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, 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 x 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 July 30, 2010, there were 52,102,417 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	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71
Item 4.	Controls and Procedures	74

PART II
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 4.	Reserved	76
Item 6.	Exhibits	77

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)	2010			2009			2009
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	184,277		$	364,483		$	350,931
Due from banks - interest-bearing	336,244			443,443			205,656
Federal funds sold	404,760			5,000			125,000
Securities available-for-sale - cost $4,668,089, $4,319,420, and $3,373,176 at June 30, 2010, December 31, 2009 and June 30, 2009, respectively:
Securities pledged as collateral	198,577			226,985			226,961
Held in portfolio	4,562,566			4,079,773			3,103,365
Trading securities	129,287			154,302			138,137
Loans and leases, excluding covered loans	11,483,044			12,146,908			12,421,342
Less: Allowance for loan and lease losses	290,492			288,493			256,018
Loans and leases, excluding covered loans, net	11,192,552			11,858,415			12,165,324
Covered loans	2,034,591			1,851,821			—
Net loans and leases	13,227,143			13,710,236			12,165,324

Premises and equipment, net	121,960			124,309			125,510
Deferred tax asset	99,894			164,038			204,303
Goodwill	479,982			479,982			459,454
Customer-relationship intangibles, net	44,838			45,601			37,108
Bank-owned life insurance	78,170			76,834			75,516
Affordable housing investments	101,999			93,429			96,389
Customers’ acceptance liability	2,515			2,951			6,094
Other real estate owned ($98,841 and $60,558 covered by FDIC loss share at June 30, 2010 and December 31, 2009, respectively)	153,292			113,866			18,064
FDIC indemnification asset	394,012			380,743			—
Other assets	711,931			612,782			322,973
Total assets	$	21,231,447		$	21,078,757		$	17,660,785

Liabilities
Demand deposits	$	8,173,386		$	7,753,936		$	7,118,660
Interest checking deposits	2,171,369			2,278,586			1,568,379
Money market deposits	5,742,069			4,546,532			4,108,607
Savings deposits	294,327			393,177			243,722
Time deposits-under $100,000	434,626			756,616			212,833
Time deposits-$100,000 and over	1,157,136			1,650,601			1,246,050
Total deposits	17,972,913			17,379,448			14,498,251
Federal funds purchased and securities sold under repurchase agreements	177,700			626,779			316,388
Other short-term borrowings	700			690			50,000
Subordinated debt	337,691			340,137			162,434
Long-term debt	473,283			471,029			233,456
Reserve for off-balance sheet credit commitments	19,310			17,340			20,422
Acceptances outstanding	2,515			2,951			6,094
Other liabilities	272,753			176,238			163,072
Total liabilities	19,256,865			19,014,612			15,450,117

Redeemable noncontrolling interest	47,622			51,381			36,752

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 June 30, 2009, respectively	—			196,048			391,091
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886 shares issued at June 30, 2010, December 31, 2009 and June 30, 2009	53,886			53,886			53,886
Additional paid-in capital	483,983			513,550			511,939
Accumulated other comprehensive gain (loss)	58,050			(3,049		)	(18,110		)
Retained earnings	1,418,486			1,377,639			1,365,842
Treasury shares, at cost - 1,796,485, 2,349,430 and 2,415,021 shares at June 30, 2010, December 31, 2009 and June 30, 2009, respectively	(112,634		)	(151,751		)	(156,119		)

Total common shareholders’ equity	1,901,771			1,790,275			1,757,438

Total shareholders’ equity	1,901,771			1,986,323			2,148,529

Noncontrolling interest	25,189			26,441			25,387

Total equity	1,926,960			2,012,764			2,173,916

Total liabilities and equity	$	21,231,447		$	21,078,757		$	17,660,785

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Table of Contents

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)	2010			2009			2010			2009

Interest Income
Loans and leases	$	174,354		$	143,705		$	343,904		$	287,880
Securities available-for-sale	32,866			31,492			65,066			56,593
Trading securities	24			379			(28		)	433
Due from banks - interest-bearing	424			291			770			446
Federal funds sold and securities purchased under resale agreements	135			9			157			15
Total interest income	207,803			175,876			409,869			345,367
Interest Expense
Deposits	12,584			16,068			25,748			35,629
Federal funds purchased and securities sold under repurchase agreements	1,704			2,084			3,639			4,263
Subordinated debt	4,664			873			9,304			2,073
Other long-term debt	6,845			1,222			13,666			2,816
Other short-term borrowings	8			53			9			113
Total interest expense	25,805			20,300			52,366			44,894
Net interest income	181,998			155,576			357,503			300,473
Provision for credit losses on loans and leases, excluding covered loans	32,000			70,000			87,000			120,000
Provision for losses on covered loans	46,516			—			46,516			—
Net interest income after provision	103,482			85,576			223,987			180,473
Noninterest Income
Trust and investment fees	33,976			25,184			67,485			51,053
Brokerage and mutual fund fees	5,461			6,645			10,742			16,402
Cash management and deposit transaction charges	12,008			12,778			24,584			26,001
International services	8,374			7,996			14,882			14,521
Bank-owned life insurance	658			871			1,336			1,734
FDIC loss sharing income, net	28,339			—			37,425			—
(Loss) gain on disposal of assets	(2,814		)	43			(1,423		)	43
Gain on sale of securities	355			3,281			2,489			350
Gain on acquisition	25,228			—			25,228			—
Other	11,448			8,996			18,161			15,021
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(13,992		)	(25,297		)	(14,995		)	(37,333		)
Less: Portion of loss recognized in other comprehensive income	13,486			23,760			13,486			23,760
Net impairment loss recognized in earnings	(506		)	(1,537		)	(1,509		)	(13,573		)
Total noninterest income	122,527			64,257			199,400			111,552
Noninterest Expense
Salaries and employee benefits	99,590			75,834			195,251			154,086
Net occupancy of premises	13,347			12,559			26,252			24,820
Legal and professional fees	13,274			7,736			22,255			15,469
Information services	7,538			6,992			15,054			13,472
Depreciation and amortization	6,363			5,953			12,710			11,945
Marketing and advertising	5,798			4,743			11,046			9,419
Office services and equipment	4,272			3,922			8,070			7,526
Amortization of intangibles	2,128			1,668			4,575			3,511
Other real estate owned	16,783			2,155			33,980			2,250
FDIC assessments	7,662			13,861			14,183			16,929
Other operating	9,823			8,711			19,136			17,692
Total noninterest expense	186,578			144,134			362,512			277,119

Income before income taxes	39,431			5,699			60,875			14,906
Income taxes	(2,859		)	(986		)	1,559			646
Net income	$	42,290		$	6,685		$	59,316		$	14,260

Less: Net income attributable to noncontrolling interest	972			(88		)	2,300			27

Net income attributable to City National Corporation	$	41,318		$	6,773		$	57,016		$	14,233

Less: Dividends and accretion on preferred stock	—			5,501			5,702			11,002

Net income available to common shareholders	$	41,318		$	1,272		$	51,314		$	3,231

Net income per share, basic	$	0.78		$	0.02		$	0.98		$	0.06

Net income per share, diluted	$	0.78		$	0.02		$	0.97		$	0.06

Shares used to compute income per share, basic	52,012			50,416			51,852			49,028

Shares used to compute income per share, diluted	52,542			50,551			52,336			49,138
Dividends per share	$	0.10		$	0.10		$	0.20		$	0.35

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)	2010			2009

Cash Flows From Operating Activities
Net income	$	59,316		$	14,260
Adjustments to net income:
Provision for credit losses on loans and leases, excluding covered loans	87,000			120,000
Provision for losses on covered loans	46,516			—
Amortization of intangibles	4,575			3,511
Depreciation and amortization	12,710			11,945
Amortization of cost and discount on long-term debt	412			306
Share-based employee compensation expense	8,109			7,193
Loss (gain) on disposal of assets	1,423			(43		)
Gain on sale of securities	(2,489		)	(350		)
Gain on acquisition	(25,228		)	—
Impairment loss on securities	1,509			13,573
Other, net	(15,045		)	(1,701		)
Net change in:
Trading securities	25,015			163,861
Deferred income tax benefit	17,813			(389		)
Other assets and other liabilities, net	154,439			(97,945		)

Net cash provided by operating activities	376,075			234,221

Cash Flows From Investing Activities
Purchases of securities available-for-sale	(1,684,200		)	(1,983,459		)
Sales of securities available-for-sale	432,021			446,001
Maturities and paydowns of securities available-for-sale	907,157			378,688
Loan originations, net of principal collections	629,454			(77,410		)
Net payments for premises and equipment	(10,361		)	(6,161		)
Net cash acquired in acquisitions	94,706			—
Other investing activities, net	10,235			745

Net cash provided by (used in) investing activities	379,012			(1,241,596		)

Cash Flows From Financing Activities
Net increase in deposits	51,966			1,846,127
Net decrease in federal funds purchased and securities sold under repurchase agreements	(449,079		)	(591,769		)
Net decrease in short-term borrowings, net of transfers from long-term debt	(30,529		)	(74,500		)
Net decrease in other borrowings	(904		)	(6,583		)
Proceeds from exercise of stock options	17,761			540
Tax benefit from exercise of stock options	3,281			100
Redemption of preferred stock	(200,000		)	—
Issuance of common stock	—			119,929
Repurchase of common stock warrants	(18,500		)	—
Cash dividends paid	(13,467		)	(26,680		)
Other financing activities, net	(3,261		)	(2,467		)

Net cash (used in) provided by financing activities	(642,732		)	1,264,697

Net increase in cash and cash equivalents	112,355			257,322
Cash and cash equivalents at beginning of year	812,926			424,265

Cash and cash equivalents at end of period	$	925,281		$	681,587

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	39,413		$	45,593
Income taxes	—			17,682

Non-cash investing activities:
Transfer of loans to other real estate owned	$	66,653		$	17,179
Transfer from securities available-for-sale to trading securities	—			6,400
Assets acquired (liabilities assumed) in acquisitions:
Securities available-for-sale	$	17,183		$	—
Covered loans	330,566			—
Covered other real estate owned	15,161			—
Deposits	(541,499		)	—
Other borrowings	(30,539		)	—

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Table of Contents

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)	—		—			—			—			—			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 expense 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

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)	—		—			—			—			—			57,016			—			1,070			58,086
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 $5.6 million	—		—			—			—			(7,844		)	—			—			—			(7,844		)
Net unrealized gain on securities available-for-sale, net of taxes of $49.9 million and reclassification of $1.2 million net gain included in net income	—		—			—			—			69,338			—			—			—			69,338
Net unrealized loss on cash flow hedges, net of taxes of $2.9 million and reclassification of $3.2 million net gain included in net income	—		—			—			—			(475		)	—			—			—			(475		)
Total comprehensive income																					1,070			119,185
Dividends and distributions to noncontrolling interest	—		—			—			—			—			—			—			(1,070		)	(1,070		)
Issuance of shares under share-based compensation plans	—		—			—			(22,687		)	—			—			39,109			—			16,422
Preferred stock accretion	—		3,952			—			—			—			(3,952		)	—			—			—
Redemption of preferred stock	—		(200,000		)	—			—			—			—			—			—			(200,000		)
Repurchase of common stock warrants	—		—			—			(18,500		)	—			—			—			—			(18,500		)
Share-based employee compensation expense	—		—			—			8,090			—			—			—			—			8,090
Tax benefit from share-based compensation plans	—		—			—			2,181			—			—			—			—			2,181
Cash dividends:															—
Preferred	—		—			—			—			—			(1,750		)	—			—			(1,750		)
Common	—		—			—			—			—			(10,467		)	—			—			(10,467		)
Net change in deferred compensation plans	—		—			—			425			—			—			8			—			433
Change in redeemable noncontrolling interest	—		—			—			924			—			—			—			—			924
Other	—		—			—			—			—			—			—			(1,252		)	(1,252		)
Balance, June 30, 2010	53,885,886		$	—		$	53,886		$	483,983		$	58,050		$	1,418,486		$	(112,634	)	$	25,189		$	1,926,960

(1)

Net income excludes net income (loss) attributable to redeemable noncontrolling interest of $1,230 and ($1,056) for the six-month periods ended June 30, 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 more than 80 offices in Southern California, the San Francisco Bay area, Nevada and New York City. The Corporation has 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 15 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, subsequent valuation of covered loans, 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 and composition. 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 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 six months ended June 30, 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.

· In July 2010, the FASB issued ASU 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”) which requires new and enhanced disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The new and amended disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. The guidance is effective for an entity’s first annual period that ends on or after December 15, 2010. The Company is evaluating the impact of adoption of ASU 2010-20 on its disclosures in the consolidated financial statements.

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Note 2. Business Combinations

1st Pacific Bank of California and Sun West Bank

On May 7, 2010, the Bank acquired the banking operations of 1st Pacific Bank of California (“FPB”) in a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”). Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $318.6 million in assets and assumed $264.2 million in liabilities. The Bank acquired most of FPB’s assets, including loans with a fair value of $202.8 million and assumed deposits with a fair value of $237.2 million. The Bank paid $12.3 million in cash to the FDIC.

On May 28, 2010, the Bank acquired the banking operations of Sun West Bank (“SWB”) in Las Vegas, Nevada in a purchase and assumption agreement with the FDIC. Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $340.0 million in assets and assumed $310.1 million in liabilities. The Bank acquired most of SWB’s assets, including loans and other real estate owned (“OREO”) with a fair value of $127.6 million and $12.1 million, respectively, and assumed deposits with a fair value of $304.3 million. The Bank received approximately $29.2 million in cash from the FDIC.

The Bank did not immediately acquire banking facilities, furniture or equipment as part of the purchase and assumption agreements, but has a 90 day option to purchase any or all owned bank premises including furniture, fixtures and equipment and to assume any or all leases for leased bank premises from the FDIC.

In connection with the acquisitions of FPB and SWB, the Bank entered into loss sharing agreements with the FDIC under which the FDIC will reimburse the Bank for 80 percent of eligible losses with respect to covered assets. Covered assets include acquired loans (“covered loans”) and OREO (“covered OREO”) that are covered under the loss sharing agreement with the FDIC. Under the FPB loss sharing agreement, the Company has a first loss tranche of $22.3 million that is not reimbursable by the FDIC. The Company will recognize losses of up to $22.3 million, and all subsequent losses above that threshold will then be subject to FDIC reimbursement of 80 percent. There is no first loss tranche under the SWB loss sharing agreement. The term of the loss share agreements is ten years for single family residential loans and five years for all other loans. The expected reimbursements under the loss sharing agreements were recorded as an indemnification asset at their estimated fair value of $36.5 million for FPB and $104.6 million for SWB. The difference between the fair value of the FDIC indemnification asset and the undiscounted cash flow the Bank expects to collect from the FDIC is accreted into noninterest income.

The Bank recognized a $3.8 million liability in the acquisition of FPB relating to a requirement that the Bank reimburse the FDIC if actual cumulative losses are lower than the cumulative losses originally estimated by the FDIC prior to the acquired bank’s failure. There was no similar liability recognized in the acquisition of SWB.

The Bank recognized a gain of $0.5 million and $24.7 million on the acquisitions of FPB and SWB, respectively. The gain represents the amount by which the fair value of the assets acquired and consideration received from or paid to the FDIC exceeds the liabilities assumed. The gain is reported in Gain on acquisition in the consolidated statements of income. The Bank recognized approximately $1.7 million of acquisition-related expense. This expense is included in Other noninterest expense in the consolidated statements of income.

The consolidated income statement for 2010 includes the operating results produced by the acquired assets and assumed liabilities of FPB and SWB from their respective acquisition dates through June 30, 2010, which are not material to total operating results for the three and six month periods ended June 30, 2010. Due primarily to the Bank acquiring certain assets and liabilities of FPB and SWB which are not material to the Company’s consolidated balance sheet, the significant amount of fair value adjustments, and the FDIC loss sharing agreement, the historical results of the acquired banks are not material to the Company’s results, and as a result, no pro forma information is presented.

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Note 2. Business Combinations (Continued)

Imperial Capital Bank

On December 18, 2009, the Bank acquired the banking operations of Imperial Capital Bank (“ICB”) in a purchase and assumption agreement with the 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 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.

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. 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 $380.0 million at the acquisition date. The difference between the fair value of the FDIC indemnification asset and the undiscounted cash flow the Bank expects to collect from the FDIC is accreted into noninterest income.

In the last three quarters of the seventh year, the Bank 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.

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Note 3. Fair Value Measurements (Continued)

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, 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 June 30, 2010, December 31, 2009 and June 30, 2009 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of June 30, 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	$	19,145	$	19,145	$	—	$	—
Federal agency - Debt	1,090,846		—		1,090,846		—
Federal agency - MBS	466,713		—		466,713		—
CMOs - Federal agency	2,528,237		—		2,528,237		—
CMOs - Non-agency	217,078		—		217,078		—
State and municipal	360,422		—		360,422		—
Other debt securities	67,147		—		42,003		25,144
Equity securities and mutual funds	11,555		11,555		—		—
Trading securities	129,287		113,483		15,804		—
Mark-to-market derivatives (1)	60,619		4,976		55,643		—
Total assets at fair value	$	4,951,049	$	149,159	$	4,776,746	$	25,144

Liabilities
Mark-to-market derivatives (2)	$	31,736	$	1,629	$	30,107	$	—
Total liabilities at fair value	$	31,736	$	1,629	$	30,107	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	2,996	$	—	$	2,746	$	250
Commercial real estate mortgages	35,656		—		21,243		14,413
Residential mortgages	7,364		—		6,985		379
Real estate construction	111,339		—		85,460		25,879
Other real estate owned (4)	50,797		—		43,592		7,205
Private equity investments	4,427		—		—		4,427
Total assets at fair value	$	212,579	$	—	$	160,026	$	52,553

(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 $153.3 million in the consolidated balance sheets includes $98.8 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 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
U.S. Treasury	$	15,831	$	15,831	$	—	$	—
Federal agency - Debt	398,409		—		398,409		—
Federal agency - MBS	584,932		—		584,932		—
CMOs - Federal agency	1,550,675		—		1,550,675		—
CMOs - Non-agency	292,669		—		292,669		—
State and municipal	403,783		—		403,783		—
Other debt securities	64,968		—		39,543		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
Collateral dependent impaired loans (3)
Commercial	$	124	$	—	$	124	$	—
Commercial real estate mortgages	28,080		—		28,080		—
Residential mortgages	3,320		—		3,320		—
Real estate construction	150,832		—		150,832		—
Equity lines of credit	1,118		—		1,118		—
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 $18.1 million in the consolidated balance sheets is net of estimated disposal costs.

At June 30, 2010, $4.95 billion, or approximately 23 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $4.51 billion or 21 percent at December 31, 2009, and $3.52 billion or 20 percent at June 30, 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 was measured using Level 3 inputs. Approximately $31.7 million, $14.6 million and $11.2 million of the Company’s total liabilities at June 30, 2010, December 31, 2009 and June 30, 2009, respectively, were recorded at fair value on a recurring basis using Level 1 or Level 2 inputs. At June 30, 2010, $212.6 million, or approximately 1 percent of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared with $293.2 million or 1 percent at December 31, 2009, and $203.7 million or 1 percent at June 30, 2009. These assets were measured using Level 2 and Level 3 inputs. There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 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 (gains), which include charge-offs, specific reserves, valuation write-downs, and net losses on sales of other real estate owned, recognized in the three and six months ended June 30, 2010 and 2009:

Three months ended
June 30,

Six months ended
June 30,

(in thousands)

2010

2009

2010

2009

Collateral dependent impaired loans