter of 2007. My name is Daisy, and I will be yourcoordinator for today. At this time, all participants are in a listen-onlymode.

After the speakers' remarks,there will be a question-and-answer session for analysts and investors.(Operator Instructions) This call is being recorded and will be availableshortly after it is completed on City National's website at www.cnb.com.

Now I would turn this call overto Cary Walker, Senior Vice President and Manager of Corporation Communicationsfor City National. Please proceed.

Cary Walker

Thank you. Good afternoon. Hereto discuss City National's third quarter results are Russell Goldsmith, ourPresident and Chief Executive Officer, and Chris Carey, our Chief FinancialOfficer.

This call will include commentsand forward-looking statements based on current plans, expectations, events,financial industry trends that may affect the company's future operatingresults and financial position.

Such statements involve risks anduncertainties about future activitiesand results may differ materially from these expectations. The speakers on thiscall claim the protection of the Safe Harbor provisionscontained in the Securities Litigation Reform Act of 1995. For a more completediscussion of the risks and uncertainties that may cause actual results todiffer materially from expected results, see the company's annual report onForm 10-K for the year ended December 31, 2006.

This afternoon, City Nationalissued a news release outlining its financial results for the third quarter of2007. To obtain a copy, please visit our website at www.cnb.com. After commentsby management today, we'll open this call to your questions. Now I would liketo turn over the call to our CEO, Russell Goldsmith.

Russell Goldsmith

Thank you, and good afternoon. Weappreciate everyone joining us on today’s call. As you know, a few minutes ago,City National announced its third quarter earnings of more than $60 million or$1.22 per share. Year-to-date City National has earned$175.8 million or $3.56 a share on revenues of just over $675 million. Allthings considered, City National performed reasonably well on our third quarterdespite the challenging economic environment.

Loans and non-interest incomegrew at double-digit rates. Deposits were stable. Credit quality continued toholdup reasonably well. Well, City National is not immune to economicdevelopments; we have managed to avoid the more highly publicized problems thatwe all read about. We don’t make sub-prime loans. We don’t hold any sub-primeCDOs or home bridge loans. We don’t have an SIV. Instead at City National, weare making quality loans and sustaining expanding and building strong clientrelationships with some of the best entrepreneurs, professionals, investors andsmall to mid size businesses in some of the best parts of this nation, as wehave been doing for many year.

Loans in the third quarter grewacross the board in every major category. Average loans increased 12% from thesame period last year to a record level of $11.2 billion. Period end balanceswere $117 million higher on September 30 than they were at the end of thesecond quarter. Strong competition for lending continues to put pressure oncredit spreads, but City National has continued to maintain and expand itsclient relationships.

Credit quality continued to holdup well in spite of some softening in the economy principally related tohomebuilding. Net charge-offs totaled just $3.6 million and that’s still just13 basis points of our total loans. Likewise non-accruals amounted to slightlymore than $26 million, but that’s only 23 basis points of total loans. CityNational did not need a loan provision in the third quarter, and remainsadequately reserved at 136 basis points of total loans.

City national has two loanportfolios that relate to real estate. Home mortgages and commercial realestate. Our home mortgage portfolio is positioned very well. In fact CityNational has been originating significant amounts of mortgage loans toaccommodate our private banking clients for over a decade, and we have neverhad a foreclosure or loss on our home mortgage we originated. With an averageLTV of over 50% at origination and the average loan size around $750,000, wefeel good about City National's home mortgage loan portfolio.

Our much smaller portfolio ofcommercial real estate loans to develop as for-sale housing, represents lessthan 5% of City National's total loans. A significant majority of these creditsare recourse loans backed by solid borrowers here in Southern California.

Looking ahead as we have said nowfor sometime we do expect charge-offs non-accruals and provisions to return tomore normalized levels. However, for sometime now we have want to preparing thebank for less than the nine stages of the business cycle. As a result, anddespite the weakening we have seen in the economy City National's creditquality remain sound and we believe that will continue to holdup reasonablywell in comparison with other banks.

Now let's move to thenon-interest income side of our income statement. Non-interest income grew 26%from the third quarter of last year. And I am pleased to say this for the firsttime that NOW accounts for 35% of City National's total revenue. That was thetarget goal we set for our company about 10 years ago, when the bank was muchsmaller and our non-interest income was about 17% of revenue.

Now that we have achieved this35% goal, we still plan to keep increasing our percentage of non-interestincome as we grow the bank.

Our Wealth Management business isstill the primary driver of non-interest income growth contributing abouttwo-thirds of the total. Third quarter asset management fee income increased25% from the same period last year, thanks to the large part to the acquisitionof what is now called Convergent Wealth Advisors as well as the continuingsuccess of City National Asset Management, whose growth and investmentperformance have also been strong. Our brokerage and mutual fund income grew19% from the same period a year ago.

Today, City National manages oradministers assets, client investment assets of more than $59 billion a newrecord for us; and that does not include any of the $12 billion in assetsmanaged by Matthews International, an outstanding investment firm specializingin investments in Asia, in which City Nationalholds a meaningful minority ownership position.

Our International Bankingbusiness also continues to achieve strong results, foreign exchange and lettersof credit lead to 17% increase in international fee income. It is the ninthtime in the last 10 quarters that this business has achieved double digitgrowth. Cash management also continues to make big contributions. As you cansee from the press release, income from cash management and deposit transactionfees grew 10% from the third quarter of last year.

City National’s outstanding cashmanagement business is important to our client relationship and depositgathering strategies. City National E-Deposit, our remote deposit capabilitythat we introduced not quite a year and half ago is now responsible forprocessing deposits electronically of more than $1.2 billion a month.

Now I would like to just take afew minutes to give you our view of the economy here in California. There is no question thatresidential real estate markets had been a drag on California’s economic growth and that trendis likely, if not certain to continue well into next year. But the stateseconomy is still relatively strong. It’s diversified and dynamic in a number ofother sectors from technology to trade and from entertainment to agriculture.

Employment is growing in California. So for thisyear the state has managed to add an average of more than 7,600 jobs a month.The Silicon Valley and the Bay Area are performing both the state and thenation in terms of job growth.

Person income in California grew 6.1%year-over-year in the second quarter compared to 5.6% in the first quarter ofthis year. Apart from for-sale housing without minimizing that we are stillseeing a meaningful amount of commercial construction activity.

Currently home sales in generalare down and inventories are up, but interesting to note that sales and pricingat the higher ends of the market were almost all of our clients reside remain fairly good.

The falling dollar has alsoboasted exports here, through July overseas sales of product made in Californiawere up more than 7% from a year earlier. In Los Angeles the film and entertainment sectorand foreign travel and tourism also were benefiting from the decline of thedollar.

Nevada represents anotherattractive growth opportunity for City National. Obviously there has been a lotof discussion of what’s going on in Nevada,but I think everybody should recognize that the state has been at or near thetop of the nation both in population and employment growth for the better partof decades.

Several projects, now underconstruction in Las Vegas, are among the biggest private sector developments inUS history, something between 10,000 to 20,000 new hotel rooms are now in thepipeline, which is enough to support and estimated 30,000 to 60,000 direct jobsand with those indirectly created jobs the number comes to about 50,000 to a100,000 depending on how many of these rules come online. This willsignificantly help Nevada’s economy in ’08 and ’09 and accelerate itsabsorption of the housing inventory that has gotten so much attention.

City National’s combination ofgreater capabilities with the talented team, we added from Business Bank ofNevada plus some people, we are adding selectively to that team continues tobode well for City National’s expansion in Nevada in the future. We believeCity National has accomplished a considerable amount this year and that we havetaken a number of steps to create long-term value for our shareholders.

Before I turn the phone over toChris Carey, I would like to briefly touch on the few of the highlights thatmany of you are probably familiar with. Focused acquisitions have alwaysplaying an important role in our growth strategy, and this year, we weresuccessful in two, I think very good acquisitions that met our standards of fitand focused Business Bank of Nevada and Convergent Wealth Advisors, which waspreviously known as Lydian Wealth Management. Both of these foreign companieshave added growth catalysts, new markets, new capabilities and outstandingtalent to our organization to help build more value for our clients and ourshareholders.

This year in addition to the 7Business Bank of Nevada offices that we acquired, we have added three newoffices in California and Nevada including an upgraded regional center inCentury City and new banking offices in Las Vegas in Ontario, California, theheart of the Inland Empire. In a couple of weeks, we will open our new regionalcenter in Summerland in the Las Vegasarea.

These and many other initiativesare helping City National to further strengthen its reputation, its reach andits opportunities as one of the nation’s premier private and business banks.There is no question that today’s operating environment and economy that morechallenges than we have seen in quite a while.

Still, City Nation is confidentin its prospects especially as we look to the long-term. We have a strongbalance sheet, sound credit quality and plenty of capital and growthopportunities in our markets. We have generally avoided the headline-grabbingfinancial problems that everyone is all too aware off.

We are in very strong markets. California is the eighthlargest economy in the world. Nevadahas great resiliency in growth prospects and our company serves the largest andstrongest communities in these two states. We are also growing and takingadvantage of new opportunities in New York City, where we continue to grow steadily andsuccessfully.

Now I would like to turn thephone over to our dynamic CFO, Chris Carey for more details about the thirdquarter performance and year-to-date results. Chris?

Chris Carey

Thank you. Thank you, Russell.Good afternoon to all. Before we start the questions I will just say a fewwords really on National's margin, deposit growth, expense management and sharerepurchase activity.

First the margin, you can see itwas down 5 basis points from the second quarter and the couple of clearreasons. One, we did have some loan growth slightly less than our very strongsecond quarter, but all in all good showing at 117 million loans added and theremainder is that as we add loans on their own they will always compress on marginbecause the spread on loans is typical lower than our margins than our overallmargin. And once we fund them all with non-interest bearing deposits. There issome compression.

Another reason for the thirdquarter margin compression was a decline of the title and escrow demand deposits,which fell about $100 million from the second quarter. And we are retaining andeven adding title on escrow clients. But the number of industry transactions isdown, reflecting trends in the real estate industry that are pretty obvious toall.

And speaking of deposits, averagebalances came to $12.4 billion in the third quarter down slightly from thesecond quarter. The mix continue to shift the debt money market balances wereup modestly, well non-interest bearing were down slightly excluding title onescrow, non-interest bearing deposits were up 1% from the second quarter.

Overall, we are pleased with thedeposit base and the sort of the stability that’s heading into the fourthquarter, where we typically see a deposit raise and our update through thismeeting deposits have started to raise a little bit, which is a good sign, Iwon’t get too optimistic, but it’s a good way to head into the fourth quarter.

We also reported some unusualitems in the quarter. We had a $5.1 million gain from the recovery of aninvestment in liquidation. This gain was offset by $1.2 million in tax expenserelated to two pending federal tax matters that are almost settled, and also a $2.4million loss in the sale of some securities that we sold at roughly $140million right at quarter end. All in all that contributed about $0.01 a shareto our results.

Now turning to expenses. Wecontinue to invest for the future. We are adding offices and talent makingsmaller acquisitions, developing new products, and more. But we feel, we aregoing about it in a discipline way excluding the impacts of the acquisitions,our expenses grew about 5% in the third quarter of 2006 and for the nine monthsthey are up about 3.5%.

Lastly a word on our share repurchaseactivity. In the third quarter, we brought back more than 858,000 shares ofstock bringing number of shares repurchase through September this year to morethan $1.1 million. That still leads us with the authorization to buy nearly920,000 additional shares.

More so than ever with the pullback in all bank stocks and ours also we continue things the international isvery attractive long term investment. So overall we are pleased with ourresults particularly in a very challenging banking environment.

Now Russell and I will be pleasedto take your questions.

Question-and-Answer session

Operator

(Operator Instructions) Yourfirst question comes from the line of Andrea Jao from Lehman Brothers. Pleaseproceed.

Andrea Jao - Lehman Brothers

Good afternoon, gentlemen.

Chris Carey

Andrea, hi nice to hear from you.

Russell Goldsmith

Hi, Andrea.

Andrea Jao - Lehman Brothers

Like wise. Quick question theefficiency ratio, which I believe is about 200 bit higher than it, was a yearago. I know you made acquisitions, but could you talk about that in variabletrend you think in coming quarters, where do you want to see it normalize andhow you will get there?

Russell Goldsmith

Well, let me take that oneAndrea. We don’t focus as much as somewhat I think on the specific efficiencyratio particularly because we are growing our fee businesses at such a highrate and they all tend to be what the industry uses not good efficiency ratebusinesses, but they are away from those businesses very high. So I mean thereare two fundamental reasons.

One, we have and really expandedour fee businesses and also over that whole year time period some of ourdeposits shifted out of the bank into our wealth management and brokeragebusiness and those are the two overriding reasons for the lower efficientratio. I just think overall we have been about as good as you can be in a toughenvironment you start to manage expenses and still investing talent, invest inoffices and things like that.

So, we don’t try to forecast onthe number. We continue to look for way and make the company more efficient,but at the same time we are always looking for things that we can invest incontinue to grow the company.

Andrea Jao - Lehman Brothers

Fair enough. My follow-upquestion is on deposit you mentioned the run up in title and escrow deposits.Could you talk a bit more about what’s going on about the mix shift customerpreferences and looking out into the first quarter when deposits tend to beweak, what can you tell us at this point?

Chris Carey

Well, I think we feel really goodabout our business area there what they done this year in the tough environmentadding more clients and actually we saw some growth in it over the part of theyear and then it came down a little bit this quarter somewhat predictably. Ithink with even a further slow down in the housing environment.

In terms of -- I’m not going togive a forecast in next year about as long as you have asked the question,there always seems to be -- I suspected it may be less this year, but there istypically a cyclical low point in the first quarter. That really relates tohousing slowing down around the holiday season. And there not being muchactivity in part of the first quarter whether that will repeat next year isanybody’s guess because the housing activities is so much slower.

So, I wouldn’t want a forecastwhere would be. We are overall looking at ways to grow it and I have beenbrining in new clients and hopefully this is we are at or somewhere near thelow point of housing activity I wouldn’t want to try to predict that yet, butit certainly slowed down further in the last quarter.

Andrea Jao - Lehman Brothers

Fair enough. Just one last thingwhat’s the level of title and escrow deposits?

Chris Carey

Little bit under $1.2 billion, Ibelieve, closer to $1.1.

Andrea Jao - Lehman Brothers

Perfect. Thank you so much.

Chris Carey

You’re welcome.

Operator

(Operator Instructions). Yournext question comes from the line of Joe Morford from RBC Capital Markets.Please proceed.

Joe Morford - RBC Capital Markets

Hi good afternoon, Russell andChris.

Russell Goldsmith

Hey, Joe, how are you?

Joe Morford - RBC Capital Markets

Very well. Thanks. I guess Chris,just a question on the outlook for the margin in the [inaudible], how do youfeel about your ability to pass on lower deposit rates given the competitiveenvironment and also taken into account, I guess, the sounds like you sold somesecurities within the period?

Chris Carey

Well, I think, the first [cut]for us is always negative frankly Joe because, it’s harder for us. We spend alot of times to pass it on and we have a big book at DDA. So, I look at that asa negative. So, I think, the sale of the securities is quite positive, and Ithink that if we did our typical run up in demand deposits in the fourthquarter that will be positive.

That should urge, certainly Iwould like to think, it would be stable to slightly positive on the marginside. But it’s still, there is still enough uncertainty. The market is difficultright now, I think for a lot of our competitors to lower their deposit prices.But there is a little relief going on there.

Joe Morford - RBC Capital Markets

Okay. And should we expect thesecurities portfolio to continue to runoff, and what about active continue toactively sell?

Chris Carey

We are that’s going to be, wewouldn’t commit to continuing actively selling it since it held the maturityportfolio. So, I think, we would see, we would expect to see some continuedrundown certainly for the next quarter or two at least. And I would also add onthe first question, we do have hedges in place that’s what gives us a littlebit relief when rates go down, they don’t take care of everything.

Joe Morford - RBC Capital Markets

Right. Okay. Thanks, so much.

Operator

Your next question comes from theline of Gary Townsend with FBR Capital Markets. Please proceed.

Gary Townsend - FBR Capital Markets

Good afternoon, Russell andChris. How are you?

Chris Carey

Good. How are you, Gary?

Gary Townsend - FBR Capital Markets

Me too.

Chris Carey

Okay.

Gary Townsend - FBR Capital Markets

How much of the increase in yourinvestment fee revenue is coming from the Convergent acquisition? So, how muchof the change there is attributable to the acquisition?

Chris Carey

Are you talking Gary about quarter-to-quarter?

Gary Townsend - FBR Capital Markets

I would be. Really those came;the acquisitions fairly recent. I was just trying to…

Chris Carey

Yeah. I would say, I mean, therewas a fair amount of moving parts in there a large chunk of this year to lastyear is coming from Convergent, and the only reason I say that way is becausewe have one of our affiliates that we bought and there was always expected somerundown there, and they are probably a little bit more than we thought, and Ithink, they have stabilize it.

So, because in general our bankbusiness has good growth and most of the affiliates have good growth. But oneof our larger ones is seeing a little bit of runoff. So, a good part of that growthis coming from Convergent.

Gary Townsend - FBR Capital Markets

Has there been any introductionof the seasonality in these businesses through the acquisitions or not?

Chris Carey

There is not that much. I mean,we happened to seem to have a lot of good momentum going into the fourthquarter and our expecting a strong fourth quarter there subject to the marketdoing something materially different.

So, I would say, we are feelingexceptionally good about the whole business and frankly all of the units withinthe affiliates as well as our bank business is hitting on all cylinders. Ithink, it’s telling Gary that the team at Convergent even with all the kind ofdistractions of a sale and conversion of the name and becoming a part of CityNational even through that whole period and we are opening an office here inLos Angeles, which is taking some time and effort.

They've managed to increase theirassets under management pretty significantly. I think they've seen roughly a10% rise from the assets that we are signed up at the time we made our deal towhere they are today or in the pipeline. So they seem to be doing quite well.

Gary Townsend - FBR Capital Markets

Could I ask what’s your grosscharge-offs were for the quarter?

Chris Carey

I don’t think that I mean it'sslightly higher than our net. I don’t think we didn’t have a lot of recoveriesthis quarter.

Gary Townsend - FBR Capital Markets

Okay. Thank you.

Operator

Your next question comes from theline of Heather Wolf with Merrill Lynch. Please proceed.

Heather Wolf - Merrill Lynch

Hi there.

Chris Carey

Hi, Heather.

Russell Goldsmith

Hi.

Heather Wolf - Merrill Lynch

Couple of questions on creditquality I’m curious you given that we are seeing a little bit of deteriorationand your charge-offs and non-performing loans. I’m curious how would it is thatthe orders will let you bring your reserve down and should we expect continuedreserve draw down if we see more non-performers and charge-offs?

Chris Carey

Well, let me say it is as I’msure you know our reserve levels are I guess I make two points. One, they arebuilt based on a complex and consistent methodology they takes into account ofwide range of factors and based on that analysis and current state of our loanportfolios.

It was very clear that there wasno need for a provision at this time. And the second point I would make isthat, if you look at where we are related to peers, I think it’s fair to saythat the City National has a broader coverage of reserves or more extensive reserveswell into our loan portfolio than a number of other banks.

As I said at the offset, a lot ofthe headline grabbing problems that are out there that people are legitimatelyconcerned about have not become issues at City National. So, some of the motivationperhaps for significant provisions that people are seeing around the industryaren’t happening here and therefore don’t want that here as well.

But we look at this every quarterafter a kind of top down and bottoms up review through an extensive process.And obviously, we will look at it again next quarter. But based on where westand today both in terms of reserves and the grading and quality of our loanportfolio this is where we should be.

Heather Wolf - Merrill Lynch

Okay. I understand that thereserve is definitely above average. I am just trying to figure out, how tothink about it going forward. Should we assume that you could, if we did see alittle bit of pressure on non-performers, should we assume that you couldcontinue to draw that down a little bit?

Russell Goldsmith

Well, Chris and I have beensaying for sometime now that we think there and I said it again earlier today.There is going to come a point, where do you might call and want to normalizedlevel of provisioning would be appropriate. We are not quite there yet. Clearlythe way the economy is growing, we are paying close attention to that issue.And at some point, I am sure we will need to add to the loan loss reserves. Weare just not there yet.

Heather Wolf - Merrill Lynch

Okay. And then quickly Russell,can you give us a little bit of color on the increase in the commercial realestate charge-offs line?

Russell Goldsmith

Yeah, two items really incommercial real estate similar in size principally and they are in the for-salehousing. I think they are more certainly not representative of our for-salehousing program and they are now in condos, but there are two project thatstill workout as well, but I think that cycle we are going to see some of that.But as we said, we feel good overall about what's going on there and thestrength of our compliance.

Heather Wolf - Merrill Lynch

Can you just give us a sense for whatthe loss severity was on those projects?

Russell Goldsmith

I would rather not guess on the conferencecall. I can get back to you if you want that. I don’t have that exact number.

Heather Wolf - Merrill Lynch

Okay. That would be great. Thanksa lot.

Operator

Your next question comes fromline of Brett Rabatin from FTN Midwest. Please proceed.

Brett Rabatin - FTN Midwest

Hey guys, good afternoon.

Chris Carey

Hi, how are you doing?

Brett Rabatin - FTN Midwest

It gets quite right away. Iwanted to ask you first of just the housekeeping issue at the end of preparedcomments that the tax issue does that mean the state tax receivable of $28million after tax related to the [requite] thing has being resolved or what'sthe tax item?

Chris Carey

Not related to the [requite]. Wedon’t have that receivable anymore for the requite because of the change and actuallythe tax accounting rules that took place effect of January 1, where we hideeffectively taken against equity. So, that to the degree that get resolved inour favor certainly a nice pickup there.

That’s just for too smallerisolated longer-term strategies that we had pursued and frankly I think we feelvery, very good about the limited amount of tax exposures that we have. Theworst case is a very small number here with these two being [sold] the companyhas not really taken a lot of tax risks. So, we don’t have a lot of exposure.

Brett Rabatin - FTN Midwest

Okay. And then secondly, I justwanted to ask about the loan pipeline and where draw ends for this quarter andobviously average versus in the period loans. I am just trying to get a senseof what you might anticipate in terms of the loan portfolio growth in the nextfew quarters?

Chris Carey

Well, we are certainly, we gointo the fourth quarter as almost another separate selling season, and it’shistorically has been a good quarter for us. I would say with the little bit offurther weakening in the economy that makes it a little harder to predict. Butwe have a good sales effort going on out there.

In general, the economy arena ispretty good, but it could be slowing further side. I wouldn’t want to give aprediction. But we certainly are forecasting that we are going to continue todraw outstandings. The area that’s probably is the softest is the real estatesector, but we are still making some headway there, and seeing [NOIs] is thebig part of our focus.

Russell Goldsmith

Well, obviously there are somesectors like for-sale housing.

Brett Rabatin - FTN Midwest

Yeah.

Russell Goldsmith

That’s not something, where weare looking to put new loans on at this point.

Brett Rabatin - FTN Midwest

All right.

Russell Goldsmith

Such in very select opportunitieswith the right clients.

Brett Rabatin - FTN Midwest

Okay. Great. Thanks.

Operator

The next question comes from theline of Manuel Ramirez from KBW. Please proceed.

Manuel Ramirez - KBW

Hi, how are you doing guys?

Chris Carey

Manuel, how are you. I hopeyou’re not getting to many jokes spread around the red socks.

Manuel Ramirez - KBW

Only by one once a week.

Chris Carey

But I want you one how is that.

Manuel Ramirez - KBW

I appreciate it, but you alwayswelcome to. A couple of things, one is from more of a portfolio managementperspective have you looked that how the slow down in the housing market lastthree months, my impact credit quality looking to see an high portfolio andelsewhere even if you don’t have direct instruction exposure.

And then to follow-up onHeather’s question on the provision if I just look out kind of 8% annualizedloan growth and your level charge-offs this quarter, your provision on thequarterly run rates about $6 to $7 million. And I think we all agree creditsecurity compare so. As you look at that transition from zero provision to somepositive dollar amount of provision, how smooth should we accept that to be orin your mind, I guess, how is it looking? In ‘08 what’s the range of powerfuloutcomes?

Chris Carey

Well, let me take the firstquestion first. One of the reasons why we stay humble around here is that we’verecognized that in an economy there are a lot of ripple effects and that slowdown in for-sale housing can effect a lot of businesses that to one degree oranother drive some benefit to one degree or another from those industry.

So we are looking at our C&Iportfolio and have been for sometime within either understanding how that slowdown in one of the many key industries in California. How that affects otherbusinesses, whether its law firms that you work with them or truck dealers thatsell trucks or whatever it is, but certainly, so for we’ve seen our credits inthe C&I portfolio holdup nicely.

But obviously we’ve been throughthis kind of situation before, and we are vigilant about that. And since, weare, as you know, we are conservative lender and work with longstanding clientrelationships that tends to work better I think in a slowing environment.

In terms of projecting ourprovisions, I think it would be inappropriate it’s not something that we do.Obviously we’ve said there is going to come a point, where we are going tostart to provision that at a more normalized levels and certainly a slowingeconomy with signs of credit starting to [copulate] suggests that that’s nottoo far away.

But when that will be and howmuch it will be is really not clear. We will follow our methodology. We willlook at loans in great depth at the end of the year. And then again in thefirst quarter and so forth, and see what it looks like. But I think we are in aposition, where we can respond appropriately and successfully.

Manuel Ramirez - KBW

Okay. Thank you very much,Russell.

Russell Goldsmith

Sure, thanks Manuel.

Operator

(Operator Instructions). The nextquestion comes from the line of Gary Townsend with FBR Capital Markets. Pleaseproceed.

Gary Townsend - FBR Capital Markets

Yes. Thanks again fellows. Withrespect to escrow deposits and such there obviously very important given thehousing industries problems in California would seem to be that the generaltrend in these deposits will be downward then what are you doing to offset orhow do you see that?

Russell Goldsmith

Well I mean first of all I thinkas just volume of sales state wide slow down and that’s kind of the form we aretrying to make that some degree in a slower velocity kind of environment thatour existing clients will have the less volume and lower deposits to some degree,and that’s what we are seeing.

The good news is the team that wehave running this area has continued to do an excellent job of retaining therelationships, in some case expanding those relationships and adding a numberof other clients, who find our capabilities and our service superior where theyare and divide when they come over to see national.

So within that business they areswimming against a tide at the moment, but I think doing quite well relativelyspeaking obviously throughout the organization there is a and has been forquite sometime focus on growing our deposit base and you seen the draw down inour securities portfolio. So we have used a whole series of tools in ourdisposal to address this inevitable reduction given what's happening withhousing volumes.

Gary Townsend - FBR Capital Markets

Thanks for your comments,Russell.

Russell Goldsmith

Thank you, Gary.

Russell Goldsmith

I think that.

Operator

At this time there are no morequestions in audio queue. So, I would like to turn the call back over to Mr.Gold Smith.

Russell Goldsmith

Thank you very much. I appreciatethe questions that we got, and appreciate everybody for participating andlistening in on today’s call and joining us. We appreciate you taking the timeto understand City National and its performance. Now, we appreciate thatinterest and look forward to talking with you again at the end of the year.Meanwhile, of course, feel free to call Chris or myself with any furtherquestions. Thank you very much.

Operator

Thank you for your participationin today's conference. This concludes the presentation. You may now disconnect.And have a good day.

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Source: City National Q3 2007 Earnings Call Transcript

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