News Column

CITY NATIONAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 We have made forward-looking statements in this document about the Company, for which the Company claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. A number of factors, many of which are beyond the Company's ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. These factors include: (1) changes in general economic, political, or industry conditions and the related credit and market conditions and the impact they have on the Company and its customers, including changes in consumer spending, borrowing and savings habits; (2) the impact on financial markets and the economy of the level of U.S. and European debt; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; (4) continued delay in the pace of economic recovery and continued stagnant or decreasing employment levels; (5) the effect of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations to be promulgated by supervisory and oversight agencies implementing the new legislation, taking into account that the precise timing, extent and nature of such rules and regulations and the impact on the Company is uncertain; (6) the impact of revised capital requirements under Basel III; (7) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (8) volatility in the municipal bond market; (9) changes in the level of nonperforming assets, charge-offs, other real estate owned and provision expense; (10) incorrect assumptions in the value of the loans acquired in FDIC-assisted acquisitions resulting in greater than anticipated losses in the acquired loan portfolios exceeding the losses covered by the loss-sharing agreements with the FDIC; (11) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (12) the Company's ability to attract new employees and retain and motivate existing employees; (13) increased competition in the Company's markets and our ability to increase market share and control expenses; (14) changes in the financial performance and/or condition of the Company's customers, or changes in the performance or creditworthiness of our customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit obligations; (15) a substantial and permanent loss of either client accounts and/or assets under management at the Company's investment advisory affiliates or its wealth management division; (16) soundness of other financial institutions which could adversely affect the Company; (17) protracted labor disputes in the Company's markets; (18) the impact of natural disasters, terrorist activities or international hostilities on the operations of our business or the value of collateral; (19) the effect of acquisitions and integration of acquired businesses and de novo branching efforts; (20) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; (21) the impact of cyber security attacks or other disruptions to the Company's information systems and any resulting compromise of data or disruptions in service; and (22) the success of the Company at managing the risks involved in the foregoing.



Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the statements are made, or to update earnings guidance, including the factors that influence earnings.

For a more complete discussion of these risks and uncertainties, see the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and particularly, Item 1A, titled "Risk Factors."

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Table of Contents CITY NATIONAL CORPORATION FINANCIAL HIGHLIGHTS Percent change At or for the three months ended June 30, 2014 from June 30, March 31, June 30, March 31, June 30, (in thousands, except per share amounts) (1) 2014 2014 2013 2014 2013 (Unaudited) (Unaudited) (Unaudited) For The Quarter Total revenue $ 320,201$ 301,046$ 285,128 6 % 12 % Net income attributable to City National Corporation 66,701 54,511 59,741 22 12 Net income available to common shareholders 62,607 50,417 57,335 24 9 Net income per common share, basic 1.13 0.91 1.05 24 8 Net income per common share, diluted 1.11 0.90 1.04 23 7 Dividends per common share 0.33 0.33 0.25 - 32 At Quarter End Assets $ 30,819,092$ 29,738,252$ 27,379,502 4 13 Securities 8,832,942 8,651,359 8,597,199 2 3 Loans and leases, excluding covered loans 18,474,788 17,751,385 15,819,252 4 17 Covered loans (2) 605,770 673,294 867,996 (10 ) (30 ) Deposits 26,651,525 25,731,766 23,651,757 4 13 Common shareholders' equity 2,585,537 2,528,344 2,374,848 2 9 Total shareholders' equity 2,853,153 2,795,960 2,544,768 2 12 Book value per common share 47.38 46.38 44.16 2 7 Average Balances Assets $ 29,978,947$ 29,426,360$ 27,469,581 2 9 Securities 8,668,011 8,585,220 8,866,911 1 (2 ) Loans and leases, excluding covered loans 17,959,191 17,338,419 15,434,102 4 16 Covered loans (2) 643,690 696,163 909,728 (8 ) (29 ) Deposits 25,912,081 25,371,598 23,118,818 2 12 Common shareholders' equity 2,562,555 2,512,775 2,412,148 2 6 Total shareholders' equity 2,830,171 2,780,392 2,582,068 2 10 Selected Ratios Return on average assets (annualized) 0.89 % 0.75 % 0.87 % 19 2 Return on average common equity (annualized) 9.80 8.14 9.53 20 3 Corporation's tier 1 leverage 7.43 7.41 7.00 0 6 Corporation's tier 1 risk-based capital 10.00 10.18 9.74 (2 ) 3 Corporation's total risk-based capital 12.81 13.08 12.78 (2 ) 0 Period-end common equity to period-end assets 8.39 8.50 8.67 (1 ) (3 ) Period-end equity to period-end assets 9.26 9.40 9.29 (1 ) (0 ) Common dividend payout ratio 29.26 36.15 23.81 (19 ) 23 Net interest margin 3.21 3.02 3.24 6 (1 ) Expense to revenue ratio (3) 68.48 69.73 71.51 (2 ) (4 ) Asset Quality Ratios (4) Nonaccrual loans to total loans and leases 0.35 % 0.40 % 0.48 % (13 ) (27 ) Nonaccrual loans and OREO to total loans and leases and OREO 0.37 0.45 0.61 (18 ) (39 ) Allowance for loan and lease losses to total loans and leases 1.68 1.72 1.83 (2 ) (8 ) Allowance for loan and lease losses to nonaccrual loans 480.50 429.21 378.12 12 27 Net (charge-offs) recoveries to average total loans and leases (annualized) (0.08 ) 0.10 0.20 (180 ) (140 ) At Quarter End Assets under management (5) $ 47,123,652$ 46,374,203$ 41,256,549 2 14 Assets under management or administration (5) 65,780,023 66,399,813 59,755,285 (1 ) 10



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(1) Certain prior period amounts have been reclassified to conform to the

current period presentation. (2) Covered loans represent acquired loans that are covered under loss-sharing

agreements with the Federal Deposit Insurance Corporation ("FDIC"). (3) The expense to revenue ratio is defined as noninterest expense excluding

other real estate owned ("OREO") expense divided by total net interest

income on a fully taxable-equivalent basis and noninterest income. (4) Excludes covered assets, which consist of acquired loans and OREO that are

covered under loss-sharing agreements with the FDIC. (5) Excludes $27.85 billion, $26.09 billion and $25.11 billion of assets under

management for asset managers in which the Company held a noncontrolling

ownership interest as of June 30, 2014, March 31, 2014 and June 30, 2013,

respectively. 53

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Table of Contents CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles. The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified 11 policies as critical because they require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, contingent assets and liabilities, and revenues and expenses included in the consolidated financial statements. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Circumstances and events that differ significantly from those underlying the Company's estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates. The Company's critical accounting policies include those that address accounting for business combinations, financial assets and liabilities reported at fair value, securities, acquired impaired loans, allowance for loan and lease losses and reserve for off-balance sheet credit commitments, OREO, goodwill and other intangible assets, noncontrolling interest, share-based compensation plans, income taxes, and derivatives and hedging activities. The Company has not made any significant changes in its critical accounting policies or 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 Note 1, Summary of Significant Accounting Policies, of the Notes to the Unaudited Consolidated Financial Statements for further discussion. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements. HIGHLIGHTS Consolidated net income attributable to City National Corporation ("CNC") was $66.7 million for the second quarter of 2014, up 12 percent from $59.7 million in the year-ago period and up 22 percent from $54.5 million for the first quarter of 2014. For the second quarter of 2014, consolidated net income available to common shareholders was $62.6 million, or $1.11 per diluted share. Net income available to common shareholders was $57.3 million, or $1.04 per diluted share, for the year-earlier quarter and $50.4 million, or 0.90 per diluted share for the quarter ended March 31, 2014. Revenue, which consists of net interest income and noninterest income, was $320.2 million for the second quarter of 2014, up 12 percent from $285.1 million in the year-earlier quarter and up 6 percent from $301.0 million in the first quarter of 2014. Fully taxable-equivalent net interest income, including dividend income, amounted to $226.1 million for the second quarter of 2014, up 9 percent from the second quarter of 2013 and 10 percent higher from the first quarter of 2014. The Company's net interest margin in the second quarter of 2014 was 3.21 percent, down from 3.24 percent in the second quarter of 2013, but up from 3.02 percent in the first quarter of 2014. The increase from the first quarter of 2014 was primarily due to higher income on covered loans that were paid off or fully-charged off in the second quarter of 2014. Noninterest income was $101.1 million for the second quarter of 2014, up 23 percent from the second quarter of 2013 and down slightly from the first quarter of 2014. The increase from the year-earlier quarter was primarily attributable to higher wealth management fee income and lower FDIC loss-sharing expense, as well as a higher net gain on the disposal of assets. The decrease from the first quarter was due largely to higher FDIC loss-sharing expense offset by higher wealth management fee income and higher net gain on disposal of assets. Results for the second quarter of 2014 also included a $5.1 million net gain on securities, compared to a $5.6 million net gain in the second quarter of 2013 and a $2.1 million net gain in the first quarter of 2014. Trust and investment fee income grew to $54.6 million in the second quarter of 2014, up 10 percent from the year-earlier quarter and up 2 percent from the first quarter of 2014. Assets under management or administration totaled $65.8 billion, up 10 percent from the second quarter of 2013, but down 1 percent from the first quarter of 2014. Noninterest expense for the second quarter of 2014 was $225.6 million, up 7 percent from the second quarter of 2013 and 5 percent higher from the first quarter of 2014. The increase from the year-ago period largely reflects higher compensation costs, as well as an increase in legal and professional fees. Legal and professional fees for the second 54 --------------------------------------------------------------------------------



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quarter of 2014 included sub-advisory expense related to the merger of two funds. These costs were offset in part by lower other real estate owned expenses and FDIC assessments.

The base yield on the covered loan portfolio generated net interest income of $12.4 million in the second quarter of 2014, compared to $16.7 million for the year-earlier quarter and $12.5 million in the first quarter of 2014. Base yield is the yield on covered loans, excluding income from covered loans that were paid off or fully charged-off. The Company recognizes other components of other income and expense related to its covered assets including income from covered loans that were paid off or fully charged-off, net impairment charges and other covered assets income and expenses. These components fluctuate from period to period. When aggregated, the impact of those items to the income statement, excluding the base yield, was total net expense of $2.8 million for the second quarter of 2014, compared to net expense of $2.0 million for the second quarter of 2013 and $3.6 million for the first quarter of 2014. Refer to the "Net Interest Income," "Provision for Credit Losses" and "Covered Assets" sections included elsewhere in this report for further discussion. The Company's effective tax rate was 30.7 percent for the second quarter of 2014, compared with 29.7 percent for the year-earlier period and 32.3 percent for the first quarter of 2014. Total assets were $30.82 billion at June 30, 2014, up 13 percent from $27.38 billion at June 30, 2013 and up 4 percent from $29.74 billion at March 31, 2014. Total average assets were $29.98 billion for the second quarter of 2014, up 9 percent from $27.47 billion for the second quarter of 2013 and up 2 percent from $29.43 billion for the first quarter of 2014. Loans and leases, excluding covered loans, grew to $18.47 billion at June 30, 2014, an increase of 17 percent from $15.82 billion at June 30, 2013 and 4 percent from $17.75 billion at March 31, 2014. Average loan and lease balances, excluding covered loans, were $17.96 billion for the second quarter of 2014, up 16 percent from the same period of last year and 4 percent from the first quarter of 2014. Average commercial loan balances were up 18 percent from the year-earlier period and 4 percent from the first quarter of 2014. Average commercial real estate balances increased 18 percent from the second quarter of 2013 and 3 percent from the first quarter of 2014. Excluding covered loans, second quarter 2014 results included a $1.0 million reversal of provision for loan and lease losses. The Company recorded no provisions or provision reversal in either the second quarter of 2013 or first quarter of 2014. The allowance for loan and lease losses on non-covered loans was $311.3 million at June 30, 2014, compared with $289.9 million at June 30, 2013 and $305.8 million at March 31, 2014. The Company remains appropriately reserved at 1.68 percent of total loans and leases, excluding covered loans, at June 30, 2014, compared with 1.83 percent at June 30, 2013 and 1.72 percent at March 31, 2014. In the second quarter of 2014, net loan charge-offs totaled $3.6 million, or 0.08 percent of average total loans and leases, excluding covered loans, on an annualized basis, compared with net recoveries of $7.5 million, or 0.20 percent, in the year-earlier quarter, and net recoveries of $4.2 million, or 0.10 percent, for the first quarter of 2014. Nonaccrual loans, excluding covered loans, totaled $64.8 million at June 30, 2014, down from $76.7 million at June 30, 2013 and $71.2 million at March 31, 2014. At June 30, 2014, nonperforming assets, excluding covered assets, were $69.1 million, down from $96.3 million at June 30, 2013 and $80.7 million at March 31, 2014. Average securities for the second quarter of 2014 totaled $8.67 billion, down 2 percent from the second quarter of 2013, but up 1 percent from the first quarter of 2014. Period-end deposits at June 30, 2014 were $26.65 billion, up 13 percent from $23.65 billion at June 30, 2013 and 4 percent from $25.73 billion at March 31, 2014. Deposit balances for the second quarter of 2014 averaged $25.91 billion, up 12 percent from $23.12 billion for the second quarter of 2013 and 2 percent from $25.37 billion for the first quarter of 2014. Average core deposits, which equal 98 percent of total deposit balances for the second quarter of 2014, were up 14 percent from the second quarter of 2013 and 2 percent from the first quarter of 2014. The Company remains well capitalized. The ratio of Tier 1 common shareholders' equity to risk-based assets was 8.8 percent at June 30, 2014, compared with 8.8 percent at June 30, 2013 and 8.9 percent at March 31, 2014. Refer to the "Capital" section included elsewhere in this report for further discussion of this non-GAAP measure. All of the Company's pro-forma capital ratios are above the Basel III rules, which were approved by the Federal Reserve on July 2, 2013. These rules are expected to be fully implemented by January 1, 2019. 55

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Table of Contents OUTLOOK Management expects moderate net income growth in 2014. Loan and deposit balances are expected to continue to increase, and credit quality should remain strong, though rising loan balances are expected to require a loan-loss provision later this year. Low interest rates and competitive loan pricing continue to put pressure on the Company's net interest margin. This outlook reflects management's expectations for moderate economic growth throughout the remainder of 2014. This does not take into account the effect that any changes in monetary policy could have on short-term interest rates, which are not expected to rise this year. RESULTS OF OPERATIONS Net Interest Income Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. The following table presents the components of net interest income on a fully taxable-equivalent basis for the three and six months ended June 30, 2014 and 2013: 56 --------------------------------------------------------------------------------

Table of Contents Net Interest Income Summary For the three months ended For the three months ended June 30, 2014 June 30, 2013 Interest Average Interest Average Average income/ interest Average income/ interest (in thousands) (1) balance expense (2)(3) rate balance expense (2)(3) rate Assets Interest-earning assets Loans and leases Commercial $ 8,605,421 $ 74,969 3.49 % $ 7,300,447 $ 65,156 3.58 % Commercial real estate mortgages 3,354,672 29,838 3.57 2,847,979 28,397 4.00 Residential mortgages 4,715,528 41,359 3.51 4,083,044 37,927 3.72 Real estate construction 418,353 3,915 3.75 352,775 3,733 4.24 Home equity loans and lines of credit 697,178 6,411 3.69 704,418 6,315 3.60 Installment 168,039 1,820 4.34 145,439 1,702 4.69 Total loans and leases, excluding covered loans (4) 17,959,191 158,312 3.54 15,434,102 143,230 3.72 Covered loans 643,690 31,061 19.30 909,728 32,610 14.34 Total loans and leases 18,602,881 189,373 4.08 16,343,830 175,840 4.32 Due from banks - interest-bearing 577,591 378 0.26 236,119 158 0.27 Federal funds sold and securities purchased under resale agreements 355,747 1,477 1.67 277,019 1,555 2.25 Securities 8,668,011 46,924 2.17 8,866,911 43,829 1.98 Other interest-earning assets 72,166 1,165 6.47 96,004 1,073 4.48 Total interest-earning assets 28,276,396 239,317 3.39 25,819,883 222,455 3.46 Allowance for loan and lease losses (327,820 ) (325,043 ) Cash and due from banks 187,710 128,489 Other non-earning assets 1,842,661 1,846,252 Total assets $ 29,978,947$ 27,469,581 Liabilities and Equity Interest-bearing deposits Interest checking accounts $ 2,327,248 $ 327 0.06 % $ 2,173,015 $ 390 0.07 % Money market accounts 6,617,913 1,142 0.07 5,758,428 1,645 0.11 Savings deposits 462,316 68 0.06 414,478 99 0.10 Time deposits - under $100,000 169,455 86 0.20 192,550 178 0.37 Time deposits - $100,000 and over 451,197 437 0.39 707,980 678 0.38 Total interest-bearing deposits 10,028,129 2,060 0.08 9,246,451 2,990 0.13 Federal funds purchased and securities sold under repurchase agreements 934 - 0.07 374,571 123 0.13 Other borrowings 737,159 11,163 6.07 927,829 10,963 4.74 Total interest-bearing liabilities 10,766,222 13,223 0.49 10,548,851 14,076 0.54 Noninterest-bearing deposits 15,883,952 13,872,367 Other liabilities 498,602 466,295 Total equity 2,830,171 2,582,068 Total liabilities and equity $ 29,978,947$ 27,469,581 Net interest spread 2.90 % 2.92 % Fully taxable-equivalent net interest and dividend income $ 226,094$ 208,379 Net interest margin 3.21 % 3.24 % Less: Dividend income included in other income 1,165 1,073 Fully taxable-equivalent net interest income $ 224,929$ 207,306



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(1) Certain prior period balances have been reclassified to conform to the

current period presentation. (2) Net interest income is presented on a fully taxable-equivalent basis. (3) Loan income includes loan fees of $8,884 and $6,534 for 2014 and 2013,

respectively.

(4) Includes average nonaccrual loans of $63,934 and $74,981 for 2014 and 2013,

respectively. 57

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Table of Contents Net Interest Income Summary For the six months ended For the six months ended June 30, 2014 June 30, 2013 Interest Average Interest Average Average income/ interest Average income/ interest (in thousands) (1) balance expense (2)(3) rate balance expense (2)(3) rate Assets Interest-earning assets Loans and leases Commercial $ 8,435,115$ 143,138 3.42 % $ 7,089,246$ 128,115 3.64 % Commercial real estate mortgages 3,305,008 59,164 3.61 2,808,007 55,522 3.99 Residential mortgages 4,656,094 82,224 3.53 4,032,470 76,014 3.77 Real estate construction 397,409 7,385 3.75 342,906 7,539 4.43 Home equity loans and lines of credit 696,137 12,620 3.66 707,971 12,778 3.64 Installment 160,757 3,515 4.41 142,847 3,162 4.46 Total loans and leases, excluding covered loans (4) 17,650,520 308,046 3.52 15,123,447 283,130 3.78 Covered loans 669,781 52,913 15.80 949,370 64,726 13.64 Total loans and leases 18,320,301 360,959 3.97 16,072,817 347,856 4.36 Due from banks - interest-bearing 621,146 820 0.27 214,535 270 0.25 Federal funds sold and securities purchased under resale agreements 317,569 2,848 1.81 215,880 2,690 2.51 Securities 8,626,844 91,699 2.13 9,329,014 90,660 1.94 Other interest-earning assets 74,538 2,375 6.42 100,364 2,035 4.09 Total interest-earning assets 27,960,398 458,701 3.31 25,932,610 443,511 3.45 Allowance for loan and lease losses (325,595 ) (326,483 ) Cash and due from banks 217,631 128,596 Other non-earning assets 1,851,746 1,853,985 Total assets $ 29,704,180$ 27,588,708 Liabilities and Equity Interest-bearing deposits Interest checking accounts $ 2,373,545 $ 710 0.06 % $

2,195,086 $ 807 0.07 % Money market accounts 6,492,299 2,242 0.07 5,725,378 3,242 0.11 Savings deposits 458,293 136 0.06 416,652 214 0.10 Time deposits - under $100,000 171,749 179 0.21 196,363 360 0.37 Time deposits - $100,000 and over 467,224 927 0.40 656,425 1,307 0.40 Total interest-bearing deposits 9,963,110 4,194 0.08 9,189,904 5,930 0.13 Federal funds purchased and securities sold under repurchase agreements 470 - 0.07 606,058 400 0.13 Other borrowings 738,021 22,316 6.10 1,188,474 22,473 3.81 Total interest-bearing liabilities 10,701,601 26,510 0.50 10,984,436 28,803 0.53 Noninterest-bearing deposits 15,680,222 13,576,936 Other liabilities 516,938 469,454 Total equity 2,805,419 2,557,882 Total liabilities and equity $ 29,704,180$ 27,588,708 Net interest spread 2.81 % 2.92 % Fully taxable-equivalent net interest and dividend income $ 432,191$ 414,708 Net interest margin 3.12 % 3.22 % Less: Dividend income included in other income 2,375 2,035 Fully taxable-equivalent net interest income $ 429,816$ 412,673



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(1) Certain prior period balances have been reclassified to conform to the

current period presentation. (2) Net interest income is presented on a fully taxable-equivalent basis. (3) Loan income includes loan fees of $15,115 and $12,719 for 2014 and 2013,

respectively.

(4) Includes average nonaccrual loans of $66,116 and $83,945 for 2014 and 2013,

respectively. 58

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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. The following table provides a breakdown of the changes in net interest income and dividend income on a fully taxable-equivalent basis due to volume and rate between the second quarter and first six months of 2014 and 2013, as well as the second quarter and first six months of 2013 and 2012. The impact of interest rate swaps, which affect interest income on loans and leases and interest expense on deposits and borrowings, is included in rate changes. Changes in Net Interest Income For the three months ended June 30, For the three months ended June 30, 2014 vs 2013 2013 vs 2012 Increase (decrease) Net Increase (decrease) Net due to increase due to increase (in thousands) Volume Rate (decrease) Volume Rate (decrease) Interest earned on: Total loans and leases (1) $ 23,362$ (9,829 )$ 13,533$ 22,848$ (34,909 )$ (12,061 ) Securities (996 ) 4,091 3,095 6,058 (8,156 ) (2,098 ) Due from banks - interest-bearing 224 (4 ) 220 (36 ) 21 (15 ) Federal funds sold and securities purchased under resale agreements 381 (459 ) (78 ) 188 1,271 1,459 Other interest-earning assets (309 ) 401 92 (142 ) 521 379 Total interest-earning assets 22,662 (5,800 ) 16,862 28,916 (41,252 ) (12,336 ) Interest paid on: Interest checking deposits 26 (89 ) (63 ) 62 (128 ) (66 ) Money market deposits 219 (722 ) (503 ) (30 ) (201 ) (231 ) Savings deposits 10 (41 ) (31 ) 17 (45 ) (28 ) Time deposits (243 ) (90 ) (333 ) (67 ) (184 ) (251 ) Total borrowings (6,139 ) 6,216 77 4,894 (3,652 ) 1,242 Total interest-bearing liabilities (6,127 ) 5,274 (853 ) 4,876 (4,210 ) 666 $ 28,789$ (11,074 )$ 17,715$ 24,040$ (37,042 )$ (13,002 ) For the six months ended June 30, For the six months ended June 30, 2014 vs 2013 2013 vs 2012 Increase (decrease) Net Increase (decrease) Net due to increase due to increase (in thousands) Volume Rate (decrease) Volume Rate (decrease) Interest earned on: Total loans and leases (1) $ 45,985$ (32,882 )$ 13,103

$ 44,165$ (54,089 )$ (9,924 ) Securities (7,047 ) 8,086 1,039 15,925 (18,776 ) (2,851 ) Due from banks - interest-bearing 536 14 550 (19 ) 23 4 Federal funds sold and securities purchased under resale agreements 1,045 (887 ) 158 492 2,092 2,584 Other interest-earning assets (617 ) 957 340 (242 ) 892 650 Total interest-earning assets 39,902 (24,712 ) 15,190



60,321 (69,858 ) (9,537 )

Interest paid on: Interest checking deposits 62 (159 ) (97 ) 125 (298 ) (173 ) Money market deposits 391 (1,391 ) (1,000 ) (143 ) (693 ) (836 ) Savings deposits 19 (97 ) (78 ) 37 (77 ) (40 ) Time deposits (385 ) (176 ) (561 ) (218 ) (402 ) (620 ) Total borrowings (19,003 ) 18,446 (557 ) 14,816 (10,633 ) 4,183 Total interest-bearing liabilities (18,916 ) 16,623 (2,293 ) 14,617 (12,103 ) 2,514 $ 58,818$ (41,335 )$ 17,483$ 45,704$ (57,755 )$ (12,051 )



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(1) Includes covered loans. 59

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Net interest income was $219.1 million for the second quarter of 2014, an increase of 10 percent from $199.8 million for the first quarter of 2014, and an 8 percent increase from $202.9 million for the second quarter of 2013. The increase in net interest income from the first quarter of 2014 was largely due to growth in non-covered loans, higher interest income from covered loans and higher interest income from the securities portfolio. The increase in net interest income from the prior-year quarter was due to higher income on loans and securities and lower interest expense on deposits and borrowings. Fully taxable-equivalent net interest income and dividend income was $226.1 million for the second quarter of 2014, compared to $206.1 million for the first quarter of 2014 and $208.4 million for the second quarter of 2013. Interest income on total loans was $187.0 million for the second quarter of 2014, up 10 percent from the first quarter of 2014 and up 7 percent from the second quarter of 2013. The increase in loan interest income from the prior quarter was driven by growth in the loan portfolio and higher income from the net accelerated accretable yield recognition on covered loans that were paid off or fully charged off in the second quarter of 2014. Compared to the year-earlier quarter, the increase in loan interest income was largely due to growth in non-covered loans. Income from accelerated accretable yield recognition during the second quarter of 2014 was $18.7 million, compared to $9.3 million in the first quarter of 2014 and $15.9 million in the year-earlier quarter. Refer to "Covered Assets" included elsewhere in this report for further discussion of interest income on covered loans. Average loans and leases, excluding covered loans, totaled $18.00 billion for the second quarter of 2014, an increase of 4 percent from $17.34 billion for the first quarter of 2014 and up 16 percent from $15.43 billion for the second quarter of 2013. Average commercial loans grew 4 percent and 18 percent from the first quarter of 2014 and second quarter of 2013, respectively. Average commercial real estate loans grew 3 percent and 18 percent for the same periods. Average covered loans decreased to $643.7 million for the second quarter of 2014 from $696.2 million for the first quarter of 2014 and $909.7 million for the year-ago quarter. Interest income on securities was $43.5 million for the second quarter of 2014, a 5 percent increase from both $41.6 million for the first quarter of 2014 and $41.2 million for the second quarter of 2013. Average total securities were $8.67 billion for the second quarter of 2014, up by 1 percent from $8.59 billion for the first quarter of 2014 and down 2 percent from $8.87 billion for the year-earlier quarter. The decrease from the second quarter of 2013 was largely due to sales of longer-duration securities in the second half of 2013 to shorten the duration of the investment portfolio in anticipation of higher interest rates. Total interest expense was $13.2 million for the second quarter of 2014, virtually unchanged from the first quarter of 2014 and down 6 percent from $14.1 million for the second quarter of 2013. Interest expense on borrowings was $11.2 million for the second quarter of 2014, unchanged from $11.2 million for the first quarter of 2014 and up 1 percent from $11.1 million for the second quarter of 2013. The decrease in total interest expense from the year-earlier quarter was attributable to lower expense on interest-bearing deposits. Interest expense on deposits was $2.1 million for the second quarter of 2014, unchanged from $2.1 million for the first quarter of 2014 and down 31 percent from $3.0 million for the year-earlier quarter. The decrease in interest expense from the year-earlier quarter was due to lower deposit rates. The impact of lower rates more than offset the impact of higher average interest-bearing deposit balances in the second quarter of 2014. Average deposits were $25.91 billion for the second quarter of 2014, up 2 percent from $25.37 billion for the first quarter of 2014, and up 12 percent from $23.12 billion for the second quarter of 2013. Average core deposits, which do not include certificates of deposits of $100,000 or more, were $25.46 billion for the second quarter of 2014, $24.89 billion for the first quarter of 2014 and $22.41 billion for the year-earlier quarter. Average core deposits represented 98 percent of total average deposits for the second and first quarter of 2014, and 97 percent for the second quarter of 2013. Average interest-bearing deposits were $10.03 billion for the second quarter of 2014, up 1 percent from the first quarter of 2014, and up 8 percent from the second quarter of 2013. Average noninterest-bearing deposits were $15.88 billion, up 3 percent from the first quarter of 2014 and up 15 percent from the year-earlier quarter. 60 --------------------------------------------------------------------------------



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Net interest margin was 3.21 percent for the second quarter of 2014, up from 3.02 percent for the first quarter of 2014 and down from 3.24 percent for the second quarter of 2013. The average yield on earning assets for the second quarter of 2014 was 3.39 percent, up 17 basis points from 3.22 percent for the first quarter of 2014 and down 7 basis points from 3.46 percent for the year-earlier quarter. The average cost of interest-bearing liabilities was 0.49 percent, down from 0.51 percent for the first quarter of 2014 and down from 0.54 percent for the same period in 2013. The increase in the net interest margin from the first quarter of 2014 was primarily attributable to higher income from the net accelerated accretable yield recognition on covered loans that were paid off or fully charged off. The decrease in the net interest margin compared to the year-earlier quarter was primarily due to lower yields on loans and leases and declining volumes of covered loans, partially offset by higher fees and interest recoveries and a lower cost of interest-bearing liabilities. Provision for Credit Losses The Company accounts for the credit risk associated with lending activities through its allowance for loan and lease losses, reserve for off-balance sheet credit commitments and provision for credit losses. The provision for credit losses on loans and leases, excluding covered loans, is the expense recognized in the consolidated statements of income to adjust the allowance and the reserve for off-balance sheet credit commitments to the levels deemed appropriate by management, as determined through application of the Company's allowance methodology procedures. See "Critical Accounting Policies- Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" in the Company's Form 10-K for the year ended December 31, 2013. The Company recorded a $1.0 million reversal of provision for credit losses on loans and leases, excluding covered loans, in the three months and six months ended June 30, 2014. The Company recorded no provision for credit losses on loans and leases, excluding covered loans, during the comparable periods in 2013. The provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by a broad range of economic factors. Additional factors affecting the provision include net loan charge-offs or recoveries, nonaccrual loans, specific reserves, risk rating migration and changes in the portfolio size and composition. See "Balance Sheet Analysis-Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" included elsewhere in this report for further information on factors considered by the Company in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses. Covered loans represent loans acquired from the FDIC that are subject to loss-sharing agreements, and are primarily accounted for as acquired impaired loans under Accounting Standards Codification Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). The provision for losses on covered loans is the expense recognized in the consolidated statements of income related to impairment losses resulting from the Company's quarterly review and update of cash flow projections on its covered loan portfolio. The Company recorded a $1.5 million reversal of provision for losses on covered loans during the second quarter of 2014, compared to a $4.7 million provision on covered loans in the first quarter of 2014 and an $11.9 million reversal of provision during the second quarter of 2013. Refer to "Covered Assets" included elsewhere in this report for further discussion of the provision for losses on covered loans. Credit quality will be influenced by underlying trends in the economic cycle, particularly in California, New York and Nevada, and other factors which are beyond management's control. Consequently, no assurances can be given that the Company will not sustain loan or lease losses, in any particular period, that are sizable in relation to the allowance for loan and lease losses.



Refer to "Loans and Leases-Asset Quality" included elsewhere in this report for further discussion of credit quality.

Noninterest Income Noninterest income was $101.1 million in the second quarter of 2014, down slightly from the first quarter of 2014 but up 23 percent from the second quarter of 2013. Higher FDIC loss sharing expense in the second quarter of 2014 compared with the first quarter was largely offset by higher wealth management fee income and higher gains on sales of securities and foreclosed assets. The increase from the year-earlier quarter was due largely to strong growth in wealth management fee income, higher gains on sales of foreclosed assets and lower FDIC loss sharing expense. Noninterest income represented 32 percent of the Company's revenue in the second quarter of 2014, compared to 34 percent in the first quarter of 2014 and 29 percent for the second quarter of 2013. 61 --------------------------------------------------------------------------------



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The following table provides a summary of noninterest income by category:

For the three months ended June 30, March 31, June 30, (in thousands) 2014 2014 2013 Trust and investment fees $ 54,599$ 53,306$ 49,830 Brokerage and mutual fund fees 14,240 10,042



8,107

Total wealth management fees 68,839 63,348



57,937

Cash management and deposit transaction charges 12,128 12,033

12,880

International services 11,483 10,395



10,911

FDIC loss sharing expense, net (24,161 ) (7,083 ) (26,477 ) Other noninterest income 20,853 17,607



20,401

Total noninterest income before gain (loss) 89,142 96,300 75,652 Gain on disposal of assets 6,838 2,826 949 Gain on sale of securities 5,367 2,122 5,790 Impairment loss on securities (248 ) - (182 ) Total noninterest income $ 101,099$ 101,248$ 82,209 Wealth Management The Company provides various trust, investment and wealth advisory services to its individual, institutional and business clients. The Company delivers these services through the Bank's wealth management division as well as through its wealth management affiliates. Trust services are provided only by the Bank. Trust and investment fee revenue includes fees from trust, investment and asset management, and other wealth advisory services. The majority of these fees are based on the market value of client assets managed, advised, administered or held in custody. The remaining portion of these fees is based on the specific service provided, such as estate and financial planning services, or may be fixed fees. For those fees based on market valuations, the mix of assets held in client accounts, as well as the type of managed account, impacts how closely changes in trust and investment fee income correlate with changes in the financial markets. Changes in market valuations are reflected in fee income on a trailing day, month or quarter basis. Also included in total trust and investment fees is the Company's portion of income from certain investments accounted for under the equity method. Trust and investment fees were $54.6 million for the second quarter of 2014, an increase of 2 percent from $53.3 million for the first quarter of 2014 and an increase of 10 percent from $49.8 million for the second quarter of 2013. The increases compared to prior periods were largely due to the growth in assets under management ("AUM") generated through asset inflows and market appreciation. Money market mutual fund and brokerage fees were $14.2 million for the second quarter of 2014, an increase of 42 percent from $10.0 million for the first quarter of 2014, and up 76 percent from $8.1 million for the year-earlier quarter. Second quarter 2014 brokerage and mutual fund fees included the recognition of $3.8 million in performance fees related to the merger of two funds. The higher fee income was partially offset by a $1.9 million increase in legal and professional fees for sub-advisory expense related to the merged funds. See "Noninterest Expense" below. The increase in fee income compared to the second quarter of 2013 was also due to asset inflows and market appreciation. AUM includes assets for which the Company makes investment decisions on behalf of its clients and assets under advisement for which the Company receives advisory fees from its clients. Assets under administration ("AUA") are assets the Company holds in a fiduciary capacity or for which it provides non-advisory services. The table below provides a summary of AUM and AUA for the dates indicated: June 30, % March 31, % (in millions) 2014 2013 Change 2014 Change Assets Under Management $ 47,124$ 41,257 14 $ 46,374 2 Assets Under Administration Brokerage 5,218 5,251 (1 ) 5,628 (7 ) Custody and other fiduciary 13,438 13,247 1 14,398 (7 ) Subtotal 18,656 18,498 1 20,026 (7 ) Total assets under management or administration (1) $ 65,780$ 59,755 10 $ 66,400 (1 )



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(1) Excludes $27.85 billion, $26.09 billion and $25.11 billion of assets under

management for asset managers in which the Company held a noncontrolling

ownership interest as of June 30, 2014, March 31, 2014 and June 30, 2013,

respectively. 62

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AUM totaled $47.12 billion as of June 30, 2014, up 14 percent from the year-earlier quarter and up 2 percent from the first quarter of 2014. Assets under management or administration were $65.78 billion at June 30, 2014, an increase of 10 percent from the year-earlier quarter but down 1 percent from the first quarter of 2014. The growth in AUM from the prior year period was primarily attributable to the addition of client assets and higher market valuations. A distribution of AUM by type of investment is provided in the following table: % of Assets Under Management June 30, March 31, June 30, Investment 2014 2014 2013 Equities 49 % 48 % 46 % U.S. fixed income 26 27 25 Cash and cash equivalents 15 16 18 Other (1) 10 9 11 100 % 100 % 100 %



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(1) Includes private equity and other alternative investments.

Other Noninterest Income Cash management and deposit transaction fees for the second quarter of 2014 were $12.1 million, up 1 percent from the first quarter of 2014 and down 6 percent from the second quarter of 2013. The decrease from the year-earlier quarter was due largely to higher deposit balances used to offset service charge fees.



International services income for the second quarter of 2014 was $11.5 million, up 10 percent from the first quarter of 2014, and up 5 percent from the year-earlier quarter. International services income is comprised of foreign exchange fees, fees on commercial letters of credit and standby letters of credit, foreign collection fees, and gains and losses associated with fluctuations in foreign currency exchange rates. The increases from prior periods were due to increased client activity and the addition of new clients.

Net FDIC loss sharing expense increased to $24.2 million for the second quarter of 2014 from $7.1 million for the first quarter of 2014. Net FDIC loss sharing expense was $26.5 million for the year-earlier quarter. See "Covered Assets" included elsewhere in this report for further discussion of FDIC loss sharing income and expense. Net gain on disposal of assets was $6.8 million in the second quarter of 2014, compared to $2.8 million in the first quarter of 2014 and $0.9 million in the year-earlier quarter. The increase from the prior periods was due primarily to the sale of assets that served as collateral for previously charged-off loans, as well as higher gains recognized on the sale of covered and non-covered OREO. The Company recognized net gains on sales of securities of $5.4 million during the second quarter of 2014. Net gains on sales of securities were $2.1 million in the first quarter of 2014 and $5.8 million for the second quarter of 2013. Impairment losses of $0.2 million were recognized in earnings on securities available-for-sale in the second quarter of 2014 and 2013. There were no impairment losses recognized in earnings on securities available-for-sale in the first quarter of 2014. Other income for the second quarter of 2014 was $20.9 million, up 18 percent from $17.6 million for the first quarter of 2014, and up 2 percent from $20.4 million for the second quarter of 2013. The increase from the first quarter of 2014 was due primarily to higher lease residual income and credit card and interchange fees. Compared to the year-earlier quarter, the increase was mainly due to higher income from private equity investments and credit card and interchange fee income, largely offset by lower income from client swap transactions in the second quarter of 2014. 63 --------------------------------------------------------------------------------

Table of Contents Noninterest Expense Noninterest expense was $225.6 million for the second quarter of 2014, up 5 percent from $214.9 million for the first quarter of 2014, and up 7 percent from $211.4 million for the second quarter of 2013. The following table provides a summary of noninterest expense by category: For the three months ended June 30, March 31, June 30, (in thousands) 2014 2014 2013



Salaries and employee benefits $ 138,859$ 136,833$ 127,168

All other: Net occupancy of premises 16,595 16,094 16,205



Legal and professional fees 18,393 12,950 13,514 Information services

9,463 9,346 9,183



Depreciation and amortization 7,885 7,828 8,249 Amortization of intangibles 1,454 1,487 1,931 Marketing and advertising

8,982 9,775 8,293 Office services and equipment 5,287 4,910 5,034 Other real estate owned 2,372 1,433 4,385 FDIC assessments 2,765 1,391 3,663 Other operating 13,567 12,846 13,804 Total all other 86,763 78,060 84,261 Total noninterest expense $ 225,622$ 214,893$ 211,429 Salaries and employee benefits expense was $138.9 million for the second quarter of 2014, up 1 percent from $136.8 million for the first quarter of 2014, and up 9 percent from $127.2 million for the year-earlier quarter. Full-time equivalent staff was 3,638 at June 30, 2014, up from 3,587 at March 31, 2014 and 3,551 at June 30, 2013. The increase in salaries and employee benefits expense in the second quarter compared with the prior and year-earlier quarters was primarily attributable to the addition of staff and higher incentive compensation. The increase in incentive compensation expense in the second quarter of 2014 compared with the first quarter was partially offset by lower payroll taxes. Salaries and employee benefits expense for the second quarter of 2014 includes $5.2 million of share-based compensation expense compared with $5.4 million for the first quarter of 2014 and $5.4 million for the year-earlier quarter. The decrease from the first quarter of 2014 was attributable to expense associated with cash-settled restricted stock units, which fluctuates based on the Company's stock price. Cash-settled restricted stock unit expense was higher during the first quarter of 2014 due to a higher average stock price during that quarter. See Note 10, Share-Based Compensation, of the Notes to the Unaudited Consolidated Financial Statements for further discussion of share-based compensation. The remaining noninterest expense categories totaled $86.8 million for the second quarter of 2014, up 11 percent from $78.1 million for the first quarter of 2014 and 3 percent from $84.3 million for the second quarter of 2013. The increase from the first quarter of 2014 was mostly due to higher legal and professional fees, OREO expense and FDIC assessments. The increase from the year-earlier quarter was primarily due to higher legal and professional fees that were partially offset by lower OREO expense and FDIC assessments. Legal and professional fees were $18.4 million for the second quarter of 2014, up 42 percent from $13.0 million in the first quarter of 2014, and up 36 percent from $13.5 million in the year-earlier quarter. The increase from the first quarter of 2014 and second quarter of 2013 was primarily due to higher legal and professional fees recognized in the current quarter from collection and defense matters, and $1.9 million of sub-advisory fees associated with the merger of two City National Rochdale funds. Legal and professional fees associated with covered loans and OREO declined to $1.0 million for the second quarter of 2014, from $1.6 million for the first quarter of 2014 and $1.7 million for the second quarter of 2013. Under the loss-sharing agreements, 80 percent of qualifying legal and professional fees associated with covered loans and OREO are reimbursable by the FDIC and reflected in FDIC loss sharing income (expense), net in the noninterest income section of the consolidated statements of income. 64

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The following table provides a summary of OREO expense for non-covered and covered OREO. Qualifying covered OREO expense is reimbursable by the FDIC at 80 percent. For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Non-covered OREO expense Valuation write-downs $ - $ 61 $ 14 $ 171 Holding costs and foreclosure expense 72 246 178 458 Total non-covered OREO expense $ 72 $ 307 $ 192 $ 629 Covered OREO expense Valuation write-downs $ 934 $ 2,184$ 1,089$ 5,219 Holding costs and foreclosure expense 1,366 1,894 2,524 3,787 Total covered OREO expense $ 2,300$ 4,078$ 3,613$ 9,006 Total OREO expense $ 2,372$ 4,385$ 3,805$ 9,635 65

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Table of Contents Covered Assets



The following table summarizes the components of income and expense related to covered assets for the three and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Interest income on covered loans Base yield $ 12,379$ 16,730$ 24,907$ 33,221 Income on loans paid-off or fully charged-off 18,682 15,880 28,006 31,505 Total interest income on covered loans $ 31,061$ 32,610



$ 52,913$ 64,726

(Reversal of) provision for losses on covered loans (Reversal of) provision for losses on covered loans $ (1,461 )$ (11,927 )



$ 3,194$ (2,035 )

Noninterest income related to covered assets FDIC loss sharing expense, net Loss on indemnification asset $ (4,392 )$ (13,102 )$ (793 )$ (2,486 ) Indemnification asset amortization (3,320 ) (4,746 ) (6,484 ) (9,645 ) Net FDIC reimbursement for OREO and loan expenses 2,160 4,995 3,813 10,188 Removal of indemnification asset for loans paid-off or fully charged-off (4,994 ) (7,650 ) (7,993 ) (13,723 ) Removal of indemnification asset for unfunded loan commitments and loans transferred to OREO (773 ) (1,163 ) (1,449 ) (3,732 ) Removal of indemnification asset for OREO and net reimbursement to FDIC for OREO sales (1,827 ) (428 ) (2,138 ) (1,272 ) Loan recoveries shared with FDIC (9,866 ) (4,095 ) (14,088 ) (9,076 ) Increase in FDIC clawback liability (1,149 ) (288 ) (2,112 ) (1,083 ) Total FDIC loss sharing expense, net (24,161 ) (26,477 )



(31,244 ) (30,829 )

Gain on disposal of assets Net gain on sale of OREO 2,613 616 3,002 1,590 Other income Net gain on transfers of covered loans to OREO 867 1,445 1,730 4,951 Amortization of fair value on acquired unfunded loan commitments 218 283 433 677 OREO income 289 456 724 1,282 Other 543 (318 ) 387 (652 ) Total other income 1,917 1,866 3,274 6,258 Total noninterest income related to covered assets $ (19,631 )$ (23,995 )



$ (24,968 )$ (22,981 )

Noninterest expense related to covered assets (1) Other real estate owned Valuation write-downs $ 934 $ 2,184$ 1,089$ 5,219 Holding costs and foreclosure expense 1,366 1,894 2,524 3,787 Total other real estate owned 2,300 4,078 3,613 9,006 Legal and professional fees 992 1,701 2,572 3,721 Other operating expense Other covered asset expenses 5 16 24 30 Total noninterest expense related to covered assets (2) $ 3,297$ 5,795$ 6,209$ 12,757



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(1) OREO, legal and professional fees and other expenses related to covered

assets must meet certain FDIC criteria in order for the expense amounts to be

reimbursed. Certain amounts reflected in these categories may not be

reimbursed by the FDIC. (2) Excludes personnel and other corporate overhead expenses that the Company

incurs to service covered assets and costs associated with the branches acquired in FDIC-assisted acquisitions. 66

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The Company accounts for its covered loans under ASC 310-30. Loans are accounted for under ASC 310-30 when there is evidence of credit deterioration since origination and for which it is probable, at acquisition, that the Company would be unable to collect all contractually required payments. These loans were recorded at fair value at the time of acquisition. In connection with its FDIC-assisted acquisitions, the Company entered into loss-sharing agreements with the FDIC under which the FDIC will reimburse the Company for 80 percent of eligible losses with respect to covered loans, OREO and unfunded loan commitments. The expected reimbursements under the loss-sharing agreements were recorded as an indemnification asset at their initial estimated fair value on the date of acquisition.



Covered Loan Base Yield and FDIC Indemnification Asset Amortization/Accretion

For covered loans, the excess of cash flows expected to be collected over the carrying value of the underlying acquired impaired loans is referred to as "accretable yield." The accretion of this amount is recognized in interest income over the expected life of the covered loans and is herein referred to as "base yield." For the FDIC indemnification asset, the difference between the cash flows the Company expects to collect from the FDIC ("FDIC cash flows") and the carrying value of the indemnification asset is amortized or accreted into noninterest income up until the expiration date of the FDIC loss sharing. Both the base yield and the amortization or accretion of the indemnification asset are calculated using a level yield method that takes into consideration the remaining life of the covered loans and the terms of the FDIC loss-sharing agreements. The quarterly review and update of cash flow projections (further discussed below) may adjust the rates used for loan accretion and indemnification asset amortization or accretion. As credit improves, expected loan cash flows will generally improve, resulting in higher accretable yield. Accordingly, as credit improves, expected FDIC cash flows will decrease, resulting in a larger difference between FDIC cash flows and indemnification asset carrying value. Such increases would result in higher rates of loan accretion and indemnification asset amortization. The Company recorded base yield on covered loans of $12.4 million in the second quarter of 2014, compared to $12.5 million in the first quarter of 2014 and $16.7 million in the second quarter of 2013. The decrease in base yield on covered loans compared to prior periods was a result of portfolio run-off. Average covered loans were $643.7 million during the second quarter of 2014, down from $696.2 million during the first quarter of 2014 and $909.7 million for the year-earlier quarter. The Company recorded indemnification asset amortization expense of $3.3 million in the second quarter of 2014, compared to $3.2 million and $4.7 million for the first quarter of 2014 and second quarter of 2013, respectively. The indemnification asset amortization expense did not change significantly from prior periods because the effects of portfolio run-off were offset by an increase in the rate of amortization, which was higher due to portfolio credit improvement.



Quarterly Update of Cash Flow Projections

The Company reviews and updates cash flow projections on covered loans and the related FDIC loss-sharing agreements on a quarterly basis. These projections take into consideration such inputs as the contractual terms of the covered loans, the contractual terms of the FDIC loss-sharing agreements, credit assumptions and prepayment assumptions. The quarterly update of cash flow projections impacts the following balance sheet and income statement items: Balance Sheet Line Item Corresponding Income Statement Line Item Covered loan Base yield in interest income Allowance for losses on (Reversal of) provision for losses on covered loans covered loans FDIC indemnification FDIC loss sharing income or expense, net asset - Gain or loss on indemnification asset - Indemnification asset amortization or accretion (on a prospective basis) FDIC clawback liability FDIC loss sharing income or expense, net - Increase or decrease in FDIC clawback liability Generally, for covered loans, decreases in estimated loan cash flows over those expected at the acquisition date and subsequent measurement periods are recognized by recording a provision for losses on covered loans. Decreases in estimated loan cash flows are typically accompanied by higher expected losses which would result in increases in FDIC cash flows. Increases in expected FDIC cash flows are recognized as gains on the FDIC indemnification asset. 67 --------------------------------------------------------------------------------



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Increases in estimated loan cash flows over those expected at the acquisition date and subsequent measurement periods are recognized as interest income, prospectively, after previously recorded allowances are reversed. Increases in estimated loan cash flows are typically accompanied by lower expected losses which would result in decreases in FDIC cash flows. Decreases in expected FDIC cash flows are recognized as indemnification asset amortization expense on a prospective basis, after previously recorded gains on the indemnification asset have been reversed. The FDIC clawback liability represents contingent consideration expected to be paid to the FDIC. The Company is required to reimburse the FDIC if actual cumulative losses are lower than the adjusted intrinsic losses contractually set forth in the FDIC loss-sharing agreements. The total FDIC clawback liability may increase as actual and expected losses decrease. The liability to the FDIC may decrease if actual and expected losses grow. The Company measures the FDIC clawback liability at fair value. As a result of improvements in the portfolio's credit quality and general market conditions, the Company recorded a $1.5 million reversal of provision for losses on covered loans during the second quarter of 2014, compared to a $4.7 million provision for losses in the first quarter of 2014 and an $11.9 million reversal of provision during the second quarter of 2013. Loss on indemnification asset was $4.4 million in the second quarter of 2014, compared to a gain of $3.6 million and a loss of $13.1 million for the first quarter of 2014 and second quarter of 2013, respectively. Expense from the increase in FDIC clawback liability was $1.1 million, $1.0 million and $0.3 million for the second quarter of 2014, first quarter of 2014, and second quarter of 2013, respectively. The provision for losses on covered loans, the gain on indemnification asset and the change in FDIC clawback liability are the result of changes, both in amount and timing, in expected loan cash flows and FDIC cash flows due to actual loan performance and the Company's revised loan loss and prepayment forecasts. During the second quarter of 2014, the expected lifetime cash flows of the covered loan portfolio improved. The covered loans that were removed, mostly due to pay-offs, performed better than previously expected. Loans are removed when they have been fully paid off, fully charged-off, sold or transferred to OREO. The credit performance of the remaining covered loans improved, which resulted in the recognition of the reversal of provision for losses on covered loans and the loss on indemnification asset during the second quarter of 2014 and the year-earlier quarter. The provision for losses on covered loans and the gain on indemnification asset in the first quarter of 2014 were attributable to credit deterioration for the remaining covered loans during the quarter. The increase in the FDIC clawback liability was driven by an overall improvement in portfolio credit. The revisions of the loss forecasts were based on the results of management's review of market conditions, the credit quality of the outstanding covered loans and loan performance data since the acquisition of covered loans. The Company will continue updating cash flow projections on covered loans and related FDIC loss-sharing agreements on a quarterly basis. Due to the uncertainty in the future performance of the covered loans, additional provision expense or provision reversal, gain or loss on indemnification asset and changes in FDIC clawback liability may be recognized in future periods. Covered Asset Removals A covered asset removal event occurs when a loan is fully paid-off, fully charged-off, sold or transferred to OREO, or when OREO is liquidated. The difference between the carrying value of the covered asset and the cash or non-cash proceeds received upon its removal is recognized as a gain or loss in the income statement. The gain or loss on covered loans that are fully paid-off and fully charged-off, also referred to as "net accelerated accretable yield recognition," is recorded in interest income. Gain or loss recognized on the transfer of covered loans to OREO is calculated as the difference between the carrying value of the covered loan and the fair value of the underlying foreclosed collateral, and is recognized in other noninterest income. The Company also recognizes gains and losses from the sale of covered OREO through noninterest income. When a covered asset is removed, the FDIC indemnification asset associated with the covered asset is also removed. The FDIC indemnification asset balance associated with unfunded loan commitments is also removed when an unfunded commitment has been funded. The difference between the FDIC indemnification asset and the expected payment from the FDIC for the removed asset represents the expense or income on removal of the indemnification asset. These amounts are recognized in FDIC loss sharing income or expense. 68 --------------------------------------------------------------------------------



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Interest income from net accelerated accretable yield recognition increased to $18.7 million in the second quarter of 2014, compared to $9.3 million in the first quarter of 2014 and $15.9 million in the year-earlier quarter. The net expense from the removal of indemnification asset for loans that were paid off or fully charged-off was $5.0 million, $3.0 million and $7.7 million in the second quarter of 2014, first quarter of 2014 and second quarter of 2013, respectively. The increase in both balances in the second quarter of 2014 compared to the first quarter of 2014 was due to higher volumes of covered loans that were paid off or fully charged-off. Net gains on transfers of covered loans to OREO were $0.9 million in both the second and first quarter of 2014, down from $1.4 million in the year-earlier quarter. Net gain on sale of covered OREO was $2.6 million in the second quarter of 2014, an increase from $0.4 million in the first quarter of 2014 and $0.6 million in the year-earlier quarter. Total net expense from the removal of the indemnification asset for all other covered asset removals, which excludes the removal of indemnification asset for loans that were paid off or fully charged-off, was $2.6 million in the second quarter of 2014, $1.0 million in the first quarter of 2014 and $1.6 million in the year-earlier quarter. The increase in net gain on sale of covered OREO and related expense from the indemnification asset recognized in the second quarter of 2014 was driven by higher OREO sale volume. Loan recoveries on previously charged-off covered loans are also shared with the FDIC. The portion that is payable to the FDIC is recognized as "Loan recoveries shared with FDIC" under FDIC loss sharing income or expense. The Company recognized expenses of $9.9 million in the second quarter of 2014, $4.2 million in the first quarter of 2014 and $4.1 million in the year-earlier quarter. The Company recognized significant loan recoveries during the first two quarters of 2014 and past two years as a result of increases in the value of real estate collateral and improvements in the financial condition of borrowers or guarantors. Other Expenses Noninterest expense related to covered assets includes OREO expense, legal and professional expense, and other covered asset expenses. These expenses are subject to FDIC reimbursement, but must meet certain FDIC criteria in order to be reimbursed. Certain amounts reflected in the table above may not be reimbursable by the FDIC. The FDIC reimbursements related to qualified expenses are recognized as income in "Net FDIC reimbursement for OREO and loan expenses" under FDIC loss sharing income or expense. Total OREO expense, which includes valuation write-downs, holding costs and foreclosure expenses was $2.3 million for the second quarter of 2014, up from $1.3 million for the first quarter of 2014, but down from $4.1 million for the year-earlier quarter. The decrease in total OREO expense from the prior-year period was due primarily to lower OREO volume and improvements in property values. Legal and professional fees related to covered assets were $1.0 million in the second quarter of 2014, down from $1.6 million in the first quarter of 2014 and $1.7 million in the year-earlier quarter. Correspondingly, net FDIC reimbursement for these expenses of $2.2 million for the second quarter of 2014 increased from $1.7 million for the first quarter of 2014, but was down from $5.0 million for the second quarter of 2013.



Other Information on the FDIC Indemnification Asset

The following table is a summary of activity in the FDIC indemnification asset for the three and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Balance, beginning of period $ 84,851$ 142,906$ 89,227$ 150,018 Indemnification asset amortization (3,320 ) (4,746 ) (6,484 ) (9,645 ) Loss on indemnification asset (4,392 ) (13,102 ) (793 ) (2,486 ) Reductions (1) (9,101 ) (7,763 ) (13,912 ) (20,592 ) Balance, end of period $ 68,038$ 117,295$ 68,038$ 117,295



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(1) The FDIC indemnification asset is reduced upon covered asset removals,

funding of covered unfunded loan commitments, partial charge-offs and OREO

write-downs. 69

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The indemnification asset amortization, gain on indemnification asset, and the impact of the reduction of indemnification asset for covered asset removals and funding of unfunded commitments are recognized in the FDIC loss sharing income or expense line item on the consolidated statements of income.



When a covered asset is charged-off or written down and is subject to FDIC reimbursement under the FDIC loss-sharing agreements, the Company records the estimated amount of reimbursement in an FDIC receivable account, which is classified in the Other Assets line of the consolidated balance sheet.

Segment Operations The Company's reportable segments are Commercial and Private Banking, Wealth Management and Other. For a more complete description of the segments, including summary financial information, see Note 18, Segment Results, of the Notes to the Unaudited Consolidated Financial Statements.



Commercial and Private Banking

Net income for the Commercial and Private Banking segment increased to $47.8 million for the second quarter of 2014 from $36.9 million for the second quarter of 2013. Net income for the six months ended June 30, 2014 was $87.2 million, up from $72.2 million for the year-earlier period. The increase from the prior year quarter was largely due to higher net interest income and noninterest income, partially offset by a lower reversal of provision for losses on covered loans. Net interest income increased to $208.4 million for the second quarter of 2014 from $185.0 million for the year-earlier quarter. Net interest income for the six months ended June 30, 2014 increased to $398.2 million from $369.0 million for the same period in 2013. The increase in net interest income from the year-earlier periods was largely attributable to an increase in interest income from non-covered loans driven by loan growth and lower deposit rates. Average loans, excluding covered loans, increased to $17.90 billion, or by 16 percent, for the second quarter of 2014 from $15.38 billion for the year-earlier quarter. Average loans, excluding covered loans, increased to $17.59 billion, or by 17 percent, for the six months ended June 30, 2014 from $15.07 billion for the year-earlier period. Average covered loans were $643.7 million for the second quarter of 2014, compared to $909.7 million for the second quarter of 2013, and $669.8 million for the first six months of 2014 compared to $949.4 million for the same period in 2013. The growth in net interest income was also a result of an increase in deposits, as the Asset Liability Funding Center (''Funding Center''), which is used for funds transfer pricing, pays the business line units for generating deposits. Average deposits increased to $25.58 billion for the three months ended June 30, 2014 from $22.41 billion for the year-earlier quarter, and increased to $25.32 billion for the six months ended June 30, 2014 from $22.13 billion for the same period in 2013, reflecting a 14 percent increase for both respective periods. The growth in average deposits compared with the prior-year period was driven by new client relationships and growth in deposits of existing clients. The segment recorded a $1.0 million reversal of provision for credit losses on loans and leases, excluding covered loans, for the three months and six months ended June 30, 2014, while no provision was recorded for the same periods in 2013. On covered loans, the segment recorded a $1.5 million reversal of provision for losses and a $3.2 million provision during the three months and six months ended June 30, 2014, respectively, compared to an $11.9 million and $2.0 million reversal of provision for losses during the three months and six months ended June 30, 2013, respectively. Refer to "Results of Operations-Provision for Credit Losses" and "Balance Sheet Analysis-Loan and Lease Portfolio-Asset Quality" included elsewhere in this report for further discussion of the provision. Refer to "Results of Operations-Covered Assets" included elsewhere in this report for further discussion of the provision for losses on covered loans. Noninterest income for the second quarter of 2014 was $40.9 million, up 34 percent from $30.6 million for the prior-year quarter. Noninterest income for the six months ended June 30, 2014 increased 10 percent to $89.1 million compared to $80.8 million for the year-earlier period. The increase from the prior periods was due primarily to the sale of assets that served as collateral for previously charged-off loans, as well as higher gains recognized on the sale of covered and non-covered OREO. Noninterest expense, including depreciation and amortization, increased to $182.7 million, or by 4 percent, for the second quarter of 2014 from $174.9 million for the year-earlier quarter. Noninterest expense, including depreciation and amortization, increased to $357.6 million, or by 2 percent, for the first half of 2014 from $349.4 million for the same period in 2013. 70

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Table of Contents Wealth Management The Wealth Management segment had net income attributable to CNC of $7.3 million for the second quarter of 2014, an increase from net income of $5.4 million for the year-earlier quarter. Net income attributable to CNC for the six months ended June 30, 2014 was $13.5 million compared to $9.8 million for the year-earlier period. Noninterest income increased 19 percent to $69.5 million for the second quarter of 2014 from $58.5 million for the year-earlier quarter, and by 17 percent to $133.6 million for the six months ended June 30, 2014 from $113.9 million for the same period in 2013. The increases from the year-earlier periods were mainly due to higher wealth management fees, driven by asset inflows and equity markets appreciation. Additionally, second quarter 2014 brokerage and mutual fund fees included the recognition of $3.8 million in performance fees related to the merger of two funds. Refer to "Results of Operations-Noninterest Income-Wealth Management" included elsewhere in this report for further discussion of the factors impacting fee income for the Wealth Management segment. Noninterest expense, including depreciation and amortization, was $58.9 million for the second quarter of 2014, an increase of 16 percent from $50.6 million for the year-earlier quarter. Noninterest expense, including depreciation and amortization, increased 14 percent to $113.4 million in the first six months of 2014 from $99.5 million in the year-earlier period. The increase in expense compared with the year-earlier period was primarily due to higher incentive compensation expense and sub-advisory expenses, which included $1.9 million in expense related to the merged funds. Other Net income for the Other segment decreased to $11.7 million for the second quarter of 2014 from $17.4 million for the second quarter of 2013. Net income decreased to $20.5 million for the six months ended June 30, 2014, from $29.3 million for the same period in 2013. The decrease in net income was due mostly to lower net interest income, partially offset by lower noninterest expense. Net interest income was $10.2 million and $19.9 million for the three and six months ended June 30, 2014, respectively, down from $17.6 million and $34.4 million for the same periods in 2013. The Funding Center, which is included in the Other segment and is used for funds transfer pricing, charges the business line units for loans and pays them for generating deposits. During the second quarter of 2014, funding credit given to the Commercial and Private Banking segment increased compared with the year-earlier quarter due to higher average deposit balances. Also, funding charges applied to loan balances in the lending units remain low due to the low interest rate environment. Both of these circumstances resulted in lower net interest income in the Other segment and higher net interest income in the Commercial and Private Banking segment. Noninterest income (loss) increased to ($9.3) million for the current quarter from ($6.8) million for the year-earlier quarter. Noninterest income (loss) increased to ($20.4) million for the six months ended June 30, 2014 from ($19.0) million for the year-earlier period. The change in noninterest income (loss) for the three and six months ended June 30, 2014 compared with the same periods in 2013 was primarily due to an increase in the elimination of inter-segment revenues (recorded in the Other segment) due to higher wealth management income compared to the year-earlier periods. Income Taxes The Company recognized income tax expense of $29.8 million during the second quarter of 2014, compared with tax expense of $26.3 million in the first quarter of 2014 and $25.4 million in the year-earlier quarter. The effective tax rate was 30.7 percent of pretax income for the second quarter of 2014, compared with 32.3 percent for the first quarter of 2014 and 29.7 percent for the year-earlier quarter. The lower tax rate during the second quarter of 2014, when compared to the prior quarter was attributable to tax refunds resulting from ordinary tax audits during 2014. The effective tax rates differ from the applicable statutory federal and state tax rates due to various factors, including tax benefits from investments in affordable housing partnerships, tax-exempt income on municipal bonds, bank-owned life insurance and other adjustments. See Note 13, Income Taxes, of the Notes to the Unaudited Consolidated Financial Statements for further discussion of income taxes. BALANCE SHEET ANALYSIS Total assets were $30.82 billion at June 30, 2014, an increase of 13 percent from $27.38 billion at June 30, 2013 and 4 percent from $29.72 billion at December 31, 2013. Average assets for the second quarter of 2014 increased to $29.98 billion from $27.47 billion for the second quarter of 2013. Total average interest-earning assets for the second quarter of 2014 were $28.28 billion, up from $25.82 billion for the second quarter of 2013. The increase in assets from the year-earlier quarter primarily reflects higher loan balances. 71 --------------------------------------------------------------------------------

Table of Contents Securities At June 30, 2014, the Company had total securities of $8.83 billion, comprised of securities available-for-sale at fair value of $5.33 billion, securities held-to-maturity at amortized cost of $3.42 billion and trading securities at fair value of $86.1 million. The Company had total securities of $9.28 billion at December 31, 2013, 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. At June 30, 2013, the Company had total securities of $8.60 billion, comprised of securities available-for-sale at fair value of $7.04 billion, securities held-to-maturity at amortized cost of $1.50 billion and trading securities at fair value of $48.7 million. The increase in the held-to-maturity category from the year-earlier quarter was due primarily to the transfer of $994.3 million of debt securities from the available-for-sale category to the held-to-maturity category during the fourth quarter of 2013. The transfer was made as part of a change in the Company's strategy to mitigate the potential volatility of higher interest rates on market values in the available-for-sale securities portfolio. The decrease in total securities from December 31, 2013 is due to growth in loan balances in excess of deposit growth.



The following is a summary of amortized cost and estimated fair value for the major categories of securities available-for-sale and held-to-maturity:

June 30, 2014 December 31, 2013 June 30, 2013 Amortized Amortized Amortized (in thousands) Cost Fair Value Cost Fair Value Cost Fair Value Securities available-for-sale: U.S. Treasury $ 36,213$ 36,258$ 35,312$ 35,335$ 30,293$ 30,285 Federal agency - Debt 1,027,192 1,026,516 1,417,509 1,410,536 987,467 980,025 Federal agency - MBS 121,501 123,229 156,399 157,226 422,699 438,182 CMOs - Federal agency 3,552,834 3,539,319 4,037,348 3,997,298 4,736,335 4,728,613 CMOs - Non-agency 27,168 26,903 38,383 37,462 47,079 45,327 State and municipal 384,359 392,593 407,312 415,995 457,869 466,760 Other debt securities 174,723 177,987 175,091 178,822 351,171 350,244 Total available-for-sale debt securities 5,323,990 5,322,805 6,267,354 6,232,674 7,032,913 7,039,436 Equity securities and mutual funds 621 5,687 337 8,443 337 5,135 Total available-for-sale securities $ 5,324,611$ 5,328,492$ 6,267,691 $



6,241,117 $ 7,033,250$ 7,044,571

Securities held-to-maturity (1): Federal agency - Debt $ 302,918$ 306,381$ 178,413$ 173,424$ 109,562$ 108,033 Federal agency - MBS 554,421 559,691 445,360 434,435 315,529 308,011 CMOs - Federal agency 1,883,461 1,889,954 1,781,219 1,742,437 797,715 783,754 State and municipal 579,473 587,591 454,155



435,562 281,167 266,759 Other debt securities 98,080 98,367 98,696 98,077

- - Total held-to-maturity securities $ 3,418,353$ 3,441,984$ 2,957,843$ 2,883,935$ 1,503,973$ 1,466,557



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

The average duration of the $5.33 billion available-for-sale portfolio was 2.2 years at June 30, 2014, down from 3.2 years at June 30, 2013 and 2.4 years at December 31, 2013. The decrease in average duration reflects the transfer of debt securities from the available-for-sale category to the held-to-maturity category in the fourth quarter of 2013 and a rotation from longer-duration to shorter-duration securities in the available-for-sale portfolio. The decrease was also partly the result of the sale of some longer duration securities from the available-for-sale portfolio in the second half of 2013. Changes in the fair value of securities available-for-sale will impact other comprehensive income, and thus shareholders' equity, on an after-tax basis. Securities held-to-maturity are presented in the consolidated balance sheets at amortized cost. Changes in the fair value of securities held-to-maturity do not have an impact on other comprehensive income. At June 30, 2014, the available-for-sale securities portfolio had a net unrealized gain of $3.9 million, consisting of $49.1 million of unrealized gains and $45.2 million of unrealized losses. At December 31, 2013, the available-for-sale securities portfolio had a net unrealized loss of $26.6 million, comprised of $56.1 million of unrealized gains and $82.6 million of unrealized losses. At June 30, 2013, the available-for-sale securities portfolio had a net unrealized gain of $11.3 million, comprised of $89.7 million of unrealized gains and $78.4 million of unrealized losses. The net unrealized gain at June 30, 2014 compared to the net unrealized loss at December 31, 2013 was due to lower market rates. The decrease in the unrealized gain compared to June 30, 2013 was primarily due to an increase in medium and long-term interest rates as well as an overall decrease in the size of the available-for-sale portfolio. 72 --------------------------------------------------------------------------------



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The following table provides the expected remaining maturities of debt securities included in the securities portfolio at June 30, 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. Over 1 year Over 5 years One year or through through Over 10 (in thousands) less 5 years 10 years years Total Securities available-for-sale: U.S. Treasury $ 23,194$ 13,064 $ - $ - $ 36,258 Federal agency - Debt 639,733 347,513 39,270 - 1,026,516 Federal agency - MBS - 105,432 17,797 - 123,229 CMOs - Federal agency 98,070 3,236,456 204,793 - 3,539,319 CMOs - Non-agency 2,237 24,666 - - 26,903 State and municipal 100,959 288,314 - 3,320 392,593 Other 58,751 119,236 - - 177,987 Total debt securities available-for-sale $ 922,944$ 4,134,681 $



261,860 $ 3,320$ 5,322,805

Amortized cost $ 919,336$ 4,135,324 $



265,930 $ 3,400$ 5,323,990

Securities held-to-maturity: Federal agency - Debt $ - $ 26,000$ 86,170$ 190,748$ 302,918 Federal agency - MBS - 75,854 467,171 11,396 554,421 CMOs - Federal agency - 805,601 1,077,860 - 1,883,461 State and municipal - 80,107 399,352 100,014 579,473 Other - 98,080 - - 98,080 Total debt securities held-to-maturity at amortized cost $ - $ 1,085,642$ 2,030,553$ 302,158$ 3,418,353 Impairment Assessment The Company performs a quarterly assessment of the debt and equity securities held in its investment portfolio to determine whether a decline in fair value below amortized cost is other-than-temporary. If a decline in fair value is determined to be other-than-temporary, the cost basis of the individual security is written down to fair value which then becomes the security's new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value. The Company recorded impairment losses in earnings on securities available-for-sale of $0.2 million for the three and six months ended June 30, 2014 and 2013, respectively. The Company recognized $0.3 million and $0.2 million of non-credit-related other-than-temporary impairment in accumulated other comprehensive income or loss ("AOCI") on securities available-for-sale at June 30, 2014 and 2013, respectively. No impairment losses were recognized in earnings or AOCI for securities held-to-maturity during the three and six months ended June 30, 2014 and 2013. Of the total securities available-for-sale in an unrealized loss position at June 30, 2014, approximately $739.0 million of securities with unrealized losses of $2.0 million were in a continuous unrealized loss position for less than 12 months, and $1.67 billion of securities with unrealized losses of $43.2 million were in a continuous loss position for more than 12 months. Securities in a loss position and total gross unrealized losses were comprised mostly of federal agency CMOs and federal agency debt securities. At December 31, 2013, approximately $2.71 billion of securities with unrealized losses of $44.3 million were in a continuous unrealized loss position for less than 12 months and $784.3 million of securities with unrealized losses of $38.4 million were in a continuous loss position for more than 12 months. At June 30, 2013, approximately $3.91 billion of securities with unrealized losses of $72.6 million were in a continuous unrealized loss position for less than 12 months and $27.7 million of securities with unrealized losses of $5.8 million were in a continuous loss position for more than 12 months. Unrealized losses on debt securities generally decreased in the first half of 2014 compared to December 31, 2013 due to lower market interest rates. Unrealized losses decreased compared to the year-earlier period largely due to the decrease in the size of the available-for-sale portfolio. 73 --------------------------------------------------------------------------------



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See Note 3, Securities, of the Notes to the Unaudited Consolidated Financial Statements for further disclosures related to the securities portfolio.

Loan and Lease Portfolio



A comparative period-end loan and lease table is presented below:

Loans and Leases June 30, December 31, June 30, (in thousands) (1) 2014 2013 2013 Commercial $ 8,230,112$ 7,562,300$ 6,910,175 Commercial real estate mortgages 3,464,918 3,223,001 2,978,975 Residential mortgages 4,814,435 4,554,311 4,153,051 Real estate construction 457,557 367,004 340,002 Home equity loans and lines of credit 716,816 709,344 700,681 Installment 183,518 151,955 149,438 Lease financing 607,432 602,523 586,930 Loans and leases, excluding covered loans 18,474,788 17,170,438 15,819,252 Less: Allowance for loan and lease losses (311,276 )



(302,584 ) (289,914 ) Loans and leases, excluding covered loans, net 18,163,512 16,867,854 15,529,338

Covered loans 605,770 716,911 867,996 Less: Allowance for loan losses (9,103 ) (15,922 ) (24,414 ) Covered loans, net 596,667 700,989 843,582 Total loans and leases $ 19,080,558$ 17,887,349$ 16,687,248 Total loans and leases, net $ 18,760,179$ 17,568,843$ 16,372,920

-------------------------------------------------------------------------------- (1) Commercial loans as of December 31, 2013 and June 30, 2013 have been corrected to include $158.2 million and $136.3 million, respectively, of loans that were previously reported as lease financing. Real estate construction loans as of June 30, 2013 have been corrected to include $122.2 million of loans that were previously reported as commercial real estate mortgages. Total loans and leases were $19.08 billion, $17.89 billion and $16.69 billion at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Total loans, excluding covered loans, were $18.47 billion, $17.17 billion and $15.82 billion at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Total loans and leases, excluding covered loans, at June 30, 2014 increased 8 percent from December 31, 2013 and 17 percent from June 30, 2013. Commercial loans, including lease financing, were up 8 percent from year-end 2013 and 18 percent from the year-earlier quarter. Commercial real estate mortgage loans increased by 8 percent from year-end 2013 and 16 percent from the year-earlier quarter. Residential mortgages grew by 6 percent and 16 percent from the same periods, respectively. Real estate construction loans increased 25 percent from year-end 2013 and 35 percent from the second quarter of 2013. Covered Loans Covered loans represent loans acquired from the FDIC that are subject to loss-sharing agreements and were $605.8 million at June 30, 2014, $716.9 million as of December 31, 2013 and $868.0 million as of June 30, 2013. Covered loans, net of allowance for loan losses, were $596.7 million as of June 30, 2014, $701.0 million as of December 31, 2013 and $843.6 million as of June 30, 2013. 74

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The following is a summary of the major categories of covered loans:

June 30, December 31, June 30, (in thousands) 2014 2013 2013 Commercial $ 6,992$ 10,009$ 8,675 Commercial real estate mortgages 568,902 666,628 789,521 Residential mortgages 5,525 4,976 5,560 Real estate construction 20,742 31,184 60,007 Home equity loans and lines of credit 3,342 3,695 3,673 Installment 267 419 560 Covered loans 605,770 716,911 867,996 Less: Allowance for loan losses (9,103 ) (15,922 ) (24,414 ) Covered loans, net $ 596,667$ 700,989$ 843,582 Other To grow loans and diversify and manage concentration risk of the Company's loan portfolio, the Company purchases and sells participations in loans. Included in this portfolio are purchased participations in Shared National Credits ("SNC"). Purchased SNC commitments at June 30, 2014 totaled $3.79 billion or 14 percent of total loan commitments, compared to $3.49 billion or 13 percent at December 31, 2013 and $3.11 billion or 13 percent at June 30, 2013. Outstanding loan balances on purchased SNCs were $1.83 billion, or approximately 10 percent of total loans outstanding, excluding covered loans, at June 30, 2014, compared to $1.60 billion or 9 percent at December 31, 2013 and $1.39 billion or 9 percent at June 30, 2013. Bank regulatory guidance on risk management practices for financial institutions with high or increasing concentrations of commercial real estate ("CRE") loans on their balance sheets emphasizes the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate CRE concentration risk. The supervisory criteria are: total reported loans for construction, land development and other land represent 100 percent of the institution's total risk-based capital, and both total CRE loans represent 300 percent or more of the institution's total risk-based capital and the institution's CRE loan portfolio has increased 50 percent or more within the last 36 months. As of June 30, 2014, total loans for construction, land development and other land represented 17 percent of total risk-based capital; total CRE loans represented 126 percent of total risk-based capital and the total portfolio of loans for construction, land development, other land and CRE increased 9 percent over the last 36 months. Asset Quality Credit Risk Management The Company has a comprehensive methodology to monitor credit quality and prudently manage credit concentration within each portfolio. The methodology includes establishing concentration limits to ensure that the loan portfolio is diversified. The limits are evaluated quarterly and are intended to mitigate the impact of any segment on the Company's capital and earnings. The limits cover major industry groups, geography, product type, loan size and customer relationship. Additional sub-limits are established for certain industries where the bank has higher exposure. The concentration limits are approved by the Bank's Credit Policy Committee and reviewed annually by the Audit & Risk Committee of the Board of Directors. The loan portfolios are monitored through delinquency tracking and a dynamic risk rating process that is designed to detect early signs of deterioration. In addition, once a loan has shown signs of deterioration, it is transferred to a Special Assets Department that consists of professionals who specialize in managing problem assets. An oversight group meets quarterly or more frequently to review the progress of problem loans and OREO. Also, the Company has established portfolio review requirements that include a periodic review and risk assessment by the Risk Management Division that reports to the Audit & Risk Committee of the Board of Directors. 75 --------------------------------------------------------------------------------



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Geographic Concentrations and Economic Trends by Geographic Region

Although the Company's lending activities are predominantly in California, and to a lesser extent, New York and Nevada, the Company has various specialty lending businesses that lend to businesses located throughout the United States of America. Excluding covered loans, California represented 73 percent of total loans outstanding and New York and Nevada represented 9 percent and 2 percent, respectively, as of June 30, 2014. The remaining 16 percent of total loans outstanding represented other states. Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio and credit performance depends on the economic stability of California. The Company has most of its loans in large metropolitan California cities such as Los Angeles, San Francisco and San Diego, rather than in the outlying suburban communities that have seen higher declines in real estate values during the recession. Within the Company's Commercial loan portfolio, the five California counties with the largest exposures at June 30, 2014 are Los Angeles (39 percent), Orange (5 percent), San Diego (3 percent), San Bernardino (2 percent) and Ventura (2 percent). Within the Commercial Real Estate Mortgage loan portfolio, the five California counties with the largest exposures are Los Angeles (35 percent), Orange (8 percent), San Diego (8 percent), Santa Clara (4 percent) and San Bernardino (4 percent). For the Real Estate Construction loan portfolio, the concentration in California is predominately in Los Angeles (26 percent), San Diego (14 percent), Orange (12 percent), Ventura (8 percent) and Alameda (7 percent). Within the Company's covered loan portfolio at June 30, 2014, the five states with the largest concentration were California (35 percent), Texas (12 percent), Nevada (7 percent), Arizona (6 percent) and Ohio (5 percent). The remaining 35 percent of total covered loans outstanding represented other states.



Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments

A consequence of lending activities is that losses may be experienced. The amount of such losses will vary from time to time depending upon the risk characteristics of the loan portfolio as affected by economic conditions, changing interest rates, and the financial performance of borrowers. The allowance for loan and lease losses and the reserve for off-balance sheet credit commitments which provide for the risk of losses inherent in the credit extension process, are increased by the provision for credit losses charged to operating expense. The allowance for loan and lease losses is decreased by the amount of charge-offs, net of recoveries. There is no exact method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio. The Company has an internal credit risk analysis and review staff that issues reports to the Audit & Risk Committee of the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of problem loans, potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, consideration of the credit loss experience, trends in problem loans and concentration of credit risk, as well as current economic conditions, particularly in California. Management then evaluates the allowance, determines its appropriate level and the need for additional provisions, and presents its analysis to the Audit & Risk Committee which ultimately reviews and approves management's recommendation. The provision is the expense recognized in the consolidated statements of income to adjust the allowance and reserve to the level deemed appropriate by management, as determined through application of the Company's allowance methodology procedures. See "Critical Accounting Policies-Allowance for Loan and Lease Losses and Reserve for Off-Balance Sheet Credit Commitments" in the Company's 2013 Annual Report on Form 10-K. The process used for determining the adequacy of the reserve for off-balance sheet credit commitments is consistent with the process for the allowance for loan and lease losses. 76 --------------------------------------------------------------------------------



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The following table summarizes activity in the allowance for loan and lease losses and the reserve for off-balance sheet credit commitments, excluding covered loans, for the three and six months ended June 30, 2014 and 2013. Activity is provided by loan type which is consistent with the Company's methodology for determining the allowance for loan and lease losses:

Changes in Allowance for Loan and Lease Losses For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Loans and leases outstanding, excluding covered loans $ 18,474,788$ 15,819,252$ 18,474,788$ 15,819,252 Average loans and leases outstanding, excluding covered loans $ 17,959,191$ 15,434,102$ 17,650,520$ 15,123,447 Allowance for loan and lease losses (1) Balance, beginning of period $ 305,790$ 282,328$ 302,584$ 277,888 Loan charge-offs: Commercial (12,862 ) (2,869 ) (14,821 ) (4,231 ) Commercial real estate mortgages - - (5 ) (45 ) Residential mortgages - (1 ) (482 ) (106 ) Real estate construction - (100 ) - (100 ) Home equity loans and lines of credit (149 ) (35 ) (165 ) (275 ) Installment (142 ) (81 ) (188 ) (352 ) Total charge-offs (13,153 ) (3,086 ) (15,661 ) (5,109 ) Recoveries of loans previously charged-off: Commercial 7,503 5,724 9,235 9,259 Commercial real estate mortgages 27 1,034 127 1,082 Residential mortgages 190 38 225 75 Real estate construction 687 2,782 5,075 5,448 Home equity loans and lines of credit 43 410 202 538 Installment 1,068 603 1,332 1,020 Total recoveries 9,518 10,591 16,196 17,422 Net (charge-offs) recoveries (3,635 ) 7,505 535 12,313 (Reversal of) provision for credit losses (1,000 ) - (1,000 ) - Transfers from (to) reserve for off-balance sheet credit commitments 10,121 81 9,157 (287 ) Balance, end of period $ 311,276$ 289,914$ 311,276$ 289,914 Net (charge-offs) recoveries to average loans and leases, excluding covered loans (annualized) (0.08 )% 0.20 % 0.01 % 0.16 % Allowance for loan and lease losses to total period-end loans and leases, excluding covered loans 1.68 % 1.83 % 1.68 % 1.83 % Reserve for off-balance sheet credit commitments Balance, beginning of period $ 34,908$ 25,205$ 33,944$ 24,837 Transfers (to) from allowance (10,121 ) (81 ) (9,157 ) 287 Balance, end of period $ 24,787$ 25,124$ 24,787$ 25,124



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(1) The allowance for loan and lease losses in this table excludes amounts related to covered loans.

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During the economic recession, the Company recognized significant charge-offs from 2008 to 2010. Total loan charge-offs have declined significantly in recent years compared to prior periods due to improving economic and business conditions in the markets served by the Company. Higher loan recoveries in recent years were largely due to increases in the value of real estate collateral, improvements in the financial condition of the Company's clients and guarantors, and increases in recoveries related to the use of legal remedies available to the Company. Recoveries occurred throughout the loan portfolio; however the majority of recoveries during the last few years relate to a small group of credit relationships and were primarily concentrated in the commercial and real estate construction portfolios. Approximately 64 percent of total recoveries during the second quarter of 2014 were related to two credit relationships. The timing and amount of recoveries is inherently uncertain, imprecise and potentially volatile and is subject to a variety of factors, including but not limited to: general economic conditions, the willingness and financial capacity of the borrower, guarantors or third parties; additional changes in the realizable value of the collateral between the date of charge-off and the date of recovery, and the legal remedies available to the Company needed to effect recovery. Based on an evaluation of individual credits, previous loan and lease loss experience, management's evaluation of the current loan portfolio, and current economic conditions, management has allocated the allowance for loan and lease losses on non-covered loans for June 30, 2014, December 31, 2013 and June 30, 2013 as shown in the table below: Allowance amount



Percentage of total allowance

June 30, December 31, June 30, June 30, December 31, June 30, (in thousands) (1) 2014 2013 2013 2014 2013 2013 Commercial and lease financing $ 126,279$ 117,103$ 116,619 41 % 38 % 40 % Commercial real estate mortgages 50,651 50,678 53,339 16 17 18 Residential mortgages 10,296 11,540 8,004 3 4 3 Real estate construction 7,191 6,351 8,335 2 2 3 Home equity loans and lines of credit 6,575 6,677 5,400 2 2 2 Installment 2,284 1,842 1,355 1 1 1 Qualitative 108,000 108,393 96,862 35 36 33 Total $ 311,276$ 302,584$ 289,914 100 % 100 % 100 %

-------------------------------------------------------------------------------- (1) Certain balances as of June 30, 2013 have been revised as a result of correcting the real estate construction loan balance to include loans that were previously reported as commercial real estate mortgages. The Company has a qualitative factor matrix to determine the amount of reserves needed for judgmental factors that are not attributable to or reflected in quantitative models. Examples of these factors include industry concentration, size of loans, general business and economic environment, internal systems and procedures, credit quality trends, changes in underwriting standards, risk appetite, loan growth and acquisitions. The qualitative factor matrix is divided into three segments: CRE, Commercial and Consumer. For each segment, the matrix evaluates the qualitative factors that could cause the quantitative models to vary from historic loss values. Each factor is assigned a risk level and a risk weight in points which is aggregated to determine the level of qualitative reserves. The factors are updated and supported quarterly to reflect changing conditions. At June 30, 2014, the Company had total qualitative reserves of $108.0 million, of which $28.7 million, $52.1 million and $27.2 million were assigned to the CRE, Commercial and Consumer segments, respectively. Currently, the primary drivers of the qualitative reserves are uncertainty in the macroeconomic environment, industry concentration, loan size and loan growth. Nonaccrual loans, excluding covered loans, were $64.8 million at June 30, 2014, down from $68.7 million at December 31, 2013 and $76.7 million at June 30, 2013. Net loan charge-offs were $3.6 million in the second quarter of 2014 and net loan recoveries were $0.5 million for the six months ended June 30, 2014, compared to net loan recoveries of $7.5 million and $12.3 million for the same periods in 2013. Classified loans were $226.1 million at June 30, 2014, down from $315.5 million at December 31, 2013 and $351.3 million at June 30, 2013. In accordance with the Company's allowance for loan and lease losses methodology and in response to continuing credit quality improvement, the Company recorded a $1.0 million reversal of provision for loan and lease losses for the three months ended June 30, 2014. The Company recorded no provision in the first quarter of 2014 and second quarter of 2013. The reversal of provision for the current quarter reflects management's ongoing assessment of the credit quality of the loan portfolio. Credit quality continued to improve in the second quarter of 2014 as evidenced by the decline in nonaccrual and classified loans from the prior and year-earlier quarters. 78 --------------------------------------------------------------------------------



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The allowance for loan and lease losses, excluding covered loans, was $311.3 million as of June 30, 2014, compared with $302.6 million as of December 31, 2013 and $289.9 million as of June 30, 2013. The ratio of the allowance for loan and lease losses as a percentage of total loans and leases, excluding covered loans, was 1.68 percent at June 30, 2014, compared to 1.76 percent at December 31, 2013 and 1.83 percent at June 30, 2013. The allowance for loan and lease losses as a percentage of nonperforming assets, excluding covered assets, was 450.79 percent, 372.36 percent and 300.90 percent at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. The Company believes that its allowance for loan and lease losses continues to be appropriate.



The following table summarizes the activity in the allowance for loan losses on covered loans for the three and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Balance, beginning of period $ 18,439$ 42,354$ 15,922$ 44,781 (Reversal of) provision for losses (1,461 ) (11,927 ) 3,194 (2,035 ) Reduction in allowance due to loan removals (7,875 ) (6,013 ) (10,013 ) (18,332 ) Balance, end of period $ 9,103$ 24,414$ 9,103$ 24,414 The allowance for losses on covered loans was $9.1 million as of June 30, 2014, compared to $15.9 million at December 31, 2013 and $24.4 million at June 30, 2013. As a result of improvements in the portfolio's credit quality and general market conditions, the Company recorded a $1.5 million reversal of provision for losses on covered loans during the three months ended June 30, 2014. Provision expense was $3.2 million for the six months ended June 30, 2014. The Company recorded an $11.9 million and $2.0 million reversal of provision during the three and six months ended June 30, 2013, respectively. The Company updates its cash flow projections for covered loans accounted for under ASC 310-30 on a quarterly basis, and may recognize provision expense or reversal of provision for loan losses as a result of that analysis. The provision expense or reversal of provision for losses on covered loans is the result of changes in expected cash flows, both in amount and timing, due to actual loan performance and the Company's revised loan loss and prepayment forecasts. The revisions of these forecasts were based on the results of management's review of the market conditions, the credit quality of the outstanding covered loans and the analysis of loan performance data since the acquisition of covered loans. The allowance for loan losses on covered loans is reversed for any loan removals, which occur when a loan has been fully paid off, fully charged off, sold or transferred to OREO. Impaired Loans Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. The assessment for impairment occurs when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market price of the debt may be used to assess impairment. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment allowance is recognized by creating or adjusting the existing allocation of the allowance for loan and lease losses. Interest payments received on impaired loans are generally applied as follows: (1) to principal if the loan is on nonaccrual principal recapture status, (2) to interest income if the loan is on cash basis nonaccrual and (3) to interest income if the impaired loan has been returned to accrual status. 79

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The following table presents information on impaired loans as of June 30, 2014, December 31, 2013 and June 30, 2013. Loan and lease balances reflect the recorded investment as of the reporting date.

June 30, 2014 December 31, 2013 June 30, 2013 Loans and Related Loans and Related Loans and Related

(in thousands) Leases Allowance Leases Allowance Leases Allowance Impaired loans, excluding covered loans (1): Impaired loans with an allowance $ 31,525$ 8,833$ 21,194$ 3,025$ 24,444$ 2,960 Impaired loans with no related allowance 58,090 - 79,470 - 94,085 - Total impaired loans, excluding covered loans $ 89,615$ 100,664$ 118,529 Total impaired loans by loan type: Commercial $ 29,231$ 8,477$ 31,857$ 1,961$ 34,915$ 478 Commercial real estate mortgages 33,456 301 38,154 586 41,932 2,252 Residential mortgages 10,596 5 9,211 478 7,979 230 Real estate construction 12,846 - 19,097 - 30,446 - Home equity loans and lines of credit 3,436 - 2,329 - 3,257 - Installment 50 50 16 - - - Total impaired loans, excluding covered loans $ 89,615$ 8,833$ 100,664$ 3,025$ 118,529$ 2,960



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(1) Impaired loans include $34.7 million, $42.1 million and $54.3 million of loans that are on accrual status at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

The recorded investment in impaired loans, excluding covered loans, was $89.6 million at June 30, 2014, $100.7 million at December 31, 2013 and $118.5 million at June 30, 2013. There were no impaired covered loans at June 30, 2014, December 31, 2013 or June 30, 2013.



Troubled Debt Restructured Loans

At June 30, 2014, troubled debt restructured loans were $45.4 million, before specific reserves of $1.6 million. Troubled debt restructured loans were $52.2 million, before specific reserves of $0.8 million, at December 31, 2013 and $64.4 million, before specific reserves of $0.6 million, at June 30, 2013. Troubled debt restructured loans included $22.0 million, $25.8 million and $38.7 million of restructured loans on accrual status at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. At June 30, 2014, commitments to lend additional funds on restructured loans totaled $0.2 million. Nonaccrual and Past Due Loans Total nonperforming assets (nonaccrual loans and OREO), excluding covered assets, were $69.1 million, or 0.37 percent of total loans and OREO, excluding covered assets, at June 30, 2014, compared with $81.3 million, or 0.47 percent, at December 31, 2013, and $96.3 million, or 0.61 percent, at June 30, 2013. Total nonperforming covered assets (nonaccrual covered loans and covered OREO) were $17.9 million at June 30, 2014, $25.5 million at December 31, 2013 and $41.8 million at June 30, 2013. Company policy requires that a loan be placed on nonaccrual status if either principal or interest payments are 90 days past due, unless the loan is both well secured and in process of collection, or if full collection of interest or principal becomes uncertain regardless of the time period involved. Covered loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired covered loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. 80 --------------------------------------------------------------------------------



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Loans are considered past due following the date when either interest or principal is contractually due and unpaid. A summary of past due loans, excluding loans on nonaccrual status, is provided below:

June 30, December 31, June 30, (in thousands) 2014 2013 2013 Past due loans, excluding covered loans 30-89 days past due $ 13,644$ 11,116$ 20,420 90 days or more past due on accrual status: Commercial real estate mortgages 1,418 - - Residential mortgages 379 379 379 Home equity loans and lines of credit - 74 249 Installment 4 - - Lease financing - - 15 Total 90 days or more past due on accrual status $ 1,801 $ 453 $ 643 Past due covered loans 30-89 days past due $ 11,572$ 15,494$ 3,107 90 days or more past due on accrual status 31,011 45,662 89,439



The following table presents information on nonaccrual loans and OREO as of June 30, 2014, December 31, 2013 and June 30, 2013:

June 30, December 31, June 30, (in thousands) 2014 2013 2013 Nonperforming assets, excluding covered assets Nonaccrual loans, excluding covered loans Commercial $ 27,314$ 14,248$ 11,654 Commercial real estate mortgages 9,216 18,449 22,433 Residential mortgages 9,031 11,661 10,580 Real estate construction 12,834 19,067 25,718 Home equity loans and lines of credit 6,090 5,144 6,239 Installment 125 32 24 Lease financing 172 50 25 Total nonaccrual loans, excluding covered loans 64,782 68,651



76,673

OREO, excluding covered OREO 4,269 12,611



19,676

Total nonperforming assets, excluding covered assets $ 69,051$ 81,262$ 96,349 Nonperforming covered assets OREO $ 17,944$ 25,481$ 41,801 Ratios (excluding covered assets): Nonaccrual loans as a percentage of total loans 0.35 % 0.40 % 0.48 % Nonperforming assets as a percentage of total loans and OREO 0.37 0.47



0.61

Allowance for loan and lease losses to nonaccrual loans 480.50 440.76



378.12

Allowance for loan and lease losses to total nonperforming assets 450.79 372.36 300.90 All nonaccrual loans greater than $1 million are considered impaired and are individually analyzed. The Company does not maintain a reserve for impaired loans where the carrying value of the loan is less than the fair value of the collateral, reduced by costs to sell. Where the carrying value of the impaired loan is greater than the fair value of the collateral, less costs to sell, the Company specifically establishes an allowance for loan and lease losses to cover the deficiency. This analysis ensures that the non-accruing loans have been appropriately reserved. 81

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The table below summarizes the total activity in non-covered and covered nonaccrual loans for the three and six months ended June 30, 2014 and 2013:

Changes in Nonaccrual Loans For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013



Balance, beginning of the period $ 71,245$ 83,275 $

68,651 $ 99,787 Loans placed on nonaccrual 11,542 22,081 24,097 25,927 Net (charge-offs) recoveries (239 ) 133 (2,159 ) 5,966 Loans returned to accrual status (3,961 ) (346 ) (5,443 ) (11,458 ) Repayments (including interest applied to principal) (13,694 ) (28,218 ) (20,253 ) (42,915 ) Transfers to OREO (111 ) (252 ) (111 ) (634 ) Balance, end of the period $ 64,782$ 76,673$ 64,782$ 76,673 In addition to loans disclosed above as past due or nonaccrual, management has also identified $19.6 million of credit facilities to 17 borrowers as of July 28, 2014, where the ability to comply with the present loan payment terms in the future is questionable. However, the inability of the borrowers to comply with repayment terms was not sufficiently probable to place the loan on nonaccrual status at June 30, 2014, and the identification of these loans is not necessarily indicative of whether the loans will be placed on nonaccrual status. This amount was determined based on analysis of information known to management about the borrowers' financial condition and current economic conditions. In the Form 10-Q for the period ended March 31, 2014, the Company reported that management had identified $51.4 million of loans to 16 borrowers where the ability to comply with the loan payment terms in the future was questionable. Management's classification of credits as nonaccrual, restructured or problems does not necessarily indicate that the principal is uncollectible in whole or part. Other Real Estate Owned



The following tables provide a summary of OREO activity for the three and six months ended June 30, 2014 and 2013:

For the three months ended For the three months ended June 30, 2014 June 30, 2013 Non-Covered Covered Non-Covered Covered (in thousands) OREO OREO Total OREO OREO Total Balance, beginning of period $ 9,412$ 24,855$ 34,267$ 19,786$ 43,751$ 63,537 Additions 110 1,987 2,097 341 4,612 4,953 Sales (5,253 ) (7,964 ) (13,217 ) (390 ) (4,378 ) (4,768 ) Valuation adjustments - (934 ) (934 ) (61 ) (2,184 ) (2,245 ) Balance, end of period $ 4,269$ 17,944$ 22,213$ 19,676$ 41,801$ 61,477 For the six months ended For the six months ended June 30, 2014 June 30, 2013 Non-Covered Covered Non-Covered Covered (in thousands) OREO OREO Total OREO OREO Total Balance, beginning of period $ 12,611$ 25,481$ 38,092$ 21,027$ 58,276$ 79,303 Additions 111 4,020 4,131 723 13,906 14,629 Sales (8,439 ) (10,468 ) (18,907 ) (1,781 ) (25,162 ) (26,943 ) Valuation adjustments (14 ) (1,089 ) (1,103 ) (293 ) (5,219 ) (5,512 ) Balance, end of period $ 4,269$ 17,944$ 22,213$ 19,676$ 41,801$ 61,477 OREO was $22.2 million at June 30, 2014, $38.1 million at December 31, 2013 and $61.5 million at June 30, 2013, respectively. The OREO balance at June 30, 2014 includes covered OREO of $17.9 million, compared with $25.5 million at December 31, 2013 and $41.8 million at June 30, 2013. The balance of OREO at June 30, 2014, December 31, 2013 and June 30, 2013 is net of valuation allowances of $11.1 million, $17.4 million and $28.7 million, respectively. 82 --------------------------------------------------------------------------------



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The Company recognized $6.9 million in total net gain on the sale of OREO in the second quarter of 2014, compared to $2.8 million in the first quarter of 2014 and $0.8 million in the year-earlier quarter. Net gain on the sale of OREO in the second quarter of 2014 included $2.6 million of net gain related to the sale of covered OREO, compared to $0.4 million in the first quarter of 2014 and $0.6 million in the year-earlier quarter. Covered OREO expenses and valuation write-downs are recorded in the noninterest expense section of the consolidated statements of income and gains or losses on sale of covered OREO are recognized in the noninterest income section. Under the loss sharing agreements, 80 percent of eligible covered OREO expenses, valuation write-downs, and losses on sales are reimbursable to the Company from the FDIC and 80 percent of covered gains on sales are payable to the FDIC. The portion of these expenses that is reimbursable or income that is payable is recorded in FDIC loss sharing income (expense), net in the noninterest income section of the consolidated statements of income. Other Assets



The following table presents information on other assets:

June 30, December 31, June 30, (in thousands) 2014 2013 2013 Accrued interest receivable $ 74,250$ 70,346$ 70,154 Deferred compensation fund assets 88,613 81,058



73,433

Stock in government agencies 58,376 64,354



77,962

Private equity and alternative investments 29,748 33,952 34,942 Bank-owned life insurance 86,694 85,596 84,243 Derivative assets 43,264 34,613 40,066 Income tax receivable - - 13,296 FDIC (payable) receivable (4,249 ) 2,782 1,482 Equipment on operating leases, net 26,085 31,982 27,677 Other 96,380 101,484 102,378 Total other assets $ 499,161$ 506,167$ 525,633 Deposits Deposits totaled $26.65 billion, $25.68 billion and $23.65 billion at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Average deposits totaled $25.91 billion for the second quarter of 2014, a slight decrease from $25.94 billion for the fourth quarter of 2013 and an increase of 12 percent from $23.12 billion for the second quarter of 2013. Core deposits, which include noninterest-bearing deposits and interest-bearing deposits excluding time deposits of $100,000 and over, provide a stable source of low cost funding. Average core deposits were $25.46 billion, $25.42 billion and $22.41 billion for the quarters ended June 30, 2014, December 31, 2013 and June 30, 2013, respectively, and represented 98 percent, 98 percent and 97 percent of total deposits for each respective period. Average noninterest-bearing deposits in the second quarter of 2014 decreased 1 percent from the fourth quarter of 2013 and increased 15 percent from the year-earlier quarter. Treasury Services deposit balances, which consist primarily of title, escrow, community association and property management deposits, averaged $2.87 billion in the second quarter of 2014, compared with $2.59 billion in the fourth quarter of 2013 and $2.59 billion for the second quarter of 2013. The growth in Treasury Services deposits was due primarily to mortgage transaction activity on higher priced homes. Borrowed Funds Total borrowed funds were $788.1 million, $739.9 million and $709.2 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Total average borrowed funds were $738.1 million, $728.5 million and $1.30 billion for the quarters ended June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Short-term borrowings consist of funds with remaining maturities of one year or less and the current portion of long-term debt. Short-term borrowings were $160.3 million as of June 30, 2014 compared to $3.9 million as of December 31, 2013 and $2.7 million as of June 30, 2013. Short-term borrowings at June 30, 2014 consist of federal funds purchased and the current portions of subordinated debt and nonrecourse debt. 83

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Long-term debt consists of borrowings with remaining maturities greater than one year and is primarily comprised of senior notes, subordinated debt, junior subordinated debt and nonrecourse debt. Long-term debt was $627.8 million, $736.0 million and $706.5 million as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. The Company's long-term borrowings have maturity dates ranging from July 2015 to November 2034. Off-Balance Sheet In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and letters of credit, and to invest in affordable housing funds, private equity and other alternative investments. These instruments involve elements of credit, foreign exchange, and interest rate risk, to varying degrees, in excess of the amount reflected in the consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments, and will evaluate each client's creditworthiness on a case-by-case basis. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company had off-balance sheet credit commitments totaling $8.78 billion at June 30, 2014, $7.99 billion at December 31, 2013 and $6.85 billion at June 30, 2013. Standby letters of credit are commitments issued by the Company to guarantee the obligations of its customer to beneficiaries. Commercial letters of credit are issued on behalf of customers to ensure payment in connection with trade transactions. The Company had $679.0 million in letters of credit at June 30, 2014, of which $574.3 million relate to standby letters of credit and $104.7 million relate to commercial letters of credit. The Company had $733.5 million outstanding in letters of credit at December 31, 2013, of which $617.3 million relate to standby letters of credit and $116.2 million relate to commercial letters of credit. As of June 30, 2014, the Company had private equity fund and alternative investment fund commitments of $66.4 million, of which $58.5 million was funded. As of December 31, 2013 and June 30, 2013, the Company had private equity and alternative investment fund commitments of $70.9 million and $67.9 million respectively, of which $62.2 million and $61.4 million was funded. Capital The ratio of period-end equity to period-end assets was 9.26 percent, 9.22 percent and 9.29 percent as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Period-end common shareholders' equity to period-end assets was 8.39 percent, 8.32 percent and 8.67 percent for the same periods, respectively. 84

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The following table presents the regulatory standards for well-capitalized institutions and the capital ratios for the Corporation and the Bank at June 30, 2014, December 31, 2013 and June 30, 2013:

Regulatory Well-Capitalized June 30, December 31, June 30, Standards 2014 2013 2013 City National Corporation Tier 1 leverage - % 7.43 % 7.17 % 7.00 % Tier 1 risk-based capital 6.00 10.00 10.09 9.74 Total risk-based capital 10.00 12.81 13.00 12.78 Tangible common equity to tangible assets (1) - 6.32 6.17 6.32 Tier 1 common equity to risk-based assets (2) - 8.75 8.78 8.83 City National Bank Tier 1 leverage 5.00 % 7.45 % 7.25 % 7.21 % Tier 1 risk-based capital 6.00 10.00 10.20 10.04 Total risk-based capital 10.00 12.78 13.08 13.03

-------------------------------------------------------------------------------- (1) Tangible common equity to tangible assets is a non-GAAP financial measure that represents total common equity less identifiable intangible assets and goodwill divided by total assets less identifiable assets and goodwill. Management reviews tangible common equity to tangible assets in evaluating the Company's capital levels and has included this ratio in response to market participants' interest in tangible common equity as a measure of capital. See reconciliation of the GAAP financial measure to this non-GAAP financial measure below. (2) Tier 1 common equity to risk-based assets is calculated by dividing (a) Tier 1 capital less non-common components including qualifying perpetual preferred stock and qualifying trust preferred securities by (b) risk-weighted assets. Tier 1 capital and risk-weighted assets are calculated in accordance with applicable bank regulatory guidelines. This ratio is a non-GAAP measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews this measure in evaluating the Company's capital levels and has included this measure in response to market participants' interest in the Tier 1 common equity to risk-based assets ratio. See reconciliation of the GAAP financial measure to this non-GAAP financial measure below.



Reconciliation of GAAP financial measure to non-GAAP financial measure:

June 30, December 31, June 30, (in thousands) 2014 2013 2013 Common equity $ 2,585,537$ 2,473,370$ 2,374,848 Less: Goodwill and other intangible assets (680,302 ) (683,243 ) (686,897 ) Tangible common equity (A) $ 1,905,235$ 1,790,127$ 1,687,951 Total assets $ 30,819,092$ 29,717,951$ 27,379,502 Less: Goodwill and other intangible assets (680,302 ) (683,243 ) (686,897 ) Tangible assets (B) $ 30,138,790 $



29,034,708 $ 26,692,605

Tangible common equity to tangible assets (A)/(B) 6.32 % 6.17 % 6.32 % Tier 1 capital $ 2,191,711$ 2,095,576$ 1,874,999 Less: Preferred stock (267,616 ) (267,616 ) (169,920 ) Less: Trust preferred securities (5,155 ) (5,155 ) (5,155 ) Tier 1 common equity (C) $ 1,918,940$ 1,822,805$ 1,699,924 Risk-weighted assets (D) $ 21,922,982$ 20,766,237$ 19,255,862 Tier 1 common equity to risk-based assets (C)/(D) 8.75 % 8.78 % 8.83 % In July 2013, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System adopted a final rule that revises its risk-based and leverage capital requirements (referred to as the Basel III rule). A key goal of the Basel III agreement is to strengthen the capital resources of banking organizations during normal and challenging business environments. The Basel III final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement, and a higher minimum Tier 1 capital requirement. For banking organizations not subject to the advanced approaches rule, compliance with the standardized approach for determining risk-weighted assets and compliance with the transition period for the revised minimum regulatory capital ratios will begin on January 1, 2015. The transition period for the capital conservation buffer will begin on January 1, 2016 and the fully implemented regulatory capital ratios will be effective on January 1, 2019. Important elements of the Basel III rule include the following: 85

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Increased minimum capital requirements; Higher quality of capital so banks are better able to absorb losses;



A leverage ratio concept for international banks and U.S. bank holding companies;

Specific capital conservation buffers; and

A more uniform supervisory standard for U.S. financial institution regulatory agencies.

Based on the final Basel III rules, the Company has estimated its capital ratios as of June 30, 2014 using the new standards and the pro forma ratios already exceed the requirements of the fully implemented capital rules.


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