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 March 31, 2015

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 (§232.405 of this chapter) 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 April 30, 2015, there were 55,605,256 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	50
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 4.	Controls and Procedures	86

PART II
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 6.	Exhibits	87

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31,			December 31,
(in thousands, except share amounts)	2015			2014
Assets
Cash and due from banks	$	433,670		$	336,470
Due from banks - interest-bearing	334,014			119,981
Federal funds sold and securities purchased under resale agreements	200,000			200,000
Securities available-for-sale - cost $5,201,001 and $5,894,509 at March 31, 2015 and December 31, 2014, respectively:
Securities pledged as collateral	21,068			14,654
Held in portfolio	5,189,320			5,868,329
Securities held-to-maturity - fair value $3,510,553 and $3,484,647 at March 31, 2015 and December 31, 2014, respectively:
Securities pledged as collateral	521,963			521,262
Held in portfolio	2,891,843			2,905,769
Trading securities	102,546			173,188
Loans and leases, excluding covered loans	20,910,355			20,337,206
Less: Allowance for loan and lease losses	308,858			310,149
Loans and leases, excluding covered loans, net	20,601,497			20,027,057
Covered loans, net of allowance for loan losses	470,484			502,371
Net loans and leases	21,071,981			20,529,428
Premises and equipment, net	202,208			207,700
Deferred tax asset	228,273			233,811
Goodwill	635,868			635,868
Customer-relationship intangibles, net	33,454			34,831
Affordable housing investments	190,347			186,423
Customers’ acceptance liability	2,390			17,664
Other real estate owned ($11,552 and $12,760 covered by FDIC loss share at March 31, 2015 and December 31, 2014, respectively)	17,509			23,496
FDIC indemnification asset	43,256			50,511
Other assets	579,189			537,847
Total assets	$	32,698,899		$	32,597,232
Liabilities
Demand deposits	$	18,579,674		$	18,030,021
Interest checking deposits	2,751,487			2,736,391
Money market deposits	6,011,679			6,198,798
Savings deposits	506,188			469,931
Time deposits-under $100,000	152,121			155,568
Time deposits-$100,000 and over	515,999			517,394
Total deposits	28,517,148			28,108,103
Short-term borrowings	4,400			322,861
Long-term debt	634,425			638,600
Reserve for off-balance sheet credit commitments	28,660			27,811
Acceptances outstanding	2,390			17,664
Other liabilities	456,180			499,514
Total liabilities	29,643,203			29,614,553
Redeemable noncontrolling interest	37,326			39,978
Commitments and contingencies
Shareholders’ equity
Preferred stock, par value $1.00 per share; 5,000,000 shares authorized; 275,000 shares issued at March 31, 2015 and December 31, 2014	267,616			267,616
Common stock, par value $1.00 per share; 75,000,000 shares authorized; 55,510,321 and 55,162,455 shares issued at March 31, 2015 and December 31, 2014, respectively	55,510			55,162
Additional paid-in capital	599,800			578,046
Accumulated other comprehensive income (loss)	5,031			(7,074		)
Retained earnings	2,109,157			2,071,230
Treasury shares, at cost - 313,965 and 377,224 shares at March 31, 2015 and December 31, 2014, respectively	(18,744		)	(22,279		)
Total common shareholders’ equity	2,750,754			2,675,085
Total shareholders’ equity	3,018,370			2,942,701
Total liabilities and shareholders’ equity	$	32,698,899		$	32,597,232

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
	March 31,
(in thousands, except per share amounts)	2015			2014
Interest income
Loans and leases	$	184,032		$	169,696
Securities	42,072			41,576
Due from banks - interest-bearing	136			443
Federal funds sold and securities purchased under resale agreements	1,241			1,370
Total interest income	227,481			213,085
Interest expense
Deposits	1,920			2,134
Federal funds purchased and securities sold under repurchase agreements	71			—
Subordinated debt	3,746			6,104
Other long-term debt	5,164			5,049
Total interest expense	10,901			13,287
Net interest income	216,580			199,798
Provision for credit losses on loans and leases, excluding covered loans	—			—
Provision for losses on covered loans	497			4,655
Net interest income after provision	216,083			195,143
Noninterest income
Trust and investment fees	55,521			53,306
Brokerage and mutual fund fees	10,598			10,042
Cash management and deposit transaction charges	12,633			12,033
International services	10,668			10,395
FDIC loss sharing expense, net	(6,688		)	(7,083		)
Gain on disposal of assets	110			2,826
Gain on sale of securities	3,376			2,122
Other	24,922			17,607
Impairment loss on securities:
Total other-than-temporary impairment loss on securities	(293		)	—
Less: Portion of loss recognized in other comprehensive income	228			—
Net impairment loss recognized in earnings	(65		)	—
Total noninterest income	111,075			101,248
Noninterest expense
Salaries and employee benefits	144,568			136,833
Net occupancy of premises	16,073			16,094
Legal and professional fees	16,938			12,950
Information services	9,860			9,346
Depreciation and amortization	14,982			7,828
Amortization of intangibles	1,377			1,487
Marketing and advertising	8,830			9,775
Office services and equipment	5,136			4,910
Other real estate owned	2,731			1,433
FDIC assessments	5,094			1,391
Other operating	8,853			8,805
Total noninterest expense	234,442			210,852
Income before income taxes	92,716			85,539
Income taxes	30,597			31,010
Net income	$	62,119		$	54,529
Less: Net income attributable to noncontrolling interest	553			699
Net income attributable to City National Corporation	$	61,566		$	53,830
Less: Dividends on preferred stock	4,094			4,094
Net income available to common shareholders	$	57,472		$	49,736
Net income per common share, basic	$	1.03		$	0.90
Net income per common share, diluted	$	1.01		$	0.89
Weighted-average common shares outstanding, basic	55,422			54,689
Weighted-average common shares outstanding, diluted	56,306			55,429
Dividends per common share	$	0.35		$	0.33

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
	March 31,
(in thousands)	2015			2014
Net income	$	62,119		$	54,529
Other comprehensive income, net of tax:
Securities available-for-sale:
Net unrealized gains arising during the period	14,217			12,553
Reclassification adjustment for net gains included in net income	(1,969		)	(1,275		)
Non-credit related impairment loss	(133		)	—
Foreign currency translation adjustments	(10		)	—
Total other comprehensive income	12,105			11,278
Comprehensive income	$	74,224		$	65,807
Less: Comprehensive income attributable to noncontrolling interest	553			699
Comprehensive income attributable to City National Corporation	$	73,671		$	65,108

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the three months ended
	March 31,
(in thousands)	2015			2014
Cash Flows From Operating Activities
Net income	$	62,119		$	54,529
Adjustments to net income:
Provision for losses on covered loans	497			4,655
Depreciation and amortization	14,982			7,828
Amortization of intangibles	1,377			1,487
Share-based employee compensation expense	6,227			5,397
Deferred income tax benefit	(3,211		)	(3,237		)
Gain on disposal of assets	(110		)	(2,826		)
Gain on sale of securities	(3,376		)	(2,122		)
Impairment loss on securities	65			—
Other, net	9,583			4,948
Net change in:
Trading securities	70,633			20,678
Other assets and other liabilities, net	(92,959		)	(88,563		)
Net cash provided by operating activities	65,827			2,774
Cash Flows From Investing Activities
Purchase of securities available-for-sale	(83,767		)	(330,444		)
Sales of securities available-for-sale	398,166			377,115
Maturities and paydowns of securities available-for-sale	375,712			823,410
Purchase of securities held-to-maturity	(42,637		)	(282,679		)
Maturities and paydowns of securities held-to-maturity	54,856			36,337
Loan originations, net of principal collections	(530,516		)	(523,514		)
Net payments for premises and equipment	(10,008		)	(8,831		)
Other investing activities, net	(851		)	6,676
Net cash provided by investing activities	160,955			98,070
Cash Flows From Financing Activities
Net increase in deposits	409,045			52,329
Net decrease in federal funds purchased	(320,000		)	—
Issuance of long-term debt	8,439			7,907
Repayment of long-term debt	(11,071		)	(10,088		)
Proceeds from exercise of stock options	21,320			13,207
Tax benefit from exercise of stock options	3,474			2,970
Cash dividends paid	(23,449		)	(22,141		)
Other financing activities, net	(3,307		)	(16,250		)
Net cash provided by financing activities	84,451			27,934
Net increase in cash and cash equivalents	311,233			128,778
Cash and cash equivalents at beginning of year	656,451			935,946
Cash and cash equivalents at end of period	$	967,684		$	1,064,724

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	18,504		$	22,121
Income taxes	39,022			39,399
Non-cash investing activities:
Transfer of loans to other real estate owned	$	1,085		$	2,033

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

									Accumulated
	Common					Additional			other									Total
	shares	Preferred		Common		paid-in			comprehensive			Retained			Treasury			shareholders’
(in thousands, except share amounts)	issued	stock		stock		capital			income (loss)			earnings			shares			equity

Balance, December 31, 2013	54,667,295	$	267,616	$	54,667	$	541,210		$	(15,641	)	$	1,918,163		$	(25,029	)	$	2,740,986
Adjustment to initially apply Accounting Standards Update 2014-01	—	—		—		—			—			(11,941		)	—			(11,941		)
Balance, January 1, 2014	54,667,295	267,616		54,667		541,210			(15,641		)	1,906,222			(25,029		)	2,729,045
Net income (1)	—	—		—		—			—			53,830			—			53,830
Other comprehensive income, net of tax	—	—		—		—			11,278			—			—			11,278
Issuance of shares under share-based compensation plans	231,763	—		232		6,702			—			—			2,492			9,426
Share-based employee compensation expense	—	—		—		4,459			—			—			—			4,459
Tax benefit from share-based compensation plans	—	—		—		2,866			—			—			—			2,866
Dividends:
Preferred	—	—		—		—			—			(4,094		)	—			(4,094		)
Common	—	—		—		—			—			(18,224		)	—			(18,224		)
Net change in deferred compensation plans	—	—		—		181			—			—			—			181
Change in redeemable noncontrolling interest	—	—		—		(5,429		)	—			—			—			(5,429		)
Balance, March 31, 2014	54,899,058	$	267,616	$	54,899	$	549,989		$	(4,363	)	$	1,937,734		$	(22,537	)	$	2,783,338

Balance, December 31, 2014	55,162,455	$	267,616	$	55,162	$	578,046		$	(7,074	)	$	2,071,230		$	(22,279	)	$	2,942,701
Net income (1)	—	—		—		—			—			61,566			—			61,566
Other comprehensive income, net of tax	—	—		—		—			12,105			—			—			12,105
Issuance of shares under share-based compensation plans	347,596	—		348		14,459			—			—			3,536			18,343
Share-based employee compensation expense	—	—		—		4,252			—			—			—			4,252
Tax benefit from share-based compensation plans	—	—		—		3,211			—			—			—			3,211
Dividends:
Preferred	—	—		—		—			—			(4,094		)	—			(4,094		)
Common	—	—		—		—			—			(19,545		)	—			(19,545		)
Net change in deferred compensation plans	270	—		—		105			—			—			(1		)	104
Change in redeemable noncontrolling interest	—	—		—		(273		)	—			—			—			(273		)
Balance, March 31, 2015	55,510,321	$	267,616	$	55,510	$	599,800		$	5,031		$	2,109,157		$	(18,744	)	$	3,018,370

(1)	Net income excludes net income attributable to redeemable noncontrolling interest of $553 and $699 for the three-month periods ended March 31, 2015 and 2014, 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.

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, investment and trust services through 75 offices in Southern California, the San Francisco Bay area, Nevada, New York City, Nashville, Tennessee and Atlanta, Georgia. As of March 31, 2015, the Corporation had four 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. Redeemable noncontrolling interests are noncontrolling ownership interests that are redeemable at the option of the holder or outside the control of the issuer. The redeemable noncontrolling interests of third parties in the Corporation’s investment advisory affiliates are not considered to be permanent equity and are reflected 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 share-based compensation awards, income taxes, goodwill and intangible asset impairment, securities impairment, private equity and alternative investments impairment, valuation of assets and liabilities acquired in business combinations, including contingent consideration liabilities, subsequent valuations of acquired impaired loans, Federal Deposit Insurance Corporation (“FDIC”) indemnification asset, valuation of noncontrolling interest, and the valuation of financial assets and liabilities reported at fair value.

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

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Note 1. Summary of Significant Accounting Policies (Continued)

Basis of Presentation

The Company is on the accrual basis of accounting for income and expenses. The results of operations reflect any adjustments, all of which are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q, and which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. In accordance with the usual practice of banks, assets and liabilities of individual trust, agency and fiduciary funds have not been included in the financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The results for the 2015 interim periods 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 2014 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, 2015. Refer to Accounting Pronouncements for discussion of accounting pronouncements adopted in 2015.

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

Accounting Pronouncements

The following is a summary of accounting pronouncements that became effective during the three months ended March 31, 2015:

· In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). ASU 2014-01 permits an entity to make an accounting policy election to apply a proportionate amortization method to its low income housing tax credit investments if certain conditions are met. Under the proportionate amortization method, an investor amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in the income statement as a component of income taxes attributable to continuing operations. On January 1, 2015, the Company adopted ASU 2014-01 and elected to apply the proportionate amortization method to its low income housing tax credit investments. Following adoption, the Company recognizes amortization of its tax credit investments as a component of income taxes. The Company previously recognized amortization as a component of noninterest expense. Prior periods presented in the Company’s consolidated financial statements have been adjusted to reflect retrospective adoption of ASU 2014-01 as follows:

	Consolidated Balance Sheet
	As of December 31, 2014
(in thousands)	As Reported		As Adjusted
			(Unaudited)
Assets
Deferred tax asset	$	230,376	$	233,811
Affordable housing investments	203,010		186,423
Other assets	537,826		537,847
Shareholders’ equity
Retained earnings	2,084,361		2,071,230

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Note 1. Summary of Significant Accounting Policies (Continued)

	Consolidated Income Statement
	For the three months ended
	March 31, 2014
(in thousands, except per share amounts)	As Reported		As Adjusted
	(Unaudited)
Noninterest expense
Other operating	$	12,846	$	8,805

Income taxes	26,288		31,010
Net income	55,210		54,529

Net income per common share, basic	$	0.91	$	0.90
Net income per common share, diluted	$	0.90	$	0.89

	Consolidated Statement of Cash Flows
	For the three months ended
	March 31, 2014
(in thousands)	As Reported			As Adjusted
	(Unaudited)
Cash Flows From Operating Activities
Net income .	$	55,210		$	54,529
Adjustments to net income:
Deferred income tax benefit .	(2,679		)	(3,237		)
Other, net	3,720			4,948
Net change in:
Other assets and other liabilities, net	(88,574		)	(88,563		)

· In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”). ASU 2014-04 requires entities to reclassify consumer mortgage loans collateralized by residential real estate to OREO when either (1) the creditor obtains legal title to the residential real estate property or (2) the borrower conveys all interest in the property to the creditor to satisfy the loan by completing a deed in lieu of foreclosure or similar agreement. The Company adopted ASU 2014-04 effective January 1, 2015 on a prospective basis. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.

· In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The Company adopted ASU 2014-08 effective January 1, 2015 on a prospective basis. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.

· In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other repurchase agreements. Going forward, these transactions will all be accounted for as secured borrowings. Under the new guidance, parties to a repurchase financing transaction will be required to separately account for the initial transfer of the financial asset and the related repurchase agreement. The initial transfer of the financial asset would be accounted for as a sale by the transferor only if all criteria for derecognition have been met. ASU 2014-11 requires new or expanded disclosures for repurchase agreements and similar transactions accounted for as secured borrowings. The Company adopted ASU 2014-11 effective January 1, 2015. Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.

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Note 1. Summary of Significant Accounting Policies (Continued)

The following is a summary of recently issued accounting pronouncements:

· In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which significantly changes the consolidation analysis required under U.S. GAAP. The new consolidation guidance maintains two models: one for assessing most corporate entities based on the notion that majority voting rights indicate control (the voting model) and another for assessing entities that may be controlled through other means, such as management contracts or subordinated financial support (the variable interest model). Under the new guidance, limited partnerships will be VIEs, unless the limited partners have either substantive kick-out or participating rights. The ASU also changes the effect that fees paid to a decision maker or service provider have on the consolidation analysis. For entities other than limited partnerships, the ASU clarifies how to determine whether the equity holders (as a group) have power over the entity. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is allowed for all entities, but the guidance must be applied as of the beginning of the annual period containing the adoption date. Entities have the option of using either a full or modified retrospective approach for adoption. The Company is assessing the impact of the new guidance on its consolidated financial statements.

· In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The amendments in this ASU are to be applied on a retrospective basis. 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. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of March 31, 2015 and December 31, 2014 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of March 31, 2015		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	$	115,907	$	115,907	$	—	$	—
Federal agency - Debt	1,220,220		—		1,220,220		—
Federal agency - MBS	101,515		—		101,515		—
CMOs - Federal agency	3,204,886		—		3,204,886		—
CMOs - Non-agency	22,811		—		22,811		—
State and municipal	427,458		—		423,905		3,553
Other debt securities	116,441		—		116,441		—
Equity securities and mutual funds	1,150		1,150		—		—
Trading securities	102,546		98,014		4,532		—
Derivative assets (1)	76,695		15,117		60,406		1,172
Contingent consideration asset (1)	2,930		—		—		2,930
Total assets at fair value	$	5,392,559	$	230,188	$	5,154,716	$	7,655

Liabilities
Derivative liabilities	$	76,938	$	15,660	$	61,278	$	—
Contingent consideration liability	35,401		—		—		35,401
FDIC clawback liability	15,963		—		—		15,963
Other liabilities	904		—		904		—
Total liabilities at fair value (2)	$	129,206	$	15,660	$	62,182	$	51,364

Redeemable noncontrolling interest	$	37,326	$	—	$	—	$	37,326

Measured on a Nonrecurring Basis
Assets
Other real estate owned (3)	$	6,506	$	—	$	—	$	6,506
Private equity and alternative investments	1,078		—		—		1,078
Total assets at fair value	$	7,584	$	—	$	—	$	7,584

(1) Reported in Other assets in the consolidated balance sheets.

(2) Reported in Other liabilities in the consolidated balance sheets.

(3) Includes covered OREO.

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Note 2. Fair Value Measurements (Continued)

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 2014		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	$	116,926	$	116,926	$	—	$	—
Federal agency - Debt	1,398,581		—		1,398,581		—
Federal agency - MBS	104,526		—		104,526		—
CMOs - Federal agency	3,580,590		—		3,580,590		—
CMOs - Non-agency	24,014		—		24,014		—
State and municipal	479,031		—		475,484		3,547
Other debt securities	176,169		—		176,169		—
Equity securities and mutual funds	3,146		3,146		—		—
Trading securities	173,188		171,778		1,410		—
Derivative assets (1)	51,586		6,106		44,598		882
Contingent consideration asset (1)	2,930		—		—		2,930
Total assets at fair value	$	6,110,687	$	297,956	$	5,805,372	$	7,359

Liabilities
Derivative liabilities	$	51,309	$	6,623	$	44,686	$	—
Contingent consideration liability	34,983		—		—		34,983
FDIC clawback liability	15,106		—		—		15,106
Other liabilities	946		—		946		—
Total liabilities at fair value (2)	$	102,344	$	6,623	$	45,632	$	50,089

Redeemable noncontrolling interest	$	39,978	$	—	$	—	$	39,978

Measured on a Nonrecurring Basis
Assets
Other real estate owned (3)	$	5,644	$	—	$	—	$	5,644
Total assets at fair value	$	5,644	$	—	$	—	$	5,644

(1) Reported in Other assets in the consolidated balance sheets.

(2) Reported in Other liabilities in the consolidated balance sheets.

(3) Includes covered OREO.

At March 31, 2015, $5.39 billion, or approximately 16 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $6.11 billion, or 19 percent, at December 31, 2014. The majority of these financial assets were valued using Level 1 or Level 2 inputs. Less than one percent of total assets were measured using Level 3 inputs. At March 31, 2015, $129.2 million of the Company’s total liabilities were recorded at fair value using mostly Level 2 or Level 3 inputs, compared with $102.3 million at December 31, 2014. 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 three months ended March 31, 2015. At March 31, 2015, $7.6 million of the Company’s total assets were recorded at fair value on a nonrecurring basis, compared with $5.6 million at December 31, 2014. These assets represent less than one percent of total assets and were measured using Level 3 inputs.

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Note 2. Fair Value Measurements (Continued)

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 three months ended March 31, 2015 and 2014.

Level 3 Assets and Liabilities Measured on a Recurring Basis

	For the three months ended March 31, 2015
(in thousands)	Securities Available-for- Sale		Equity Warrants			Contingent Consideration Asset		Contingent Consideration Liability			FDIC Clawback Liability
Balance, beginning of period	$	3,547	$	882		$	2,930	$	(34,983	)	$	(15,106	)
Total realized/unrealized gains (losses):
Included in earnings	—		(8		)	—		—			(857		)
Included in other comprehensive income	6		—			—		—			—
Additions	—		298			—		—			—
Other (1)	—		—			—		(418		)	—
Balance, end of period	$	3,553	$	1,172		$	2,930	$	(35,401	)	$	(15,963	)

	For the three months ended March 31, 2014
(in thousands)	Securities Available-for- Sale			Contingent Consideration Liability			FDIC Clawback Liability
Balance, beginning of period	$	3,633		$	(49,900	)	$	(11,967	)
Total realized/unrealized gains (losses):
Included in earnings	—			—			(964		)
Included in other comprehensive income	(17		)	—			—
Settlements	—			16,250			—
Other (1)	—			(411		)	—
Balance, end of period	$	3,616		$	(34,061	)	$	(12,931	)

(1) Other rollforward activity consists of accretion of discount related to the contingent consideration liability.

Redeemable noncontrolling interest is classified as Level 3 in the fair value hierarchy and measured on a recurring basis. Redeemable noncontrolling interest is valued based on a combination of factors, including but not limited to, observable valuation of firms similar to the affiliates, multiples of revenue or profit, unique investment products or performance track records, strength in the marketplace, projected discounted cash flow scenarios, strategic value of affiliates to other entities, as well as unique sources of value specific to an individual firm. The methodology used to fair value these interests is consistent with the industry practice of valuing similar types of instruments. Refer to Note 17, Noncontrolling Interest, for a rollforward of activity for the three months ended March 31, 2015 and 2014.

Level 3 assets measured at fair value on a recurring basis include municipal auction rate securities that are classified in securities available-for-sale, a contingent consideration asset and equity warrants classified as derivative assets. Municipal auction rate 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. The contingent consideration asset represents the fair value of future payments to be received on the sale of the Company’s retirement services recordkeeping business. The fair value of contingent consideration was determined by discounting the expected future cash flows using a bond rate for an investment grade finance company. Equity warrants in private companies obtained in association with certain loan transactions are measured at fair value on a recurring basis using the Black-Scholes option pricing model. Key inputs to the valuation model include current share estimated fair value, strike price, volatility, expected life, risk-free interest rate, and market and liquidity discounts. Several of the inputs to the valuation model incorporate assumptions by management that are not observable in the market; consequently, the valuation of warrants is classified in Level 3 of the fair value hierarchy. Refer to Note 11, Derivative Instruments, for additional discussion of equity warrants.

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Note 2. Fair Value Measurements (Continued)

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. As part of its acquisition of Rochdale Investment Management, LLC and associated entities (collectively, “Rochdale”), the Company entered into a contingent consideration arrangement that requires the Company to pay additional cash consideration to Rochdale’s former shareholders at certain points in time over the six years after the date of acquisition if certain criteria, such as revenue growth and pre-tax margin, are met. In 2014, the Company made total contingent consideration payments to Rochdale’s former shareholders of approximately $17.4 million. The fair value of the remaining contingent consideration was estimated using a probability-weighted discounted cash flow model. Although the acquisition agreement does not set a limit on the total payment, the Company estimates that the remaining consideration payment could be in the range of $30 million to $53 million, but will ultimately be determined based on actual future results. The contingent consideration liability is remeasured to fair value at each reporting date until its settlement.

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, and (2) loan performance assumptions such as prepayments and losses.

There were no transfers into or out of Level 3 assets or liabilities measured on a recurring basis during the three months ended March 31, 2015 and 2014.

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 whether the Company expects to recover the cost of an investment.

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

Information About Nonrecurring Level 3 Fair Value Measurements

(in thousands)	Fair Value at March 31, 2015		Valuation Method	Unobservable Inputs
Other real estate owned	$	6,506	Third-party appraisal	- Fair values are primarily based on unadjusted appraised values. - A limited number of properties were valued using comparable sales values or income approaches, resulting in discounts to appraised values ranging from 34% to 50%.

Private equity and alternative investments	$	1,078	Cost recovery	- Fair values are based on management’s assumptions regarding recoverability of an investment based on fund operating results, investment performance, nature of the investment, market conditions, exit strategies and other relevant factors. - Fair values reflect discounts to investment carrying amounts ranging from 25% to 31%.

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Note 2. Fair Value Measurements (Continued)

For assets measured at fair value on a nonrecurring basis, the following table presents the total net gains and losses, which include charge-offs, recoveries, specific reserves, OREO valuation write-downs and write-ups, gains and losses on sales of OREO, and impairment write-downs on private equity investments, recognized in the three months ended March 31, 2015 and 2014:

	For the three months ended March 31,
(in thousands)	2015			2014
Collateral dependent impaired loans:
Commercial real estate mortgages	$	—		$	(5	)
Other real estate owned (1)	(1,637		)	61
Private equity and alternative investments	(400		)	—
Total net (losses) gains recognized	$	(2,037	)	$	56

(1) Net losses and gains on OREO include amounts related to covered OREO, a significant portion of which is reimbursable by or payable to 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 financial assets or liabilities. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2014 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 2. 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 determining 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.

	March 31, 2015
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	433.7	$	433.7	$	433.7	$	—	$	—
Due from banks - interest-bearing	334.0		334.0		334.0		—		—
Securities purchased under resale agreements	200.0		202.1		—		202.1		—
Securities held-to-maturity	3,413.8		3,510.6		—		3,510.6		—
Loans and leases, net of allowance	20,601.5		21,153.4		—		—		21,153.4
Covered loans, net of allowance	470.5		518.5		—		—		518.5
FDIC indemnification asset	43.3		34.6		—		—		34.6
Investment in FHLB and FRB stock	58.4		58.4		—		58.4		—

Financial Liabilities:
Deposits	$	28,517.1	$	28,518.3	$	—	$	27,849.0	$	669.3
Short-term borrowings	4.4		4.4		—		—		4.4
Long-term debt	634.4		712.8		—		617.6		95.2

	December 31, 2014
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	336.5	$	336.5	$	336.5	$	—	$	—
Due from banks - interest-bearing	120.0		120.0		120.0		—		—
Securities purchased under resale agreements	200.0		201.1		—		201.1		—
Securities held-to-maturity	3,427.0		3,484.6		—		3,484.6		—
Loans and leases, net of allowance	20,027.1		20,576.9		—		—		20,576.9
Covered loans, net of allowance	502.4		549.1		—		—		549.1
FDIC indemnification asset	50.5		40.2		—		—		40.2
Investment in FHLB and FRB stock	58.4		58.4		—		58.4		—

Financial Liabilities:
Deposits	$	28,108.1	$	28,109.6	$	—	$	27,435.1	$	674.5
Short-term borrowings	322.9		322.9		320.0		—		2.9
Long-term debt	638.6		704.3		—		605.3		99.0

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

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

Securities purchased under resale agreements — The fair value of securities purchased under term resale agreements is determined using a combination of quoted market prices and observable market inputs such as interest rates and credit spreads.

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Note 2. Fair Value Measurements (Continued)

Securities held-to-maturity — For securities held-to-maturity, the fair value is generally determined by quoted market prices, where available, or based on observable market inputs appropriate for the type of security.

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 tables. 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 Company’s loan pricing model for like-quality credits. The discount rates used in the model represent the rates the Company 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 future loan cash flows are estimated 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 expected cash flows with appropriate market discount rates.

Investment in FHLB and FRB stock — Investments in Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank (“FRB”) 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 FHLB and FRB 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 Company 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 Company’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 Company 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.

Short-term borrowings — The fair value of nonrecourse debt is determined by discounting expected cash flows with appropriate market discount rates. The carrying amount of the remaining 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 expected cash flows with appropriate market discount rates.

Off-balance sheet commitments, which include commitments to extend credit, are excluded from the tables. 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 3. Securities

At March 31, 2015, the Company had total securities of $8.73 billion, comprised of securities available-for-sale at fair value of $5.21 billion, securities held-to-maturity at amortized cost of $3.41 billion and trading securities at fair value of $102.5 million. At December 31, 2014, the Company had total securities of $9.48 billion, comprised of securities available-for-sale at fair value of $5.88 billion, securities held-to-maturity at amortized cost of $3.43 billion and trading securities at fair value of $173.2 million.

The following is a summary of amortized cost and estimated fair value for the major categories of securities available-for-sale and securities held-to-maturity at March 31, 2015 and December 31, 2014:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
March 31, 2015
Securities available-for-sale:
U.S. Treasury	$	115,893	$	29	$	(15	)	$	115,907
Federal agency - Debt	1,219,481		1,168		(429		)	1,220,220
Federal agency - MBS	99,891		2,498		(874		)	101,515
CMOs - Federal agency	3,204,823		22,016		(21,953		)	3,204,886
CMOs - Non-agency	23,147		24		(360		)	22,811
State and municipal	421,419		6,257		(218		)	427,458
Other debt securities	115,006		1,438		(3		)	116,441
Total debt securities	5,199,660		33,430		(23,852		)	5,209,238
Equity securities and mutual funds	1,341		219		(410		)	1,150
Total securities available-for-sale	$	5,201,001	$	33,649	$	(24,262	)	$	5,210,388

Securities held-to-maturity (1):
Federal agency - Debt	$	286,581	$	9,923	$	(72	)	$	296,432
Federal agency - MBS	556,931		20,346		(567		)	576,710
CMOs - Federal agency	1,766,325		48,270		(2,749		)	1,811,846
State and municipal	717,937		23,084		(1,810		)	739,211
Other debt securities	86,032		322		—			86,354
Total securities held-to-maturity	$	3,413,806	$	101,945	$	(5,198	)	$	3,510,553

December 31, 2014
Securities available-for-sale:
U.S. Treasury	$	116,919	$	17	$	(10	)	$	116,926
Federal agency - Debt	1,401,303		558		(3,280		)	1,398,581
Federal agency - MBS	102,939		2,601		(1,014		)	104,526
CMOs - Federal agency	3,599,831		19,628		(38,869		)	3,580,590
CMOs - Non-agency	24,385		40		(411		)	24,014
State and municipal	473,272		6,139		(380		)	479,031
Other debt securities	174,352		1,817		—			176,169
Total debt securities	5,893,001		30,800		(43,964		)	5,879,837
Equity securities and mutual funds	1,508		1,988		(350		)	3,146
Total securities available-for-sale	$	5,894,509	$	32,788	$	(44,314	)	$	5,882,983

Securities held-to-maturity (1):
Federal agency - Debt	$	292,932	$	6,430	$	(255	)	$	299,107
Federal agency - MBS	553,589		13,427		(2,275		)	564,741
CMOs - Federal agency	1,811,574		29,998		(10,292		)	1,831,280
State and municipal	682,705		22,732		(1,997		)	703,440
Other debt securities	86,231		72		(224		)	86,079
Total securities held-to-maturity	$	3,427,031	$	72,659	$	(15,043	)	$	3,484,647

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

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Note 3. Securities (Continued)

Proceeds from sales of securities available-for-sale were $398.2 million for the three months ended March 31, 2015, compared with $377.1 million for the three months ended March 31, 2014. There were no sales of securities held-to-maturity during the three months ended March 31, 2015 and 2014. The following table provides the gross realized gains and losses on the sales and calls of securities (including trading securities):

	For the three months ended
	March 31,
(in thousands)	2015	2014