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 March 31, 2010

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)

(213) 673-7700

(Registrant’s telephone number, including area code)

(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

(Do not check if a smaller reporting company)

Smaller reporting company o

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 April 30, 2010, there were 51,919,975 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	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 4.	Controls and Procedures	67

PART II
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 4.	Reserved	69
Item 6.	Exhibits	70

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,			March 31,
(in thousands, except share amounts)	2010			2009			2009
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	293,855		$	364,483		$	378,289
Due from banks - interest-bearing	429,157			443,443			140,484
Federal funds sold	50,000			5,000			12,300
Securities available-for-sale - cost $3,897,750, $4,319,420, and $2,969,554 at March 31, 2010, December 31, 2009 and March 31, 2009, respectively:
Securities pledged as collateral	198,349			226,985			237,003
Held in portfolio	3,730,132			4,079,773			2,678,880
Trading securities	68,405			154,302			67,582
Loans and leases, excluding covered loans	11,689,536			12,146,908			12,305,114
Covered loans	1,803,048			1,851,821			—
Total loans and leases	13,492,584			13,998,729			12,305,114
Less: Allowance for loan and lease losses	292,799			288,493			241,586
Net loans and leases	13,199,785			13,710,236			12,063,528
Premises and equipment, net	123,178			124,309			128,189
Deferred tax asset	149,397			164,038			207,860
Goodwill	479,982			479,982			459,418
Customer-relationship intangibles, net	43,153			45,601			38,776
Bank-owned life insurance	77,512			76,834			75,043
Affordable housing investments	90,304			93,429			97,869
Customers’ acceptance liability	3,267			2,951			2,112
Other real estate owned ($77,526 and $60,558 covered by FDIC loss share at March 31, 2010 and December 31, 2009, respectively)	135,551			113,866			12,639
FDIC indemnification asset	325,356			380,743			—
Other assets	669,092			612,782			333,558
Total assets	$	20,066,475		$	21,078,757		$	16,933,530
Liabilities
Demand deposits	$	7,881,959		$	7,753,936		$	6,611,752
Interest checking deposits	2,202,703			2,278,586			1,184,225
Money market deposits	4,939,662			4,546,532			4,025,741
Savings deposits	382,994			393,177			197,020
Time deposits-under $100,000	421,808			756,616			233,605
Time deposits-$100,000 and over	1,134,603			1,650,601			1,437,207
Total deposits	16,963,729			17,379,448			13,689,550
Federal funds purchased and securities sold under repurchase agreements	183,884			626,779			519,687
Other short-term borrowings	730			690			28,405
Subordinated debt	339,392			340,137			164,296
Long-term debt	472,193			471,029			242,122
Reserve for off-balance sheet credit commitments	18,498			17,340			21,545
Acceptances outstanding	3,266			2,951			2,112
Other liabilities	174,707			176,238			176,206
Total liabilities	18,156,399			19,014,612			14,843,923
Redeemable noncontrolling interest	46,665			51,381			40,237
Commitments and contingencies
Equity
Preferred stock; 5,000,000 shares authorized; 200,000 and 400,000 shares issued and aggregate liquidation preference of $200,000 and $400,000 at December 31, 2009 and March 31, 2009, respectively	—			196,048			390,590
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886, 53,885,886, and 50,961,457 shares issued at March 31, 2010, December 31, 2009 and March 31, 2009, respectively	53,886			53,886			50,961
Additional paid-in capital	505,330			513,550			393,114
Accumulated other comprehensive gain (loss)	23,927			(3,049		)	(23,093		)
Retained earnings	1,382,421			1,377,639			1,369,451
Treasury shares, at cost - 1,997,480, 2,349,430 and 2,427,659 shares at March 31, 2010, December 31, 2009 and March 31, 2009, respectively	(127,342		)	(151,751		)	(157,094		)
Total common shareholders’ equity	1,838,222			1,790,275			1,633,339
Total shareholders’ equity	1,838,222			1,986,323			2,023,929
Noncontrolling interest	25,189			26,441			25,441
Total equity	1,863,411			2,012,764			2,049,370
Total liabilities and equity	$	20,066,475		$	21,078,757		$	16,933,530

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
	March 31,
(in thousands, except per share amounts)	2010			2009
Interest Income
Loans and leases	$	169,549		$	144,176
Securities available-for-sale	32,200			25,100
Trading securities	(51		)	54
Due from banks - interest-bearing	346			155
Federal funds sold and securities purchased under resale agreements	22			6
Total interest income	202,066			169,491
Interest Expense
Deposits	13,164			19,561
Federal funds purchased and securities sold under repurchase agreements	1,936			2,179
Subordinated debt	4,639			1,200
Other long-term debt	6,822			1,594
Other short-term borrowings	—			60
Total interest expense	26,561			24,594
Net interest income	175,505			144,897
Provision for credit losses	55,000			50,000
Net interest income after provision for credit losses	120,505			94,897
Noninterest Income
Trust and investment fees	33,509			25,869
Brokerage and mutual fund fees	5,281			9,757
Cash management and deposit transaction charges	12,576			13,223
International services	6,508			6,525
Bank-owned life insurance	678			863
FDIC loss sharing income, net	9,086			—
Gain on sale of other assets	1,391			—
Gain (loss) on sale of securities	2,134			(2,931		)
Other	6,713			6,025
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(15,208		)	(12,036		)
Less: Portion of loss recognized in other comprehensive income	14,205			—
Net impairment loss recognized in earnings	(1,003		)	(12,036		)
Total noninterest income	76,873			47,295
Noninterest Expense
Salaries and employee benefits	95,661			78,252
Net occupancy of premises	12,905			12,261
Legal and professional fees	8,981			7,733
Information services	7,516			6,480
Depreciation and amortization	6,347			5,992
Marketing and advertising	5,248			4,676
Office services and equipment	3,798			3,604
Amortization of intangibles	2,447			1,843
Other real estate owned	17,197			94
FDIC assessments	6,521			3,068
Other operating	9,313			8,982
Total noninterest expense	175,934			132,985
Income before income taxes	21,444			9,207
Income taxes	4,418			1,632
Net income	$	17,026		$	7,575
Less: Net income attributable to noncontrolling interest	1,328			115
Net income attributable to City National Corporation	$	15,698		$	7,460
Less: Dividends and accretion on preferred stock	5,702			5,501
Net income available to common shareholders	$	9,996		$	1,959
Net income per share, basic	$	0.19		$	0.04
Net income per share, diluted	$	0.19		$	0.04
Shares used to compute income per share, basic	51,690			48,046
Shares used to compute income per share, diluted	52,092			48,130
Dividends per share	$	0.10		$	0.25

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the three months ended
	March 31,
(in thousands)	2010			2009
Cash Flows From Operating Activities
Net income	$	17,026		$	7,575
Adjustments to net income:
Provision for credit losses	55,000			50,000
Amortization of intangibles	2,447			1,843
Depreciation and amortization	6,347			5,992
Amortization of cost and discount on long-term debt	205			150
Share-based employee compensation expense	3,872			3,493
Gain on sale of other assets	(1,391		)	—
(Gain) loss on sale of securities	(2,134		)	2,931
Impairment loss on securities	1,003			12,036
Other, net	12,777			(1,378		)
Net change in:
Trading securities	85,897			231,969
Deferred income tax benefit	(1,050		)	(219		)
Other assets and other liabilities, net	4,406			(90,325		)
Net cash provided by operating activities	184,405			224,067
Cash Flows From Investing Activities
Purchase of securities available-for-sale	(398,372		)	(1,181,219		)
Sales of securities available-for-sale	407,611			278,139
Maturities and paydowns of securities available-for-sale	406,905			152,345
Loan originations, net of principal collections	410,291			104,910
Net payments for premises and equipment	(5,216		)	(2,887		)
Other investing activities, net	12,967			(897		)
Net cash provided by (used in) investing activities	834,186			(649,609		)
Cash Flows From Financing Activities
Net (decrease) increase in deposits	(415,719		)	1,037,426
Net decrease in federal funds purchased and securities sold under repurchase agreements	(442,895		)	(388,470		)
Net increase (decrease) in short-term borrowings, net of transfers from long-term debt	40			(96,095		)
Net decrease in other borrowings	(421		)	(3,440		)
Proceeds from exercise of stock options	9,821			88
Tax benefit from exercise of stock options	2,142			46
Redemption of preferred stock	(200,000		)	—
Cash dividends paid	(8,214		)	(16,799		)
Other financing activities, net	(3,259		)	(406		)
Net cash (used in) provided by financing activities	(1,058,505		)	532,350
Net increase in cash and cash equivalents	(39,914		)	106,808
Cash and cash equivalents at beginning of year	812,926			424,265
Cash and cash equivalents at end of period	$	773,012		$	531,073
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	28,253		$	30,233
Income taxes	—			2,615
Non-cash investing activities:
Transfer of loans to other real estate owned	42,497			1,251
Transfer from securities available for sale to trading securities	—			3,953

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
	Common						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, 2009	50,961,457	$	390,089		$	50,961	$	389,077		$	(48,022	)	$	1,379,624		$	(156,736	)	$	25,441		$	2,030,434
Net income (1)	—	—			—		—			—			7,460			—			542			8,002
Other comprehensive income, net of tax:
Amortization of prior service cost	—	—			—		—			40			—			—			—			40
Net unrealized gain on securities available-for-sale, net of taxes of $17.0 million and reclassification of $1.7 million net loss included in net income	—	—			—		—			23,642			—			—			—			23,642
Net unrealized gain on cash flow hedges, net of taxes of $0.9 million and reclassification of $1.7 million net gain included in net income	—	—			—		—			1,247			—			—			—			1,247
Total comprehensive income																			542			32,931
Dividends and distributions to noncontrolling interest	—	—			—		—			—			—			—			(542		)	(542		)
Issuance of shares under share-based compensation plans	—	—			—		(126		)	—			—			(358		)	—			(484		)
Preferred stock accretion	—	501			—		—			—			(501		)	—			—			—
Share-based employee compensation expense	—	—			—		3,475			—			—			—			—			3,475
Tax benefit from share-based compensation plans	—	—			—		(1,185		)	—			—			—			—			(1,185		)
Cash dividends:
Preferred	—	—			—		—			—			(5,000		)	—			—			(5,000		)
Common	—	—			—		—			—			(12,132		)	—			—			(12,132		)
Net change in deferred compensation plans	—	—			—		41			—			—			—			—			41
Change in redeemable noncontrolling interest	—	—			—		1,832			—			—			—			—			1,832
Balance, March 31, 2009	50,961,457	$	390,590		$	50,961	$	393,114		$	(23,093	)	$	1,369,451		$	(157,094	)	$	25,441		$	2,049,370

Balance, January 1, 2010	53,885,886	$	196,048		$	53,886	$	513,550		$	(3,049	)	$	1,377,639		$	(151,751	)	$	26,441		$	2,012,764
Net income (1)	—	—			—		—			—			15,698			—			535			16,233
Other comprehensive income, net of tax:
Amortization of prior service cost	—	—			—		—			40			—			—			—			40
Non-credit related impairment loss on investment securities, net of taxes of $5.9 million	—	—			—		—			(8,262		)	—			—			—			(8,262		)
Net unrealized gain on securities available-for-sale, net of taxes of $24.1 million and reclassification of $1.4 million net gain included in net income	—	—			—		—			33,504			—			—			—			33,504
Net unrealized gain on cash flow hedges, net of taxes of $2.5 million and reclassification of $1.7 million net gain included in net income	—	—			—		—			1,694			—			—			—			1,694
Total comprehensive income																			535			43,209
Dividends and distributions to noncontrolling interest	—	—			—		—			—			—			—			(535		)	(535		)
Issuance of common stock	—				—		—			—			—			—			—			—
Issuance of shares under share-based compensation plans	—	—			—		(15,658		)	—			—			24,409			—			8,751
Preferred stock accretion	—	3,952			—		—			—			(3,952		)	—			—			—
Redemption of preferred stock	—	(200,000		)	—		—			—			—			—			—			(200,000		)
Share-based employee compensation expense	—	—			—		3,849			—			—			—			—			3,849
Tax benefit from share-based compensation plans	—	—			—		1,413			—			—			—			—			1,413
Cash dividends:
Preferred	—	—			—		—			—			(1,750		)	—			—			(1,750		)
Common	—	—			—		—			—			(5,214		)	—			—			(5,214		)
Net change in deferred compensation plans	—	—			—		27			—			—			—			—			27
Change in redeemable noncontrolling interest	—	—			—		2,149			—			—			—			—			2,149
Other	—	—			—					—			—			—			(1,252		)	(1,252		)
Balance, March 31, 2010	53,885,886	$	—		$	53,886	$	505,330		$	23,927		$	1,382,421		$	(127,342	)	$	25,189		$	1,863,411

(1)

Net income excludes net income (loss) attributable to redeemable noncontrolling interest of $793 and $(427) for the three-month periods ended March 31, 2010 and 2009, respectively. Redeemable noncontrolling interest is reflected in the mezzanine section of the consolidated balance sheets. See Note 16 of the Notes to the Unaudited Consolidated Financial Statements.

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 67 offices in Southern California, the San Francisco Bay area, Nevada and New York City. As of March 31, 2010, the Corporation had seven consolidated investment advisory affiliates and a noncontrolling interest in two other firms. The Corporation also has two unconsolidated subsidiaries, Business Bancorp Capital Trust I and City National Capital Trust I. Because the Bank comprises substantially all of the business of the Corporation, references to the “Company” mean the Corporation and the Bank together. The Corporation is approved as a financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999.

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. The Company has both redeemable and non-redeemable noncontrolling interest. A noncontrolling interest is the portion of equity in a subsidiary not attributable to a parent. Preferred stock of consolidated bank affiliates that is owned by third parties is reflected as Noncontrolling interest in the equity section of the consolidated balance sheets. Redeemable noncontrolling interest includes noncontrolling ownership interests that are redeemable at the option of the holder or outside the control of the issuer. The redeemable equity ownership interests of third parties in the Corporation’s investment advisory affiliates are not considered to be permanent equity and are reflected as Redeemable noncontrolling interest in the mezzanine section between liabilities and equity in the consolidated balance sheets. Noncontrolling interests’ share of subsidiary earnings is reflected 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 that meet the prescribed criteria for consolidation are consolidated. In November 2009, the Company deconsolidated one of its affiliates, but retained a noncontrolling interest in that affiliate. The Corporation’s interests in two investment management affiliates in which it holds a noncontrolling share are accounted for using the equity method. Additionally, the Company has various interests in variable interest entities (“VIEs”) that are not required to be consolidated. See Note 16 for a more detailed discussion on VIEs.

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, securities available-for-sale impairment, private equity and alternative investment impairment, valuation of assets and liabilities acquired in business combinations, valuation of noncontrolling interest and the valuation of financial assets and liabilities reported at fair value.

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Note 1. Summary of Significant Accounting Policies (Continued)

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. 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 expenses. The results of operations reflect any 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 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, 2009.

The results for the 2010 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 2009 Annual Report other than the adoption of new accounting pronouncements and other authoritative guidance that became effective for the Company on January 1, 2010. Refer to Accounting Pronouncements below for discussion of accounting pronouncements adopted in 2010.

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

Accounting Pronouncements

During the three months ended March 31, 2010, the following accounting pronouncements applicable to the Company were issued or became effective:

·		In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU’) 2009-16, which codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets into Codification Topic 860. ASU 2009-16 represents a revision to former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. ASU 2009-16 expands required disclosures about transfers of financial assets and the risks associated with a transferor’s continuing involvement with transferred assets. It also removes the concept of “qualifying special-purpose entity” from U.S. GAAP. The new guidance became effective for the Company on January 1, 2010. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

·		In December 2009, the FASB issued ASU 2009-17, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), into Accounting Standards Codification (“ASC”) Topic 810, Consolidations (“ASC 810”). ASU 2009-17 revises former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities. The revised guidance requires, among other things, that an entity perform both a quantitative and qualitative analysis to determine if it is the primary beneficiary of a VIE and therefore required to consolidate the VIE. The qualitative analysis includes determining whether an entity has the power to direct the most significant activities of the VIE. The amended guidance also requires consideration of related party relationships in the determination of the primary beneficiary of a VIE and enhanced disclosures about an enterprise’s involvement with a VIE. The new guidance became effective for the Company on January 1, 2010. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

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Note 1. Summary of Significant Accounting Policies (Continued)

·		In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements (Topic 820), Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 enhances disclosure requirements under ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), to include disclosure of transfers in and out of Level 1 and 2, and detail of activity in Level 3 fair value measurements. The ASU also provides clarification of existing disclosure requirements pertaining to the level of disaggregation used in fair value measurements, and disclosures about inputs and valuation techniques used for both recurring and nonrecurring fair value measurements. The new guidance became effective for the Company on January 1, 2010. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

·		In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855), Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09 addresses the interaction of the requirements of Subtopic 855-10 with the SEC’s reporting requirements. The amendments in the ASU provide that an entity that is an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The ASU also refines the scope of disclosure requirements pertaining to revised financial statements. The new guidance became effective for the Company upon issuance. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

·		In February 2010, the FASB issued ASU 2010-10, Consolidation (Topic 810), Amendments for Certain Investment Funds (“ASU 2010-10”). ASU 2010-10 defers the effective date of the consolidation provisions contained in ASU 2009-17 for a reporting entity’s interest in an entity: (1) that has attributes of an investment company; or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The ASU also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the ASU clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The new guidance became effective for the Company on January 1, 2010. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

·		In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310), Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset (“ASU 2010-18”). ASU 2010-18 applies to loans that are currently accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), as part of a pool of loans that, when acquired, had deteriorated in credit quality. Under the guidance, modification of a loan that is part of a pool accounted for under ASC 310-30 should not result in removal of the loan from the pool. Such modifications would include those that would otherwise qualify as a troubled debt restructuring had the loan not been part of a pool. ASU 2010-18 is effective for any modifications of a loan accounted for within a pool in the first interim reporting period ending after July 15, 2010, and will be applied prospectively. Early application is permitted as long as an entity has not issued financial statements in that fiscal year. The Company elected to early adopt ASU 2010-18 effective with March 31, 2010 reporting. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

Note 2. Business Combination

On December 18, 2009, the Bank acquired the banking operations of Imperial Capital Bank (“ICB”) in a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”). Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $3.25 billion in assets and assumed $3.09 billion in liabilities. The Bank acquired most of ICB’s assets, including loans and other real estate owned (“OREO”) with a fair value of $1.86 billion and $58.8 million, respectively, and assumed deposits of $2.08 billion. The Bank received approximately $70.8 million in cash from the FDIC and recorded a receivable for an additional $5.3 million expected to be received in 2010. The acquisition of ICB added three new bank branches in California.

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Note 2. Business Combinations (Continued)

In connection with the acquisition, the Bank entered into a loss sharing agreement with the FDIC under which the FDIC will reimburse the Bank for 80 percent of eligible losses up to $649 million with respect to covered assets and 95 percent of eligible losses in excess of $649 million. Covered assets include acquired loans (“covered loans”) and OREO (“covered OREO”) that are covered under the loss sharing agreement with the FDIC. The term of the loss share agreement is ten years for single family residential loans and seven years for all other loans. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at their estimated fair value of $380.7 million at the acquisition date. The difference between the fair value of the FDIC indemnification asset and the undiscounted cash flow the Company expects to collect from the FDIC is accreted into noninterest income.

In the last three quarters of the seventh year, the Company has the right, without FDIC consent, to sell up to $400 million of the remaining covered loans provided the properties securing those loans have a current independent appraisal which supports a loan-to-value ratio of 75 percent or more of the covered loans’ book value.

The Bank recognized a gain of $38.2 million on the acquisition in 2009. The gain represents the amount by which the fair value of the assets acquired and consideration received from the FDIC exceeds the liabilities assumed.

Note 3. Fair Value Measurements

ASC 820 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). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.

For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated for purposes of applying fair value measurement. The valuation premise is a concept that determines whether an asset is measured on a standalone basis or in combination with other assets. The Company measures its assets and liabilities on a standalone basis then aggregates assets and liabilities with similar characteristics for disclosure purposes.

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. The inputs used in valuation techniques are prioritized 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.

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Note 3. Fair Value Measurements (Continued)

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, 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.

The following tables summarize assets and liabilities measured at fair value as of March 31, 2010, December 31, 2009 and March 31, 2009 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of March 31, 2010		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
U.S. Treasury	$	15,100	$	15,100	$	—	$	—
Federal agency - Debt	611,317		—		611,317
Federal agency - MBS	448,293		—		448,293
CMOs - Federal agency	2,174,217		—		2,174,217
CMOs - Non-agency	228,930		—		228,930
State and municipal	365,826		—		365,826
Other debt securities	70,600		—		45,607		24,993
Equity securities and mutual funds	14,198		—		14,198
Trading securities	68,405		66,932		1,473		—
Mark-to-market derivatives (1)	51,039		5,258		45,781		—
Total assets at fair value	$	4,047,925	$	87,290	$	3,935,642	$	24,993

Liabilities
Mark-to-market derivatives (2)	$	19,567	$	1,733	$	17,834	$	—
Total liabilities at fair value	$	19,567	$	1,733	$	17,834	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	3,810	$	—	$	3,810	$	—
Commercial real estate mortgages	46,267		—		32,889		13,378
Residential mortgages	7,450		—		7,065		385
Real estate construction	128,740		—		70,489		58,251
Other real estate owned (4)	36,532		—		27,394		9,138
Private equity investments	3,740		—		—		3,740
Total assets at fair value	$	226,539	$	—	$	141,647	$	84,892

(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 $135.6 million in the consolidated balance sheets includes $77.5 million of covered OREO and is net of estimated disposal costs.

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Note 3. Fair Value Measurements (Continued)

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 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:
U.S. Treasury	$	73,597	$	73,597	$	—	$	—
Federal agency - Debt	656,721		—		656,721		—
Federal agency - MBS	555,157		—		555,157		—
CMOs - Federal agency	2,306,111		—		2,306,111		—
CMOs - Non-agency	241,329		—		241,329		—
State and municipal	378,639		—		378,639		—
Other debt securities	76,506		—		49,727		26,779
Equity securities and mutual funds	18,698		18,698		—		—
Trading securities	154,302		154,302		—		—
Mark-to-market derivatives (1)	52,309		5,335		46,974		—
Total assets at fair value	$	4,513,369	$	251,932	$	4,234,658	$	26,779

Liabilities
Mark-to-market derivatives (2)	$	14,577	$	1,080	$	13,497	$	—
Total liabilities at fair value	$	14,577	$	1,080	$	13,497	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	450	$	—	$	450	$	—
Commercial real estate mortgages	54,212		—		34,302		19,910
Residential mortgages	8,112		—		7,726		386
Real estate construction	176,202		—		98,387		77,815
Equity lines of credit	912		—		912		—
Other real estate owned (4)	48,920		—		30,866		18,054
Private equity investments	4,374		—		—		4,374
Total assets at fair value	$	293,182	$	—	$	172,643	$	120,539

(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 $113.9 million in the consolidated balance sheets includes $60.6 million of covered OREO and is net of estimated disposal costs.

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Note 3. Fair Value Measurements (Continued)

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of March 31, 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:
U.S. Treasury	$	36,307	$	36,307	$	—	$	—
Federal agency - Debt	378,176		—		378,176		—
Federal agency - MBS	600,283		—		600,283		—
CMOs - Federal agency	1,120,749		—		1,120,749		—
CMOs - Non-agency	298,054		—		298,054		—
State and municipal	400,921		—		400,921		—
Other debt securities	64,361		—		38,085		26,276
Equity securities and mutual funds	17,032		17,032		—		—
Trading securities	67,582		50,802		16,780		—
Mark-to-market derivatives (1)	69,762		2,447		67,315
Total assets at fair value	$	3,053,227	$	106,588	$	2,920,363	$	26,276

Liabilities
Mark-to-market derivatives (2)	$	17,258	$	18	$	17,240	$	—
Total liabilities at fair value	$	17,258	$	18	$	17,240	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	1,400	$	—	$	1,400	$	—
Commercial real estate mortgages	—		—		—		—
Residential mortgages	476		—		476		—
Real estate construction	140,772		—		140,772		—
Other real estate owned (4)	14,103		—		14,103		—
Total assets at fair value	$	156,751	$	—	$	156,751	$	—

(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 $12.6 million in the consolidated balance sheets is net of estimated disposal costs.

At March 31, 2010, $4.05 billion, or approximately 20 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared to $4.51 billion or 21 percent at December 31, 2009, and $3.05 billion or 18 percent at March 31, 2009. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than a quarter of 1 percent of total assets were measured using Level 3 inputs. Approximately $19.6 million, $14.6 million and $17.3 million of the Company’s total liabilities at March 31, 2010, December 31, 2009 and March 31, 2009, respectively, were recorded at fair value on a recurring basis using Level 1 or Level 2 inputs. At March 31, 2010, $226.5 million, or approximately 1 percent of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared to $293.2 million or 1 percent at December 31, 2009, and $156.8 million or less than 1 percent at March 31, 2009. These assets were measured using Level 2 and Level 3 inputs. There were no transfers of assets or liabilities between Level 1 or Level 2 of the fair value hierarchy during the three months ended March 31, 2010.

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Note 3. Fair Value Measurements (Continued)

For assets measured at fair value on a nonrecurring basis, the following table presents the total losses, which include charge-offs, specific reserves, valuation write-downs, and net losses on sales of other real estate owned, recognized in the three months ended March 31, 2010 and 2009, respectively:

	Three months ended March 31,
(in thousands)	2010		2009
Collateral dependent impaired loans
Commercial	$	2,618	$	3,910
Commercial real estate mortgages	17,307		—
Residential mortgages	852		—
Real estate construction	10,245		12,075
Other real estate owned	12,548		—
Private equity investments	398		—
Total losses recognized	$	43,968	$	15,985

Level 3 assets measured at fair value on a recurring basis are CDO senior notes and CDO income notes 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 income (“AOCI”) in the consolidated balance sheets. Activity in Level 3 assets measured on a recurring basis for the three-months ended March 31, 2010 and 2009 is summarized in the following table:

Level 3 Assets Measured on a Recurring Basis

	March 31, 2010			March 31, 2009
(in thousands)	Securities Available-for-Sale			Securities Available-for-Sale
Balance, beginning of period	$	26,779		$	32,419
Total realized/unrealized gains (losses):
Included in earnings	—			(9,282		)
Included in other comprehensive income	(1,638		)	3,544
Purchases, sales, issuances and settlements, net	(148		)	(405		)
Transfers in and/or out of Level 3	—			—
Balance, end of period	$	24,993		$	26,276

Level 3 assets measured at fair value on a nonrecurring basis include certain collateral dependent impaired loans, OREO for which fair value is not solely based on market observable inputs, and private equity and alternative investments. Non-observable inputs related to valuing loans and OREO may include adjustments to external appraised values based on an internally generated discounted cash flow analysis or management’s assumptions about market trends or other factors that are not directly observable. Private equity and alternative investments do not have readily determinable fair values. These investments are carried at cost and evaluated for impairment on a quarterly basis. Due to the lack of readily determinable fair values for these investments, the impairment assessment is based primarily on a review of investment performance and the likelihood that the capital invested would be recovered.

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 March 31, 2010 and December 31, 2009. 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.

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Note 3. Fair Value Measurements (Continued)

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, Due from banks—interest bearing and Federal funds sold — 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. Fair value 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. Due to the lack of activity in the secondary market for the types of loans in the Company’s portfolio, a model-based approach is used for determining the fair value of loans for purposes of the disclosures in the table below. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions concerning current market yields, credit risk and liquidity premiums. Loan cash flow projections are based on contractual loan terms adjusted for the impact of current interest rate levels on borrower behavior, including prepayments. Loan prepayment assumptions are based on industry standards for the type of loans being valued. Projected cash flows are discounted using yield curves based on current market conditions. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Company’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans.

Covered loans — Fair value is determined using a discounted cash flow model based on assumptions about the amount and timing of principal and interest payments, principal prepayments and estimates of principal defaults, loss given default and current market rates.

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 third-party pricing sources.

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Note 3. Fair Value Measurements (Continued)

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 carrying amounts and fair values of the Company’s financial instruments as of March 31, 2010 and December 31, 2009 were as follows:

	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
(in millions)	Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	$	293.9	$	293.9	$	364.5	$	364.5
Due from banks - interest bearing	429.2		429.2		443.4		443.4
Federal funds sold	50.0		50.0		5.0		5.0
Securities available-for-sale	3,928.5		3,928.5		4,306.8		4,306.8
Trading securities	68.4		68.4		154.3		154.3
Loans and leases, net of allowance	11,396.7		11,616.9		11,858.4		12,006.9
Covered loans	1,803.0		1,803.0		1,851.8		1,851.8
Derivative contracts	51.0		51.0		52.3		52.3

Financial Liabilities:
Deposits	$	16,963.7	$	16,968.1	$	17,379.4	$	17,383.4
Federal funds purchased and securities sold under repurchase agreements	8.9		8.9		426.8		426.8
Structured securities sold under repurchase agreements	175.0		184.4		200.0		208.7
Other short-term borrowings	0.7		0.7		0.7		0.7
Subordinated and long-term debt	811.6		849.3		811.2		829.9