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 September 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 October 29, 2010, there were 52,118,347 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	43
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	76
Item 4.	Controls and Procedures	79

PART II
Item 1A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 4.	Reserved	81
Item 6.	Exhibits	82

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,			September 30,
(in thousands, except share amounts)	2010			2009			2009
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	224,363		$	364,483		$	348,958
Due from banks - interest-bearing	506,081			443,443			767,362
Federal funds sold	395,010			5,000			240,000
Securities available-for-sale - cost $5,275,623, $4,319,420, and $3,480,659 at September 30, 2010, December 31, 2009 and September 30, 2009, respectively:
Securities pledged as collateral	—			226,985			226,497
Held in portfolio	5,397,870			4,079,773			3,285,575
Trading securities	170,750			154,302			188,904
Loans and leases, excluding covered loans	11,418,625			12,146,908			12,168,490
Less: Allowance for loan and lease losses	274,167			288,493			265,005
Loans and leases, excluding covered loans, net	11,144,458			11,858,415			11,903,485
Covered loans, net of allowance for loan losses	1,910,133			1,851,821			—
Net loans and leases	13,054,591			13,710,236			11,903,485
Premises and equipment, net	123,427			124,309			126,097
Deferred tax asset	86,948			164,038			173,752
Goodwill	479,982			479,982			491,501
Customer-relationship intangibles, net	42,610			45,601			41,866
Bank-owned life insurance	78,897			76,834			76,155
Affordable housing investments	98,667			93,429			92,170
Customers’ acceptance liability	2,970			2,951			3,476
Other real estate owned ($110,391 and $60,558 covered by FDIC loss share at September 30, 2010 and December 31, 2009, respectively)	168,853			113,866			43,969
FDIC indemnification asset	324,240			380,743			—
Other assets	668,357			612,782			390,837
Total assets	$	21,823,616		$	21,078,757		$	18,400,604
Liabilities
Demand deposits	$	8,455,164		$	7,753,936		$	7,441,898
Interest checking deposits	1,513,924			2,278,586			1,776,643
Money market deposits	6,711,758			4,546,532			4,220,737
Savings deposits	288,417			393,177			276,087
Time deposits-under $100,000	373,276			756,616			210,344
Time deposits-$100,000 and over	1,071,067			1,650,601			1,182,734
Total deposits	18,413,606			17,379,448			15,108,443
Federal funds purchased and securities sold under repurchase agreements	—			626,779			231,903
Other short-term borrowings	710			690			720
Current portion of subordinated debt	155,649			—			—
Subordinated debt	179,384			340,137			341,587
Long-term debt	771,408			471,029			233,536
Reserve for off-balance sheet credit commitments	20,401			17,340			19,576
Acceptances outstanding	2,970			2,951			3,476
Other liabilities	255,358			176,238			192,974
Total liabilities	19,799,486			19,014,612			16,132,215
Redeemable noncontrolling interest	46,967			51,381			49,897
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 September 30, 2009, respectively	—			196,048			391,593
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886 shares issued at September 30, 2010, December 31, 2009 and September 30, 2009	53,886			53,886			53,886
Additional paid-in capital	487,919			513,550			514,904
Accumulated other comprehensive income (loss)	73,369			(3,049		)	24,329
Retained earnings	1,447,569			1,377,639			1,363,176
Treasury shares, at cost - 1,771,740, 2,349,430 and 2,386,899 shares at September 30, 2010, December 31, 2009 and September 30, 2009, respectively	(110,769		)	(151,751		)	(154,245		)
Total common shareholders’ equity	1,951,974			1,790,275			1,802,050
Total shareholders’ equity	1,951,974			1,986,323			2,193,643
Noncontrolling interest	25,189			26,441			24,849
Total equity	1,977,163			2,012,764			2,218,492
Total liabilities and equity	$	21,823,616		$	21,078,757		$	18,400,604

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 nine months ended
	September 30,						September 30,
(in thousands, except per share amounts)	2010			2009			2010			2009
Interest Income
Loans and leases	$	177,526		$	145,756		$	521,430		$	433,636
Securities available-for-sale	35,716			34,243			100,783			90,835
Trading securities	34			31			6			465
Due from banks - interest-bearing	546			259			1,315			705
Federal funds sold and securities purchased under resale agreements	239			130			396			145
Total interest income	214,061			180,419			623,930			525,786
Interest Expense
Deposits	12,417			12,854			38,165			48,483
Federal funds purchased and securities sold under repurchase agreements	1,652			2,016			5,291			6,279
Subordinated debt	4,697			3,220			14,001			5,294
Other long-term debt	7,579			988			21,245			3,803
Other short-term borrowings	—			—			9			113
Total interest expense	26,345			19,078			78,711			63,972
Net interest income	187,716			161,341			545,219			461,814
Provision for credit losses on loans and leases, excluding covered loans	13,000			85,000			100,000			205,000
Provision for losses on covered loans	8,233			—			54,749			—
Net interest income after provision	166,483			76,341			390,470			256,814
Noninterest Income
Trust and investment fees	32,695			32,289			100,180			83,342
Brokerage and mutual fund fees	6,494			6,041			17,236			22,443
Cash management and deposit transaction charges	11,620			13,142			36,204			39,143
International services	7,905			7,895			22,787			22,416
Bank-owned life insurance	727			639			2,063			2,373
FDIC loss sharing (expense) income, net	(377		)	—			37,048			—
Gain (loss) on disposal of assets	2,603			(173		)	1,180			(130		)
Gain on sale of securities	451			3,445			2,940			3,795
Gain on acquisition	2,111			—			27,339			—
Other	2,721			6,345			20,991			21,366
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(11,739		)	(20,588		)	(13,248		)	(34,161		)
Less: Portion of loss recognized in other comprehensive income	11,587			19,810			11,587			19,810
Net impairment loss recognized in earnings	(152		)	(778		)	(1,661		)	(14,351		)
Total noninterest income	66,798			68,845			266,307			180,397
Noninterest Expense
Salaries and employee benefits	103,397			80,776			297,966			234,690
Net occupancy of premises	14,463			12,613			40,715			37,433
Legal and professional fees	10,633			8,706			33,570			24,347
Information services	7,940			7,342			22,994			20,814
Depreciation and amortization	6,351			6,472			19,061			18,417
Marketing and advertising	4,954			4,615			16,000			14,034
Office services and equipment	4,035			3,610			12,105			11,136
Amortization of intangibles	2,228			1,726			6,803			5,237
Other real estate owned	12,642			2,231			46,731			4,481
FDIC assessments	7,561			5,308			21,744			22,237
Other operating	10,477			10,366			29,613			28,058
Total noninterest expense	184,681			143,765			547,302			420,884
Income before income taxes	48,600			1,421			109,475			16,327
Income taxes	13,461			(6,966		)	15,020			(6,320		)
Net income	$	35,139		$	8,387		$	94,455		$	22,647
Less: Net income attributable to noncontrolling interest	721			348			3,021			375
Net income attributable to City National Corporation	$	34,418		$	8,039		$	91,434		$	22,272
Less: Dividends and accretion on preferred stock	—			5,502			5,702			16,504
Net income available to common shareholders	$	34,418		$	2,537		$	85,732		$	5,768
Net income per share, basic	$	0.65		$	0.05		$	1.63		$	0.11
Net income per share, diluted	$	0.65		$	0.05		$	1.62		$	0.11
Shares used to compute income per share, basic	52,105			51,482			51,937			49,855
Shares used to compute income per share, diluted	52,498			51,660			52,391			49,987
Dividends per share	$	0.10		$	0.10		$	0.30		$	0.45

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the nine months ended
	September 30,
(in thousands)	2010			2009
Cash Flows From Operating Activities
Net income	$	94,455		$	22,647
Adjustments to net income:
Provision for credit losses on loans and leases, excluding covered loans	100,000			205,000
Provision for losses on covered loans	54,749			—
Amortization of intangibles	6,803			5,237
Depreciation and amortization	19,061			18,417
Amortization of cost and discount on long-term debt	614			436
Share-based employee compensation expense	12,425			10,786
(Gain) loss on disposal of assets	(1,180		)	130
Gain on sale of securities	(2,940		)	(3,795		)
Gain on acquisition	(27,339		)	—
Impairment loss on securities	1,661			14,351
Other, net	(14,127		)	2,085
Net change in:
Trading securities	(16,448		)	113,094
Deferred income tax benefit	18,727			(470		)
Other assets and other liabilities, net	247,074			(143,336		)
Net cash provided by operating activities	493,535			244,582
Cash Flows From Investing Activities
Purchases of securities available-for-sale	(2,933,612		)	(2,440,987		)
Sales of securities available-for-sale	436,894			554,834
Maturities and paydowns of securities available-for-sale	1,535,868			618,141
Loan originations, net of principal collections	751,982			73,617
Net payments for premises and equipment	(18,179		)	(10,432		)
Net cash acquired (paid) in acquisitions	94,706			(18,328		)
Other investing activities, net	39,824			2,779
Net cash used in investing activities	(92,517		)	(1,220,376		)
Cash Flows From Financing Activities
Net increase in deposits	492,659			2,456,319
Net decrease in federal funds purchased and securities sold under repurchase agreements	(626,779		)	(676,254		)
Net decrease in short-term borrowings, net of transfers from long-term debt	(30,519		)	(123,780		)
Net increase in other borrowings	294,858			170,900
Proceeds from exercise of stock options	18,578			1,150
Tax benefit from exercise of stock options	3,186			141
Redemption of preferred stock	(200,000		)	—
Issuance of common stock	—			119,929
Repurchase of common stock warrants	(18,500		)	—
Cash dividends paid	(18,737		)	(36,883		)
Other financing activities, net	(3,236		)	(3,673		)
Net cash (used in) provided by financing activities	(88,490		)	1,907,849
Net increase in cash and cash equivalents	312,528			932,055
Cash and cash equivalents at beginning of year	812,926			424,265
Cash and cash equivalents at end of period	$	1,125,454		$	1,356,320
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	83,921		$	63,804
Income taxes	—			17,689
Non-cash investing activities:
Transfer of loans to other real estate owned	$	116,010		$	47,715
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)	—		—			—			—			—			22,272			—			1,625			23,897
Other comprehensive income, net of tax:
Amortization of prior service cost	—		—			—			—			119			—			—			—			119
Non-credit related impairment loss on investment securities, net of taxes of $8.3 million	—		—			—			—			(11,523		)	—			—			—			(11,523		)
Net unrealized gain on securities available-for-sale, net of taxes of $60.9 million and reclassification of $2.0 million net loss included in net income	—		—			—			—			84,657			—			—			—			84,657
Net unrealized loss on cash flow hedges, net of taxes of $0.6 million and reclassification of $5.2 million net gain included in net income	—		—			—			—			(902		)	—			—			—			(902		)
Total comprehensive income																					1,625			96,248
Dividends and distributions to noncontrolling interest	—		—			—			—			—			—			—			(1,717		)	(1,717		)
Issuance of common stock	3,220,000		—			3,220			116,409			—			—			—			—			119,629
Issuance of shares under share-based compensation plans	(295,571	)	—			(295		)	(1,814		)	—			—			2,491			—			382
Preferred stock accretion	—		1,504			—			—			—			(1,504		)	—			—			—
Share-based employee compensation expense	—		—			—			10,693			—			—			—			—			10,693
Tax expense from share-based compensation plans	—		—			—			(714		)	—			—			—			—			(714		)
Cash dividends:
Preferred	—		—			—			—			—			(15,000		)	—			—			(15,000		)
Common	—		—			—			—			—			(22,216		)	—			—			(22,216		)
Net change in deferred compensation plans	—		—			—			492			—			—			—			—			492
Change in redeemable noncontrolling interest	—		—			—			761			—			—			—			—			761
Other	—		—			—			—			—			—			—			(500		)	(500		)
Balance, September 30, 2009	53,885,886		$	391,593		$	53,886		$	514,904		$	24,329		$	1,363,176		$	(154,245	)	$	24,849		$	2,218,492

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)	—		—			—			—			—			91,434			—			1,606			93,040
Other comprehensive income, net of tax:
Amortization of prior service cost	—		—			—			—			119			—			—			—			119
Non-credit related impairment loss on investment securities, net of taxes of $4.8 million	—		—			—			—			(6,740		)	—			—			—			(6,740		)
Net unrealized gain on securities available-for-sale, net of
taxes of $61.3 million and reclassification of $0.6 million net gain included in net income	—		—			—			—			85,215			—			—			—			85,215
Net unrealized loss on cash flow hedges, net of taxes of $3.1 million and reclassification of $4.3 million net gain included in net income	—		—			—			—			(2,176		)	—			—			—			(2,176		)
Total comprehensive income																					1,606			169,458
Dividends and distributions to noncontrolling interest	—		—			—			—			—			—			—			(1,606		)	(1,606		)
Issuance of shares under share-based compensation plans	—		—			—			(23,671		)	—			—			40,885			—			17,214
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	—		—			—			12,367			—			—			—			—			12,367
Tax benefit from share-based compensation plans	—		—			—			2,107			—			—			—			—			2,107
Cash dividends:															—
Preferred	—		—			—			—			—			(1,750		)	—			—			(1,750		)
Common	—		—			—			—			—			(15,802		)	—			—			(15,802		)
Net change in deferred compensation plans	—		—			—			350			—			—			97			—			447
Change in redeemable noncontrolling interest	—		—			—			1,716			—			—			—			—			1,716
Other	—		—			—			—			—			—			—			(1,252		)	(1,252		)
Balance, September 30, 2010	53,885,886		$	—		$	53,886		$	487,919		$	73,369		$	1,447,569		$	(110,769	)	$	25,189		$	1,977,163

(1) Net income excludes net income (loss) attributable to redeemable noncontrolling interest of $1,415 and ($1,250) for the nine-month periods ended September 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 74 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 valuations of covered loans, valuation of noncontrolling interest and the valuation of financial assets and liabilities reported at fair value.

The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

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Note 1. Summary of Significant Accounting Policies (Continued)

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 or after 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 nine months ended September 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 Accounting Standards Codification (“ASC”) 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 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.

· 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, except for the requirement to provide the Level 3 activity on a gross basis, 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. The expanded disclosure requirements pertaining to Level 3 activity will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

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Note 1. Summary of Significant Accounting Policies (Continued)

· 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 expanded disclosures as of the end of the reporting period are effective for interim or annual reporting periods ending after December 15, 2010. These period-end disclosure requirements will become effective for the Company with its 2010 Form 10-K. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The ASU encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption. 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. The acquisition of FPB added five new bank branches in California.

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 acquisition of SWB added three new bank branches in Nevada.

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 that is not reimbursable by the FDIC. At acquisition date, the first loss tranche was determined by the FDIC to be $22.3 million but was later amended by the FDIC to $19.8 million in September 2010. The Company will recognize losses of up to $19.8 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 indemnification assets 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 flows that 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.

During the second quarter of 2010, 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. During the third quarter of 2010, the Bank recognized an additional gain of $2.1 million when the first loss tranche under the FPB loss-sharing agreement was revised from $22.3 million to $19.8 million. Acquisition gains are reported in Gain on acquisition in the consolidated statements of income.

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 Bank 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 in 2010. A gain of $38.2 million was recognized on the acquisition in 2009. 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 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 of the agreement, 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 that supports a loan-to-value ratio of 75 percent or more of the covered loans’ book value.

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.

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.

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Note 3. Fair Value Measurements (Continued)

The following tables summarize assets and liabilities measured at fair value as of September 30, 2010, December 31, 2009 and September 30, 2009 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of September 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	$	19,117	$	19,117	$	—	$	—
Federal agency - Debt	1,311,936		—		1,311,936		—
Federal agency - MBS	508,508		—		508,508		—
CMOs - Federal agency	2,923,601		—		2,923,601		—
CMOs - Non-agency	205,320		—		205,320		—
State and municipal	360,471		—		360,471		—
Other debt securities	58,890		—		38,594		20,296
Equity securities and mutual funds	10,027		10,027		—		—
Trading securities	170,750		154,309		16,441		—
Mark-to-market derivatives (1)	66,191		3,547		62,644		—
Total assets at fair value	$	5,634,811	$	187,000	$	5,427,515	$	20,296

Liabilities
Mark-to-market derivatives (2)	$	38,798	$	1,391	$	37,407	$	—
Total liabilities at fair value	$	38,798	$	1,391	$	37,407	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	1,869	$	—	$	1,869	$	—
Commercial real estate mortgages	31,733		—		20,134		11,599
Residential mortgages	9,319		—		9,319		—
Real estate construction	130,744		—		125,712		5,032
Equity lines of credit	3,485		—		3,485		—
Collateral dependent impaired covered loans (3)
Commercial	2,633		—		—		2,633
Other real estate owned (4)	71,297		—		59,592		11,705
Private equity investments	8,580		—		—		8,580
Total assets at fair value	$	259,660	$	—	$	220,111	$	39,549

(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 $168.9 million in the consolidated balance sheets includes $110.4 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 September 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	$	13,554	$	13,554	$	—	$	—
Federal agency - Debt	360,284		—		360,284		—
Federal agency - MBS	581,974		—		581,974		—
CMOs - Federal agency	1,781,666		—		1,781,666		—
CMOs - Non-agency	280,856		—		280,856		—
State and municipal	403,264		—		403,264		—
Other debt securities	69,749		—		42,776		26,973
Equity securities and mutual funds	20,725		20,725		—		—
Trading securities	188,904		175,035		13,040		829
Mark-to-market derivatives (1)	64,414		5,337		59,077		—
Total assets at fair value	$	3,765,390	$	214,651	$	3,522,937	$	27,802

Liabilities
Mark-to-market derivatives (2)	$	19,315	$	624	$	18,691	$	—
Total liabilities at fair value	$	19,315	$	624	$	18,691	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial	$	414	$	—	$	414	$	—
Commercial real estate mortgages	40,193		—		40,193		—
Residential mortgages	2,472		—		2,472		—
Real estate construction	180,118		—		180,118		—
Equity lines of credit	1,487		—		1,487		—
Other real estate owned (4)	32,758		—		32,758		—
Private equity investments	4,954		—		—		4,954
Total assets at fair value	$	262,396	$	—	$	257,442	$	4,954

(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) Other real estate owned balance of $44.0 million in the consolidated balance sheets is net of estimated disposal costs.

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Note 3. Fair Value Measurements (Continued)

At September 30, 2010, $5.63 billion, or approximately 26 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 $3.77 billion or 20 percent at September 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 $38.8 million, $14.6 million and $19.3 million of the Company’s total liabilities at September 30, 2010, December 31, 2009 and September 30, 2009, respectively, were recorded at fair value on a recurring basis using Level 1 or Level 2 inputs. At September 30, 2010, $259.7 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 $262.4 million or 1 percent at September 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 nine months ended September 30, 2010.

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 nine months ended September 30, 2010 and 2009:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2010		2009		2010		2009
Collateral dependent impaired loans
Commercial	$	829	$	368	$	7,725	$	5,203
Commercial real estate mortgages	5,288		11,481		22,736		14,737
Residential mortgages