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 March 31, 2014

 

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, 2014, there were 54,961,350 shares of Common Stock outstanding (including unvested restricted shares).

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

78

Item 4.

Controls and Procedures

82

 

 

 

PART II

 

 

Item 1A.

Risk Factors

83

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

83

Item 6.

Exhibits

83

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CITY NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

(in thousands, except share amounts) 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

425,427

 

$

183,227

 

Due from banks - interest-bearing 

 

434,297

 

552,719

 

Federal funds sold and securities purchased under resale agreements 

 

205,000

 

200,000

 

Securities available-for-sale - cost $5,394,065 and $6,267,691 at March 31, 2014 and December 31, 2013, respectively:

 

 

 

 

 

Securities pledged as collateral

 

14,792

 

12,376

 

Held in portfolio 

 

5,371,962

 

6,228,741

 

Securities held-to-maturity - fair value $3,165,068 and $2,883,935 at March 31, 2014 and December 31, 2013, respectively 

 

3,202,997

 

2,957,843

 

Trading securities 

 

61,608

 

82,357

 

Loans and leases, excluding covered loans 

 

17,751,385

 

17,170,438

 

Less: Allowance for loan and lease losses 

 

305,790

 

302,584

 

Loans and leases, excluding covered loans, net 

 

17,445,595

 

16,867,854

 

Covered loans, net of allowance for loan losses 

 

654,855

 

700,989

 

Net loans and leases

 

18,100,450

 

17,568,843

 

Premises and equipment, net 

 

199,401

 

198,398

 

Deferred tax asset 

 

212,611

 

217,990

 

Goodwill 

 

642,622

 

642,622

 

Customer-relationship intangibles, net 

 

39,134

 

40,621

 

Affordable housing investments 

 

199,389

 

188,207

 

Customers’ acceptance liability 

 

1,295

 

10,521

 

Other real estate owned ($24,855 and $25,481 covered by FDIC loss share at March 31, 2014 and December 31, 2013, respectively)

 

34,267

 

38,092

 

FDIC indemnification asset 

 

84,851

 

89,227

 

Other assets 

 

508,149

 

506,167

 

Total assets 

 

$

29,738,252

 

$

29,717,951

 

Liabilities

 

 

 

 

 

Demand deposits 

 

$

15,664,029

 

$

16,058,968

 

Interest checking deposits 

 

2,370,741

 

2,467,890

 

Money market deposits 

 

6,610,811

 

6,022,457

 

Savings deposits 

 

458,328

 

441,521

 

Time deposits-under $100,000 

 

172,024

 

176,488

 

Time deposits-$100,000 and over 

 

455,833

 

512,113

 

Total deposits 

 

25,731,766

 

25,679,437

 

Short-term borrowings 

 

4,107

 

3,889

 

Long-term debt 

 

733,537

 

735,968

 

Reserve for off-balance sheet credit commitments

 

34,908

 

33,944

 

Acceptances outstanding 

 

1,295

 

10,521

 

Other liabilities 

 

391,038

 

473,438

 

Total liabilities 

 

26,896,651

 

26,937,197

 

Redeemable noncontrolling interest 

 

45,641

 

39,768

 

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, 2014 and December 31, 2013 

 

267,616

 

267,616

 

Common stock, par value $1.00 per share; 75,000,000 shares authorized; 54,899,058 and 54,667,295 shares issued at March 31, 2014 and December 31, 2013, respectively 

 

54,899

 

54,667

 

Additional paid-in capital 

 

549,989

 

541,210

 

Accumulated other comprehensive loss 

 

(4,363

)

(15,641

)

Retained earnings 

 

1,950,356

 

1,918,163

 

Treasury shares, at cost - 388,156 and 483,523 shares at March 31, 2014 and December 31, 2013, respectively

 

(22,537

)

(25,029

)

Total common shareholders’ equity

 

2,528,344

 

2,473,370

 

Total shareholders’ equity 

 

2,795,960

 

2,740,986

 

Total liabilities and shareholders’ equity 

 

$

29,738,252

 

$

29,717,951

 

 

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

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2014

 

2013

 

Interest income

 

 

 

 

 

Loans and leases

 

$

169,696

 

$

170,290

 

Securities

 

41,576

 

44,262

 

Due from banks - interest-bearing

 

443

 

112

 

Federal funds sold and securities purchased under resale agreements

 

1,370

 

1,136

 

Total interest income

 

213,085

 

215,800

 

Interest expense

 

 

 

 

 

Deposits

 

2,134

 

2,939

 

Federal funds purchased and securities sold under repurchase agreements

 

 

278

 

Subordinated debt

 

6,104

 

6,106

 

Other long-term debt

 

5,049

 

4,979

 

Other short-term borrowings

 

 

425

 

Total interest expense

 

13,287

 

14,727

 

Net interest income

 

199,798

 

201,073

 

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

 

 

 

Provision for losses on covered loans

 

4,655

 

9,892

 

Net interest income after provision

 

195,143

 

191,181

 

Noninterest income

 

 

 

 

 

Trust and investment fees

 

53,306

 

46,653

 

Brokerage and mutual fund fees

 

10,042

 

8,066

 

Cash management and deposit transaction charges

 

12,033

 

13,009

 

International services

 

10,395

 

9,619

 

FDIC loss sharing expense, net

 

(7,083

)

(4,352

)

Gain on disposal of assets

 

2,826

 

1,114

 

Gain on sale of securities

 

2,122

 

1,046

 

Other

 

17,607

 

18,373

 

Impairment loss on securities:

 

 

 

 

 

Total other-than-temporary impairment loss on securities

 

 

(492

)

Less: Portion of loss recognized in other comprehensive income

 

 

492

 

Net impairment loss recognized in earnings

 

 

 

Total noninterest income

 

101,248

 

93,528

 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

136,833

 

128,195

 

Net occupancy of premises

 

16,094

 

15,989

 

Legal and professional fees

 

12,950

 

11,952

 

Information services

 

9,346

 

9,391

 

Depreciation and amortization

 

7,828

 

8,172

 

Amortization of intangibles

 

1,487

 

1,932

 

Marketing and advertising

 

9,775

 

7,976

 

Office services and equipment

 

4,910

 

4,946

 

Other real estate owned

 

1,433

 

5,250

 

FDIC assessments

 

1,391

 

5,481

 

Other operating

 

12,846

 

12,056

 

Total noninterest expense

 

214,893

 

211,340

 

Income before income taxes

 

81,498

 

73,369

 

Income taxes

 

26,288

 

21,261

 

Net income

 

$

55,210

 

$

52,108

 

Less: Net income attributable to noncontrolling interest

 

699

 

585

 

Net income attributable to City National Corporation

 

$

54,511

 

$

51,523

 

Less: Dividends on preferred stock

 

4,094

 

2,406

 

Net income available to common shareholders

 

$

50,417

 

$

49,117

 

Net income per common share, basic

 

$

0.91

 

$

0.90

 

Net income per common share, diluted

 

$

0.90

 

$

0.90

 

Weighted average common shares outstanding, basic

 

54,689

 

53,731

 

Weighted average common shares outstanding, diluted

 

55,429

 

54,068

 

Dividends per common share

 

$

0.33

 

$

 

 

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

 

 

 

March 31,

 

(in thousands)

 

2014

 

2013

 

Net income

 

$

55,210

 

$

52,108

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

Net unrealized gains (losses) arising during the period

 

12,553

 

(11,523

)

Reclassification adjustment for net gains included in net income

 

(1,275

)

(516

)

Non-credit related impairment loss

 

 

(286

)

Net change on cash flow hedges

 

 

(35

)

Total other comprehensive income (loss)

 

11,278

 

(12,360

)

Comprehensive income

 

$

66,488

 

$

39,748

 

Less: Comprehensive income attributable to noncontrolling interest

 

699

 

585

 

Comprehensive income attributable to City National Corporation

 

$

65,789

 

$

39,163

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

5



Table of Contents

 

CITY NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

(in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

55,210

 

$

52,108

 

Adjustments to net income:

 

 

 

 

 

Provision for losses on covered loans

 

4,655

 

9,892

 

Amortization of intangibles

 

1,487

 

1,932

 

Depreciation and amortization

 

7,828

 

8,172

 

Share-based employee compensation expense

 

5,397

 

5,091

 

Deferred income tax benefit

 

(2,679

)

(598

)

Gain on disposal of assets

 

(2,826

)

(1,114

)

Gain on sale of securities

 

(2,122

)

(1,046

)

Other, net

 

3,720

 

1,472

 

Net change in:

 

 

 

 

 

Trading securities

 

20,678

 

61,692

 

Other assets and other liabilities, net

 

(88,574

)

(25,394

)

Net cash provided by operating activities

 

2,774

 

112,207

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of securities available-for-sale

 

(330,444

)

(293,985

)

Sales of securities available-for-sale

 

377,115

 

1,034,250

 

Maturities and paydowns of securities available-for-sale

 

823,410

 

695,518

 

Purchase of securities held-to-maturity

 

(282,679

)

(9,965

)

Maturities and paydowns of securities held-to-maturity

 

36,337

 

6,736

 

Loan originations, net of principal collections

 

(523,514

)

(313,834

)

Net payments for premises and equipment

 

(8,831

)

(11,128

)

Other investing activities, net

 

6,676

 

23,927

 

Net cash provided by investing activities

 

98,070

 

1,131,519

 

Cash Flows From Financing Activities

 

 

 

 

 

Net increase (decrease) in deposits

 

52,329

 

(564,769

)

Net decrease in federal funds purchased

 

 

(510,600

)

Net increase in short-term borrowings

 

 

100,000

 

Issuance of long-term debt

 

7,907

 

5,603

 

Repayment of long-term debt

 

(10,088

)

(214,081

)

Proceeds from exercise of stock options

 

13,207

 

11,835

 

Tax benefit from exercise of stock options

 

2,970

 

2,627

 

Cash dividends paid

 

(22,141

)

(2,406

)

Other financing activities, net

 

(16,250

)

(404

)

Net cash provided by (used in) financing activities

 

27,934

 

(1,172,195

)

Net increase in cash and cash equivalents

 

128,778

 

71,531

 

Cash and cash equivalents at beginning of year

 

935,946

 

415,405

 

Cash and cash equivalents at end of period

 

$

1,064,724

 

$

486,936

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

22,121

 

$

26,960

 

Income taxes

 

39,399

 

9,261

 

Non-cash investing activities:

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

2,033

 

$

9,675

 

 

See accompanying Notes to the Unaudited Consolidated Financial Statements.

 

6



Table of Contents

 

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, January 1, 2013

 

53,885,886

 

$

169,920

 

$

53,886

 

$

490,339

 

$

86,582

 

$

1,738,957

 

$

(34,366

)

$

2,505,318

 

Net income (1) 

 

 

 

 

 

 

51,523

 

 

51,523

 

Other comprehensive loss, net of tax

 

 

 

 

 

(12,360

)

 

 

(12,360

)

Issuance of shares under share-based compensation plans

 

247,179

 

 

247

 

(337

)

 

 

8,926

 

8,836

 

Share-based employee compensation expense

 

 

 

 

4,297

 

 

 

 

4,297

 

Tax benefit from share-based compensation plans

 

 

 

 

1,651

 

 

 

 

1,651

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

 

 

 

 

(2,406

)

 

(2,406

)

Common

 

 

 

 

 

 

(33

)

 

(33

)

Net change in deferred compensation plans

 

 

 

 

122

 

 

 

 

122

 

Change in redeemable noncontrolling interest

 

 

 

 

(59

)

 

 

 

(59

)

Balance, March 31, 2013

 

54,133,065

 

$

169,920

 

$

54,133

 

$

496,013

 

$

74,222

 

$

1,788,041

 

$

(25,440

)

$

2,556,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

54,667,295

 

$

267,616

 

$

54,667

 

$

541,210

 

$

(15,641

)

$

1,918,163

 

$

(25,029

)

$

2,740,986

 

Net income (1) 

 

 

 

 

 

 

54,511

 

 

54,511

 

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

)

$

1,950,356

 

$

(22,537

)

$

2,795,960

 

 


(1)          Net income excludes net income attributable to redeemable noncontrolling interest of $699 and $585 for the three month periods ended March 31, 2014 and 2013, 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.

 

7



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 77 offices in Southern California, the San Francisco Bay area, Nevada, New York City, Nashville, Tennessee and Atlanta, Georgia. As of March 31, 2014, 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 investment 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.

 

8



Table of Contents

 

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, 2013.

 

The results for the 2014 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 2013 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, 2014. Refer to Accounting Pronouncements for discussion of accounting pronouncements adopted in 2014.

 

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, 2014:

 

·                  In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. Examples of obligations within the scope of the ASU include debt arrangements, other contractual obligations and settled litigation. ASU 2013-04 requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. Adoption of the new guidance on January 1, 2014 did not have a significant impact on the Company’s consolidated financial statements.

 

·                  In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires an entity to present liabilities for unrecognized tax benefits in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, except as follows: (1) to the extent a net operating loss carryforward or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (2) the tax law of the applicable jurisdiction does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose. In these situations, the unrecognized tax benefit should be presented in the balance sheet as a liability and should not be combined with deferred tax assets. Adoption of the new guidance on January 1, 2014 did not have a significant impact on the Company’s consolidated financial statements.

 

9



Table of Contents

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

The following is a summary of recently issued accounting pronouncements:

 

·                  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. Under the revised standard, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity’s operations and financial results could include the disposal of (1) a major line of business, (2) a major geographical area, (3) a major equity method investment or (4) other major parts of an entity. Under current guidance, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after the disposal. The new guidance eliminates these criteria. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014, and interim periods therein. The new guidance will be applied prospectively. Early adoption is permitted. Adoption of the new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

·                  In January 2014, the FASB issued 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 the 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. The ASU becomes effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The provisions of ASU 2014-01 must be applied retrospectively to all periods presented. Early adoption is permitted. The Company is assessing the impact of the new guidance on its consolidated financial statements.

 

·                  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 ASU becomes effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Entities will have the option of adopting the guidance using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. Adoption of the new guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

10



Table of Contents

 

Note 2. Fair Value Measurements

 

The following tables summarize assets and liabilities measured at fair value as of March 31, 2014 and December 31, 2013 by level in the fair value hierarchy:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(in thousands)

 

Balance as of
March 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

 

$

185,313

 

$

185,313

 

$

 

$

 

Federal agency - Debt

 

753,689

 

 

753,689

 

 

Federal agency - MBS

 

125,613

 

 

125,613

 

 

CMOs - Federal agency

 

3,689,946

 

 

3,689,946

 

 

CMOs - Non-agency

 

36,348

 

 

36,348

 

 

State and municipal

 

406,897

 

 

403,281

 

3,616

 

Other debt securities

 

178,408

 

 

178,408

 

 

Equity securities and mutual funds

 

10,540

 

10,540

 

 

 

Trading securities

 

61,608

 

58,354

 

3,254

 

 

Derivatives (1)

 

35,469

 

3,088

 

32,381

 

 

Total assets at fair value

 

$

5,483,831

 

$

257,295

 

$

5,222,920

 

$

3,616

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives

 

$

34,596

 

$

2,966

 

$

31,630

 

$

 

Contingent consideration liability

 

34,061

 

 

 

34,061

 

FDIC clawback liability

 

12,931

 

 

 

12,931

 

Other liabilities

 

996

 

 

996

 

 

Total liabilities at fair value (2)

 

$

82,584

 

$

2,966

 

$

32,626

 

$

46,992

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

$

45,641

 

$

 

$

 

$

45,641

 

 

 

 

 

 

 

 

 

 

 

Measured on a Nonrecurring Basis

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans (3):

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

1,300

 

$

 

$

 

$

1,300

 

Other real estate owned (4)

 

17,536

 

 

355

 

17,181

 

Total assets at fair value

 

$

18,836

 

$

 

$

355

 

$

18,481

 

 


(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 covered OREO.

 

11



Table of Contents

 

Note 2. Fair Value Measurements (Continued)

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(in thousands)

 

Balance as of
December 31,
2013

 

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

 

$

35,335

 

$

35,335

 

$

 

$

 

Federal agency - Debt

 

1,410,536

 

 

1,410,536

 

 

Federal agency - MBS

 

157,226

 

 

157,226

 

 

CMOs - Federal agency

 

3,997,298

 

 

3,997,298

 

 

CMOs - Non-agency

 

37,462

 

 

37,462

 

 

State and municipal

 

415,995

 

 

412,362

 

3,633

 

Other debt securities

 

178,822

 

 

178,822

 

 

Equity securities and mutual funds

 

8,443

 

8,443

 

 

 

Trading securities

 

82,357

 

80,659

 

1,698

 

 

Derivatives (1)

 

34,613

 

3,487

 

31,126

 

 

Total assets at fair value

 

$

6,358,087

 

$

127,924

 

$

6,226,530

 

$

3,633

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives

 

$

32,970

 

$

3,333

 

$

29,637

 

$

 

Contingent consideration liability

 

49,900

 

 

 

49,900

 

FDIC clawback liability

 

11,967

 

 

 

11,967

 

Other liabilities

 

1,044

 

 

1,044

 

 

Total liabilities at fair value (2)

 

$

95,881

 

$

3,333

 

$

30,681

 

$

61,867

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

$

39,768

 

$

 

$

 

$

39,768

 

 

 

 

 

 

 

 

 

 

 

Measured on a Nonrecurring Basis

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Collateral dependent impaired loans (3):

 

 

 

 

 

 

 

 

 

Commercial real estate mortgages

 

$

1,220

 

$

 

$

 

$

1,220

 

Residential mortgages

 

1,300

 

 

 

1,300

 

Other real estate owned (4)

 

18,251

 

 

 

18,251

 

Private equity and alternative investments

 

895

 

 

 

895

 

Total assets at fair value

 

$

21,666

 

$

 

$

 

$

21,666

 

 


(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 covered OREO.

 

At March 31, 2014, $5.48 billion, or approximately 18 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $6.36 billion, or 21 percent, at December 31, 2013. 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, 2014, $82.6 million of the Company’s total liabilities were recorded at fair value using mostly Level 2 or Level 3 inputs, compared with $95.9 million at December 31, 2013. 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, 2014. At March 31, 2014, $18.8 million of the Company’s total assets were recorded at fair value on a nonrecurring basis, compared with $21.7 million at December 31, 2013. These assets represent less than one percent of total assets and were measured using Level 2 or Level 3 inputs.

 

12



Table of Contents

 

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, 2014 and 2013.

 

Level 3 Assets and Liabilities Measured on a Recurring Basis

 

 

 

For the three months ended
March 31, 2014

 

For the three months ended
March 31, 2013

 

(in thousands)

 

Securities
Available-for-
Sale

 

Contingent
Consideration
Liability

 

FDIC
Clawback
Liability

 

Securities
Available-for-
Sale

 

Contingent
Consideration
Liability

 

FDIC
Clawback
Liability

 

Balance, beginning of period

 

$

3,633

 

$

(49,900

)

$

(11,967

)

$

65,187

 

$

(47,724

)

$

(9,970

)

Total realized/unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

(964

)

 

 

(795

)

Included in other comprehensive income

 

(17

)

 

 

(199

)

 

 

Settlements

 

 

16,250

 

 

(3,555

)

 

 

Other (1)

 

 

(411

)

 

52

 

(549

)

 

Balance, end of period

 

$

3,616

 

$

(34,061

)

$

(12,931

)

$

61,485

 

$

(48,273

)

$

(10,765

)

 


(1)  Other rollforward activity consists of amortization of premiums and accretion of discounts recognized on the initial purchase of securities available-for-sale and 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, 2014 and 2013.

 

Level 3 assets measured at fair value on a recurring basis consist of municipal auction rate securities that are included in securities available-for-sale. 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. During the first quarter of 2013, Level 3 assets measured on a recurring basis also included a collateralized debt obligation senior note classified as an available-for-sale security. This security was sold during the fourth quarter of 2013.

 

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 next six years if certain criteria, such as revenue growth and pre-tax margin, are met. During the first quarter of 2014, the Company made its first contingent consideration payment to Rochdale’s former shareholders for approximately $16.3 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 $16 million to $58 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, (2) prepayment assumptions, and (3) credit assumptions.

 

There were no purchases, sales, or transfers out of Level 3 assets measured on a recurring basis during the three months ended March 31, 2014 and 2013. Paydowns of $3.6 million were received on Level 3 assets measured on a recurring basis for the three months ended March 31, 2013.

 

13



Table of Contents

 

Note 2. Fair Value Measurements (Continued)

 

Nonrecurring Fair Value Measurements

 

Assets measured at fair value on a nonrecurring basis using significant unobservable inputs include certain collateral dependent impaired loans, OREO for which fair value is not solely based on market observable inputs, and certain private equity and alternative investments. Private equity and alternative investments do not have readily determinable fair values. These investments are carried at cost and evaluated for impairment on a quarterly basis. Due to the lack of readily determinable fair values for these investments, the impairment assessment is based primarily on a review of investment performance and the likelihood that the capital invested would be recovered.

 

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

 

Information About Nonrecurring Level 3 Fair Value Measurements

 

(in thousands)

 

Fair Value at
March 31,
2014

 

Valuation
Method

 

Unobservable Inputs

 

Collateral dependent impaired loans and other real estate owned

 

$

18,481

 

Market

 

- Assumptions made in the appraisal process

 

 

 

 

 

 

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

 

 

 

 

 

 

 

- Probability weighting of broker price opinions

 

 

 

 

 

 

 

- Management assumptions regarding market trends or other relevant factors

 

 

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

 

For assets measured at fair value on a nonrecurring basis, the following table presents the total net 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, 2014 and 2013:

 

 

 

For the three months ended
March 31,

 

(in thousands)

 

2014

 

2013

 

Collateral dependent impaired loans:

 

 

 

 

 

Commercial real estate mortgages

 

$

(5

)

$

145

 

Residential mortgages

 

 

9

 

Home equity loans and lines of credit

 

 

116

 

Installment

 

 

(138

)

Other real estate owned (1)

 

61

 

(2,853

)

Private equity and alternative investments

 

 

(399

)

Total net gains (losses) recognized

 

$

56

 

$

(3,120

)

 


(1) Net gains and losses on OREO include amounts related to covered OREO, a significant portion of which is payable to or reimbursable by the FDIC.

 

14



Table of Contents

 

Note 2. Fair Value Measurements (Continued)

 

Fair Value of Financial Instruments

 

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2013 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.

 

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, 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

 

$

425.4

 

$

425.4

 

$

425.4

 

$

 

$

 

Due from banks - interest bearing

 

434.3

 

434.3

 

434.3

 

 

 

Federal funds sold and securities purchased under resale agreements

 

205.0

 

206.5

 

5.0

 

201.5

 

 

Securities held-to-maturity

 

3,203.0

 

3,165.1

 

 

3,165.1

 

 

Loans and leases, net of allowance

 

17,445.6

 

18,005.1

 

 

 

18,005.1

 

Covered loans, net of allowance

 

654.9

 

698.8

 

 

 

698.8

 

FDIC indemnification asset

 

84.9

 

70.1

 

 

 

70.1

 

Investment in FHLB and FRB stock

 

57.2

 

57.2

 

 

57.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

25,731.8

 

$

25,734.2

 

$

 

$

25,103.9

 

$

630.3

 

Other short-term borrowings

 

4.1

 

4.1

 

 

 

4.1

 

Long-term debt

 

733.5

 

801.7

 

 

713.0

 

88.7

 

 

 

 

December 31, 2013

 

 

 

Carrying

 

Total

 

Fair Value Measurements Using

 

(in millions)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

183.2

 

$

183.2

 

$

183.2

 

$

 

$

 

Due from banks - interest bearing

 

552.7

 

552.7

 

552.7

 

 

 

Securities purchased under resale agreements

 

200.0

 

200.5

 

 

200.5

 

 

Securities held-to-maturity

 

2,957.8

 

2,883.9

 

 

2,883.9

 

 

Loans and leases, net of allowance

 

16,867.9

 

17,362.9

 

 

 

17,362.9

 

Covered loans, net of allowance

 

701.0

 

739.5

 

 

 

739.5

 

FDIC indemnification asset

 

89.2

 

74.3

 

 

 

74.3

 

Investment in FHLB and FRB stock

 

64.4

 

64.4

 

 

64.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

25,679.4

 

$

25,682.2

 

$

 

$

24,990.8

 

$

691.4

 

Other short-term borrowings

 

3.9

 

3.9

 

 

 

3.9

 

Long-term debt

 

736.0

 

788.9

 

 

697.8

 

91.1

 

 

15



Table of Contents

 

Note 2. Fair Value Measurements (Continued)

 

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

 

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

 

Securities purchased under resale agreementsThe 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.

 

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

 

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

 

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

 

Investment in FHLB and FRB stock Investments in 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 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.

 

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.

 

16



Table of Contents

 

Note 2. Fair Value Measurements (Continued)

 

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

 

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

 

Note 3. Securities

 

At March 31, 2014, the Company had total securities of $8.65 billion, comprised of securities available-for-sale at fair value of $5.39 billion, securities held-to-maturity at amortized cost of $3.20 billion and trading securities at fair value of $61.6 million. At December 31, 2013, the Company had total securities of $9.28 billion, comprised of securities available-for-sale at fair value of $6.24 billion, securities held-to-maturity at amortized cost of $2.96 billion and trading securities at fair value of $82.4 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, 2014 and December 31, 2013:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

March 31, 2014

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

185,275

 

$

38

 

$

 

$

185,313

 

Federal agency - Debt

 

756,828

 

648

 

(3,787

)

753,689

 

Federal agency - MBS

 

124,698

 

3,119

 

(2,204

)

125,613

 

CMOs - Federal agency

 

3,715,837

 

28,420

 

(54,311

)

3,689,946

 

CMOs - Non-agency

 

36,773

 

351

 

(776

)

36,348

 

State and municipal

 

398,960

 

8,055

 

(118

)

406,897

 

Other debt securities

 

174,907

 

3,501

 

 

178,408

 

Total debt securities

 

5,393,278

 

44,132

 

(61,196

)

5,376,214

 

Equity securities and mutual funds

 

787

 

9,753

 

 

10,540

 

Total securities available-for-sale

 

$

5,394,065

 

$

53,885

 

$

(61,196

)

$

5,386,754

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity (1):

 

 

 

 

 

 

 

 

 

Federal agency - Debt

 

$

265,071

 

$

372

 

$

(3,342

)

$

262,101

 

Federal agency - MBS

 

450,334

 

3,601

 

(7,335

)

446,600

 

CMOs - Federal agency

 

1,867,099

 

4,867

 

(32,845

)

1,839,121

 

State and municipal

 

522,104

 

6,234

 

(9,287

)

519,051

 

Other debt securities

 

98,389

 

55

 

(249

)

98,195

 

Total securities held-to-maturity

 

$

3,202,997

 

$

15,129

 

$

(53,058

)

$

3,165,068

 

 


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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

December 31, 2013

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

35,312

 

$

23

 

$

 

$

35,335

 

Federal agency - Debt

 

1,417,509

 

938

 

(7,911

)

1,410,536

 

Federal agency - MBS

 

156,399

 

3,615

 

(2,788

)

157,226

 

CMOs - Federal agency

 

4,037,348

 

30,721

 

(70,771

)

3,997,298

 

CMOs - Non-agency

 

38,383

 

127

 

(1,048

)

37,462

 

State and municipal

 

407,312

 

8,806

 

(123

)

415,995

 

Other debt securities

 

175,091

 

3,731

 

 

178,822

 

Total debt securities

 

6,267,354

 

47,961

 

(82,641

)

6,232,674

 

Equity securities and mutual funds

 

337

 

8,106

 

 

8,443

 

Total securities available-for-sale

 

$

6,267,691

 

$

56,067

 

$

(82,641

)

$

6,241,117

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity (1):

 

 

 

 

 

 

 

 

 

Federal agency - Debt

 

$

178,413

 

$

133

 

$

(5,122

)

$

173,424

 

Federal agency - MBS

 

445,360

 

1,005

 

(11,930

)

434,435

 

CMOs - Federal agency

 

1,781,219

 

1,839

 

(40,621

)

1,742,437

 

State and municipal

 

454,155

 

421

 

(19,014

)

435,562

 

Other debt securities

 

98,696

 

 

(619

)

98,077

 

Total securities held-to-maturity

 

$

2,957,843

 

$

3,398

 

$

(77,306

)

$

2,883,935

 

 


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

 

17



Table of Contents

 

Note 3. Securities (Continued)

 

Proceeds from sales of securities available-for-sale were $377.1 million for the three months ended March 31, 2014 and $1.03 billion for the three months ended March 31, 2013. There were no sales of securities held-to-maturity during the three months ended March 31, 2014 and 2013. 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)

 

2014

 

2013

 

Gross realized gains

 

$

2,602

 

$

1,046

 

Gross realized losses

 

(480

)

 

Net realized gains

 

$

2,122

 

$

1,046

 

 

Interest income on securities for the three months ended March 31, 2014 and 2013 is comprised of: (i) taxable interest income of $36.0 million and $39.8 million, respectively (ii) nontaxable interest income of $5.5 million and $4.4 million, respectively, and (iii) dividend income of $9 thousand and $19 thousand, respectively.

 

18



Table of Contents

 

Note 3. Securities (Continued)

 

The following table provides the expected remaining maturities of debt securities included in the securities portfolio at March 31, 2014, except for maturities of mortgage-backed securities which are allocated according to the average life of expected cash flows. Average expected maturities will differ from contractual maturities because of the amortizing nature of the loan collateral and prepayment behavior of borrowers.

 

(in thousands)

 

One year or
less

 

Over 1 year
through

5 years

 

Over 5 years
through
10 years

 

Over 10
years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

172,234

 

$

13,079

 

$

 

$

 

$

185,313

 

Federal agency - Debt

 

215,510

 

499,012

 

39,167

 

 

753,689

 

Federal agency - MBS

 

 

107,729

 

17,884

 

 

125,613

 

CMOs - Federal agency

 

98,666

 

3,244,429

 

346,851

 

 

3,689,946

 

CMOs - Non-agency

 

2,500

 

33,848

 

 

 

36,348

 

State and municipal

 

78,801

 

324,777

 

 

3,319

 

406,897

 

Other

 

29,345

 

149,063

 

 

 

178,408

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt securities available-for-sale

 

$

597,056

 

$

4,371,937

 

$

403,902

 

$

3,319

 

$

5,376,214

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

594,486

 

$

4,385,520

 

$

409,872

 

$

3,400

 

$

5,393,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

Federal agency - Debt

 

$

 

$

11,082