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, 2011

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 31, 2011, there were 53,193,015 shares of Common Stock outstanding (including unvested restricted shares).

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	53
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	89
Item 4.	Controls and Procedures	93

PART II
Item 1A.	Risk Factors	95
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95
Item 4.	Reserved	96
Item 6.	Exhibits	96

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)	2011			2010			2010
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	249,496		$	126,882		$	224,363
Due from banks - interest-bearing	144,754			142,807			506,081
Federal funds sold	100,000			165,000			395,010
Securities available-for-sale (cost $7,042,934, $5,658,120, and $5,275,623 at September 30, 2011, December 31, 2010 and September 30, 2010, respectively):
Securities pledged as collateral	41,235			8,697			16,462
Held in portfolio	7,144,053			5,711,978			5,381,408
Trading securities	93,707			255,397			170,750
Loans and leases, excluding covered loans	12,164,209			11,386,628			11,418,625
Less: Allowance for loan and lease losses	263,348			257,007			274,167
Loans and leases, excluding covered loans, net	11,900,861			11,129,621			11,144,458
Covered loans, net of allowance for loan losses	1,550,103			1,790,133			1,910,133
Net loans and leases	13,450,964			12,919,754			13,054,591
Premises and equipment, net	140,871			128,426			123,427
Deferred tax asset	69,439			105,398			86,948
Goodwill	486,383			486,070			479,982
Customer-relationship intangibles, net	37,720			42,564			42,610
Affordable housing investments	109,863			99,670			98,667
Customers’ acceptance liability	1,924			1,715			2,970
Other real estate owned ($102,848, $120,866 and $110,391 covered by FDIC loss share at September 30, 2011, December 31, 2010 and September 30, 2010, respectively)	147,369			178,183			168,853
FDIC indemnification asset	212,809			295,466			324,240
Other assets	673,673			685,111			747,254
Total assets	$	23,104,260		$	21,353,118		$	21,823,616

Liabilities
Demand deposits	$	10,308,547		$	8,457,178		$	8,455,164
Interest checking deposits	1,751,316			1,863,004			1,513,924
Money market deposits	6,474,818			6,344,749			6,711,758
Savings deposits	331,433			291,299			288,417
Time deposits-under $100,000	270,734			338,112			373,276
Time deposits-$100,000 and over	772,233			882,520			1,071,067
Total deposits	19,909,081			18,176,862			18,413,606
Short-term borrowings	30,640			153,444			156,359
Long-term debt	699,983			704,971			950,792
Reserve for off-balance sheet credit commitments	22,826			21,529			20,401
Acceptances outstanding	1,924			1,715			2,970
Other liabilities	276,637			264,203			255,358
Total liabilities	20,941,091			19,322,724			19,799,486
Redeemable noncontrolling interest	42,704			45,676			46,967
Commitments and contingencies
Equity
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886 shares issued at September 30, 2011, December 31, 2010 and September 30, 2010	53,886			53,886			53,886
Additional paid-in capital	489,037			487,868			487,919
Accumulated other comprehensive income	82,467			36,853			73,369
Retained earnings	1,578,747			1,482,037			1,447,569
Treasury shares, at cost - 1,401,598, 1,639,203 and 1,771,740 shares at September 30, 2011, December 31, 2010 and September 30, 2010, respectively	(83,672		)	(101,065		)	(110,769		)
Total shareholders’ equity	2,120,465			1,959,579			1,951,974
Noncontrolling interest	—			25,139			25,189
Total equity	2,120,465			1,984,718			1,977,163
Total liabilities and equity	$	23,104,260		$	21,353,118		$	21,823,616

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
(in thousands, except per share amounts)	2011			2010			2011			2010
Interest Income
Loans and leases	$	175,435		$	177,526		$	508,366		$	521,430
Securities available-for-sale	40,803			35,716			117,541			100,783
Trading securities	90			34			410			6
Due from banks - interest-bearing	474			546			1,179			1,315
Federal funds sold and securities purchased under resale agreements	90			239			342			396
Total interest income	216,892			214,061			627,838			623,930
Interest Expense
Deposits	8,535			12,417			28,742			38,165
Federal funds purchased and securities sold under repurchase agreements	—			1,652			2			5,291
Subordinated debt	4,419			4,697			13,701			14,001
Other long-term debt	4,622			7,579			13,958			21,245
Other short-term borrowings	—			—			2			9
Total interest expense	17,576			26,345			56,405			78,711
Net interest income	199,316			187,716			571,433			545,219
Provision for credit losses on loans and leases, excluding covered loans	7,500			13,000			7,500			100,000
Provision for losses on covered loans	5,147			8,233			25,979			54,749
Net interest income after provision	186,669			166,483			537,954			390,470
Noninterest Income
Trust and investment fees	35,412			32,695			107,737			100,180
Brokerage and mutual fund fees	5,079			6,494			15,604			17,236
Cash management and deposit transaction charges	10,986			11,620			33,616			36,204
International services	10,352			7,905			27,683			22,787
FDIC loss sharing (expense) income, net	(14,191		)	(377		)	(16,270		)	37,048
Gain on disposal of assets	5,191			2,603			16,037			1,180
Gain on sale of securities	3,520			451			5,339			2,940
Gain on acquisition	—			2,111			8,164			27,339
Other	13,479			3,448			58,206			23,054
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(4,549		)	(11,739		)	(5,007		)	(13,248		)
Less: Portion of loss recognized in other comprehensive income	4,356			11,587			4,356			11,587
Net impairment loss recognized in earnings	(193		)	(152		)	(651		)	(1,661		)
Total noninterest income	69,635			66,798			255,465			266,307
Noninterest Expense
Salaries and employee benefits	112,729			103,397			335,880			297,966
Net occupancy of premises	13,713			14,463			40,724			40,715
Legal and professional fees	14,242			10,633			39,109			33,570
Information services	7,906			7,940			23,738			22,994
Depreciation and amortization	6,930			6,351			20,582			19,061
Amortization of intangibles	2,105			2,228			6,377			6,803
Marketing and advertising	6,675			4,954			20,819			16,000
Office services and equipment	4,456			4,035			13,734			12,105
Other real estate owned	13,160			12,642			49,811			46,731
FDIC assessments	6,670			7,561			25,000			21,744
Other operating	9,051			10,477			31,092			29,613
Total noninterest expense	197,637			184,681			606,866			547,302
Income before income taxes	58,667			48,600			186,553			109,475
Income taxes	16,267			13,461			54,803			15,020
Net income	$	42,400		$	35,139		$	131,750		$	94,455
Less: Net income attributable to noncontrolling interest	1,002			721			3,189			3,021
Net income attributable to City National Corporation	$	41,398		$	34,418		$	128,561		$	91,434
Less: Dividends and accretion on preferred stock	—			—			—			5,702
Net income available to common shareholders	$	41,398		$	34,418		$	128,561		$	85,732
Net income per share, basic	$	0.78		$	0.65		$	2.41		$	1.63
Net income per share, diluted	$	0.77		$	0.65		$	2.39		$	1.62
Shares used to compute net income per share, basic	52,481			52,105			52,422			51,937
Shares used to compute net income per share, diluted	52,720			52,498			52,882			52,391
Dividends per share	$	0.20		$	0.10		$	0.60		$	0.30

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)	2011			2010
Cash Flows From Operating Activities
Net income	$	131,750		$	94,455
Adjustments to net income:
Provision for credit losses on loans and leases, excluding covered loans	7,500			100,000
Provision for losses on covered loans	25,979			54,749
Amortization of intangibles	6,377			6,803
Depreciation and amortization	20,582			19,061
Share-based employee compensation expense	14,171			12,425
Deferred income tax benefit	2,578			18,727
Gain on disposal of assets	(16,037		)	(1,180		)
Gain on sale of securities	(5,339		)	(2,940		)
Gain on acquisition	(8,164		)	(27,339		)
Impairment loss on securities	651			1,661
Other, net	(8,708		)	(16,952		)
Net change in:
Trading securities	161,591			(16,448		)
Other assets and other liabilities, net	105,224			247,074
Net cash provided by operating activities	438,155			490,096

Cash Flows From Investing Activities
Purchase of securities available-for-sale	(3,990,753		)	(2,933,612		)
Sales of securities available-for-sale	101,548			436,894
Maturities and paydowns of securities available-for-sale	2,496,283			1,535,868
Loan originations, net of principal collections	(508,913		)	751,982
Net payments for premises and equipment	(32,927		)	(18,179		)
Net cash acquired in acquisitions	28,066			94,706
Other investing activities, net	96,819			39,824
Net cash used in investing activities	(1,809,877		)	(92,517		)

Cash Flows From Financing Activities
Net increase in deposits	1,605,424			492,659
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements	30,000			(626,779		)
Net decrease in short-term borrowings, net of transfers from long-term debt	(150,895		)	(30,519		)
Net (decrease) increase in long-term debt	(757		)	298,297
Proceeds from exercise of stock options	4,792			18,578
Tax benefit from exercise of stock options	1,024			3,186
Redemption of preferred stock	—			(200,000		)
Repurchase of common stock warrants	—			(18,500		)
Cash dividends paid	(31,851		)	(18,737		)
Other financing activities, net	(26,454		)	(3,236		)
Net cash provided by (used in) financing activities	1,431,283			(85,051		)

Net increase in cash and cash equivalents	59,561			312,528
Cash and cash equivalents at beginning of year	434,689			812,926
Cash and cash equivalents at end of period	$	494,250		$	1,125,454

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	70,612		$	83,921
Income taxes	79,739			—
Non-cash investing activities:
Transfer of loans to other real estate owned	$	81,109		$	116,010
Assets acquired (liabilities assumed) in acquisitions:
Securities available-for-sale	$	10,441		$	17,183
Covered loans	55,313			330,566
Covered other real estate owned	7,463			15,161
Deposits	(126,795		)	(541,499		)
Other borrowings	(3,165		)	(30,539		)

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

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

Balance, January 1, 2010	53,885,886	$	196,048		$	53,886	$	513,550		$	(3,049	)	$	1,377,639		$	(151,751	)	$	26,441		$	2,012,764
Comprehensive income:
Net income (1)	—	—			—		—			—			91,434			—			1,606			93,040
Other comprehensive income, net of tax (2)	—	—			—		—			76,418			—			—			—			76,418
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

Balance, January 1, 2011	53,885,886	$	—		$	53,886	$	487,868		$	36,853		$	1,482,037		$	(101,065	)	$	25,139		$	1,984,718
Comprehensive income:
Net income (1)	—	—			—		—			—			128,561			—			1,678			130,239
Other comprehensive income, net of tax (2)	—	—			—		—			45,614			—			—			—			45,614
Total comprehensive income																			1,678			175,853
Dividends and distributions to noncontrolling interest	—	—			—		—			—			—			—			(1,678		)	(1,678		)
Issuance of shares under share-based compensation plans	—	—			—		(14,589		)	—			—			17,393			—			2,804
Share-based employee compensation expense	—	—			—		14,039			—			—			—			—			14,039
Tax benefit from share-based compensation plans	—	—			—		1,247			—			—			—			—			1,247
Cash dividends:
Common	—	—			—		—			—			(31,851		)	—			—			(31,851		)
Net change in deferred compensation plans	—	—			—		641			—			—			—			—			641
Change in redeemable noncontrolling interest	—	—			—		(245		)	—			—			—			—			(245		)
Other (3)	—	—			—		76			—			—			—			(25,139		)	(25,063		)
Balance, September 30, 2011	53,885,886	$	—		$	53,886	$	489,037		$	82,467		$	1,578,747		$	(83,672	)	$	—		$	2,120,465

(1) Net income excludes net income attributable to redeemable noncontrolling interest of $1,511 and $1,415 for the nine-month periods ended September 30, 2011 and 2010, respectively. Redeemable noncontrolling interest is reflected in the mezzanine section of the consolidated balance sheets. See Note 17 of the Notes to the Unaudited Consolidated Financial Statements.

(2) See Note 9 for additional information on other comprehensive income.

(3) See Note 17 for additional information on the change in noncontrolling interest.

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 78 offices in Southern California, the San Francisco Bay area, Nevada, New York City and Nashville, Tennessee. As of September 30, 2011, the Corporation had five consolidated investment advisory affiliates and one unconsolidated subsidiary, Business Bancorp 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. It also includes noncontrolling interest, which 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. This preferred stock was liquidated or redeemed in full by the Bank in July and August of 2011. 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. The Corporation’s interests in investment management affiliates in which it holds a noncontrolling share are accounted for using the equity method. Additionally, the Company has various interests in variable interest entities (“VIEs”) that are not required to be consolidated. See Note 16 for a more detailed discussion on VIEs.

Use of Estimates

The Company’s accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and income and expenses during the reporting period. Circumstances and events that differ significantly from those underlying the Company’s estimates and assumptions could cause actual financial results to differ from those estimates. The material estimates included in the financial statements relate to the allowance for loan and lease losses, the reserve for off-balance sheet credit commitments, valuation of stock options and restricted stock, income taxes, goodwill and intangible asset impairment, securities available-for-sale impairment, private equity and alternative investment impairment, valuation of assets and liabilities acquired in business combinations, subsequent valuations of acquired impaired loans, FDIC indemnification assets, 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, 2010.

The results for the 2011 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 2010 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, 2011. Refer to Accounting Pronouncements for discussion of accounting pronouncements adopted in 2011.

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

Accounting Pronouncements

During the nine months ended September 30, 2011, the following accounting pronouncements applicable to the Company were issued or became effective:

· In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements (Topic 820), Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 enhances disclosure requirements under Accounting Standards Codification (“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, was adopted by the Company on January 1, 2010. The expanded disclosure requirements pertaining to Level 3 activity became effective for the Company on January 1, 2011. Adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

· In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructurings (“ASU 2011-02”). In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor (“lender”) must separately conclude that both of the following exist: (1) the restructuring constitutes a concession and (2) the debtor (“borrower”) is experiencing financial difficulties. Determining whether a modification is a troubled debt restructuring requires significant judgment. ASU 2011-02 clarifies the guidance on whether a lender has granted a concession, and on the lender’s evaluation of whether a borrower is experiencing financial difficulties. ASU 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the annual period of adoption. The Company adopted ASU 2011-02 for third quarter 2011 reporting and applied the guidance retrospectively to restructurings that occurred on or after January 1, 2011. Additionally, the previously deferred disclosure provisions of ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, pertaining to loan modifications also became effective for third quarter reporting. Adoption of the new guidance resulted in expanded troubled debt restructuring disclosures in the Company’s financial statements. Of the restructurings completed in 2011, $26.1 million were recognized as troubled debt restructurings due to the adoption of ASU 2011-02.

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Note 1. Summary of Significant Accounting Policies (Continued)

· In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”). ASC 860, Transfers and Servicing, provides the criteria for determining whether a transfer of financial assets is accounted for as a secured borrowing or as a sale. Under the guidance, an entity that maintains effective control over transferred assets must account for the transfer as a secured borrowing. ASU 2011-03 eliminates the requirement for entities to consider whether a transferor has the ability to repurchase the financial assets in a repurchase agreement for purposes of determining whether the transferor has maintained effective control. The ASU does not change the other criteria applicable to the assessment of effective control. ASU 2011-03 is effective for transactions, or modification of existing transactions, that occur on or after the first interim or annual period beginning on or after December 15, 2011. The new guidance is not expected to have a material effect on the Company’s consolidated financial statements.

· In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 represents the converged guidance of the FASB and International Accounting Standards Board on fair value. The new guidance establishes a common framework for measuring fair value and for disclosing information about fair value measurements. While ASU 2011-04 is largely consistent with existing fair value measurement principles, it does expand disclosure requirements and amends certain guidance. ASU 2011-04 clarifies existing guidance pertaining to the applicability of the concepts of highest and best use and valuation premise in a fair value measurement, and on measuring the fair value of an instrument classified in shareholders’ equity. The ASU provides a framework for considering whether a premium or discount can be applied in a fair value measurement, and provides additional guidance on the application of fair value measurements to financial assets and liabilities with offsetting positions in market risk or counterparty credit risks. The expanded disclosure requirements include more detailed disclosures about the valuation processes used in fair value measurements within Level 3 of the fair value hierarchy, and categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which fair value is required to be disclosed in accordance with ASC Topic 825, Financial Instruments. The ASU is effective for interim and annual periods beginning after December 15, 2011. Adoption of ASU 2011-04, when effective, will result in expanded fair value disclosures in the Company’s consolidated financial statements.

· In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). Under either method, entities must display adjustments for items that are reclassified from OCI to net income in both net income and OCI. The ASU does not change the items that must be reported in OCI. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. After adoption, the guidance must be applied retrospectively for all periods presented in the financial statements. The new guidance is not expected to have a material effect on the Company’s consolidated financial statements.

· In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 simplifies how entities test goodwill for impairment. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under ASU 2011-08, an entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for the fiscal year beginning after December 15, 2011. Early adoption is permitted. The new guidance is not expected to have a significant impact on the results of the Company’s goodwill assessment.

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Note 2. Business Combinations

Nevada Commerce Bank

On April 8, 2011, the Bank acquired the banking operations of Nevada Commerce Bank (“NCB”), based in Las Vegas, Nevada, in a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”). Excluding the effects of acquisition accounting adjustments, the Bank acquired approximately $138.9 million in assets and assumed $121.9 million in liabilities. The Bank acquired most of NCB’s assets, including loans and other real estate owned (“OREO”) with a fair value of $56.4 million and $7.5 million, respectively, and assumed deposits with a fair value of $118.4 million. The Bank received approximately $2.7 million in cash from the FDIC at acquisition.

In connection with the acquisition of NCB, 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 loss-sharing agreements with the FDIC. The term of the loss-sharing agreements is 10 years for single-family residential loans and eight 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 $33.8 million. 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 gain of $8.2 million on the acquisition of NCB. The gain represents the amount by which the fair value of the assets acquired and consideration received from the FDIC exceeds the liabilities assumed. The gain is reported in Gain on acquisition in the consolidated statements of income. The Bank recognized approximately $0.3 million of acquisition-related expense. This expense is included in Legal and professional fees in the consolidated statements of income.

The consolidated statement of income for 2011 includes the operating results produced by the acquired assets and assumed liabilities of NCB from its acquisition date through September 30, 2011, which are not material to total operating results for the three and nine month periods ended September 30, 2011. Due primarily to the Bank acquiring certain assets and liabilities of NCB which are not material to the Company’s consolidated balance sheet, the significant amount of fair value adjustments, and the FDIC loss-sharing agreements, the historical results of the acquired bank are not material to the Company’s results, consequently, no pro forma information is presented.

San Jose, California Branch

On February 11, 2011, the Company purchased a branch banking office in San Jose, California from another financial institution. The Company acquired approximately $8.4 million in deposits. The Company recorded $0.3 million of goodwill and a core deposit intangible of $0.1 million with its acquisition of the branch.

Datafaction, Inc.

On November 15, 2010, the Corporation acquired Datafaction Inc. (“Datafaction”), a provider of accounting and imaging software for business managers and professional services firms, in an all-cash transaction. Datafaction’s product and service offerings are expected to complement the cash management solutions available to the Company’s business clients. The Company recognized goodwill of approximately $6.2 million and a customer contract intangible of approximately $2.2 million related to the acquisition.

Sun West Bank and 1st Pacific Bank of 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 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 at acquisition and recognized a gain of $24.7 million on the acquisition of SWB in the second quarter of 2010.

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Note 2. Business Combinations (Continued)

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 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 at acquisition. During the second quarter of 2010, the Bank recognized a gain of $0.5 million on the acquisition of FPB. 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 amended by the FDIC.

In connection with the acquisitions of SWB and FPB, the Bank entered into loss-sharing agreements with the FDIC under which the FDIC reimburses the Bank for 80 percent of eligible losses with respect to covered assets. The term of the loss-sharing agreements is 10 years for single-family residential loans and eight years for all other loans. The expected reimbursements under the loss-sharing agreements were recorded as indemnification assets at their estimated fair value of $104.6 million for SWB and $36.5 million for FPB at acquisition date. 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 $3.6 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 at the time of acquisition. There was no similar liability recognized in the acquisition of SWB.

Note 3. Fair Value Measurements

Accounting guidance defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could transact.

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

Fair Value Hierarchy

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

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

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

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

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

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Note 3. Fair Value Measurements (Continued)

The Company records securities available-for-sale, trading securities and derivative contracts at fair value on a recurring basis. Certain other assets such as impaired loans, OREO, goodwill, customer-relationship intangibles and investments carried at cost 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 September 30, 2011, December 31, 2010 and September 30, 2010 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of September 30, 2011		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	$	19,213	$	19,213	$	—	$	—
Federal agency - Debt	1,903,688		—		1,903,688		—
Federal agency - MBS	541,225		—		541,225		—
CMOs - Federal agency	4,227,653		—		4,227,653		—
CMOs - Non-agency	76,430		—		76,430		—
State and municipal	373,632		—		373,632		—
Other debt securities	41,632		—		22,282		19,350
Equity securities and mutual funds	1,815		1,815		—		—
Trading securities	93,707		91,398		2,309		—
Mark-to-market derivatives (1)	63,094		2,338		60,756		—
Total assets at fair value	$	7,342,089	$	114,764	$	7,207,975	$	19,350

Liabilities
Mark-to-market derivatives (2)	$	51,150	$	1,284	$	49,866	$	—
Other liabilities	280		—		280		—
Total liabilities at fair value	$	51,430	$	1,284	$	50,146	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial (4)	$	3,699	$	—	$	1,075	$	2,624
Commercial real estate mortgages	5,478		—		5,478		—
Residential mortgages	4,931		—		4,455		476
Real estate construction	23,019		—		23,019		—
Equity lines of credit	3,274		—		2,395		879
Installment	675		—		675		—
Collateral dependent impaired covered loans (3)
Commercial	1,023		—		—		1,023
Other real estate owned (5)	65,268		—		60,202		5,066
Private equity investments	7,273		—		—		7,273
Total assets at fair value	$	114,640	$	—	$	97,299	$	17,341

(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) Includes lease financing.

(5) Other real estate owned balance of $147.4 million in the consolidated balance sheets includes $102.8 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, 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	$	14,113	$	14,113	$	—	$	—
Federal agency - Debt	1,142,328		—		1,142,328		—
Federal agency - MBS	551,346		—		551,346		—
CMOs - Federal agency	3,497,147		—		3,497,147		—
CMOs - Non-agency	118,295		—		118,295		—
State and municipal	343,380		—		343,380		—
Other debt securities	43,630		—		22,648		20,982
Equity securities and mutual funds	10,436		10,436		—		—
Trading securities	255,397		249,861		5,536		—
Mark-to-market derivatives (1)	46,712		3,258		43,454		—
Total assets at fair value	$	6,022,784	$	277,668	$	5,724,134	$	20,982

Liabilities
Mark-to-market derivatives (2)	$	26,437	$	1,215	$	25,222	$	—
Other liabilities	160		—		160		—
Total liabilities at fair value	$	26,597	$	1,215	$	25,382	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3)
Commercial (4)	$	1,528	$	—	$	1,528	$	—
Commercial real estate mortgages	31,684		—		21,236		10,448
Residential mortgages	9,061		—		8,210		851
Real estate construction	98,059		—		98,059		—
Equity lines of credit	3,092				2,224		868
Collateral dependent impaired covered loans (3)
Commercial	2,557		—		—		2,557
Other real estate owned (5)	88,993		—		65,605		23,388
Private equity investments	10,804		—		—		10,804
Total assets at fair value	$	245,778	$	—	$	196,862	$	48,916

(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) Includes lease financing.

(5) Other real estate owned balance of $178.2 million in the consolidated balance sheets includes $120.9 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, 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 (4)	$	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 (5)	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) Includes lease financing.

(5) Other real estate owned 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)

At September 30, 2011, $7.34 billion, or approximately 32 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $6.02 billion or approximately 28 percent at December 31, 2010, and $5.63 billion or approximately 26 percent at September 30, 2010. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than 1 percent of total assets was measured using Level 3 inputs. Approximately $51.4 million, $26.6 million and $38.8 million of the Company’s total liabilities at September 30, 2011, December 31, 2010 and September 30, 2010, respectively, were recorded at fair value on a recurring basis using Level 1 or Level 2 inputs. At September 30, 2011, $114.6 million, or less than 1 percent of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared with $245.8 million, or 1 percent, at December 31, 2010, and $259.7 million, or 1 percent, at September 30, 2010. 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, 2011.

For assets measured at fair value on a nonrecurring basis, the following table presents the total net (losses) gains, which include charge-offs, recoveries, specific reserves, OREO valuation write-downs and write-ups, gains and losses on sales of OREO, and impairment write-downs on private equity investments, recognized in the three and nine months ended September 30, 2011 and 2010:

	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2011			2010			2011			2010
Collateral dependent impaired loans:
Commercial	$	80		$	(829	)	$	(526	)	$	(7,725	)
Commercial real estate mortgages	(1,643		)	(5,288		)	5,811			(22,736		)
Residential mortgages	(266		)	(507		)	(455		)	(1,713		)
Real estate construction	(10,413		)	5,210			(11,612		)	(4,910		)
Equity lines of credit	(179		)	(487		)	(689		)	(538		)
Installment	(279		)	—			(4,596		)	—
Collaterial dependent impaired covered loans:
Commercial	(325		)	(414		)	(325		)	(414		)
Other real estate owned (1)	(6,585		)	(5,794		)	(32,575		)	(28,410		)
Private equity investments	(32		)	(487		)	(232		)	(915		)
Total net losses recognized	$	(19,642	)	$	(8,596	)	$	(45,199	)	$	(67,361	)

(1) Net losses on OREO includes $6.7 million and $29.5 million of net losses related to covered OREO for the three and nine months ended September 30, 2011, respectively, and $6.4 million and $13.2 million of net losses for the three and nine months ended September 30, 2010, respectively. A significant portion of net losses on covered OREO is reimbursable by the FDIC.

Level 3 assets measured at fair value on a recurring basis consist of collateralized debt obligation senior notes. The fair value of these securities is determined using an internal cash flow model that incorporates management’s assumptions about risk-adjusted discount rates, prepayment expectations, projected cash flows and collateral performance. These assumptions are not directly observable in the market. Unrealized gains and losses on securities available-for-sale are reported as a component of Accumulated other comprehensive income (“AOCI”) in the consolidated balance sheets. Activity in Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2011 and 2010 is summarized in the following table:

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Note 3. Fair Value Measurements (Continued)

Level 3 Assets Measured on a Recurring Basis

	For the nine months ended
	September 30, 2011			September 30, 2010
(in thousands)	Securities Available-for-Sale			Securities Available-for-Sale
Balance, beginning of period	$	20,982		$	26,779
Total realized/unrealized gains (losses):
Included in other comprehensive income	348			(4,952		)
Settlements	(1,960		)	(1,407		)
Other (1)	(20		)	(124		)
Balance, end of period	$	19,350		$	20,296

(1) Other rollforward activity consists of the amortization of premium recognized on the initial purchase of the securities available-for-sale.

There were no purchases, sales or issuances of Level 3 assets measured on a recurring basis during the nine months ended September 30, 2011 and 2010. Paydowns of $2.0 million and $1.4 million were received on Level 3 assets measured on a recurring basis for the nine months ended September 30, 2011 and 2010, respectively. There were no gains or losses for the nine months ended September 30, 2011 and 2010 included in earnings that were attributable to the change in unrealized gains or losses relating to assets still held as of September 30, 2011 and 2010.

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

Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. The table below summarizes the estimated fair values for the Company’s financial instruments as of September 30, 2011 and September 30, 2010. The disclosure does not include estimated fair value amounts for assets and liabilities which are not defined as financial instruments but which have significant value. These assets and liabilities include the value of customer-relationship intangibles, goodwill, and affordable housing investments carried at cost, other assets, deferred taxes and other liabilities. Accordingly, the total of the fair values presented does not represent the underlying value of the Company.

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

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

Securities available-for-sale and Trading securities — For securities held as available-for-sale, the fair value is determined by quoted market prices, where available, or on observable market inputs appropriate for the type of security. If quoted market prices or observable market inputs are not available, discounted cash flows may be used to determine an appropriate fair value. Fair values for trading securities are based on quoted market prices or dealer quotes. The fair value of trading securities for which quoted prices are not available is based on observable market inputs.

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Note 3. Fair Value Measurements (Continued)

Loans and leases — Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. Due to the lack of activity in the secondary market for the types of loans in the Company’s portfolio, a model-based approach is used for determining the fair value of loans for purposes of the disclosures in the following table. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions concerning current market yields, credit risk and liquidity premiums. Loan cash flow projections are based on contractual loan terms adjusted for the impact of current interest rate levels on borrower behavior, including prepayments. Loan prepayment assumptions are based on industry standards for the type of loans being valued. Projected cash flows are discounted using yield curves based on current market conditions. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Company’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans.

Covered loans — The fair value of covered loans is based on estimates of future loan cash flows and appropriate discount rates, which incorporate the Company’s assumptions about market funding cost and liquidity premium. The estimates of future loan cash flows are determined using the Company’s assumptions concerning the amount and timing of principal and interest payments, prepayments and credit losses.

FDIC indemnification asset — The fair value of the FDIC indemnification asset is estimated by discounting estimated future cash flows based on estimated current market rates.

Investment in FHLB and FRB stock — Investments in government agency stock are recorded at cost. Ownership of these securities is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FRB and FHLB stock is equal to the carrying amount.

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

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

Federal funds purchased and Securities sold under repurchase agreements — The carrying amount is a reasonable estimate of fair value.

Other short-term borrowings — The fair value of the current portion of long-term debt classified in short-term borrowings is obtained through third-party pricing sources. The carrying amount of the remaining other short-term borrowings is a reasonable estimate of fair value.

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

Long-term debt — The fair value of long-term debt is obtained through third-party pricing sources.

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Note 3. Fair Value Measurements (Continued)

FDIC clawback liability — The FDIC clawback liability represents an estimated payment by the Company to the FDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The fair value of the FDIC clawback liability is estimated by discounting estimated future cash flows based on estimated current market rates.

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

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

The carrying amounts and fair values of the Company’s financial instruments as of September 30, 2011 and September 30, 2010 were as follows:

	September 30, 2011				September 30, 2010
	Carrying		Fair		Carrying		Fair
(in millions)	Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	$	249.5	$	249.5	$	224.4	$	224.4
Due from banks - interest bearing	144.8		144.8		506.1		506.1
Federal funds sold	100.0