Edgar Filing: CITY NATIONAL CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED

For the quarterly period ended June 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-10521

CITY NATIONAL CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware		95-2568550
(State of Incorporation)		(I.R.S. Employer Identification No.)

City National Plaza

555 South Flower Street, Los Angeles, California, 90071

(Address of principal executive offices)(Zip Code)

(800) 773-7100

(Registrant’s telephone number, including area code)

City National Center

400 North Roxbury Drive, Beverly Hills, California, 90210

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of July 31, 2009, there were 51,471,508 shares of Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	67
Item 4.	Controls and Procedures	69

PART II
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 4.	Submission of Matters to a Vote of Security Holders	72
Item 6.	Exhibits	73

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,			June 30,
(in thousands, except share amounts)	2009			2008			2008
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	350,931		$	279,921		$	513,736
Due from banks - interest-bearing	205,656			144,344			88,149
Federal funds sold	125,000			—			—
Securities available-for-sale - cost $3,373,176, $2,239,184, and $2,349,032 at June 30, 2009, December 31, 2008 and June 30, 2008, respectively:
Securities pledged as collateral	226,961			223,506			222,912
Held in portfolio	3,103,365			1,921,364			2,080,070
Trading securities	138,137			295,598			204,825
Loans and leases	12,421,342			12,444,259			12,178,330
Less: Allowance for loan and lease losses	256,018			224,046			185,070
Net loans and leases	12,165,324			12,220,213			11,993,260
Premises and equipment, net	125,510			131,294			122,959
Deferred tax asset	204,303			226,854			145,150
Goodwill	459,454			459,418			460,186
Customer-relationship intangibles, net	37,108			40,619			54,398
Bank-owned life insurance	75,516			74,575			73,503
Affordable housing investments	96,389			74,577			70,627
Customers’ acceptance liability	6,094			1,714			3,981
Other real estate owned	18,064			11,388			9,113
Other assets	322,973			350,130			296,389
Total assets	$	17,660,785		$	16,455,515		$	16,339,258
Liabilities
Demand deposits	$	7,118,660		$	6,140,619		$	5,861,823
Interest checking deposits	1,568,379			988,313			807,734
Money market deposits	4,108,607			3,699,900			3,771,824
Savings deposits	243,722			146,590			132,261
Time deposits-under $100,000	212,833			234,669			200,788
Time deposits-$100,000 and over	1,246,050			1,442,033			1,121,907
Total deposits	14,498,251			12,652,124			11,896,337
Federal funds purchased and securities sold under repurchase agreements	316,388			908,157			1,221,428
Other short-term borrowings	50,000			124,500			955,000
Subordinated debt	162,434			161,595			157,080
Long-term debt	233,456			246,554			237,867
Reserve for off-balance sheet credit commitments	20,422			22,703			24,154
Acceptances outstanding	6,094			1,714			3,981
Other liabilities	163,072			262,923			143,463
Total liabilities	15,450,117			14,380,270			14,639,310
Redeemable noncontrolling interest	36,752			44,811			59,234
Commitments and contingencies
Equity
Preferred Stock; 5,000,000 shares authorized; 400,000 shares issued; aggregate liquidation preference of $400,000 as of June 30, 2009 and December 31, 2008, respectively	391,091			390,089			—
Common Stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886, 50,961,457, and 50,971,611 shares issued at June 30, 2009, December 31, 2008 and June 30, 2008, respectively	53,886			50,961			50,972
Additional paid-in capital	511,939			389,077			369,045
Accumulated other comprehensive loss	(18,110		)	(48,022		)	(24,853		)
Retained earnings	1,365,842			1,379,624			1,403,062
Treasury shares, at cost - 2,415,021, 2,413,039 and 2,811,898 shares at June 30, 2009, December 31, 2008 and June 30, 2008, respectively	(156,119		)	(156,736		)	(183,222		)
Total common shareholders’ equity	1,757,438			1,614,904			1,615,004
Total shareholders’ equity	2,148,529			2,004,993			1,615,004
Noncontrolling interest	25,387			25,441			25,710
Total equity	2,173,916			2,030,434			1,640,714
Total liabilities and equity	$	17,660,785		$	16,455,515		$	16,339,258

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the three months ended						For the six months ended
	June 30,						June 30,
(in thousands, except per share amounts)	2009			2008			2009			2008

Interest Income
Loans and leases	$	143,705		$	166,158		$	287,880		$	345,469
Securities available-for-sale	31,492			26,565			56,593			53,841
Trading securities	379			397			433			976
Due from banks - interest-bearing	291			529			446			1,051
Federal funds sold and securities purchased under resale agreements	9			58			15			122
Total interest income	175,876			193,707			345,367			401,459
Interest Expense
Deposits	16,068			27,292			35,629			66,122
Federal funds purchased and securities sold under repurchase agreements	2,084			7,611			4,263			17,242
Subordinated debt	873			1,587			2,073			3,815
Other long-term debt	1,222			2,234			2,816			5,287
Other short-term borrowings	53			4,815			113			10,660
Total interest expense	20,300			43,539			44,894			103,126
Net interest income	155,576			150,168			300,473			298,333
Provision for credit losses	70,000			35,000			120,000			52,000
Net interest income after provision for credit losses	85,576			115,168			180,473			246,333
Noninterest Income
Trust and investment fees	25,184			34,187			51,053			70,536
Brokerage and mutual fund fees	6,645			18,709			16,402			36,131
Cash management and deposit transaction charges	12,778			12,196			26,001			23,320
International services	7,996			8,176			14,521			15,863
Bank-owned life insurance	871			628			1,734			1,283
Gain (loss) on sale of other assets	43			(192		)	43			(192		)
Gain (loss) on sale of securities	3,281			(417		)	350			552
Other	8,996			8,177			15,021			13,787
Total other-than-temporary impairment loss on securities	(25,297		)	—			(37,333		)	—
Less: Portion of loss recognized in other comprehensive income	23,760			—			23,760			—
Net impairment loss recognized in earnings	(1,537		)	—			(13,573		)	—
Total noninterest income	64,257			81,464			111,552			161,280
Noninterest Expense
Salaries and employee benefits	75,834			87,520			154,086			177,699
Net occupancy of premises	12,559			12,462			24,820			23,974
Legal and professional fees	7,736			7,531			15,469			16,091
Information services	6,992			6,388			13,472			12,594
Depreciation and amortization	5,953			5,460			11,945			10,962
Marketing and advertising	4,743			5,360			9,419			10,955
Office services and equipment	3,922			3,886			7,526			7,785
Amortization of intangibles	1,668			1,528			3,511			3,959
Other real estate owned	2,155			320			2,250			320
FDIC assessments	13,861			1,820			16,929			2,171
Other operating	8,711			8,226			17,692			15,078
Total noninterest expense	144,134			140,501			277,119			281,588
Income before income taxes	5,699			56,131			14,906			126,025
Income taxes	(986		)	18,385			646			40,986
Net income	$	6,685		$	37,746		$	14,260		$	85,039
Less: Net (loss) income attributable to noncontrolling interest	(88		)	2,262			27			5,568
Net income attributable to City National Corporation	$	6,773		$	35,484		$	14,233		$	79,471
Less: Dividends on preferred stock	5,501			—			11,002			—
Net income available to common shareholders	$	1,272		$	35,484		$	3,231		$	79,471
Net income per common share, basic	$	0.02		$	0.74		$	0.06		$	1.65
Net income per common share, diluted	$	0.02		$	0.73		$	0.06		$	1.64
Shares used to compute income per common share, basic	50,416			47,849			49,028			47,839
Shares used to compute income per common share, diluted	50,551			48,179			49,138			48,164
Dividends per common share	$	0.10		$	0.48		$	0.35		$	0.96

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended
	June 30,
(in thousands)	2009			2008

Cash Flows From Operating Activities
Net income attributable to City National Corporation	$	14,233		$	79,471
Adjustments to net income:
Provision for credit losses	120,000			52,000
Amortization of intangibles	3,511			3,959
Depreciation and amortization	11,945			10,962
Amortization of cost and discount on long-term debt	306			264
Share-based employee compensation expense	7,193			7,225
(Gain) loss on sale of other assets	(43		)	192
Gain on sale of securities	(350		)	(552		)
Impairment loss on securities	13,573			—
Other, net	(1,674		)	5,425
Net change in:
Trading securities	163,861			88,530
Deferred income tax benefit	(389		)	(15,747		)
Other assets and other liabilities, net	(97,945		)	(42,076		)

Net cash provided by operating activities	234,221			189,653

Cash Flows From Investing Activities
Purchase of securities available-for-sale	(1,983,459		)	(208,080		)
Sales of securities available-for-sale	446,001			88,157
Maturities and paydowns of securities	378,688			255,395
Loan originations, net of principal collections	(77,410		)	(582,379		)
Net payments for premises and equipment	(6,161		)	(15,854		)
Other investing activities, net	(1,722		)	(13,680		)

Net cash used in investing activities	(1,244,063		)	(476,441		)

Cash Flows From Financing Activities
Net increase in deposits	1,846,127			73,832
Net decrease in federal funds purchased and securities sold under repurchase agreements	(591,769		)	(322,983		)
Net (decrease) increase in short-term borrowings, net of transfers from long-term debt	(74,500		)	855,000
Net decrease in other borrowings	(6,583		)	(111,230		)
Proceeds from exercise of stock options	540			6,985
Tax benefit from exercise of stock options	100			1,046
Stock repurchases	—			(21,638		)
Issuance of common stock	119,929			—
Cash dividends paid	(26,680		)	(46,408		)

Net cash provided by financing activities	1,267,164			434,604

Net increase in cash and cash equivalents	257,322			147,816
Cash and cash equivalents at beginning of year	424,265			454,069

Cash and cash equivalents at end of period	$	681,587		$	601,885

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	45,593		$	116,097
Income taxes	17,682			55,148

Non-cash investing activities:
Transfer of loans to foreclosed assets	17,179			12,612
Transfer from securities available-for-sale to trading securities	6,400			—

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

	City National Corporation Shareholders’ Equity
											Accumulated
								Additional			other									Non-
	Shares		Preferred		Common			paid-in			comprehensive			Retained			Treasury			controlling			Total
(in thousands, except share amounts)	issued		stock		stock			capital			income (loss)			earnings			shares			interest			equity

Balance, January 1, 2008	50,824,178		$	—	$	50,824		$	374,700		$	(9,349	)	$	1,369,999		$	(176,035	)	$	25,583		$	1,635,722
Net income	—		—		—									79,471			—			1,210			80,681
Other comprehensive loss, net of tax:
Amortization of prior service cost	—		—		—			—			(26		)	—			—			—			(26		)
Net unrealized loss on securities available-for-sale, net of taxes of $10.0 million and reclassification of $0.1 million net loss included in net income	—		—		—			—			(13,845		)	—			—			—			(13,845		)
Net unrealized loss on cash flow hedges, net of taxes of $1.2 million and reclassification of $1.5 million net gain included in net income	—		—		—			—			(1,633		)	—			—			—			(1,633		)
Total comprehensive income																				1,210			65,177
Dividends and distributions to noncontrolling interest	—		—		—			—			—			—			—			(1,083		)	(1,083		)
Issuance of shares under share-based compensation plans	147,433		—		148			(7,614		)	—			—			14,451			—			6,985
Share-based employee compensation expense	—		—		—			7,136			—			—			—			—			7,136
Tax benefit from share-based compensation plans	—		—		—			1,268			—			—			—			—			1,268
Cash dividends paid	—		—		—			—			—			(46,408		)	—			—			(46,408		)
Repurchased shares, net	—		—		—			—			—			—			(21,638		)	—			(21,638		)
Net change in deferred compensation plans	—		—		—			731			—			—			—			—			731
Change in redeemable noncontrolling interest	—		—		—			(7,176		)	—			—			—			—			(7,176		)
Balance, June 30, 2008	50,971,611		$	—	$	50,972		$	369,045		$	(24,853	)	$	1,403,062		$	(183,222	)	$	25,710		$	1,640,714

Balance, January 1, 2009	50,961,457		$	390,089	$	50,961		$	389,077		$	(48,022	)	$	1,379,624		$	(156,736	)	$	25,441		$	2,030,434
Net income	—		—		—			—			—			14,233			—			1,083			15,316
Other comprehensive income, net of tax:
Amortization of prior service cost	—		—		—			—			80			—			—			—			80
Non-credit related impairment loss on investment securities, net of taxes of $9.9 million	—		—		—			—			(13,821		)	—			—			—			(13,821		)
Net unrealized gain on securities available-for-sale, net of taxes of $31.5 million and reclassification of $1.1 million net loss included in net income	—		—		—			—			43,757			—			—			—			43,757
Net unrealized loss on cash flow hedges, net of taxes of $0.1 million and reclassification of $3.4 million net gain included in net income	—		—		—			—			(104		)	—			—			—			(104		)
Total comprehensive income																				1,083			45,228
Dividends and distributions to noncontrolling interest	—		—		—			—			—			—			—			(1,137		)	(1,137		)
Issuance of common stock	3,220,000				3,220			116,409			—			—			—			—			119,629
Issuance of shares under share-based compensation plans	(295,571	)	—		(295		)	(525		)	—			—			617			—			(203		)
Preferred stock accretion	—		1,002		—			—			—			(1,002		)	—			—			—
Share-based employee compensation expense	—		—		—			7,138			—			—			—			—			7,138
Tax benefit from share-based compensation plans	—		—		—			(661		)	—			—			—			—			(661		)
Cash dividends:
Preferred	—		—		—			—			—			(10,000		)	—			—			(10,000		)
Common	—		—		—			—			—			(17,013		)	—			—			(17,013		)
Net change in deferred compensation plans	—		—		—			449			—			—			—			—			449
Change in redeemable noncontrolling interest	—		—		—			52			—			—			—			—			52
Balance, June 30, 2009	53,885,886		$	391,091	$	53,886		$	511,939		$	(18,110	)	$	1,365,842		$	(156,119	)	$	25,387		$	2,173,916

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Organization

City National Corporation (the “Corporation”) is the holding company for City National Bank (“the Bank”). The Bank delivers banking, trust and investment services through 63 offices in Southern California, the San Francisco Bay area, Nevada and New York City. Additionally, the Corporation delivers investment and wealth advisory services through its wealth advisory affiliates. The Corporation also has an unconsolidated subsidiary, Business Bancorp Capital Trust I. The Corporation is approved as a financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999. References to the “Company” mean the Corporation, Bank, all subsidiaries and affiliates together.

Consolidation

The consolidated financial statements of the Company include the accounts of the Corporation, its non-bank subsidiaries, the Bank and the Bank’s wholly owned subsidiaries, after the elimination of all material intercompany transactions. Preferred stock and equity ownership of others are reflected as Redeemable noncontrolling interest and Noncontrolling interest in the consolidated balance sheets. The related noncontrolling share of earnings is shown as Net income attributable to noncontrolling interest in the consolidated statements of income.

The Company’s investment management and wealth advisory affiliates are organized as limited liability companies. The Corporation generally owns a majority position in each affiliate and certain management members of each affiliate own the remaining shares. The Corporation has contractual arrangements with its affiliates whereby a percentage of revenue is allocable to fund affiliate operating expenses (“operating share”) while the remaining portion of revenue (“distributable revenue”) is allocable to the Corporation and the noncontrolling owners. All majority-owned affiliates are consolidated. The Corporation’s interest in one investment management affiliate in which it holds a noncontrolling share is accounted for using the equity method. Additionally, the Company has various interests in variable interest entities that are not required to be consolidated. See Note 13 for a more detailed discussion on variable interest entities.

Use of Estimates

The Company’s accounting and reporting policies conform to 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. Circumstances and events that differ significantly from those underlying the Company’s estimates and assumptions could cause actual financial results to differ from those estimates. The material estimates included in the financial statements relate to the allowance for loan and lease losses, the reserve for off-balance sheet credit commitments, valuation of stock options and restricted stock, income taxes, goodwill and intangible asset impairment, available-for-sale securities impairment and the valuation of financial assets and liabilities reported at fair value. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements. The allowance for loan and lease losses reflects management’s ongoing assessment of the credit quality of the Company’s portfolio, which is affected by a broad range of economic factors, including weak valuations in commercial and residential real estate. Additional factors affecting the provision include net loan charge-offs, nonaccrual loans, specific reserves, risk-rating migration and changes in the portfolio size. The Company’s estimates and assumptions are expected to change as changes in market conditions and the Company’s portfolio occur in subsequent periods.

Basis of Presentation

The Company is on the accrual basis of accounting for income and expense. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q, and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. In accordance with the usual practice of banks, assets and liabilities of individual trust, agency and fiduciary funds have not been included in the financial statements. 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, 2008.

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Note 1. Summary of Significant Accounting Policies (continued)

The results for the 2009 interim period are not necessarily indicative of the results expected for the full year. The Company has not made any significant changes in its critical accounting policies or in its estimates and assumptions from those disclosed in its 2008 Annual Report other than the adoption of new accounting pronouncements and other authoritative guidance that became effective for the Company on January 1, 2009. Refer to Accounting Pronouncements below for discussion of accounting pronouncements adopted in 2009.

Certain prior period amounts have been reclassified or restated to conform to the current period presentation.

Goodwill and Customer-Relationship Intangible Assets

The Company has not completed any acquisitions since the change to the acquisition method of accounting with the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 141(R), Business Combinations (“SFAS 141(R)”). Prior acquisitions were accounted for under the purchase method. Under the purchase method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes valuation techniques based on discounted cash flow analysis to determine these fair values. Any excess of the purchase price over amounts allocated to acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Intangible assets include core deposit intangibles and client advisory contract intangibles (combined, customer-relationship intangibles) originating from acquisitions of financial services firms. Core deposit intangibles are amortized over a range of four to eight years and client advisory contract intangibles are amortized over various periods ranging from 12 to 20 years. The weighted-average amortization period for the contract intangibles is 18.6 years.

Goodwill and customer-relationship intangibles are evaluated for impairment at least annually or more frequently if events or circumstances, such as changes in economic or market conditions, indicate that potential impairment exists. Given the volatility in the current economic environment, goodwill and customer-relationship intangibles are evaluated for impairment on a quarterly basis. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment for which discrete financial information is available and regularly reviewed by management. Fair values of reporting units are determined using methods consistent with current market practices for valuing similar types of businesses. Valuations are generally based on market multiples of net income or gross revenue combined with an analysis of expected near and long-term financial performance. Management utilizes market information including market comparables and recent merger and acquisition transactions to validate the reasonableness of its valuations. If the fair value of the reporting unit, including goodwill, is determined to be less than the carrying amount of the reporting unit, a further test is required to measure the amount of impairment. If an impairment loss exists, the carrying amount of the goodwill is adjusted to a new cost basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

Impairment testing of customer-relationship intangibles is performed at the individual asset level. Impairment exists when the carrying amount of an intangible asset is not recoverable and exceeds its fair value. The carrying amount of an intangible asset is not recoverable when the carrying amount of the asset exceeds the sum of undiscounted cash flows (cash inflows less cash outflows) associated with the use and/or disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The fair value of core deposit intangibles is determined using market-based core deposit premiums from recent deposit sale transactions. The fair value of client advisory contracts is based on discounted expected future cash flows. Management makes certain estimates and assumptions in determining the expected future cash flows from customer-relationship intangibles including account attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these estimates and assumptions could adversely impact the valuation of these intangible assets. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is amortized over the remaining useful life of the asset.

Earnings per Common Share

The Company calculates earnings per common share (“EPS”) using the two-class method in accordance with FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”), effective January 1, 2009 with retrospective application to all prior-period earnings per share data presented. Refer to Accounting Pronouncements below. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to common shareholders and any participating securities, regardless of whether any actual dividends or distributions are made. Under FSP 03-6-1, all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities under EITF 03-6. The Company grants restricted shares under a share-based compensation plan that qualify as

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Note 1. Summary of Significant Accounting Policies (Continued)

participating securities. Restricted shares issued under the Company’s share-based compensation plan are entitled to dividends at the same rate as common stock.

Basic EPS are computed by dividing distributed and undistributed earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Distributed and undistributed earnings available to common shareholders represents net income reduced by preferred stock dividends and distributed and undistributed earnings available to participating securities. Common shares outstanding include common stock and vested restricted stock awards. Diluted EPS reflects the assumed conversion of all potential dilutive securities. Adoption of FSP 03-6-1 resulted in a 1 cent per share reduction in basic EPS for the six-month period ended June 30, 2008. Diluted EPS for 2008 was not impacted by the adoption of FSP 03-6-1. Prior-period EPS data presented has been restated retrospectively for comparability.

Accounting Pronouncements

During the six months ended June 30, 2009, the following accounting pronouncements applicable to the Company were issued or became effective:

· The Company adopted SFAS 141(R) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”) effective January 1, 2009. SFAS 141(R) requires the acquiring entity in a business combination to recognize 100 percent of the assets acquired and liabilities assumed in the transaction; establishes acquisition date fair value as the measurement objective for the assets acquired and liabilities assumed; requires recognition of contingent consideration arrangements at their acquisition date fair values; and expands required disclosures regarding the nature and financial effect of the business combination. SFAS 141(R) also requires that acquisition-related costs be expensed when incurred. The provisions of SFAS 141(R) will be applied prospectively for business combination transactions consummated after the date of adoption. SFAS 160 requires that noncontrolling interests in subsidiaries be initially measured at fair value and classified as a separate component of equity in the consolidated financial statements. Following adoption of SFAS 160, the Company reports noncontrolling interests in subsidiaries, with the exception of certain redeemable noncontrolling interests, as a separate component of equity in the consolidated balance sheets, and noncontrolling interests’ share of subsidiary earnings is no longer recognized as an expense in the computation of consolidated net income. The presentation and disclosure requirements of SFAS 160 have been applied for the current period and retrospectively for prior periods presented. Redeemable noncontrolling interest continues to be reported in the mezzanine section of the consolidated balance sheets.

· FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) became effective for the Company for annual and interim reporting periods beginning January 1, 2009. FSP 157-2 amended FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), to delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company’s non-financial assets within the scope of SFAS 157, which include goodwill, customer-relationship intangible assets and private equity investments, are reported at fair value on a nonrecurring basis (generally as the result of an impairment assessment) during the period in which the remeasurement at fair value is recorded. The Company currently has no non-financial liabilities required to be reported at fair value.

· FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) became effective for the Company for annual and interim reporting periods beginning January 1, 2009. The Statement expands disclosure requirements for derivative instruments and hedging activities. The new disclosures address how derivative instruments are used, how derivatives and the related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. In addition, companies are required to disclose the fair values of derivative instruments and their gains and losses in a tabular format. The disclosure requirements of SFAS 161 have been applied for the current period and retrospectively for prior periods presented.

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Note 1. Summary of Significant Accounting Policies (continued)

· FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, Business Combinations, when the underlying arrangement includes renewal or extension terms. FSP 142-3 permits an entity to use its own assumptions, based on its historical experience, about the renewal or extension of an arrangement to determine the useful life of an intangible asset. These assumptions are to be adjusted for the entity-specific factors detailed in SFAS 142. FSP 142-3 became effective for the Company on January 1, 2009. Adoption of FSP 142-3 did not have a significant impact on the Company’s consolidated financial statements.

· FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”) became effective for the Company for annual and interim reporting periods beginning January 1, 2009. FSP 03-6-1 states that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities under EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share (“EITF 03-6”). As such, the issuing entity is required to apply the two-class method of computing basic and diluted EPS. The Company grants restricted shares under a share-based compensation plan that qualify as participating securities. Adoption of FSP 03-6-1 resulted in a 1 cent per share reduction in basic EPS for the six-month period ended June 30, 2008. Diluted EPS for 2008 was not impacted by the adoption of FSP 03-6-1. Prior-period EPS and share data presented has been restated retrospectively for comparability.

· EITF No. 07-5, Determining Whether an Instrument is Indexed to an Entity’s Own Stock (“EITF 07-5”) became effective for the Company for annual and interim reporting periods beginning January 1, 2009. EITF 07-5 replaces the guidance in EITF Issue 01-6, The Meaning of Indexed to a Company’s Own Stock. Both Issues 01-6 and 07-5 require an entity to evaluate an instrument’s contingency provisions and the factors that affect its ultimate settlement amount (i.e., the payoff to the holder) when determining whether the instrument is indexed to the entity’s own stock. Adoption of EITF 07-5 did not have a material impact on the Company’s consolidated financial statements.

· On November 13, 2008, the FASB reached a consensus on the issues addressed in EITF Issue 08-6, Equity Method Accounting Considerations (“EITF 08-6”). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. The EITF applies to all investments accounted for under the equity method and became effective for the Company, on a prospective basis, for annual and interim reporting periods beginning January 1, 2009. Adoption of EITF 08-6 did not have a significant impact on the Company’s consolidated financial statements.

· On April 1, 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(R)-1”). FSP 141(R)-1 amends the requirements associated with the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Under the revised guidance, an asset or liability assumed in a business combination that arises from a contingency is to be initially measured at fair value if fair value can be determined. If fair value cannot be determined, an asset or liability is to be recognized if it is probable that an asset existed or a liability had been incurred at the acquisition date and the amount can be reasonably estimated. An acquiring entity should develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effects of a business combination. FSP 141(R)-1 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will apply the guidance in the FSP to all future acquisitions.

· On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS 107”), to require disclosures about fair value of financial instruments in interim financial statements of publicly traded companies as well as in annual financial statements. The FSP also amends APB opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in interim financial statements and any changes in these methods and

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Note 1. Summary of Significant Accounting Policies (continued)

assumptions from prior periods. FSP 107-1 became effective for the Company for June 30, 2009 reporting. In periods after initial adoption, the FSP requires comparative disclosures only for periods ending after initial adoption. Adoption of FSP FAS 107-1 did not have a significant impact on the Company’s consolidated financial statements.

· On April 9, 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). FSP 115-2 amends the other-than-temporary impairment guidance for debt securities. FSP 115-2 modifies the “intent and ability” indicator for recognizing other-than-temporary impairment, and changes the trigger used to assess the collectibility of cash flows from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” FSP 115-2 changes the total amount recognized in earnings when there are credit losses associated with an impaired debt security and management asserts that it does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis. In those situations, impairment shall be separated into (a) the amount representing a credit loss and (b) the amount related to non-credit factors. The amount of impairment related to credit losses shall be recognized in earnings. The credit loss component of an other-than-temporary impairment, representing an increase in credit risk, shall be determined by the reporting entity using its best estimate of the present value of cash flows expected to be collected from the debt security. The amount of impairment related to non-credit factors shall be recognized in other comprehensive income. The previous cost basis less impairment recognized in earnings becomes the new cost basis of the security and shall not be adjusted for subsequent recoveries in fair value. However, the difference between the new amortized cost basis and the cash flows expected to be collected should be accreted as interest income. The total other-than-temporary impairment is presented in the consolidated statements of income with a reduction for the amount of the other-than-temporary impairment that is recognized in other comprehensive income, if any.

FSP 115-2 requires that the cumulative effect of initial adoption be recorded as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. The amortized cost basis of a security for which an other-than-temporary impairment was previously recognized shall be adjusted by the amount of the cumulative effect adjustment before taxes. The difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted as interest income. FSP 115-2 became effective for the Company on April 1, 2009. The Company did not hold any available-for-sale debt securities on April 1, 2009 with previously recognized other-than-temporary impairment. Therefore, the Company was not required to record a cumulative effect adjustment upon adoption of the FSP.

· On April 9, 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability have significantly decreased, and identifying transactions that are not orderly. FSP 157-4 identifies several factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability. If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity, transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly), further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS 157. FSP 157-4 reiterates that even in circumstances where there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP 157-4 became effective for the Company for the June 30, 2009 reporting period. Adoption of the FSP did not have a significant impact on the consolidated financial statements.

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Note 1. Summary of Significant Accounting Policies (continued)

· On May 28, 2009, the FASB issued FASB Statement No. 165, Subsequent Events (“SFAS 165”). The purpose of the statement is to provide authoritative accounting literature for a topic that was previously addressed only in the auditing literature. The guidance in SFAS 165 is similar to the current guidance with some modifications that are not intended to result in significant changes in practice. Under SFAS 165, subsequent events are categorized as recognized (currently type I) or nonrecognized (currently type II). The definition of subsequent events is modified to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). Entities are required to disclose the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009 and became effective for the Company for the June 30, 2009 reporting period. Adoption of SFAS 165 did not have a significant impact on the Company’s consolidated financial statements.

The following accounting pronouncements were issued prior to or during the first six months of 2009, but are not effective for the company until after June 30, 2009:

· In May 2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The FASB Accounting Standards Codification (the “Codification”) is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy (levels A through D) and establishes two levels of guidance: authoritative and nonauthoritative. The Codification is organized by topic, subtopic, section, subsection and paragraph. The Codification will become the single source of authoritative GAAP effective July 1, 2009. Companies may elect to use dual references to current GAAP and the Codification in their June 30, 2009 financial statements. References to GAAP in financial statements issued after September 15, 2009 are required to be based on the Codification. The Company will adopt the codification for September 30, 2009 reporting. Adoption of SFAS 162 is not expected to have a material effect on the Company’s consolidated financial statements.

· On June 12, 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”). SFAS 166 revises SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to expand required disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred assets. It also removes the concept of “qualifying special-purpose entity” from U.S. GAAP. SFAS 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. Adoption of SFAS 166 is not expected to have a material effect on the Company’s consolidated financial statements.

· On June 12, 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No 46(R) (“SFAS 167”). SFAS 167 requires, among other things: that an entity perform a qualitative analysis to determine if it is the primary beneficiary of a variable interest entity (“VIE”), amends FASB Interpretation No. 46(R)’s (“FIN 46(R)”) consideration of related party relationships in the determination of the primary beneficiary of a VIE, amends certain guidance in FIN 46(R) for determining whether an entity is a VIE and requires enhanced disclosures about an enterprise’s involvement with a VIE. SFAS 167 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim reporting periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact of adoption of SFAS 167 on its consolidated financial statements.

· On June 29, 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS 168 establishes the Codification as the official source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. The U.S. GAAP hierarchy will be modified to include only two levels: authoritative and nonauthoritative. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of SFAS 168 is not expected to have a material effect on the Company’s consolidated financial statements.

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Note 2. Business Combinations

On July 21, 2009, the Company acquired a majority interest in Lee Munder Capital Group, a Boston-based investment firm that manages assets for corporations, pensions, endowments and affluent households. Lee Munder Capital Group was merged with Independence Investments, a Boston-based institutional asset management firm in which the Company holds a majority interest. The combined company operates under the Lee Munder Capital Group name and as an affiliate of Convergent Capital Management LLC, the Chicago-based asset management holding company that the Company acquired in 2003. At the issuance date of these financial statements, the Company had not completed its initial accounting for this business combination.

Note 3. Fair Value Measurements

The Company adopted SFAS 157, effective January 1, 2008, on a prospective basis. SFAS 157 defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Under the statement, fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.

Fair Value Hierarchy

Management employs market standard valuation techniques in determining the fair value of assets and liabilities. Inputs used in valuation techniques are based on assumptions that market participants would use in pricing an asset or liability. SFAS 157 prioritizes inputs used in valuation techniques as follows:

Level 1—Quoted market prices in an active market for identical assets and liabilities.

Level 2—Observable inputs including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability such as interest rates, yield curves, volatilities and default rates, and inputs that are derived principally from or corroborated by observable market data.

Level 3—Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available.

If the determination of fair value measurement for a particular asset or liability is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability measured.

The Company records securities available-for-sale, trading securities and derivative contracts at fair value on a recurring basis. Certain other assets such as impaired loans, other real estate owned (“OREO”), goodwill, customer-relationship intangibles and private equity investments are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.

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Note 3. Fair Value Measurements (continued)

A distribution of asset and liability fair values according to the fair value hierarchy at June 30, 2009 is provided in the table below:

			Fair Value Measurements at Reporting Date Using
(in thousands) Asset or Liability Measured at Fair Value	Balance as of June 30, 2009		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale
Debt securities	$	3,311,267	$	15,831	$	3,270,011	$	25,425
Equity securities and mutual funds	19,059		19,059		—		—
Trading securities	138,137		102,802		33,532		1,803
Mark-to-market derivatives (1)	53,058		1,688		51,370		—
Total assets at fair value	$	3,521,521	$	139,380	$	3,354,913	$	27,228

Liabilities
Mark-to-market derivatives (2)	$	11,175	$	321	$	10,854	$	—
Total liabilities at fair value	$	11,175	$	321	$	10,854	$	—

Measured on a Nonrecurring Basis
Assets
Colleral dependent impaired loans (3)	$	183,474	$	—	$	183,474	$	—
Other real estate owned (4)	19,554		—		19,554		—
Private equity investments	700		—		—		700
Total assets at fair value	$	203,728	$	—	$	203,028	$	700

(1) Reported in Other assets in the consolidated balance sheets.

(2) Reported in Other liabilities in the consolidated balance sheets.

(3) Impaired loans for which fair value was calculated using the collateral valuation method.

(4) OREO balance of $18,064 in the consolidated balance sheets is net of estimated disposal costs.

For assets measured at fair value on a nonrecurring basis, the following table presents the total losses recognized in the three months and six months ended June 30, 2009:

(in thousands)	Three months ended June 30, 2009			Six months ended June 30, 2009
Impaired loans	$	(26,351	)	$	(24,488	)
Other real estate owned	(5,323		)	(5,323		)
Private equity investments	(403		)	(403		)
Total losses recognized	$	(32,077	)	$	(30,214	)

Level 3 assets measured at fair value on a recurring basis are CDO senior notes, included in available-for-sale debt securities, and CDO income notes, included in trading securities, for which the market is inactive. The fair value of these securities is determined using an internal cash flow model that incorporates management’s assumptions about risk-adjusted discount rates, prepayment expectations, projected cash flows and collateral performance. These assumptions are not directly observable in the market. Unrealized gains and losses on available-for-sale securities are reported as a component of Accumulated other comprehensive loss in the consolidated balance sheets. Unrealized gains and losses on trading securities are reported in earnings.

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Note 3. Fair Value Measurements (continued)

Level 3 assets measured at fair value on a nonrecurring basis include private equity investments. Private equity investments do not have readily determinable fair values. These investments are carried at cost and evaluated for impairment quarterly in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Due to the lack of readily determinable fair values for these investments, the impairment assessment was based primarily on a review of investment performance and the likelihood that the capital invested would be recovered. The Company recorded an impairment loss of $0.4 million on two private equity investments at June 30, 2009. This impairment is included in Other noninterest income in the consolidated statements of income.

Activity in Level 3 assets for the six-months ended June 30, 2009 is summarized in the following table:

Level 3 Assets Measured on a Recurring Basis

(in thousands)	Securities Available-for- Sale			Trading Securities			Total Level 3 Assets
Balance of recurring Level 3 assets at January 1, 2009	$	32,419		$	—		$	32,419
Total realized/unrealized gains (losses):
Included in earnings	(9,282		)	(644		)	(9,926		)
Included in other comprehensive income	5,285			—			5,285
Purchases, sales, issuances and settlements, net	(550		)	—			(550		)
Transfers between categories	(2,447		)	2,447			—
Balance of recurring Level 3 assets at June 30, 2009	$	25,425		$	1,803		$	27,228

There were no purchases or sales of Level 3 assets during the period.

Note 4. Disclosures about Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. The table below summarizes the estimated fair values for the Company’s financial instruments as of June 30, 2009 and December 31, 2008. In accordance with SFAS 107, the disclosure does not include estimated fair value amounts for assets and liabilities which are not defined as financial instruments but which have significant value. These assets and liabilities include the value of customer-relationship intangibles, goodwill, private equity and affordable housing investments carried at cost, other assets, deferred taxes and other liabilities. Accordingly, the total of the fair values presented does not represent the underlying value of the Company.

Following is a description of the methods and assumptions used in estimating the fair values for each class of financial instrument:

Cash and due from banks — For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities available-for-sale and Trading securities — For securities held as available-for-sale, the fair value is determined by quoted market prices, where available, or on observable market inputs appropriate for the type of security. If quoted market prices or observable market inputs are not available, discounted cash flows may be used to determine an appropriate fair value. See Note 3, Fair Value Measurements. Fair values for trading securities, with the exception of CDO income notes, are based on quoted market prices or dealer quotes. The fair value of CDO income notes is determined using a discounted cash flow model.

Loans and leases — Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. See Note 3, Fair Value Measurements. For purposes of SFAS 107, the fair value of the Company’s variable rate loans is estimated by adjusting their carrying value by an amount representing the change in fair value attributable to changes in borrowers’ credit quality since the loans were originated. The fair value of fixed rate loans is estimated by discounting future cash flows using discount rates that reflect the Company’s current pricing for loans with similar characteristics, such as loan type, credit risk, pricing and remaining maturity. The discount rates used in the valuation incorporate prepayment assumptions appropriate for the type of loan being valued as well as an adjustment for a bid-offer spread to approximate an exit price. Due to the lack of secondary market activity in these loan products, a liquidity premium has also been incorporated into the bid-offer spread for these products. The fair values resulting from this calculation are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated.

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Note 4. Disclosures about Fair Value of Financial Instruments

Derivative Contracts — The fair value of non-exchange traded (over-the-counter) derivatives are obtained from third party market sources. The Company provides client data to the third party source for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts. The fair values of interest rate contracts include interest receivable and payable and cash collateral, if any.

Deposits — The fair value of demand and interest checking deposits, savings deposits, and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is determined by discounting expected future cash flows using the rates offered by the Bank for deposits of similar type and remaining maturity at the measurement date. This value is compared to the termination value of each CD given the bank’s standard early withdrawal penalties. The fair value reported is the higher of the discounted present value of each CD and the termination value after the recovery of prepayment penalties. The Bank reviews pricing for its CD products weekly. This review gives consideration to market pricing for products of similar type and maturity offered by other financial institutions.

Federal funds purchased, Securities sold under repurchase agreements and Other short-term borrowings — The carrying amount is a reasonable estimate of fair value.

Structured securities sold under repurchase agreements — The fair value of structured repurchase agreements is based on market pricing for synthetic instruments with the same term and structure. These values are validated against dealer quotes for similar instruments.

Subordinated and long-term debt — The fair value of subordinated and long-term debt is obtained through a third-party pricing service.

Commitments to extend credit — The fair value of these commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The Company does not make fixed-rate loan commitments. The fair value of commitments to extend credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

Commitments to private equity and affordable housing funds — The fair value of commitments to invest in private equity and affordable housing funds is based on the estimated cost to terminate them or otherwise settle the obligation.

The estimated fair values of financial instruments of the Company are as follows:

	June 30, 2009					December 31, 2008
	Carrying		Fair			Carrying		Fair
(in millions)	Amount		Value			Amount		Value
Financial Assets:
Cash and due from banks	$	350.9	$	350.9		$	279.9	$	279.9
Due from banks - interest bearing	205.6		205.6			144.3		144.3
Federal funds sold	125.0		125.0			—		—
Securities available-for-sale	3,330.3		3,330.3			2,144.9		2,144.9
Trading securities	138.1		138.1			295.6		295.6
Loans and leases, net of allowance	12,165.3		12,297.2			12,220.2		12,515.8
Derivative contracts	53.1		53.1			48.2		48.2

Financial Liabilities:
Deposits	$	14,498.3	$	14,502.6		$	12,652.1	$	12,663.7
Federal funds purchased and securities sold under repurchase agreements	116.4		116.4			708.2		708.2
Structured securities sold under repurchase agreements	200.0		208.7			200.0		218.0
Other short-term borrowings	50.0		50.0			124.5		124.5
Subordinated and long-term debt	395.9		367.5			408.1		369.6
Derivative contracts	11.2		11.2			21.0		21.0
Commitments to extend credit	—		(13.2		)	—		(13.1		)
Commitments to private equity and affordable housing funds	—		41.4			—		44.0

Table of Contents

Note 5. Investment Securities

Securities are classified based on management’s intention on the date of purchase. All securities other than trading securities are classified as available-for-sale and are valued at fair value. Unrealized gains or losses on securities available-for-sale are excluded from net income, to the extent they are considered temporary, but are included as separate components 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. For most of the Company’s investments, fair values are determined based upon externally verifiable quoted prices or other observable inputs. Realized gains or losses on sales of securities available-for-sale are recorded using the specific identification method.

The following is a summary of amortized cost and estimated fair value for the major categories of securities available-for-sale:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2009
U.S. Treasury	$	15,786	$	45	$	—		$	15,831
Federal agency - Debt	397,859		1,417		(867		)	398,409
Federal agency - MBS	575,184		10,887		(1,139		)	584,932
CMOs - Federal agency	1,542,507		16,712		(8,544		)	1,550,675
CMOs - Non-agency	349,687		—		(57,018		)	292,669
State and municipal	398,584		7,042		(1,843		)	403,783
Other	76,252		235		(11,519		)	64,968
Total debt securities	3,355,859		36,338		(80,930		)	3,311,267
Equity securities and mutual funds	17,317		1,742		—			19,059
Total securities	$	3,373,176	$	38,080	$	(80,930	)	$	3,330,326

December 31, 2008
U.S. Treasury	$	45,709	$	488	$	—		$	46,197
Federal agency - Debt	29,939		241		—			30,180
Federal agency - MBS	644,594		10,206		(886		)	653,914
CMOs - Federal agency	563,310		6,966		(907		)	569,369
CMOs - Non-agency	393,150		—		(87,434		)	305,716
State and municipal	404,787		9,729		(1,486		)	413,030
Other	98,419		139		(24,215		)	74,343
Total debt securities	2,179,908		27,769		(114,928		)	2,092,749
Equity securities and mutual funds	59,276		1,154		(8,309		)	52,121
Total securities	$	2,239,184	$	28,923	$	(123,237	)	$	2,144,870

June 30, 2008
U.S. Treasury