XNYS:CYN City National Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:CYN (City National Corp): Fair Value Estimate
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XNYS:CYN (City National Corp): Consider Buying
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Table of Contents

 

 

 

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 June 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 the filing requirements for at least the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller
reporting company)

 

Smaller reporting company o

 

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

 

As of July 31, 2012, there were 53,570,205 shares of Common Stock outstanding (including unvested restricted shares).

 

 

 




Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(in thousands, except share amounts) 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

162,893

 

$

168,376

 

Due from banks - interest-bearing

 

106,109

 

76,438

 

Federal funds sold

 

162,000

 

 

Securities available-for-sale - cost $6,723,761 and $7,445,999 at June 30, 2012 and December 31, 2011, respectively:

 

 

 

 

 

Securities pledged as collateral

 

42,789

 

37,861

 

Held in portfolio

 

6,823,092

 

7,534,040

 

Securities held-to-maturity - fair value $1,127,053 and $473,903 at June 30, 2012 and December 31, 2011, respectively

 

1,100,229

 

467,680

 

Trading securities

 

62,585

 

61,975

 

Loans and leases, excluding covered loans

 

13,507,209

 

12,309,385

 

Less: Allowance for loan and lease losses

 

269,534

 

262,557

 

Loans and leases, excluding covered loans, net

 

13,237,675

 

12,046,828

 

Covered loans, net of allowance for loan losses

 

1,216,988

 

1,417,289

 

Net loans and leases

 

14,454,663

 

13,464,117

 

Premises and equipment, net

 

147,245

 

143,641

 

Deferred tax asset

 

147,503

 

155,529

 

Goodwill

 

556,149

 

486,383

 

Customer-relationship intangibles, net

 

32,965

 

36,370

 

Affordable housing investments

 

145,582

 

121,039

 

Customers’ acceptance liability

 

1,746

 

1,702

 

Other real estate owned ($82,834 and $98,550 covered by FDIC loss share at June 30, 2012 and December 31, 2011, respectively)

 

117,501

 

129,340

 

FDIC indemnification asset

 

170,654

 

204,259

 

Other assets

 

568,268

 

577,541

 

Total assets

 

$

24,801,973

 

$

23,666,291

 

Liabilities

 

 

 

 

 

Demand deposits

 

$

12,187,075

 

$

11,146,627

 

Interest checking deposits

 

1,849,588

 

2,034,815

 

Money market deposits

 

5,714,258

 

5,954,886

 

Savings deposits

 

368,544

 

339,858

 

Time deposits-under $100,000

 

222,368

 

251,782

 

Time deposits-$100,000 and over

 

767,219

 

659,614

 

Total deposits

 

21,109,052

 

20,387,582

 

Short-term borrowings

 

322,077

 

50,000

 

Long-term debt

 

712,280

 

697,778

 

Reserve for off-balance sheet credit commitments

 

24,351

 

23,097

 

Acceptances outstanding

 

1,746

 

1,702

 

Other liabilities

 

335,203

 

316,640

 

Total liabilities

 

22,504,709

 

21,476,799

 

Redeemable noncontrolling interest

 

41,899

 

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 June 30, 2012 and December 31, 2011

 

53,886

 

53,886

 

Additional paid-in capital

 

491,439

 

489,200

 

Accumulated other comprehensive income

 

82,807

 

72,372

 

Retained earnings

 

1,686,163

 

1,611,969

 

Treasury shares, at cost - 1,063,534 and 1,386,705 shares at June 30, 2012 and December 31, 2011, respectively

 

(58,930

)

(82,578

)

Total shareholders’ equity

 

2,255,365

 

2,144,849

 

Total liabilities and shareholders’ equity

 

$

24,801,973

 

$

23,666,291

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

3



Table of Contents

 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

Interest income

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

186,071

 

$

169,992

 

$

354,173

 

$

332,931

 

Securities

 

43,549

 

39,639

 

88,935

 

77,058

 

Due from banks - interest-bearing

 

173

 

407

 

266

 

705

 

Federal funds sold and securities purchased under resale agreements

 

96

 

98

 

107

 

252

 

Total interest income

 

229,889

 

210,136

 

443,481

 

410,946

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

3,566

 

10,016

 

7,599

 

20,206

 

Federal funds purchased and securities sold under repurchase agreements

 

1

 

2

 

32

 

2

 

Subordinated debt

 

4,308

 

4,635

 

8,369

 

9,283

 

Other long-term debt

 

5,535

 

4,656

 

10,289

 

9,338

 

Total interest expense

 

13,410

 

19,309

 

26,289

 

38,829

 

Net interest income

 

216,479

 

190,827

 

417,192

 

372,117

 

Provision for credit losses on loans and leases, excluding covered loans

 

1,000

 

 

1,000

 

 

Provision for losses on covered loans

 

13,293

 

1,716

 

20,759

 

20,832

 

Net interest income after provision

 

202,186

 

189,111

 

395,433

 

351,285

 

Noninterest income

 

 

 

 

 

 

 

 

 

Trust and investment fees

 

34,067

 

36,687

 

67,721

 

72,325

 

Brokerage and mutual fund fees

 

5,293

 

4,864

 

10,321

 

10,525

 

Cash management and deposit transaction charges

 

11,475

 

10,905

 

22,643

 

22,630

 

International services

 

10,017

 

9,015

 

18,802

 

17,331

 

FDIC loss sharing expense, net

 

(6,026

)

(10,684

)

(5,160

)

(2,079

)

Gain on disposal of assets

 

3,011

 

8,422

 

5,202

 

10,846

 

(Loss) gain on sale of securities

 

(279

)

1,689

 

170

 

1,819

 

Gain on acquisition

 

 

8,164

 

 

8,164

 

Other

 

17,388

 

23,169

 

30,947

 

44,727

 

Impairment loss on securities:

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment loss on securities

 

(4,129

)

(4,132

)

(4,129

)

(4,296

)

Less: Portion of loss recognized in other comprehensive income

 

3,951

 

3,838

 

3,951

 

3,838

 

Net impairment loss recognized in earnings

 

(178

)

(294

)

(178

)

(458

)

Total noninterest income

 

74,768

 

91,937

 

150,468

 

185,830

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

115,035

 

112,139

 

235,280

 

223,151

 

Net occupancy of premises

 

14,056

 

13,665

 

27,742

 

27,011

 

Legal and professional fees

 

11,359

 

14,790

 

23,239

 

24,867

 

Information services

 

8,539

 

8,335

 

16,688

 

15,832

 

Depreciation and amortization

 

8,013

 

6,904

 

15,441

 

13,652

 

Amortization of intangibles

 

1,518

 

2,104

 

3,404

 

4,272

 

Marketing and advertising

 

7,597

 

7,626

 

14,413

 

14,144

 

Office services and equipment

 

4,492

 

4,672

 

8,440

 

9,278

 

Other real estate owned

 

7,541

 

22,162

 

19,635

 

36,651

 

FDIC assessments

 

4,523

 

8,524

 

9,002

 

18,330

 

Other operating

 

11,843

 

10,911

 

21,952

 

22,041

 

Total noninterest expense

 

194,516

 

211,832

 

395,236

 

409,229

 

Income before income taxes

 

82,438

 

69,216

 

150,665

 

127,886

 

Income taxes

 

27,271

 

20,650

 

48,990

 

38,536

 

Net income

 

$

55,167

 

$

48,566

 

$

101,675

 

$

89,350

 

Less: Net income attributable to noncontrolling interest

 

409

 

1,095

 

652

 

2,187

 

Net income attributable to City National Corporation

 

$

54,758

 

$

47,471

 

$

101,023

 

$

87,163

 

Net income per share, basic

 

$

1.02

 

$

0.89

 

$

1.88

 

$

1.64

 

Net income per share, diluted

 

$

1.01

 

$

0.88

 

$

1.87

 

$

1.62

 

Shares used to compute net income per share, basic

 

53,105

 

52,462

 

52,923

 

52,392

 

Shares used to compute net income per share, diluted

 

53,373

 

52,977

 

53,217

 

52,931

 

Dividends per share

 

$

0.25

 

$

0.20

 

$

0.50

 

$

0.40

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

4



Table of Contents

 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

55,167

 

$

48,566

 

$

101,675

 

$

89,350

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Net unrealized gains arising during the period

 

3,815

 

33,254

 

11,971

 

23,541

 

Reclassification adjustment for net gains included in net income

 

(10

)

(1,048

)

(239

)

(1,099

)

Non-credit related impairment loss

 

(2,299

)

(2,233

)

(2,299

)

(2,233

)

Net change on cash flow hedges (1)

 

(41

)

(248

)

(83

)

(834

)

Pension liability adjustment

 

 

33

 

1,085

 

65

 

Total other comprehensive income

 

1,465

 

29,758

 

10,435

 

19,440

 

Comprehensive income

 

$

56,632

 

$

78,324

 

$

112,110

 

$

108,790

 

Less: Comprehensive income attributable to noncontrolling interest

 

409

 

1,095

 

652

 

2,187

 

Comprehensive income attributable to City National Corporation

 

$

56,223

 

$

77,229

 

$

111,458

 

$

106,603

 

 


(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.

 

5



Table of Contents

 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the six months ended

 

 

 

June 30,

 

(in thousands)

 

2012

 

2011

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

101,675

 

$

89,350

 

Adjustments to net income:

 

 

 

 

 

Provision for credit losses on loans and leases, excluding covered loans

 

1,000

 

 

Provision for losses on covered loans

 

20,759

 

20,832

 

Amortization of intangibles

 

3,404

 

4,272

 

Depreciation and amortization

 

15,441

 

13,652

 

Share-based employee compensation expense

 

8,968

 

9,468

 

Deferred income tax benefit

 

1,276

 

2,686

 

Gain on disposal of assets

 

(5,202

)

(10,846

)

Gain on sale of securities

 

(170

)

(1,819

)

Gain on acquisition

 

 

(8,164

)

Impairment loss on securities

 

178

 

458

 

Other, net

 

(19,467

)

(9,418

)

Net change in:

 

 

 

 

 

Trading securities

 

(851

)

129,818

 

Other assets and other liabilities, net

 

40,111

 

51,709

 

Net cash provided by operating activities

 

167,122

 

291,998

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of securities available-for-sale

 

(1,331,692

)

(2,017,983

)

Sales of securities available-for-sale

 

5,189

 

53,304

 

Maturities and paydowns of securities available-for-sale

 

2,031,596

 

1,367,512

 

Purchase of securities held-to-maturity

 

(638,006

)

 

Maturities and paydowns of securities held-to-maturity

 

4,617

 

 

Loan originations, net of principal collections

 

(671,623

)

(108,530

)

Net payments for premises and equipment

 

(14,703

)

(19,637

)

Net cash (paid) acquired in acquisitions

 

(69,987

)

28,066

 

Other investing activities, net

 

28,527

 

59,628

 

Net cash used in investing activities

 

(656,082

)

(637,640

)

Cash Flows From Financing Activities

 

 

 

 

 

Net increase in deposits

 

721,470

 

961,463

 

Net increase in federal funds purchased and securities sold under repurchase agreements

 

60,000

 

 

Net decrease in short-term borrowings, net of transfers from long-term debt

 

(95,691

)

(3,105

)

Net increase (decrease) in long-term debt

 

7,707

 

(757

)

Proceeds from exercise of stock options

 

9,044

 

4,507

 

Tax benefit from exercise of stock options

 

1,180

 

992

 

Cash dividends paid

 

(26,632

)

(21,211

)

Other financing activities, net

 

(1,930

)

(1,429

)

Net cash provided by financing activities

 

675,148

 

940,460

 

Net increase in cash and cash equivalents

 

186,188

 

594,818

 

Cash and cash equivalents at beginning of year

 

244,814

 

434,689

 

Cash and cash equivalents at end of period

 

$

431,002

 

$

1,029,507

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

25,674

 

$

40,129

 

Income taxes

 

30,373

 

26,072

 

Non-cash investing activities:

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

41,728

 

$

64,191

 

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.

 

6



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)

 

 

 

 

 

87,163

 

 

1,067

 

88,230

 

Other comprehensive income, net of tax

 

 

 

 

19,440

 

 

 

 

19,440

 

Dividends and distributions to noncontrolling interest

 

 

 

 

 

 

 

(1,067

)

(1,067

)

Issuance of shares under share-based compensation plans

 

 

 

(14,229

)

 

 

16,754

 

 

2,525

 

Share-based employee compensation expense

 

 

 

9,363

 

 

 

 

 

9,363

 

Tax benefit from share-based compensation plans

 

 

 

1,037

 

 

 

 

 

1,037

 

Common stock dividends

 

 

 

 

 

(21,211

)

 

 

(21,211

)

Net change in deferred compensation plans

 

 

 

600

 

 

 

 

 

600

 

Change in redeemable noncontrolling interest

 

 

 

349

 

 

 

 

 

349

 

Other

 

 

 

76

 

 

 

 

(50

)

26

 

Balance, June 30, 2011

 

53,885,886

 

$

53,886

 

$

485,064

 

$

56,293

 

$

1,547,989

 

$

(84,311

)

$

25,089

 

$

2,084,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

53,885,886

 

$

53,886

 

$

489,200

 

$

72,372

 

$

1,611,969

 

$

(82,578

)

$

 

$

2,144,849

 

Net income (1)

 

 

 

 

 

101,023

 

 

 

101,023

 

Other comprehensive income, net of tax

 

 

 

 

10,435

 

 

 

 

10,435

 

Issuance of shares under share-based compensation plans

 

 

 

(16,506

)

 

 

23,646

 

 

7,140

 

Share-based employee compensation expense

 

 

 

8,502

 

 

 

 

 

8,502

 

Tax benefit from share-based compensation plans

 

 

 

400

 

 

 

 

 

400

 

Common stock dividends

 

 

 

 

 

(26,829

)

 

 

(26,829

)

Net change in deferred compensation plans

 

 

 

703

 

 

 

2

 

 

705

 

Change in redeemable noncontrolling interest

 

 

 

792

 

 

 

 

 

792

 

Other (2)

 

 

 

8,348

 

 

 

 

 

8,348

 

Balance, June 30, 2012

 

53,885,886

 

$

53,886

 

$

491,439

 

$

82,807

 

$

1,686,163

 

$

(58,930

)

$

 

$

2,255,365

 

 


(1)      Net income excludes net income attributable to redeemable noncontrolling interest of $652 and $1,120 for the six month periods ended June 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)      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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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 78 offices in Southern California, the San Francisco Bay area, Nevada, New York City, Nashville, Tennessee and Atlanta, Georgia. As of June 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, 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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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 six months ended June 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.

 

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Table of Contents

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

The Company elected to 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.

 

Note 2. Business Combinations

 

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 consolidated statement of income for 2012 includes the operating results produced by the acquired assets and assumed liabilities of FAEF from its acquisition date through June 30, 2012, which are not material to total operating results for the three and six month periods ended June 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 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.

 

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Table of Contents

 

Note 2. Business Combinations (Continued)

 

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 June 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
June 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

 

$

17,208

 

$

17,208

 

$

 

$

 

Federal agency - Debt

 

999,207

 

 

999,207

 

 

Federal agency - MBS

 

691,672

 

 

691,672

 

 

CMOs - Federal agency

 

4,477,264

 

 

4,477,264

 

 

CMOs - Non-agency

 

65,466

 

 

65,466

 

 

State and municipal

 

383,650

 

 

336,483

 

47,167

 

Other debt securities

 

229,908

 

 

210,724

 

19,184

 

Equity securities and mutual funds

 

1,506

 

1,506

 

 

 

Trading securities

 

62,585

 

55,034

 

7,551

 

 

Mark-to-market derivatives (1)

 

66,659

 

3,177

 

63,482

 

 

Total assets at fair value

 

$

6,995,125

 

$

76,925

 

$

6,851,849

 

$

66,351

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Mark-to-market derivatives (2)

 

$

61,400

 

$

1,690

 

$

59,710

 

$

 

Other liabilities

 

417

 

 

417

 

 

Total liabilities at fair value

 

$

61,817

 

$

1,690

 

$

60,127

 

$

 

 

 

 

 

 

 

 

 

 

 

Measured on a Nonrecurring Basis

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans (3):

 

 

 

 

 

 

 

 

 

Commercial (4)

 

$

1,671

 

$

 

$

 

$

1,671

 

Commercial real estate mortgages

 

13,238

 

 

12,565

 

673

 

Residential mortgages

 

7,899

 

 

7,435

 

464

 

Real estate construction

 

7,499

 

 

 

7,499

 

Equity lines of credit

 

790

 

 

 

790

 

Installment

 

550

 

 

550

 

 

Other real estate owned (5)

 

48,550

 

 

37,865

 

10,685

 

Private equity and alternative investments

 

3,455

 

 

 

3,455

 

Total assets at fair value

 

$

83,652

 

$

 

$

58,415

 

$

25,237

 

 


(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 $117.5 million in the consolidated balance sheets includes $82.8 million of covered OREO and is net of estimated disposal costs.

 

11



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.

 

12



Table of Contents

 

Note 3. Fair Value Measurements (Continued)

 

At June 30, 2012, $7.00 billion, or approximately 28 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 June 30, 2012, $61.8 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 six months ended June 30, 2012.  At June 30, 2012, $83.7 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 measured at fair value on a recurring basis for the six months ended June 30, 2012 and 2011.

 

Level 3 Assets Measured on a Recurring Basis

 

 

 

For the six months ended

 

 

 

June 30, 2012

 

June 30, 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

 

1,221

 

1,585

 

Settlements

 

(1,664

)

(1,728

)

Transfers into Level 3

 

47,165

 

 

Other (1)

 

46

 

(33

)

Balance, end of period

 

$

66,351

 

$

20,806

 

 


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

 

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 six months ended June 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 June 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 $19.2 million at June 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. The Company had no liabilities with fair value measurements categorized as Level 3 at June 30, 2012 or 2011.

 

There were no purchases, sales, or transfers out of Level 3 assets measured on a recurring basis during the six months ended June 30, 2012 and 2011. Paydowns of $1.7 million were received on Level 3 assets measured on a recurring basis for the six months ended June 30, 2012 and 2011, respectively. There were no gains or losses for the six months ended June 30, 2012 and 2011 included in earnings that were attributable to the change in unrealized gains or losses relating to Level 3 assets still held as of June 30, 2012 and 2011.

 

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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
June 30, 2012

 

Valuation
Method

 

Unobservable Inputs

 

Collateral dependent impaired loans

 

$

11,097

 

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

 

$

10,685

 

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

 

$

3,455

 

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.

 

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Table of Contents

 

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 six months ended June 30, 2012 and 2011:

 

 

 

For the three months ended
June 30,

 

For the six months ended
June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

Collateral dependent impaired loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

(367

)

$

(606

)

Commercial real estate mortgages

 

(1,572

)

340

 

(1,937

)

7,454

 

Residential mortgages

 

(540

)

(47

)

(1,122

)

(189

)

Real estate construction

 

(281

)

(3,417

)

(6,753

)

(1,199

)

Equity lines of credit

 

(115

)

(546

)

(62

)

(510

)

Installment

 

 

197

 

(107

)

(4,317

)

Other real estate owned (1)

 

(3,700

)

(16,869

)

(12,165

)

(25,991

)

Private equity and alternative investments

 

(333

)

(200

)

(460

)

(200

)

Total net losses recognized

 

$

(6,541

)

$

(20,542

)

$

(22,973

)

$

(25,558

)

 


(1)         Net losses on OREO includes $3.5 million and $11.0 million of net losses related to covered OREO for the three and six months ended June 30, 2012, respectively, and $14.6 million and $22.8 million of net losses for the three and six months ended June 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. The table below summarizes the estimated fair values for the Company’s financial instruments as of June 30, 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. 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. 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 or market valuations of comparable securities with similar credit risk and maturities may be used to determine an appropriate fair value. Fair values for trading securities are based on quoted market prices or dealer quotes. The fair value of trading securities for which quoted prices are not available is based on observable market inputs.

 

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Table of Contents

 

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 following table. The fair value of loans is estimated by discounting future cash flows using discount rates that incorporate the Company’s assumptions concerning current market yields, credit risk and liquidity premiums. Loan cash flow projections are based on contractual loan terms adjusted for the impact of current interest rate levels on borrower behavior, including prepayments. Loan prepayment assumptions are based on industry standards for the type of loans being valued. Projected cash flows are discounted using yield curves based on current market conditions. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Company’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans.

 

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

 

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

 

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

 

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

 

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

 

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

 

Other short-term borrowings The fair value of the current portion of long-term debt classified in short-term borrowings is obtained through third-party pricing sources. The 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.

 

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Table of Contents

 

Note 3. Fair Value Measurements (Continued)

 

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

 

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.

 

 

 

 

 

June 30, 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

 

$

162.9

 

$

162.9

 

$

168.4

 

$

168.4

 

Due from banks - interest bearing

 

1

 

106.1

 

106.1

 

76.4

 

76.4

 

Federal funds sold

 

1

 

162.0

 

162.0

 

 

 

Securities available-for-sale

 

1, 2, 3

 

6,865.9

 

6,865.9

 

7,571.9

 

7,571.9

 

Securities held-to-maturity

 

2

 

1,100.2

 

1,127.1

 

467.7

 

473.9

 

Trading securities

 

1, 2

 

62.6

 

62.6

 

62.0

 

62.0

 

Loans and leases, net of allowance

 

3

 

13,237.7

 

13,694.6

 

12,046.8

 

12,400.5

 

Covered loans, net of allowance

 

3

 

1,217.0

 

1,282.2

 

1,417.3

 

1,472.6

 

FDIC indemnification asset

 

3

 

170.7

 

149.4

 

204.3

 

184.3

 

Investment in FHLB and FRB stock

 

2

 

99.7

 

99.7

 

107.4

 

107.4

 

Derivative assets

 

1, 2

 

66.7

 

66.7

 

62.2

 

62.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

2, 3

 

$

21,109.1

 

$

21,112.9

 

$

20,387.6

 

$

20,392.3

 

Federal funds purchased and securities sold under repurchase agreements

 

1

 

110.0

 

110.0

 

50.0

 

50.0

 

Other short-term borrowings

 

2, 3

 

212.1

 

216.0

 

 

 

Long-term debt

 

2, 3

 

712.3

 

758.2

 

697.8

 

718.7

 

Derivative liabilities

 

1, 2

 

61.4

 

61.4

 

52.9

 

52.9

 

FDIC clawback liability

 

3

 

9.2

 

9.2

 

8.1

 

8.1

 

 

Note 4. Securities

 

At June 30, 2012, the Company had total securities of $8.03 billion, comprised of securities available-for-sale at fair value of $6.87 billion, securities held-to-maturity at amortized cost of $1.10 billion and trading securities at fair value of $62.6 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.

 

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Table of Contents

 

Note 4. Securities (Continued)

 

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 June 30, 2012 and December 31, 2011:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

17,223

 

$

1

 

$

(16

)

$

17,208

 

Federal agency - Debt

 

994,268

 

4,954

 

(15

)

999,207

 

Federal agency - MBS

 

655,384

 

36,288

 

 

691,672

 

CMOs - Federal agency

 

4,388,817

 

89,297

 

(850

)

4,477,264

 

CMOs - Non-agency

 

70,702

 

839

 

(6,075

)

65,466

 

State and municipal

 

365,236

 

18,515

 

(101

)

383,650

 

Other debt securities

 

231,795

 

5,291

 

(7,178

)

229,908

 

Total debt securities

 

6,723,425

 

155,185

 

(14,235

)

6,864,375

 

Equity securities and mutual funds

 

336

 

1,170

 

 

1,506

 

Total securities available-for-sale

 

$

6,723,761

 

$

156,355

 

$

(14,235

)

$

6,865,881

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity (1):

 

 

 

 

 

 

 

 

 

Federal agency - Debt

 

$

103,439

 

$

2,002

 

$

 

$

105,441

 

Federal agency - MBS

 

200,763

 

5,520

 

(99

)

206,184

 

CMOs - Federal agency

 

642,102

 

18,384

 

(22

)

660,464

 

State and municipal

 

153,925

 

2,248

 

(1,209

)

154,964

 

Total securities held-to-maturity