City National (CYN)

Capital Standards

        Each federal banking agency has promulgated regulations defining the following five categories in which a banking organization will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

        To be “well capitalized,” a banking organization must maintain minimum ratios of total capital to risk-weighted assets of ten percent (10%) and Tier 1 capital to risk-weighted assets of six percent (6%). To be “adequately capitalized,” a banking organization must maintain minimum ratios of total capital to risk-weighted assets of eight percent (8%) and of Tier 1 capital to risk-weighted assets of four percent (4%). The three undercapitalized categories are based upon the amount by which a bank falls below the ratios applicable to adequately capitalized banking organizations. For the Bank and the Corporation, Tier 1 capital includes common shareholders’ equity, less goodwill and certain other deductions, including the unrealized net gains and losses, after applicable taxes, on available-for-sale securities carried at fair value. For the Bank and the Corporation, total capital also includes the allowance for credit losses, subordinated debt, and net unrealized gains on marketable securities, subject to limitations established by the guidelines. At least half of total capital must be in the form of Tier 1 capital.

        Under the capital regulations, capital is compared to the risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets as well as transactions which are off-balance sheet items, such as letters of credit and recourse arrangements. Under the capital regulations, the nominal dollar amounts of assets and the balance sheet equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans.

        At December 31, 2000 and June 30, 2001, the Bank and the Corporation each exceeded the required ratios for classification as “well capitalized.” A banking organization’s capital category, however, is determined solely for the purposes of applying certain regulatory rules and may not constitute an accurate representation of that banking organization’s overall financial condition or prospects.

        In addition to the risk-based capital guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the “leverage ratio”. For a banking organization rated in the highest of the five categories used by the federal banking agencies to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all other banking organizations, the minimum ratio of Tier 1 capital to total assets is 4%. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios above the minimum levels. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

        Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement remedies available to federal banking agencies, including limitations on the ability to pay dividends, the issuance of a capital directive to increase capital, the termination of deposit insurance by the FDIC, and the appointment of a conservator or receiver.

        Federal banking agencies have proposed regulations that would modify existing rules related to risk-based capital and leverage ratios. The Bank does not believe that the aggregate impact of these modifications would have a significant impact on its capital position. Bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their

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 current levels. However, the Bank is unable to predict whether and when higher capital requirements would be imposed and, if so, at what level and on what schedule.

        Certain capital ratios of the Bank and the Corporation are included herein under “Selected Unaudited Financial Data for City National Bank” and “Selected Consolidated Financial Data for City National Corporation,” respectively.

Capital Standards

Each federal banking agency has adopted risk-based capital regulations under which a banking organization’s capital is compared to the risk associated with its operations for both transactions reported on the balance sheet as assets as well as transactions which are off-balance sheet items, such as letters of credit and recourse arrangements. Under the capital regulations, the nominal dollar amounts of assets and

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the balance sheet equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for asset categories with low credit risk, such as certain U.S. Treasury securities, to 100 percent for asset categories with relatively high credit risk, such as commercial loans.

In addition to the risk-based capital guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated composite 1 under the “Composite Uniform Financial Institutions Rating System (CAMELS)” for banks, which rating is the lowest level of supervisory concern of the five categories used by the federal banking agencies to rate banking organizations (“5” being the highest level of supervisory concern), the minimum leverage ratio of Tier 1 capital to total assets is 3 percent. For all banking organizations other than those rated composite 1 under the CAMELS system, the minimum leverage ratio of Tier 1 capital to total assets is 4 percent. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios above the minimum levels. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

At December 31, 2004, the Corporation and the Bank each exceeded the required risk-based capital ratios for classification as “well capitalized” as well as the required minimum leverage ratios. See “Management’s Discussion and Analysis—Balance Sheet Analysis—Capital” on page A-35 of this report.

The Federal Deposit Insurance Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation.

The existing U.S. federal bank regulatory agencies’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (“BIS”). In June 2004, BIS issued a revised framework for measuring capital adequacy (“Basel II”) including setting capital requirements for operational risk. Basel II promotes risk management practices and includes a greater use of assessments of risk provided by banks’ internal systems as inputs to capital calculations. Federal regulators are currently preparing regulations on compliance with Basel II in the United States. U.S. banking regulators have stated that only the 10 largest U.S. bank holding companies will be required to adopt the new standards, and that others may do so voluntarily. The Corporation continues to monitor and analyze Basel II and its implementation, including what effect the new capital requirements of Basel II may have on the Corporation’s minimum capital requirements and on its risk management policies.