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 March 31, 2012

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		Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of April 30, 2012, there were 53,300,468 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	50
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 4.	Controls and Procedures	85

PART II
Item 1A.	Risk Factors	86
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	86
Item 6.	Exhibits	86

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(in thousands, except share amounts)	2012			2011
	(Unaudited)
Assets
Cash and due from banks	$	210,799		$	168,376
Due from banks - interest-bearing	101,375			76,438
Federal funds sold	156,000			—
Securities available-for-sale - cost $6,699,181 and $7,445,999 at March 31, 2012 and December 31, 2011, respectively:
Securities pledged as collateral	38,817			37,861
Held in portfolio	6,799,893			7,534,040
Securities held-to-maturity - fair value $996,455 and $473,903 at March 31, 2012 and December 31, 2011, respectively	996,613			467,680
Trading securities	82,589			61,975
Loans and leases, excluding covered loans	12,747,902			12,309,385
Less: Allowance for loan and lease losses	266,077			262,557
Loans and leases, excluding covered loans, net	12,481,825			12,046,828
Covered loans, net of allowance for loan losses	1,335,685			1,417,289
Net loans and leases	13,817,510			13,464,117
Premises and equipment, net	143,238			143,641
Deferred tax asset	149,532			155,529
Goodwill	487,233			486,383
Customer-relationship intangibles, net	34,484			36,370
Affordable housing investments	143,916			121,039
Customers’ acceptance liability	1,343			1,702
Other real estate owned ($78,456 and $98,550 covered by FDIC loss share at March 31, 2012 and December 31, 2011, respectively)	107,530			129,340
FDIC indemnification asset	185,392			204,259
Other assets	582,225			577,541
Total assets	$	24,038,489		$	23,666,291
Liabilities
Demand deposits	$	11,550,000		$	11,146,627
Interest checking deposits	1,950,035			2,034,815
Money market deposits	5,946,064			5,954,886
Savings deposits	365,773			339,858
Time deposits-under $100,000	234,180			251,782
Time deposits-$100,000 and over	741,685			659,614
Total deposits	20,787,737			20,387,582
Short-term borrowings	222,776			50,000
Long-term debt	482,024			697,778
Reserve for off-balance sheet credit commitments	24,067			23,097
Acceptances outstanding	1,343			1,702
Other liabilities	277,541			316,640
Total liabilities	21,795,488			21,476,799
Redeemable noncontrolling interest	43,436			44,643
Commitments and contingencies
Shareholders’ Equity
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 53,885,886 shares issued at March 31, 2012 and December 31, 2011	53,886			53,886
Additional paid-in capital	489,717			489,200
Accumulated other comprehensive income	81,342			72,372
Retained earnings	1,644,861			1,611,969
Treasury shares, at cost - 1,225,218 and 1,386,705 shares at March 31, 2012 and December 31, 2011, respectively	(70,241		)	(82,578		)
Total shareholders’ equity	2,199,565			2,144,849
Total liabilities and shareholders’ equity	$	24,038,489		$	23,666,291

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
	March 31,
(in thousands, except per share amounts)	2012			2011
Interest income
Loans and leases	$	168,102		$	162,939
Securities	45,387			37,420
Due from banks - interest-bearing	93			297
Federal funds sold and securities purchased under resale agreements	10			154
Total interest income	213,592			200,810
Interest expense
Deposits	4,033			10,190
Federal funds purchased and securities sold under repurchase agreements	31			—
Subordinated debt	4,061			4,648
Other long-term debt	4,754			4,682
Total interest expense	12,879			19,520
Net interest income	200,713			181,290
Provision for credit losses on loans and leases, excluding covered loans	—			—
Provision for losses on covered loans	7,466			19,116
Net interest income after provision	193,247			162,174
Noninterest income
Trust and investment fees	33,654			35,638
Brokerage and mutual fund fees	5,028			5,661
Cash management and deposit transaction charges	11,168			11,725
International services	8,785			8,316
FDIC loss sharing income, net	866			8,605
Gain on disposal of assets	2,191			2,424
Gain on sale of securities	449			130
Other	13,559			21,558
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(2,432		)	(4,510		)
Less: Portion of loss recognized in other comprehensive income	2,432			4,346
Net impairment loss recognized in earnings	—			(164		)
Total noninterest income	75,700			93,893
Noninterest expense
Salaries and employee benefits	120,245			111,012
Net occupancy of premises	13,686			13,346
Legal and professional fees	11,880			10,077
Information services	8,149			7,497
Depreciation and amortization	7,428			6,748
Amortization of intangibles	1,886			2,168
Marketing and advertising	6,816			6,518
Office services and equipment	3,948			4,606
Other real estate owned	12,094			14,489
FDIC assessments	4,479			9,806
Other operating	10,109			11,130
Total noninterest expense	200,720			197,397
Income before income taxes	68,227			58,670
Income taxes	21,719			17,886
Net income	$	46,508		$	40,784
Less: Net income attributable to noncontrolling interest	243			1,092
Net income attributable to City National Corporation	$	46,265		$	39,692
Net income per share, basic	$	0.86		$	0.75
Net income per share, diluted	$	0.86		$	0.74
Shares used to compute net income per share, basic	52,741			52,320
Shares used to compute net income per share, diluted	53,021			52,894
Dividends per share	$	0.25		$	0.20

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Table of Contents

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the three months ended
	March 31,
(in thousands)	2012			2011
Net income	$	46,508		$	40,784
Other comprehensive income (loss), net of tax:
Securities available for sale:
Net unrealized gain (loss), net of taxes of $6,882 and ($5,167)	9,570			(7,185		)
Reclassification adjustment for net gains included in net income, net of taxes of $165 and $37	(229		)	(51		)
Non-credit related impairment loss, net of taxes of ($1,017) and ($1,818)	(1,414		)	(2,528		)
Net change on cash flow hedges (1)	(42		)	(586		)
Pension liability adjustment	1,085			32
Total other comprehensive income (loss)	8,970			(10,318		)
Comprehensive income	$	55,478		$	30,466
Less: Comprehensive income attributable to noncontrolling interest	243			1,092
Comprehensive income attributable to City National Corporation	$	55,235		$	29,374

(1) See Note 12 for additional information on other comprehensive income related to cash flow hedges.

Table of Contents

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the three months ended
	March 31,
(in thousands)	2012			2011
Cash Flows From Operating Activities
Net income	$	46,508		$	40,784
Adjustments to net income:
Provision for losses on covered loans	7,466			19,116
Amortization of intangibles	1,886			2,168
Depreciation and amortization	7,428			6,748
Share-based employee compensation expense	4,706			4,678
Deferred income tax benefit	297			(811		)
Gain on disposal of assets	(2,191		)	(2,424		)
Gain on sale of securities	(449		)	(130		)
Impairment loss on securities	—			164
Other, net	(2,430		)	(12,700		)
Net change in:
Trading securities	(20,559		)	174,171
Other assets and other liabilities, net	(41,395		)	35,560

Net cash provided by operating activities	1,267			267,324

Cash Flows From Investing Activities
Purchase of securities available-for-sale	(629,049		)	(598,336		)
Sales of securities available-for-sale	5,173			6,094
Maturities and paydowns of securities available-for-sale	1,362,442			436,519
Purchase of securities held-to-maturity	(530,159		)	—
Maturities and paydowns of securities held-to-maturity	1,005			—
Loan originations, net of principal collections	(346,887		)	199,409
Net payments for premises and equipment	(7,025		)	(9,567		)
Net cash (paid) acquired in acquisitions	(850		)	7,922
Other investing activities, net	20,592			16,624

Net cash (used in) provided by investing activities	(124,758		)	58,665

Cash Flows From Financing Activities
Net increase in deposits	400,155			292,671
Net decrease in federal funds purchased and securities sold under repurchase agreements	(40,000		)	—
Net (decrease) increase in short-term borrowings, net of transfers from long-term debt	(1,500		)	70
Proceeds from exercise of stock options	2,000			4,015
Tax benefit from exercise of stock options	770			920
Cash dividends paid	(13,302		)	(10,576		)
Other financing activities, net	(1,272		)	(609		)

Net cash provided by financing activities	346,851			286,491

Net increase in cash and cash equivalents	223,360			612,480
Cash and cash equivalents at beginning of year	244,814			434,689

Cash and cash equivalents at end of period	$	468,174		$	1,047,169

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	22,386		$	32,666
Income taxes	27,163			2

Non-cash investing activities:
Transfer of loans to other real estate owned	$	8,292		$	34,139
Transfer of SERP liability to equity		8,348			—

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Table of Contents

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

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

Balance, January 1, 2011	53,885,886	$	53,886	$	487,868		$	36,853		$	1,482,037		$	(101,065	)	$	25,139		$	1,984,718
Net income (1)	—	—		—			—			39,692			—			534			40,226
Other comprehensive loss, net of tax	—	—		—			(10,318		)	—			—			—			(10,318		)
Dividends and distributions to noncontrolling interest	—	—		—			—			—			—			(534		)	(534		)
Issuance of shares under share-based compensation plans	—	—		(11,820		)	—			—			14,111			—			2,291
Share-based employee compensation expense	—	—		4,629			—			—			—			—			4,629
Tax benefit from share-based compensation plans	—	—		1,037			—			—			—			—			1,037
Common stock dividends	—	—		—			—			(10,576		)	—			—			(10,576		)
Net change in deferred compensation plans	—	—		26			—			—			—			—			26
Change in redeemable noncontrolling interest	—	—		(822		)	—			—			—			—			(822		)
Other	—	—		—			—			—			—			(50		)	(50		)
Balance, March 31, 2011	53,885,886	$	53,886	$	480,918		$	26,535		$	1,511,153		$	(86,954	)	$	25,089		$	2,010,627

Balance, January 1, 2012	53,885,886	$	53,886	$	489,200		$	72,372		$	1,611,969		$	(82,578	)	$	—		$	2,144,849
Net income (1)	—	—		—			—			46,265			—			—			46,265
Other comprehensive income, net of tax	—	—		—			8,970			—			—			—			8,970
Issuance of shares under share-based compensation plans	—	—		(12,175		)	—			—			12,337			—			162
Share-based employee compensation expense	—	—		4,549			—			—			—			—			4,549
Tax expense from share-based compensation plans	—	—		(136		)	—			—			—			—			(136		)
Common stock dividends	—	—		—			—			(13,373		)	—			—			(13,373		)
Net change in deferred compensation plans	—	—		42			—			—			—			—			42
Change in redeemable noncontrolling interest	—	—		(111		)	—			—			—			—			(111		)
Other (2)	—	—		8,348			—			—			—			—			8,348
Balance, March 31, 2012	53,885,886	$	53,886	$	489,717		$	81,342		$	1,644,861		$	(70,241	)	$	—		$	2,199,565

(1)	Net income excludes net income attributable to redeemable noncontrolling interest of $243 and $558 for the three-month periods ended March 31, 2012 and 2011, 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)	Conversion of pension liability to equity due to SERP amendment. See Note 14 for additional information.

See accompanying Notes to the Unaudited Consolidated Financial Statements.

Table of Contents

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 79 offices in Southern California, the San Francisco Bay area, Nevada, New York City, Nashville, Tennessee and Atlanta, Georgia. As of March 31, 2012, 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 the third quarter 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 impairment, private equity and alternative investment impairment, valuation of assets and liabilities acquired in business combinations, subsequent valuations of acquired impaired loans, Federal Deposit Insurance Corporation (“FDIC”) indemnification assets, valuation of noncontrolling interest and the valuation of financial assets and liabilities reported at fair value.

Table of Contents

Note 1. Summary of Significant Accounting Policies (Continued)

The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements. The Company’s estimates and assumptions are expected to change as changes in market conditions and the Company’s portfolio occur in subsequent periods.

Basis of Presentation

The Company is on the accrual basis of accounting for income and expenses. The results of operations reflect any adjustments, all of which are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q, and which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. In accordance with the usual practice of banks, assets and liabilities of individual trust, agency and fiduciary funds have not been included in the financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The results for the 2012 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 2011 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, 2012. Refer to Accounting Pronouncements for discussion of accounting pronouncements adopted in 2012.

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

Accounting Pronouncements

During the three months ended March 31, 2012, the following accounting pronouncements applicable to the Company were issued or became effective:

· In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”). Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, provides the criteria for determining whether a transfer of financial assets under a repurchase agreement is accounted for as a secured borrowing or as a sale. In a typical repurchase transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. 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. Adoption of ASU 2011-03 on January 1, 2012 did not 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. Under the revised guidance, the highest and best use and valuation premise concepts only apply to measuring the fair value of nonfinancial assets. The highest and best use of a nonfinancial asset is one that is physically possible, legally permissible and financially feasible. The valuation premise guidance provides that the highest and best use of a nonfinancial asset is either on a stand-alone basis or in combination with other assets as a group. The ASU provides a framework for considering whether a premium or discount can be applied in a fair value measurement, and provides a model for measuring the fair value of an instrument classified in shareholders’ equity. ASU 2011-04 requires entities to make an accounting policy election regarding fair value measurements of financial assets and liabilities, such as derivatives, for which the exposure to market or counterparty credit risks is managed on a net or portfolio basis. The Company elected to continue measuring derivative instruments that are subject to master netting agreements on the net risk exposure at the measurement date.

Table of Contents

Note 1. Summary of Significant Accounting Policies (Continued)

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 Company adopted ASU 2011-04 for first quarter 2012 reporting. Adoption of the new guidance did not have a significant impact on 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. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”). ASU 2011-12 indefinitely defers the provision of ASU 2011-05 that would have required entities to present reclassification adjustments out of accumulated other comprehensive income (“AOCI”) by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. ASU 2011-05 and ASU 2011-12 became effective for the Company for first quarter 2012 reporting. The Company elected to report components of comprehensive income in two separate but consecutive statements. The new guidances were applied retrospectively for all periods presented.

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 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 and recognized a gain of $8.2 million on the acquisition of NCB in the second quarter of 2011.

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.

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, and recorded goodwill and core deposit intangibles of $0.3 million and $0.1 million, respectively.

Table of Contents

Note 3. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of March 31, 2012 and December 31, 2011 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of March 31, 2012		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	$	19,202	$	19,202	$	—	$	—
Federal agency - Debt	1,051,348		—		1,051,348		—
Federal agency - MBS	720,590		—		720,590		—
CMOs - Federal agency	4,400,318		—		4,400,318		—
CMOs - Non-agency	68,587		—		68,587		—
State and municipal	395,723		—		395,723		—
Other debt securities	181,792		—		162,783		19,009
Equity securities and mutual funds	1,150		1,150		—		—
Trading securities	82,589		80,527		2,062		—
Mark-to-market derivatives (1)	57,891		3,239		54,652		—
Total assets at fair value	$	6,979,190	$	104,118	$	6,856,063	$	19,009

Liabilities
Mark-to-market derivatives (2)	$	49,384	$	1,574	$	47,810	$	—
Other liabilities	290		—		290		—
Total liabilities at fair value	$	49,674	$	1,574	$	48,100	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	1,878	$	—	$	—	$	1,878
Commercial real estate mortgages	3,170		—		3,170		—
Residential mortgages	5,988		—		5,525		463
Real estate construction	14,300		—		7,500		6,800
Equity lines of credit	904		—		—		904
Installment	550		—		550		—
Other real estate owned (5)	27,347		—		23,269		4,078
Private equity and alternative investments	258		—		—		258
Total assets at fair value	$	54,395	$	—	$	40,014	$	14,381

(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 $107.5 million in the consolidated balance sheets includes $78.5 million of covered OREO and is net of estimated disposal costs.

Table of Contents

Note 3. Fair Value Measurements (Continued)

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 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	$	19,182	$	19,182	$	—	$	—
Federal agency - Debt	1,973,862		—		1,973,862		—
Federal agency - MBS	681,044		—		681,044		—
CMOs - Federal agency	4,326,907		—		4,326,907		—
CMOs - Non-agency	69,001		—		69,001		—
State and municipal	401,604		—		401,604		—
Other debt securities	99,074		—		79,491		19,583
Equity securities and mutual funds	1,227		1,227		—		—
Trading securities	61,975		61,922		53		—
Mark-to-market derivatives (1)	62,230		2,552		59,678		—
Total assets at fair value	$	7,696,106	$	84,883	$	7,591,640	$	19,583

Liabilities
Mark-to-market derivatives (2)	$	52,881	$	1,542	$	51,339	$	—
Other liabilities	263		—		263		—
Total liabilities at fair value	$	53,144	$	1,542	$	51,602	$	—

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	2,484	$	—	$	—	$	2,484
Commercial real estate mortgages	6,830		—		6,830		—
Residential mortgages	5,555		—		5,084		471
Real estate construction	18,528		—		9,680		8,848
Equity lines of credit	3,471		—		2,588		883
Installment	675		—		675		—
Collateral dependent impaired covered loans (3):
Commercial	422		—		—		422
Other real estate owned (5)	66,837		—		56,898		9,939
Private equity and alternative investments	6,558		—		—		6,558
Total assets at fair value	$	111,360	$	—	$	81,755	$	29,605

(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 $129.3 million in the consolidated balance sheets includes $98.6 million of covered OREO and is net of estimated disposal costs.

Table of Contents

Note 3. Fair Value Measurements (Continued)

At March 31, 2012, $6.98 billion, or approximately 29 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $7.70 billion, or 33 percent, at December 31, 2011. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than 1 percent of total assets were measured using Level 3 inputs. At March 31, 2012, $49.7 million of the Company’s total liabilities were recorded at fair value using Level 1 or Level 2 inputs, compared with $53.1 million at December 31, 2011. There were no transfers between Level 1 and Level 2 of the fair value hierarchy for assets or liabilities measured on a recurring basis during the first quarter of 2012. At March 31, 2012, $54.4 million, or approximately 0.2 percent of the Company’s total assets, were recorded at fair value on a nonrecurring basis, compared with $111.4 million, or approximately 0.5 percent, at December 31, 2011. These assets were measured using Level 2 and Level 3 inputs.

Recurring Fair Value Measurements

Assets and liabilities for which fair value measurement is based on significant unobservable inputs are classified as Level 3 in the fair value hierarchy. Level 3 assets measured at fair value on a recurring basis consist of collateralized debt obligation senior notes that are included in securities available-for-sale. These securities totaling $19.0 million at March 31, 2012 were valued using the discounted cash flow method with the following unobservable inputs: (1) risk-adjusted discount rate consistent with similarly rated securities, (2) prepayment rate of 2 percent, (3) default rate of 0.75 percent of performing collateral, and (4) 15 percent recovery rate with a 2-year lag. The Company had no liabilities with fair value measurements categorized as Level 3 at March 31, 2012 or 2011.

The following table provides a reconciliation of the beginning and ending balances for Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2012 and 2011. Unrealized gains and losses on securities available-for-sale are reported as a component of AOCI in the consolidated balance sheets.

Level 3 Assets Measured on a Recurring Basis

	March 31, 2012			March 31, 2011
(in thousands)	Securities Available- for-Sale			Securities Available- for-Sale
Balance, beginning of period	$	19,583		$	20,982
Total realized/unrealized gains (losses):
Included in other comprehensive income	964			1,690
Settlements	(1,562		)	(1,707		)
Other (1)	24			(53		)
Balance, end of period	$	19,009		$	20,912

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

There were no purchases, sales, or transfers in and/or out of Level 3 assets measured on a recurring basis during the three months ended March 31, 2012 and 2011. Paydowns of $1.6 million and $1.7 million were received on Level 3 assets measured on a recurring basis for the three months ended March 31, 2012 and 2011, respectively. There were no gains or losses for the three months ended March 31, 2012 and 2011 included in earnings that were attributable to the change in unrealized gains or losses relating to assets still held as of March 31, 2012 and 2011.

Table of Contents

Note 3. Fair Value Measurements (Continued)

Nonrecurring Fair Value Measurements

Assets measured at fair value on a nonrecurring basis using significant unobservable inputs 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. 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.

The table below provides information about valuation method, inputs and assumptions for nonrecurring Level 3 fair value measurements. The weight assigned to each input is based on the facts and circumstances that exist at the date of measurement.

Information About Nonrecurring Level 3 Fair Value Measurements

(in thousands)	Fair Value at March 31, 2012		Valuation Method	Unobservable Inputs
Collateral dependent impaired loans	$	10,045	Market	- Adjustments to external or internal appraised values - Probability weighting of broker price opinions - Management assumptions regarding market trends or other relevant factors

Other real estate owned	$	4,078	Market	- Adjustments to external or internal appraised values
				- Probability weighting of broker price opinions
				- Management assumptions regarding market trends or other relevant factors

Private equity and alternative investments	$	258	Cost Recovery	- Management’s assumptions regarding recoverability of investment based on fund financial performance, market conditions and other relevant factors

Market-based valuation methods use prices and other relevant information generated by market transactions involving identical or comparable assets. Under the cost recovery approach, fair value represents an estimate of the amount of an asset expected to be recovered. The Company only employs the cost recovery approach for assets that are not readily marketable and for which minimal market-based information exists.

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 months ended March 31, 2012 and 2011:

	For the three months ended March 31,
(in thousands)	2012			2011
Collateral dependent impaired loans:
Commercial	$	(368	)	$	(606	)
Commercial real estate mortgages	(365		)	7,114
Residential mortgages	(582		)	(142		)
Real estate construction	(6,472		)	2,217
Equity lines of credit	54			36
Installment	(107		)	(4,514		)
Other real estate owned (1)	(8,465		)	(9,122		)
Private equity and alternative investments	(127		)	—
Total net losses recognized	$	(16,432	)	$	(5,017	)

(1)	Net losses on OREO includes $7.6 million and $8.2 million of net losses related to covered OREO for the three months ended March 31, 2012 and 2011, respectively, a significant portion of which is reimbursable by the FDIC.

Table of Contents

Note 3. Fair Value Measurements (Continued)

Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. The table below summarizes the estimated fair values for the Company’s financial instruments as of March 31, 2012 and December 31, 2011. The table also provides information on the level in the fair value hierarchy for inputs used in the fair value of financial assets and financial liabilities. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2011 Form 10-K for additional information on fair value measurements. Financial assets and financial liabilities for which carrying amount equals fair value are considered by the Company to be Level 1 in the fair value hierarchy. Additional detail on assets and liabilities that are categorized in multiple levels of the fair value hierarchy is provided in the above tables of this Note.

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, 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, Securities held-to-maturity and Trading securities — For securities held as available-for-sale and held-to-maturity, 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.

Loans and leases — Loans and leases, excluding covered 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.

Table of Contents

Note 3. Fair Value Measurements (Continued)

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.

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

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.

Off-balance sheet commitments, which include commitments to extend credit, are excluded from the table below. A reasonable estimate of fair value for these instruments is the carrying amount of deferred fees and the reserve for any credit losses related to these off-balance sheet instruments. This estimate is not material to the Company’s financial position.

		March 31, 2012				December 31, 2011
	Fair Value	Carrying		Fair		Carrying		Fair
(in millions)	Level	Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	1	$	210.8	$	210.8	$	168.4	$	168.4
Due from banks - interest bearing	1	101.4		101.4		76.4		76.4
Federal funds sold	1	156.0		156.0		—		—
Securities available-for-sale	1,2,3	6,838.7		6,838.7		7,571.9		7,571.9
Securities held-to-maturity	2	996.6		996.5		467.7		473.9
Trading securities	1,2	82.6		82.6		62.0		62.0
Loans and leases, net of allowance	3	12,481.8		12,909.0		12,046.8		12,400.5
Covered loans, net of allowance	3	1,335.7		1,388.7		1,417.3		1,472.6
FDIC indemnification asset	3	185.4		163.0		204.3		184.3
Investment in FHLB and FRB stock	1	103.8		103.8		107.4		107.4
Derivative assets	1,2	57.9		57.9		62.2		62.2

Financial Liabilities:
Deposits	1,3	$	20,787.7	$	20,791.8	$	20,387.6	$	20,392.3
Federal funds purchased and securities sold under repurchase agreements	1	10.0		10.0		50.0		50.0
Other short-term borrowings	2	212.8		219.0		—		—
Long-term debt	2	482.0		505.6		697.8		718.7
Derivative liabilities	1,2	49.4		49.4		52.9		52.9
FDIC clawback liability	3	8.7		8.7		8.1		8.1

Table of Contents

Note 4. Securities

At March 31, 2012, the Company had total securities of $7.92 billion, comprised of securities available-for-sale at fair value of $6.84 billion, securities held-to-maturity at amortized cost of $996.6 million and trading securities at fair value of $82.6 million. At December 31, 2011, the Company had total securities of $8.10 billion, comprised of securities available-for-sale at fair value of $7.57 billion, securities held-to-maturity at amortized cost of $467.7 million and trading securities at fair value of $62.0 million.

The following is a summary of amortized cost and estimated fair value for the major categories of securities available-for-sale and securities held-to-maturity at March 31, 2012 and December 31, 2011:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
March 31, 2012
Securities available-for-sale:
U.S. Treasury	$	19,217	$	8	$	(23	)	$	19,202
Federal agency - Debt	1,046,035		5,348		(35		)	1,051,348
Federal agency - MBS	690,183		30,580		(173		)	720,590
CMOs - Federal agency	4,304,148		97,498		(1,328		)	4,400,318
CMOs - Non-agency	74,737		809		(6,959		)	68,587
State and municipal	378,541		17,379		(197		)	395,723
Other debt securities	185,968		3,417		(7,593		)	181,792
Total debt securities	6,698,829		155,039		(16,308		)	6,837,560
Equity securities and mutual funds	352		798		—			1,150
Total securities available-for-sale	$	6,699,181	$	155,837	$	(16,308	)	$	6,838,710

Securities held-to-maturity (1):
Federal agency - Debt	$	104,268	$	394	$	(66	)	$	104,596
Federal agency - MBS	173,380		1,794		(427		)	174,747
CMOs - Federal agency	590,931		2,496		(3,918		)	589,509
State and municipal	128,034		1,431		(1,862		)	127,603
Total securities held-to-maturity	$	996,613	$	6,115	$	(6,273	)	$	996,455

December 31, 2011
Securities available-for-sale:
U.S. Treasury	$	19,163	$	24	$	(5	)	$	19,182
Federal agency - Debt	1,967,928		6,230		(296		)	1,973,862
Federal agency - MBS	650,091		31,040		(87		)	681,044
CMOs - Federal agenc	4,239,205		89,926		(2,224		)	4,326,907
CMOs - Non-agency	79,999		322		(11,320		)	69,001
State and municipal	383,210		18,767		(373		)	401,604
Other debt securities	106,051		1,896		(8,873		)	99,074
Total debt securities	7,445,647		148,205		(23,178		)	7,570,674
Equity securities and mutual funds	352		875		—			1,227
Total securities available-for-sale	$	7,445,999	$	149,080	$	(23,178	)	$	7,571,901

Securities held-to-maturity (1):
Federal agency - Debt	$	40,423	$	780	$	—		$	41,203
Federal agency - MBS	75,231		1,632		—			76,863
CMOs - Federal agency	292,547		2,580		(195		)	294,932
State and municipal	59,479		1,463		(37		)	60,905
Total securities held-to-maturity	$	467,680	$	6,455	$	(232	)	$	473,903

(1)	Securities held-to-maturity are presented in the consolidated balance sheets at amortized cost.

Table of Contents

Note 4. Securities (Continued)

Proceeds from sales of securities available-for-sale were $5.2 million and $6.1 million for the three months ended March 31, 2012 and 2011, respectively. There were no sales of securities held-to-maturity during the three months ended March 31, 2012. The following table provides the gross realized gains and losses on the sales and calls of securities:

	For the three months ended
	March 31,
(in thousands)	2012			2011
Gross realized gains	$	496		$	160
Gross realized losses	(47		)	(30		)
Net realized gains	$	449		$	130

Interest income on securities (including trading securities) for the three months ended March 31, 2012 and 2011 is comprised of: (i) taxable interest income of $41.5 million and $34.3 million, respectively (ii) nontaxable interest income of $3.8 million and $2.9 million, respectively, and (iii) dividend income of $0.1 million and $0.2 million, respectively.

The following table provides the expected remaining maturities of debt securities included in the securities portfolio at March 31, 2012. The maturities of mortgage-backed securities are allocated according to the average life of expected cash flows. Average expected maturities will differ from contractual maturities because of the amortizing nature of the loan collateral and prepayment behavior of borrowers.

(in thousands)	One year or less		Over 1 year through 5 years		Over 5 years through 10 years		Over 10 years		Total

Securities available-for-sale:
U.S. Treasury	$	10,013	$	9,189	$	—	$	—	$	19,202
Federal agency - Debt	847,374		203,974		—		—		1,051,348
Federal agency - MBS	14		447,143		273,433		—		720,590
CMOs - Federal agency	181,389		4,040,298		178,631		—		4,400,318
CMOs - Non-agency	8,286		33,100		27,201		—		68,587
State and municipal	53,996		209,947		80,836		50,944		395,723
Other	3,383		136,042		42,367		—		181,792
Total debt securities available-for-sale	$	1,104,455	$	5,079,693	$	602,468	$	50,944	$	6,837,560

Amortized cost	$	1,099,279	$	4,965,611	$	583,091	$	50,848	$	6,698,829

Securities held-to-maturity:
Federal agency - Debt	$	10,950	$	33,669	$	—	$	59,649	$	104,268
Federal agency - MBS	—		—		173,380		—		173,380
CMOs - Federal agency	—		45,373		545,558		—		590,931
State and municipal	—		8,259		79,468		40,307		128,034
Total debt securities held-to-maturity at amortized cost	$	10,950	$	87,301	$	798,406	$	99,956	$	996,613

Impairment Assessment

The Company performs a quarterly assessment of the debt and equity securities in its investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their cost is other-than-temporary. Impairment is considered other-than-temporary when it becomes probable that an investor will be unable to recover the cost of an investment. The Company’s impairment assessment takes into consideration factors such as the length of time and the extent to which the market value has been less than cost; the financial condition and near-term prospects of the issuer, including events

Table of Contents

Note 4. Securities (Continued)

specific to the issuer or industry; defaults or deferrals of scheduled interest, principal or dividend payments; external credit ratings and recent downgrades; and whether the Company intends to sell the security and whether it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value.

When there are credit losses associated with an impaired debt security and the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company will separate the amount of the impairment into the amount that is credit-related and the amount related to non-credit factors. The credit-related impairment is recognized in Net impairment loss recognized in earnings in the consolidated statements of income. The non-credit-related impairment is recognized in AOCI.

Securities Deemed to be Other-Than-Temporarily Impaired

The Company determined through its impairment assessment process that none of the securities held had a credit loss impairment at March 31, 2012. Accordingly, there were no impairment losses recognized in earnings on securities available-for-sale for the three months ended March 31, 2012. The Company recognized an impairment loss of $0.2 million in earnings related to non-agency CMOs for the three months ended March 31, 2011. The Company recognized $2.4 million and $4.3 million of non-credit-related other-than-temporary impairment in AOCI on securities available-for-sale at March 31, 2012 and 2011, respectively. There were no impairment losses recognized in earnings or AOCI for securities held-to-maturity during the three months ended March 31, 2012.

The following table summarizes the changes in cumulative credit-related other-than-temporary impairment recognized in earnings for debt securities for the three months ended March 31, 2012 and 2011. Credit-related other-than-temporary impairment that was recognized in earnings is reflected as an “Initial credit-related impairment” if the period reported is the first time the security had a credit impairment. A credit-related other-than-temporary impairment is reflected as a “Subsequent credit-related impairment” if the period reported is not the first time the security had a credit impairment. Cumulative impairment is reduced for securities with previously recognized credit-related impairment that were sold during the period. Cumulative impairment is further reduced for increases in expected cash flows.

	For the three months ended
	March 31,
(in thousands)	2012			2011
Balance, beginning of period	$	17,531		$	17,923
Subsequent credit-related impairment	—			164
Net increase in expected cash flows on securities for which OTTI was previously recognized	(162		)	(537		)
Balance, end of period	$	17,369		$	17,550

Non-Agency CMOs

The Company held $44.7 million of variable rate non-agency CMOs at March 31, 2012. These CMOs have a fixed interest rate for an initial period after which they become variable-rate instruments with annual rate resets. The variable rate non-agency securities held include $10.8 million of securities that had non-credit-related impairment recognized in AOCI. There were no credit-related impairment losses recognized in earnings in the first quarter of 2012. The non-credit portion of other-than-temporary impairment for these securities at March 31, 2012 was recognized in AOCI, and is attributed to external market conditions, primarily the lack of liquidity in these securities, and increases in interest rates. The Company recognized credit-related impairment losses in earnings on its investments in certain variable rate non-agency CMOs totaling $0.2 million in the first quarter of 2011. The Company also holds $23.9 million in fixed rate non-agency CMOs at March 31, 2012, none of which have experienced any other-than-temporary impairment.

Table of Contents

Note 4. Securities (Continued)

The following table provides a summary of the gross unrealized losses and fair value of investment securities that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011. The table also includes investment securities that had both a credit-related impairment recognized in earnings and a non-credit-related impairment recognized in AOCI.