Note 3. Fair Value Measurements

The following tables summarize assets and liabilities measured at fair value as of June 30, 2013 and December 31, 2012 by level in the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of June 30, 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	$	30,285	$	30,285	$	—	$	—
Federal agency - Debt	980,025		—		980,025		—
Federal agency - MBS	438,182		—		438,182		—
CMOs - Federal agency	4,728,613		—		4,728,613		—
CMOs - Non-agency	45,327		—		45,327		—
State and municipal	466,760		—		420,594		46,166
Other debt securities	350,244		—		334,571		15,673
Equity securities and mutual funds	5,135		5,135		—		—
Trading securities	48,655		38,411		10,244		—
Derivatives (1)	40,066		1,963		38,103		—
Total assets at fair value	$	7,133,292	$	75,794	$	6,995,659	$	61,839

Liabilities
Derivatives	$	38,771	$	2,490	$	36,281	$	—
Contingent consideration liability	48,800		—		—		48,800
FDIC clawback liability	11,053		—		—		11,053
Other liabilities	319		—		319		—
Total liabilities at fair value (2)	$	98,943	$	2,490	$	36,600	$	59,853

Redeemable noncontrolling interest	$	39,943	$	—	$	—	$	39,943

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	17	$	—	$	—	$	17
Commercial real estate mortgages	7,300		—		—		7,300
Residential mortgages	1,457		—		—		1,457
Other real estate owned (5)	19,525		—		16,494		3,031
Private equity and alternative investments	686		—		—		686
Total assets at fair value	$	28,985	$	—	$	16,494	$	12,491

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

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

(3) Impaired loans for which fair value was calculated using the collateral valuation method.

(4) Includes lease financing.

(5) Includes covered OREO.

			Fair Value Measurements at Reporting Date Using
(in thousands)	Balance as of December 31, 2012		Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Measured on a Recurring Basis
Assets
Securities available-for-sale:
U.S. Treasury	$	20,397	$	20,397	$	—	$	—
Federal agency - Debt	2,349,202		—		2,349,202		—
Federal agency - MBS	693,032		—		693,032		—
CMOs - Federal agency	5,318,253		—		5,318,253		—
CMOs - Non-agency	61,513		—		61,513		—
State and municipal	454,474		—		407,429		47,045
Other debt securities	307,417		—		289,275		18,142
Equity securities and mutual funds	1,701		1,701		—		—
Trading securities	115,059		113,010		2,049		—
Derivatives (1)	67,496		218		67,278		—
Total assets at fair value	$	9,388,544	$	135,326	$	9,188,031	$	65,187

Liabilities
Derivatives	$	64,432	$	—	$	64,432	$	—
Contingent consideration liability	47,724		—		—		47,724
FDIC clawback liability	9,970		—		—		9,970
Other liabilities	368		—		368		—
Total liabilities at fair value (2)	$	122,494	$	—	$	64,800	$	57,694

Redeemable noncontrolling interest	$	41,112	$	—	$	—	$	41,112

Measured on a Nonrecurring Basis
Assets
Collateral dependent impaired loans (3):
Commercial (4)	$	2,655	$	—	$	—	$	2,655
Commercial real estate mortgages	10,963		—		3,950		7,013
Residential mortgages	1,811		—		—		1,811
Real estate construction	7,918		—		—		7,918
Home equity loans and lines of credit	780		—		—		780
Installment	550		—		550		—
Other real estate owned (5)	44,396		—		34,624		9,772
Private equity and alternative investments	6,178		—		—		6,178
Total assets at fair value	$	75,251	$	—	$	39,124	$	36,127

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

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

(3) Impaired loans for which fair value was calculated using the collateral valuation method.

(4) Includes lease financing.

(5) Includes covered OREO.

At June 30, 2013, $7.13 billion, or approximately 26 percent, of the Company’s total assets were recorded at fair value on a recurring basis, compared with $9.39 billion, or 33 percent, at December 31, 2012. 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 June 30, 2013, $98.9 million of the Company’s total liabilities were recorded at fair value using mostly Level 2 or Level 3 inputs, compared with $122.5 million at December 31, 2012. There were no transfers between Level 1 and Level 2 of the fair value hierarchy for assets or liabilities measured on a recurring basis during the six months ended June 30, 2013. At June 30, 2013, $29.0 million of the Company’s total assets were recorded at fair value on a nonrecurring basis, compared with $75.3 million at December 31, 2012. These assets represent less than one percent of total assets and were measured using Level 2 and Level 3 inputs.

Recurring Fair Value Measurements

Assets and liabilities for which fair value measurement is based on significant unobservable inputs are classified as Level 3 in the fair value hierarchy. The following table provides a reconciliation of the beginning and ending balances for Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2013 and 2012.

Level 3 Assets and Liabilities Measured on a Recurring Basis

	For the six months ended June 30, 2013									For the six months ended June 30, 2012
(in thousands)	Securities Available-for- Sale			Contingent Consideration Liability			FDIC Clawback Liability			Securities Available-for- Sale			FDIC Clawback Liability
Balance, beginning of period	$	65,187		$	(47,724	)	$	(9,970	)	$	19,583		$	(8,103	)
Total realized/unrealized gains (losses):
Included in earnings	—			—			(1,083		)	—			(1,114		)
Included in other comprehensive income	233			—			—			1,221			—
Settlements	(3,655		)	—			—			(1,664		)	—
Transfers into Level 3	—			—			—			47,165			—
Other (1)	74			(1,076		)	—			46			—
Balance, end of period	$	61,839		$	(48,800	)	$	(11,053	)	$	66,351		$	(9,217	)

(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. Refer to Note 18, Noncontrolling Interest, for a rollforward of activity for the six months ended June 30, 2013 and 2012.

Level 3 assets measured at fair value on a recurring basis consist of municipal auction rate securities and collateralized debt obligation senior notes that are included in securities available-for-sale. At June 30, 2013, 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. Senior notes totaling $15.7 million at June 30, 2013 were valued using the discounted cash flow method with the following unobservable inputs: (1) risk-adjusted discount rate consistent with similarly-rated securities, (2) prepayment rate of 2 percent, (3) default rate of 0.75 percent of performing collateral, and (4) 15 percent recovery rate with a 2-year lag.

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

There were no purchases, sales, or transfers out of Level 3 assets measured on a recurring basis during the six months ended June 30, 2013 and 2012. Paydowns of $3.7 million and $1.7 million were received on Level 3 assets measured on a recurring basis for the six months ended June 30, 2013 and 2012, respectively.

Nonrecurring Fair Value Measurements

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

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

Information About Nonrecurring Level 3 Fair Value Measurements

(in thousands)	Fair Value at June 30, 2013		Valuation Method	Unobservable Inputs
Collateral dependent impaired loans	$	8,774	Market	- Adjustments to external or internal appraised values (1) - Probability weighting of broker price opinions - Management assumptions regarding market trends or other relevant factors

Other real estate owned	$	3,031	Market	- Adjustments to external or internal appraised values (1) - Probability weighting of broker price opinions - Management assumptions regarding market trends or other relevant factors

Private equity and alternative investments	$	686	Cost Recovery	- Management's assumptions regarding recoverability of investment based on fund financial performance, market conditions and other relevant factors

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

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

For assets measured at fair value on a nonrecurring basis, the following table presents the total net (losses) gains, which include charge-offs, recoveries, specific reserves, OREO valuation write-downs and write-ups, gains and losses on sales of OREO, and impairment write-downs on private equity investments, recognized in the three and six months ended June 30, 2013 and 2012:

	For the three months ended June 30,						For the six months ended June 30,
(in thousands)	2013			2012			2013			2012
Collateral dependent impaired loans:
Commercial	$	—		$	—		$	—		$	(367	)
Commercial real estate mortgages	148			(1,572		)	293			(1,937		)
Residential mortgages	(230		)	(540		)	(221		)	(1,122		)
Real estate construction	—			(281		)	—			(6,753		)
Home equity loans and lines of credit	—			(115		)	116			(62		)
Installment	—			—			(138		)	(107		)
Other real estate owned (1)	(1,857		)	(3,700		)	(4,711		)	(12,165		)
Private equity and alternative investments	—			(333		)	(399		)	(460		)
Total net losses recognized	$	(1,939	)	$	(6,541	)	$	(5,060	)	$	(22,973	)

(1)

Net losses on OREO includes $1.9 million and $4.7 million of net losses related to covered OREO for the three and six months ended June 30, 2013, respectively, and $3.5 million and $11.0 million of net losses for the three and six months ended June 30, 2012, respectively. A significant portion of net losses on covered OREO is reimbursable by the FDIC.

Fair Value of Financial Instruments

A financial instrument is broadly defined as cash, evidence of an ownership interest in another entity, or a contract that imposes a contractual obligation on one entity and conveys a corresponding right to a second entity to require delivery or exchange of a financial instrument. Refer to Note 1, Summary of Significant Accounting Policies, in the Company’s 2012 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.

	June 30, 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	$	146.3	$	146.3	$	146.3	$	—	$	—
Due from banks - interest bearing	156.2		156.2		156.2		—		—
Federal funds sold and securities purchased under resale agreements	200.0		194.6		—		194.6		—
Securities held-to-maturity	1,504.0		1,466.6		—		1,466.6		—
Loans and leases, net of allowance	15,529.3		15,926.6		—		—		15,926.6
Covered loans, net of allowance	843.6		893.6		—		—		893.6
FDIC indemnification asset	117.3		96.6		—		—		96.6
Investment in FHLB and FRB stock	78.0		78.0		—		78.0		—

Financial Liabilities:
Deposits	$	23,651.8	$	23,655.4	$	—	$	22,779.3	$	876.1
Other short-term borrowings	2.7		2.7		—		—		2.7
Long-term debt	706.5		769.0		—		693.9		75.1

	December 31, 2012
	Carrying		Total		Fair Value Measurements Using
(in millions)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	152.0	$	152.0	$	152.0	$	—	$	—
Due from banks - interest bearing	246.3		246.3		246.3		—		—
Federal funds sold	17.1		17.1		17.1		—		—
Securities held-to-maturity	1,398.4		1,446.6		—		1,446.6		—
Loans and leases, net of allowance	14,540.4		14,988.6		—		4.5		14,984.1
Covered loans, net of allowance	986.2		1,055.0		—		—		1,055.0
FDIC indemnification asset	150.0		123.9		—		—		123.9
Investment in FHLB and FRB stock	90.0		90.0		—		90.0		—

Financial Liabilities:
Deposits	$	23,502.4	$	23,506.9	$	—	$	22,734.5	$	772.4
Federal funds purchased and securities sold under repurchase agreements	1,214.2		1,214.2		1,214.2		—		—
Other short-term borrowings	209.6		210.7				207.6		3.1
Long-term debt	706.1		774.8		—		698.9		75.9

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 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.

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 FRB and FHLB stock is equal to the carrying amount.

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

Other short-term borrowings — The fair value of the current portion of long-term debt classified in short-term borrowings is obtained through third-party pricing sources. The fair value of nonrecourse debt is determined by discounting estimated future cash flows based on estimated current market rates. The carrying amount of the remaining other short-term borrowings is a reasonable estimate of fair value.

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

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