Edgar Filing: CITY NATIONAL CORP

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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 September 30, 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 such filing requirements for 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 October 31, 2012, there were 53,795,583 shares of Common Stock outstanding (including unvested restricted shares).

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TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	87
Item 4.	Controls and Procedures	91

PART II
Item 1A.	Risk Factors	92
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92
Item 6.	Exhibits	92

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
(in thousands, except share amounts)	2012			2011
	(Unaudited)
Assets
Cash and due from banks	$	235,038		$	168,376
Due from banks - interest-bearing	335,300			76,438
Federal funds sold	19,500			—
Securities available-for-sale - cost $7,710,762 and $7,445,999 at September 30, 2012 and December 31, 2011, respectively:
Securities pledged as collateral	50,820			37,861
Held in portfolio	7,821,244			7,534,040
Securities held-to-maturity - fair value $1,222,721 and $473,903 at September 30, 2012 and December 31, 2011, respectively	1,174,161			467,680
Trading securities	64,749			61,975
Loans and leases, excluding covered loans	13,724,651			12,309,385
Less: Allowance for loan and lease losses	268,440			262,557
Loans and leases, excluding covered loans, net	13,456,211			12,046,828
Covered loans, net of allowance for loan losses	1,099,359			1,417,289
Net loans and leases	14,555,570			13,464,117
Premises and equipment, net	147,621			143,641
Deferred tax asset	139,829			155,529
Goodwill	641,694			486,383
Customer-relationship intangibles, net	50,071			36,370
Affordable housing investments	156,982			121,039
Customers’ acceptance liability	2,573			1,702
Other real estate owned ($83,618 and $98,550 covered by FDIC loss share at September 30, 2012 and December 31, 2011, respectively)	110,673			129,340
FDIC indemnification asset	160,991			204,259
Other assets	584,712			577,541
Total assets	$	26,251,528		$	23,666,291
Liabilities
Demand deposits	$	13,432,413		$	11,146,627
Interest checking deposits	1,979,580			2,034,815
Money market deposits	5,826,708			5,954,886
Savings deposits	374,197			339,858
Time deposits-under $100,000	214,620			251,782
Time deposits-$100,000 and over	684,798			659,614
Total deposits	22,512,316			20,387,582
Short-term borrowings	211,739			50,000
Long-term debt	706,035			697,778
Reserve for off-balance sheet credit commitments	25,260			23,097
Acceptances outstanding	2,573			1,702
Other liabilities	421,895			316,640
Total liabilities	23,879,818			21,476,799
Redeemable noncontrolling interest	41,386			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 September 30, 2012 and December 31, 2011	53,886			53,886
Additional paid-in capital	485,975			489,200
Accumulated other comprehensive income	93,924			72,372
Retained earnings	1,732,417			1,611,969
Treasury shares, at cost - 695,872 and 1,386,705 shares at September 30, 2012 and December 31, 2011, respectively	(35,878		)	(82,578		)
Total shareholders’ equity	2,330,324			2,144,849
Total liabilities and shareholders’ equity	$	26,251,528		$	23,666,291

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)	2012			2011			2012			2011
Interest income
Loans and leases	$	180,349		$	175,435		$	534,521		$	508,366
Securities	44,182			40,893			133,118			117,951
Due from banks - interest-bearing	163			474			429			1,179
Federal funds sold and securities purchased under resale agreements	74			90			181			342
Total interest income	224,768			216,892			668,249			627,838
Interest expense
Deposits	3,316			8,535			10,914			28,742
Federal funds purchased and securities sold under repurchase agreements	9			—			42			2
Subordinated debt	6,125			4,419			14,494			13,701
Other long-term debt	5,396			4,622			15,685			13,960
Total interest expense	14,846			17,576			41,135			56,405
Net interest income	209,922			199,316			627,114			571,433
Provision for credit losses on loans and leases, excluding covered loans	2,000			7,500			3,000			7,500
Provision for losses on covered loans	18,089			5,147			38,848			25,979
Net interest income after provision	189,833			186,669			585,266			537,954
Noninterest income
Trust and investment fees	43,477			35,412			111,198			107,737
Brokerage and mutual fund fees	9,059			5,079			19,380			15,604
Cash management and deposit transaction charges	11,526			10,986			34,169			33,616
International services	9,819			10,352			28,621			27,683
FDIC loss sharing income (expense), net	1,667			(14,191		)	(3,493		)	(16,270		)
Gain on disposal of assets	3,199			5,191			8,401			16,037
Gain on sale of securities	856			3,520			1,026			5,339
Gain on acquisition	—			—			—			8,164
Other	27,693			13,479			58,640			58,206
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(1,510		)	(4,549		)	(1,688		)	(5,007		)
Less: Portion of loss recognized in other comprehensive income	1,471			4,356			1,471			4,356
Net impairment loss recognized in earnings	(39		)	(193		)	(217		)	(651		)
Total noninterest income	107,257			69,635			257,725			255,465
Noninterest expense
Salaries and employee benefits	120,210			112,729			355,490			335,880
Net occupancy of premises	16,238			13,713			43,980			40,724
Legal and professional fees	11,757			14,242			34,996			39,109
Information services	8,660			7,906			25,348			23,738
Depreciation and amortization	8,324			6,930			23,765			20,582
Amortization of intangibles	1,932			2,105			5,336			6,377
Marketing and advertising	7,141			6,675			21,554			20,819
Office services and equipment	4,673			4,456			13,113			13,734
Other real estate owned	8,749			13,160			28,384			49,811
FDIC assessments	4,616			6,670			13,618			25,000
Other operating	15,586			9,051			37,538			31,092
Total noninterest expense	207,886			197,637			603,122			606,866
Income before income taxes	89,204			58,667			239,869			186,553
Income taxes	29,052			16,267			78,042			54,803
Net income	$	60,152		$	42,400		$	161,827		$	131,750
Less: Net income attributable to noncontrolling interest	372			1,002			1,024			3,189
Net income attributable to City National Corporation	$	59,780		$	41,398		$	160,803		$	128,561
Net income per share, basic	$	1.10		$	0.78		$	2.98		$	2.41
Net income per share, diluted	$	1.10		$	0.77		$	2.97		$	2.39
Shares used to compute net income per share, basic	53,425			52,481			53,092			52,422
Shares used to compute net income per share, diluted	53,711			52,720			53,376			52,882
Dividends per share	$	0.25		$	0.20		$	0.75		$	0.60

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
(in thousands)	2012			2011			2012			2011
Net income	$	60,152		$	42,400		$	161,827		$	131,750
Other comprehensive income, net of tax:
Securities available for sale:
Net unrealized gains arising during the period	12,042			30,523			21,715			51,834
Reclassification adjustment for net gains included in net income	(28		)	(1,780		)	(267		)	(2,882		)
Non-credit related impairment loss	(856		)	(2,533		)	(856		)	(2,533		)
Net change on cash flow hedges (1)	(42		)	32			(125		)	(903		)
Pension liability adjustment	—			(68		)	1,085			98
Total other comprehensive income	11,116			26,174			21,552			45,614
Comprehensive income	$	71,268		$	68,574		$	183,379		$	177,364
Less: Comprehensive income attributable to noncontrolling interest	372			1,002			1,024			3,189
Comprehensive income attributable to City National Corporation	$	70,896		$	67,572		$	182,355		$	174,175

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

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)	2012			2011
Cash Flows From Operating Activities
Net income	$	161,827		$	131,750
Adjustments to net income:
Provision for credit losses on loans and leases, excluding covered loans	3,000			7,500
Provision for losses on covered loans	38,848			25,979
Amortization of intangibles	5,336			6,377
Depreciation and amortization	23,765			20,582
Share-based employee compensation expense	13,694			14,171
Deferred income tax benefit	926			2,578
Gain on disposal of assets	(8,401		)	(16,037		)
Gain on sale of securities	(1,026		)	(5,339		)
Gain on acquisition	—			(8,164		)
Impairment loss on securities	217			651
Other, net	(29,115		)	(8,708		)
Net change in:
Trading securities	(2,187		)	161,591
Other assets and other liabilities, net	75,109			105,224
Net cash provided by operating activities	281,993			438,155
Cash Flows From Investing Activities
Purchase of securities available-for-sale	(2,997,503		)	(3,990,753		)
Sales of securities available-for-sale	6,216			101,548
Maturities and paydowns of securities available-for-sale	2,699,482			2,496,283
Purchase of securities held-to-maturity	(728,064		)	—
Maturities and paydowns of securities held-to-maturity	20,124			—
Loan originations, net of principal collections	(779,081		)	(508,913		)
Net payments for premises and equipment	(23,039		)	(32,927		)
Net cash (paid) acquired in acquisitions	(123,746		)	28,066
Other investing activities, net	23,976			96,819
Net cash used in investing activities	(1,901,635		)	(1,809,877		)
Cash Flows From Financing Activities
Net increase in deposits	2,124,734			1,605,424
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements	(50,000		)	30,000
Net decrease in short-term borrowings, net of transfers from long-term debt	(94,141		)	(150,895		)
Net increase (decrease) in long-term debt	1,906			(757		)
Proceeds from exercise of stock options	21,653			4,792
Tax benefit from exercise of stock options	2,959			1,024
Cash dividends paid	(40,029		)	(31,851		)
Other financing activities, net	(2,416		)	(26,454		)
Net cash provided by financing activities	1,964,666			1,431,283
Net increase in cash and cash equivalents	345,024			59,561
Cash and cash equivalents at beginning of year	244,814			434,689
Cash and cash equivalents at end of period	$	589,838		$	494,250
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	47,903		$	70,612
Income taxes	53,783			79,739
Non-cash investing activities:
Transfer of loans to other real estate owned	$	58,202		$	81,109
Transfer of SERP liability to equity	8,348			—
Assets acquired (liabilities assumed) in acquisitions:
Securities available-for-sale	$	—		$	10,441
Loans and leases	318,301			—
Covered loans	—			55,313
Covered other real estate owned	—			7,463
Deposits	—			(126,795		)
Other borrowings	(320,856		)	(3,165		)

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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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		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)	—	—		—			—		128,561			—			1,678			130,239
Other comprehensive income, net of tax	—	—		—			45,614		—			—			—			45,614
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
Common stock dividends	—	—		—			—		(31,851		)	—			—			(31,851		)
Net change in deferred compensation plans	—	—		641			—		—			—			—			641
Change in redeemable noncontrolling interest	—	—		(245		)	—		—			—			—			(245		)
Other (2)	—	—		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

Balance, January 1, 2012	53,885,886	$	53,886	$	489,200		$	72,372	$	1,611,969		$	(82,578	)	$	—		$	2,144,849
Net income (1)	—	—		—			—		160,803			—			—			160,803
Other comprehensive income, net of tax	—	—		—			21,552		—			—			—			21,552
Issuance of shares under share-based compensation plans	—	—		(27,171		)	—		—			46,698			—			19,527
Share-based employee compensation expense	—	—		12,825			—		—			—			—			12,825
Tax benefit from share-based compensation plans	—	—		953			—		—			—			—			953
Common stock dividends	—	—		—			—		(40,355		)	—			—			(40,355		)
Net change in deferred compensation plans	—	—		787			—		—			2			—			789
Change in redeemable noncontrolling interest	—	—		1,033			—		—			—			—			1,033
Other (3)	—	—		8,348			—		—			—			—			8,348
Balance, September 30, 2012	53,885,886	$	53,886	$	485,975		$	93,924	$	1,732,417		$	(35,878	)	$	—		$	2,330,324

(1) Net income excludes net income attributable to redeemable noncontrolling interest of $1,024 and $1,511 for the nine month periods ended September 30, 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) See Note 17 for additional information on the change in noncontrolling interest.

(3) 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.

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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, Nashville, Tennessee and Atlanta, Georgia. As of September 30, 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, other real estate owned (“OREO”), 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.

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Note 1. Summary of Significant Accounting Policies (Continued)

The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements. The 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 nine months ended September 30, 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

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Note 1. Summary of Significant Accounting Policies (Continued)

continue measuring derivative instruments that are subject to master netting agreements on the net risk exposure at the measurement date.

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 and expanded its disclosures starting with its 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.

· In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of the new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

· In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805), Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (“ASU 2012-06”). ASU 2012-06 clarifies existing guidance on the subsequent measurement of an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Existing guidance specifies that an acquirer must record an indemnification asset at the same time as it recognizes the indemnified item in a business combination. The indemnification asset is initially measured on the same basis as the indemnified item, with a valuation allowance for amounts deemed uncollectible, and is subsequently also measured on the same basis as the indemnified item, subject to any contractual limitations on the asset’s amount. Under ASU 2012-06, when there is a subsequent change in the cash flows expected to be collected on the indemnified asset, the reporting entity should subsequently measure the indemnification asset on the same basis as the underlying loans by taking into account the contractual limitation of the loss-sharing agreement with the FDIC. For amortization of changes in value, the reporting entity should use the term of the loss-sharing agreement if it is shorter than the term of the acquired loans. ASU 2012-06 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Adoption of the new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

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Note 2. Business Combinations

Rochdale Investment Management

On July 2, 2012, the Company acquired Rochdale Investment Management, LLC and associated entities (collectively, “Rochdale”), a New York City-based investment firm with approximately $4.89 billion of assets under management at the date of acquisition. Rochdale manages assets for affluent and high-net-worth clients and their financial advisors across the nation, and will operate as a wholly owned subsidiary of the Bank. The investment firm was acquired with both cash and contingent consideration.

The Company recognized goodwill of approximately $85.5 million and a client contract intangible of $19.0 million related to the acquisition. The Company recognized a contingent consideration liability at its fair value of $45.8 million. The contingent consideration arrangements require the Company to pay additional cash consideration to Rochdale’s former shareholders at certain points in time over the next six years if certain criteria, such as revenue growth and pre-tax margin, are met. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model. Although the agreement does not set a limit on the total payment, the Company estimates that the total consideration payment could be in the range of $32 million to $74 million, but will ultimately be determined based on actual future results.

The Company recognized acquisition-related expense of $2.0 million during the nine months ended September 30, 2012. The majority of this expense is included in Legal and professional fees in the consolidated statements of income.

The operating results of Rochdale from its acquisition date through September 30, 2012 are included in the consolidated statement of income for 2012 and are not material to total consolidated operating results for the three and nine month periods ended September 30, 2012. Further, the historical results of the acquired entity are not material to the Company’s results, and consequently, no pro forma information is presented.

First American Equipment Finance

The Company acquired First American Equipment Finance (“FAEF”), a privately owned equipment leasing company, in an all-cash transaction on April 30, 2012. Headquartered in Rochester, New York, FAEF leases technology and office equipment nationwide. Its clients include educational institutions, hospitals and health systems, large law firms, insurance underwriters, enterprise businesses, professional service businesses and nonprofit organizations. FAEF operates as a wholly owned subsidiary of the Bank.

Excluding the effects of acquisition accounting adjustments, the Company acquired approximately $343.0 million in assets and assumed $325.0 million in liabilities. The Company acquired lease receivables with a fair value of $318.3 million and assumed borrowings and nonrecourse debt with a fair value of $320.9 million. The Company recognized goodwill of approximately $68.4 million and acquisition-related expense of $0.6 million. This expense is included in Legal and professional fees in the consolidated statements of income.

The operating results of FAEF from its acquisition date through September 30, 2012 are included in the consolidated statement of income for 2012 and are not material to total consolidated operating results for the three and nine month periods ended September 30, 2012. Further, the historical results of the acquired entity are not material to the Company’s results, and consequently, no pro forma information is presented.

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 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

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Note 2. Business Combinations (Continued)

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.

Note 3. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of September 30, 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	$	20,355	$	20,355	$	—	$	—
Federal agency - Debt	1,547,300		—		1,547,300		—
Federal agency - MBS	657,935		—		657,935		—
CMOs - Federal agency	4,847,471		—		4,847,471		—
CMOs - Non-agency	64,489		—		64,489		—
State and municipal	425,169		—		378,072		47,097
Other debt securities	308,524		—		290,182		18,342
Equity securities and mutual funds	821		821		—		—
Trading securities	64,749		61,883		2,866		—
Mark-to-market derivatives (1)	70,878		3,068		67,810		—
Total assets at fair value	$	8,007,691	$	86,127	$	7,856,125	$	65,439

Liabilities
Mark-to-market derivatives	$	66,692	$	1,719	$	64,973	$	—
Contingent consideration liability	46,283		—		$	—	46,283
FDIC clawback liability	9,914		—		—		9,914
Other liabilities	393		—		393		—
Total liabilities at fair value (2)	$	123,282	$	1,719	$	65,366	$	56,197

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	1,658	$	—	$	—	$	1,658
Commercial real estate mortgages	11,699		—		11,699		—
Residential mortgages	4,382		—		3,924		458
Real estate construction	7,208		—		7,208		—
Equity lines of credit	782		—		—		782
Installment	399		—		399		—
Other real estate owned (5)	55,321		—		49,579		5,742
Private equity and alternative investments	5,982		—		—		5,982
Total assets at fair value	$	87,431	$	—	$	72,809	$	14,622

(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 $110.7 million in the consolidated balance sheets includes $83.6 million of covered OREO and is net of estimated disposal costs.

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Note 3. Fair Value Measurements (Continued)

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of 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	$	52,881	$	1,542	$	51,339	$	—
FDIC clawback liability	8,103		$	—	$	—	$	8,103
Other liabilities	263		—		263		—
Total liabilities at fair value (2)	$	61,247	$	1,542	$	51,602	$	8,103

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.

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Note 3. Fair Value Measurements (Continued)

At September 30, 2012, $8.01 billion, or approximately 31 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 September 30, 2012, $123.3 million of the Company’s total liabilities were recorded at fair value using Level 1, Level 2 or Level 3 inputs, compared with $61.2 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 nine months ended September 30, 2012. At September 30, 2012, $87.4 million, or approximately 0.3 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. The following table provides a reconciliation of the beginning and ending balances for Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2012 and 2011.

Level 3 Assets and Liabilities Measured on a Recurring Basis

	For the nine months ended September 30, 2012									For the nine months ended September 30, 2011
(in thousands)	Securities Available-for- Sale			Contingent Consideration Liability			FDIC Clawback Liability			Securities Available-for- Sale			FDIC Clawback Liability
Balance, beginning of period	$	19,583		$	—		$	(8,103	)	$	20,982		$	(6,911	)
Total realized/unrealized gains (losses):
Included in earnings	—			—			(1,811		)	—			(1,131		)
Included in other comprehensive income	1,770			—			—			348			—
Additions	—			(45,768		)	—			—			—
Settlements	(3,152		)	—			—			(1,960		)	—
Transfers into Level 3	47,165			—			—			—			—
Other (1)	73			(515		)	—			(20		)	—
Balance, end of period	$	65,439		$	(46,283	)	$	(9,914	)	$	19,350		$	(8,042	)

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

Level 3 assets measured at fair value on a recurring basis consist of municipal auction rate securities and collateralized debt obligation senior notes that are included in securities available-for-sale. During the nine months ended September 30, 2012, municipal auction rate securities totaling $47.2 million were transferred from Level 2 to Level 3 of the fair value hierarchy as a result of a change in the method used to value these securities. The valuation methodology was revised due to the prolonged period of inactivity in the market for auction rate securities. At September 30, 2012, these securities were valued using an average yield on California variable rate notes that were comparable in credit rating and maturity to the securities held, plus a liquidity premium. Senior notes totaling $18.3 million at September 30, 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.

Level 3 liabilities measured at fair value on a recurring basis consist of contingent consideration and an FDIC clawback liability that are included in other liabilities. Refer to Note 3, Business Combinations, for further discussion of the methodology used to value the contingent consideration liability. The FDIC clawback liability was valued using the discounted cash flow method based on the terms specified in loss-sharing agreements with the FDIC, the actual FDIC payments collected and the following unobservable inputs: (1) risk-adjusted discount rate reflecting the Bank’s credit risk, plus a liquidity premium, (2) prepayment assumptions and (3) credit assumptions.

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Note 3. Fair Value Measurements (Continued)

There were no purchases, sales, or transfers out of Level 3 assets measured on a recurring basis during the nine months ended September 30, 2012 and 2011. Paydowns of $3.2 million and $2.0 million were received on Level 3 assets measured on a recurring basis for the nine months ended September 30, 2012 and 2011, respectively.

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 September 30, 2012		Valuation Method		Unobservable Inputs
Collateral dependent impaired loans	$	2,898	Market	-	Adjustments to external or internal appraised values (1)
				-	Probability weighting of broker price opinions
				-	Management assumptions regarding market trends or other relevant factors

Other real estate owned	$	5,742	Market	-	Adjustments to external or internal appraised values (1)
				-	Probability weighting of broker price opinions
				-	Management assumptions regarding market trends or other relevant factors

Private equity and alternative investments	$	5,982	Cost Recovery	-	Management’s assumptions regarding recoverability of investment based on fund financial performance, market conditions and other relevant factors

(1) Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.

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.

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Note 3. Fair Value Measurements (Continued)

For assets measured at fair value on a nonrecurring basis, the following table presents the total 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, 2012 and 2011:

	For the three months ended						For the nine months ended
	September 30,						September 30,
(in thousands)	2012			2011			2012			2011
Collateral dependent impaired loans:
Commercial	$	—		$	80		$	(368	)	$	(526	)
Commercial real estate mortgages	306			(1,643		)	(1,630		)	5,811
Residential mortgages	(31		)	(266		)	(1,152		)	(455		)
Real estate construction	130			(10,413		)	(6,623		)	(11,612		)
Equity lines of credit	16			(179		)	(47		)	(689		)
Installment	(101		)	(279		)	(208		)	(4,596		)
Collaterial dependent impaired covered loans:
Commercial	—			(325		)	—			(325		)
Other real estate owned (1)	(4,147		)	(6,585		)	(16,312		)	(32,575		)
Private equity and alternative investments	(2,477		)	(32		)	(2,938		)	(232		)
Total net losses recognized	$	(6,304	)	$	(19,642	)	$	(29,278	)	$	(45,199	)

(1)

Net losses on OREO includes $3.6 million and $14.7 million of net losses related to covered OREO for the three and nine months ended September 30, 2012, respectively, and $6.7 million and $29.5 million of net losses for the three and nine months ended September 30, 2011, respectively. A significant portion of net losses on covered OREO is reimbursable by the FDIC.

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. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2011 Form 10-K for additional information on fair value measurements.

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.

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Note 3. Fair Value Measurements (Continued)

The following tables summarize the carrying amounts and estimated fair values of those financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets. The tables also provide information on the level in the fair value hierarchy for inputs used in the fair value of those financial instruments. Most financial assets and financial liabilities for which carrying amount equals fair value are considered by the Company to be Level 1 measurements in the fair value hierarchy.

	September 30, 2012
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	235.0	$	235.0	$	235.0	$	—	$	—
Due from banks - interest bearing	335.3		335.3		335.3		—		—
Federal funds sold	19.5		19.5		19.5		—		—
Securities held-to-maturity	1,174.2		1,222.7		—		1,222.7		—
Loans and leases, net of allowance	13,456.2		13,903.0		—		—		13,903.0
Covered loans, net of allowance	1,099.4		1,173.8		—		—		1,173.8
FDIC indemnification asset	161.0		135.3		—		—		135.3
Investment in FHLB and FRB stock	96.1		96.1		—		96.1		—

Financial Liabilities:
Deposits	$	22,512.3	$	22,516.7	$	—	$	21,612.9	$	903.8
Other short-term borrowings	211.7		214.4		—		211.2		3.2
Long-term debt	706.0		773.0		—		697.4		75.6

	December 31, 2011
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	168.4	$	168.4	$	168.4	$	—	$	—
Due from banks - interest bearing	76.4		76.4		76.4		—		—
Securities held-to-maturity	467.7		473.9		—		473.9		—
Loans and leases, net of allowance	12,046.8		12,400.5		—		—		12,400.5
Covered loans, net of allowance	1,417.3		1,472.6		—		—		1,472.6
FDIC indemnification asset	204.3		184.3		—		—		184.3
Investment in FHLB and FRB stock	107.4		107.4		—		107.4		—

Financial Liabilities:
Deposits	$	20,387.6	$	20,392.3	$	—	$	19,476.2	$	916.1
Federal funds purchased and securities sold under repurchase agreements	50.0		50.0		50.0		—		—
Long-term debt	697.8		718.7		—		718.7		—

Following is a description of the methods and assumptions used in estimating the fair values of these financial instruments:

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 held-to-maturity — For securities 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.

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Note 3. Fair Value Measurements (Continued)

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 previous table. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions for 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.

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 fair value of nonrecourse debt is determined by discounting estimated future cash flows based on estimated current market rates. 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, excluding nonrecourse debt, is obtained through third-party pricing sources. The fair value of nonrecourse debt is determined 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. 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.

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Note 4. Securities

At September 30, 2012, the Company had total securities of $9.11 billion, comprised of securities available-for-sale at fair value of $7.87 billion, securities held-to-maturity at amortized cost of $1.17 billion and trading securities at fair value of $64.7 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 September 30, 2012 and December 31, 2011:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
September 30, 2012
Securities available-for-sale:
U.S. Treasury	$	20,352	$	6	$	(3	)	$	20,355
Federal agency - Debt	1,542,162		5,169		(31		)	1,547,300
Federal agency - MBS	612,713		45,222		—			657,935
CMOs - Federal agency	4,755,996		95,410		(3,935		)	4,847,471
CMOs - Non-agency	66,431		1,070		(3,012		)	64,489
State and municipal	406,127		19,177		(135		)	425,169
Other debt securities	306,645		8,329		(6,450		)	308,524
Total debt securities	7,710,426		174,383		(13,566		)	7,871,243
Equity securities and mutual funds	336		485		—			821
Total securities available-for-sale	$	7,710,762	$	174,868	$	(13,566	)	$	7,872,064

Securities held-to-maturity (1):