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FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2014
FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS |
FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS | NOTE 4 — FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: · Level 1 — Valuation is based on quoted prices for identical instruments traded in active markets. · Level 2 — Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. · Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities. In determining the appropriate hierarchy levels, the Company performs an analysis of the assets and liabilities that are subject to fair value disclosure. The following tables present both financial and nonfinancial assets and liabilities that are measured at fair value on a recurring basis. These assets and liabilities are reported on the consolidated balance sheets at their fair values as of September 30, 2014 and December 31, 2013. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. There were no transfers for assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2014 and 2013.
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis |
|  | as of September 30, 2014 |
|  |  |  | Quoted Prices in |  | Significant |  |  |
|  | Fair Value |  | Active Markets |  | Other |  | Significant |
|  | Measurements |  | for Identical |  | Observable |  | Unobservable |
|  | September 30, |  | Assets |  | Inputs |  | Inputs |
|  | 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (In thousands) |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 603,647 |  | $ | 603,647 |  | $ | — |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 412,981 |  | — |  | 412,981 |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 125,567 |  | — |  | 125,567 |  | — |
Residential mortgage-backed securities |  | 757,582 |  | — |  | 757,582 |  | — |
Municipal securities |  | 296,597 |  | — |  | 296,597 |  | — |
Other residential mortgage-backed securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 55,258 |  | — |  | 55,258 |  | — |
Other commercial mortgage-backed securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 51,127 |  | — |  | 51,127 |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 210,825 |  | — |  | 210,825 |  | — |
Non-investment grade |  | 17,776 |  | — |  | 8,867 |  | 8,909 |
Other securities |  | 61,307 |  | — |  | 61,307 |  | — |
Total investment securities available-for-sale |  | $ | 2,592,667 |  | $ | 603,647 |  | $ | 1,980,111 |  | $ | 8,909 |
Foreign exchange options |  | $ | 6,155 |  | $ | — |  | $ | 6,155 |  | $ | — |
Interest rate swaps and caps |  | 29,170 |  | — |  | 29,170 |  | — |
Foreign exchange contracts |  | 9,204 |  | — |  | 9,204 |  | — |
Derivative liabilities |  | (54,086 | ) | — |  | (50,660 | ) | (3,426 | )
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis |
|  | as of December 31, 2013 |
|  |  |  | Quoted Prices in |  | Significant |  |  |
|  | Fair Value |  | Active Markets |  | Other |  | Significant |
|  | Measurements |  | for Identical |  | Observable |  | Unobservable |
|  | December 31, |  | Assets |  | Inputs |  | Inputs |
|  | 2013 |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (In thousands) |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 491,632 |  | $ | 491,632 |  | $ | — |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 394,323 |  | — |  | 394,323 |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 178,870 |  | — |  | 178,870 |  | — |
Residential mortgage-backed securities |  | 885,237 |  | — |  | 885,237 |  | — |
Municipal securities |  | 280,979 |  | — |  | 280,979 |  | — |
Other residential mortgage-backed securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 46,327 |  | — |  | 46,327 |  | — |
Other commercial mortgage-backed securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 51,617 |  | — |  | 51,617 |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |
Investment grade |  | 309,995 |  | — |  | 309,995 |  | — |
Non-investment grade |  | 15,101 |  | — |  | 8,730 |  | 6,371 |
Other securities |  | 79,716 |  | — |  | 79,716 |  | — |
Total investment securities available-for-sale |  | $ | 2,733,797 |  | $ | 491,632 |  | $ | 2,235,794 |  | $ | 6,371 |
Foreign exchange options |  | $ | 6,290 |  | $ | — |  | $ | 6,290 |  | $ | — |
Interest rate swaps and caps |  | 28,078 |  | — |  | 28,078 |  | — |
Foreign exchange contracts |  | 6,181 |  | — |  | 6,181 |  | — |
Derivative liabilities |  | (50,262 | ) | — |  | (46,607 | ) | (3,655 | )
At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The following tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2014 and 2013:
|  | Corporate Debt Securities: |  |  |
|  | Non-Investment Grade |  | Derivatives Liabilities |
|  | (In thousands) |
Opening balance, July 1, 2014 |  | $ | 7,917 |  | $ | (3,362 | )
Total gains or (losses) for the period: (1) |  |  |  |  |
Included in earnings |  | — |  | (64 | )
Included in other comprehensive income (unrealized) (2) |  | 1,009 |  | — |
Purchases, issues, sales, settlements |  | — |  | — |
Purchases |  | — |  | — |
Issues |  | — |  | — |
Sales |  | — |  | — |
Settlements |  | (17 | ) | — |
Transfer from investment grade to non-investment grade |  | — |  | — |
Transfers in and/or out of Level 3 |  | — |  | — |
Closing balance, September 30, 2014 |  | $ | 8,909 |  | $ | (3,426 | )
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2014 |  | $ | — |  | $ | 64 |
|  | Corporate Debt Securities: |  |  |
|  | Non-Investment Grade |  | Derivatives Liabilities |
|  | (In thousands) |
Opening balance, July 1, 2013 |  | $ | 5,517 |  | $ | (3,257 | )
Total gains or (losses) for the period: (1) |  |  |  |  |
Included in earnings |  | — |  | (254 | )
Included in other comprehensive income (unrealized) (2) |  | 619 |  | — |
Purchases, issues, sales, settlements |  |  |  |  |
Purchases |  | — |  | — |
Issues |  | — |  | — |
Sales |  | — |  | — |
Settlements |  | (4 | ) | — |
Transfer from investment grade to non-investment grade |  | — |  | — |
Transfers in and/or out of Level 3 |  | — |  | — |
Closing balance, September 30, 2013 |  | $ | 6,132 |  | $ | (3,511 | )
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2013 |  | $ | — |  | $ | 254 |
(1) Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities. Realized gains or losses are included in net gains on sale of investment securities in the consolidated statements of income. (2) Unrealized gains or losses on investment securities are reported in other comprehensive income (loss), net of tax, in the consolidated statements of comprehensive income. The following tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and 2013:
|  | Corporate Debt Securities: |  |  |
|  | Non-Investment Grade |  | Derivatives Liabilities |
|  | (In thousands) |
Beginning balance, January 1, 2014 |  | $ | 6,371 |  | $ | (3,655 | )
Total gains or (losses) for the period: (1) |  |  |  |  |
Included in earnings |  | — |  | 229 |
Included in other comprehensive income (unrealized) (2) |  | 2,652 |  | — |
Purchases, issues, sales, settlements |  |  |  |  |
Purchases |  | — |  | — |
Issues |  | — |  | — |
Sales |  | — |  | — |
Settlements |  | (114 | ) | — |
Transfer from investment grade to non-investment grade |  | — |  | — |
Transfers in and/or out of Level 3 |  | — |  | — |
Closing balance, September 30, 2014 |  | $ | 8,909 |  | $ | (3,426 | )
Changes in unrealized gains included in earnings relating to assets and liabilities held at the end of September 30, 2014 |  | $ | — |  | $ | (229 | )
|  | Corporate Debt Securities: |  |  |
|  | Non-Investment Grade |  | Derivatives Liabilities |
|  | (In thousands) |
Beginning balance, January 1, 2013 |  | $ | 4,800 |  | $ | (3,052 | )
Total gains or (losses) for the period: (1) |  |  |  |  |
Included in earnings |  | — |  | (459 | )
Included in other comprehensive income (unrealized) (2) |  | 1,406 |  | — |
Purchases, issues, sales, settlements |  |  |  |  |
Purchases |  | — |  | — |
Issues |  | — |  | — |
Sales |  | — |  | — |
Settlements |  | (74 | ) | — |
Transfer from investment grade to non-investment grade |  | — |  | — |
Transfers in and/or out of Level 3 |  | — |  | — |
Closing balance, September 30, 2013 |  | $ | 6,132 |  | $ | (3,511 | )
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2013 |  | $ | — |  | $ | 459 |
(1) Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities. Realized gains or losses are included in net gains on sale of investment securities in the consolidated statements of income. (2) Unrealized gains or losses on investment securities are reported in other comprehensive income (loss), net of tax, in the consolidated statements of comprehensive income. The following table presents quantitative information about significant unobservable inputs used in the valuation of assets and liabilities measured on a recurring basis classified as Level 3 as of September 30, 2014 and December 31, 2013:
|  | Fair Value Measurements (Level 3) |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average |
September 30, 2014 |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |
Non-investment grade |  | $ | 8,909 |  | Discounted cash flow |  | Constant prepayment rate |  | 0% - 1% |  | 0.73% |
|  |  |  |  |  | Constant default rate |  | 0.75% - 1.20% |  | 0.87% |
|  |  |  |  |  | Loss severity |  | 85% - 100% |  | 85% |
|  |  |  |  |  | Discount margin |  | 4.50% - 9.50% |  | 7.99% |
Derivative liabilities |  | (3,426 | ) | Discounted cash flow |  | Credit risk |  | 0.035% - 0.046% |  | 0.043% |
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |
Non-investment grade |  | $ | 6,371 |  | Discounted cash flow |  | Constant prepayment rate |  | 0% - 1% |  | 0.74% |
|  |  |  |  |  | Constant default rate |  | 0.75% - 1.20% |  | 0.87% |
|  |  |  |  |  | Loss severity |  | 85% - 100% |  | 85% |
|  |  |  |  |  | Discount margin |  | 6.50% - 11.50% |  | 9.97% |
Derivative liabilities |  | (3,655 | ) | Discounted cash flow |  | Credit risk |  | 0.175% - 0.212% |  | 0.200% |
Assets measured at fair value on a nonrecurring basis using significant unobservable inputs include certain loans and OREO. The inputs and assumptions for nonrecurring Level 3 fair value measurements for certain loans and OREO include adjustments to external and internal appraisals for changes in the market, assumptions by appraiser embedded into appraisals, probability weighting of broker price opinions, and management’s adjustments for other relevant factors and market trends. The following tables present assets measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013:
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of September 30, 2014 |
|  |  |  | Quoted Prices in |  | Significant |  |  |
|  |  |  | Active Markets |  | Other |  | Significant |
|  |  |  | for Identical |  | Observable |  | Unobservable |
|  | Fair Value |  | Assets |  | Inputs |  | Inputs |
|  | Measurements |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (In thousands) |
Non-covered impaired loans: |  |  |  |  |  |  |  |  |
Total residential |  | $ | 19,930 |  | $ | — |  | $ | — |  | $ | 19,930 |
Total commercial real estate |  | 25,122 |  | — |  | — |  | 25,122 |
Total commercial and industrial |  | 11,355 |  | — |  | — |  | 11,355 |
Total consumer |  | 107 |  | — |  | — |  | 107 |
Total non-covered loans |  | $ | 56,514 |  | $ | — |  | $ | — |  | $ | 56,514 |
Non-covered OREO |  | $ | 15,556 |  | $ | — |  | $ | — |  | $ | 15,556 |
Covered OREO |  | $ | 2,400 |  | $ | — |  | $ | — |  | $ | 2,400 |
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2013 |
|  |  |  | Quoted Prices in |  | Significant |  |  |
|  |  |  | Active Markets |  | Other |  | Significant |
|  |  |  | for Identical |  | Observable |  | Unobservable |
|  | Fair Value |  | Assets |  | Inputs |  | Inputs |
|  | Measurements |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (In thousands) |
Non-covered impaired loans: |  |  |  |  |  |  |  |  |
Total residential |  | $ | 12,791 |  | $ | — |  | $ | — |  | $ | 12,791 |
Total commercial real estate |  | 29,559 |  | — |  | — |  | 29,559 |
Total commercial and industrial |  | 15,120 |  | — |  | — |  | 15,120 |
Total consumer |  | 281 |  | — |  | — |  | 281 |
Total non-covered loans |  | $ | 57,751 |  | $ | — |  | $ | — |  | $ | 57,751 |
Non-covered OREO |  | $ | 13,031 |  | $ | — |  | $ | — |  | $ | 13,031 |
Covered OREO |  | $ | 17,284 |  | $ | — |  | $ | — |  | $ | 17,284 |
The following table presents the increase (decrease) in the value of certain assets for which a nonrecurring fair value adjustment has been recognized during the three and nine months ended September 30, 2014 and 2013:
|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
Non-covered impaired loans: |  |  |  |  |  |  |  |  |
Total residential |  | $ | (538 | ) | $ | (96 | ) | $ | (475 | ) | $ | (677 | )
Total commercial real estate |  | (281 | ) | 1,412 |  | 1,049 |  | (1,706 | )
Total commercial and industrial |  | (3,457 | ) | (7,172 | ) | (8,488 | ) | (8,599 | )
Total consumer |  | (1 | ) | — |  | (1 | ) | (112 | )
Total non-covered loans |  | $ | (4,277 | ) | $ | (5,856 | ) | $ | (7,915 | ) | $ | (11,094 | )
Non-covered OREO |  | $ | (1,527 | ) | $ | (17 | ) | $ | (1,527 | ) | $ | (1,420 | )
Covered OREO (1) |  | $ | (608 | ) | $ | (219 | ) | $ | (852 | ) | $ | (1,344 | )
(1) Covered OREO results from the Washington First International Bank (“WFIB”) and United Commercial Bank (“UCB”) FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $608 thousand in losses, or $122 thousand, and 20% of the $852 thousand in losses, or $170 thousand, for the three and nine months ended September 30, 2014, respectively. In comparison, the Company’s liability for losses is 20% of the $219 thousand in losses, or $44 thousand, and 20% of the $1.3 million in losses, or $269 thousand, for the three and nine months ended September 30, 2013, respectively. The following table presents qualitative information about significant unobservable inputs used in the valuation of assets and liabilities measured on a nonrecurring basis classified as Level 3 as of September 30, 2014 and December 31, 2013:
|  | Fair Value Measurements (Level 3) |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average |
September 30, 2014 |  |  |  |  |  |  |  |  |  |  |
Non-covered impaired loans |  | $ | 56,514 |  | Market comparables |  | Discount rate(1) |  | 0% - 100% |  | 15% |
Non-covered OREO |  | 15,556 |  | Appraisal |  | Selling cost |  | 8% |  | 8% |
Covered OREO |  | 2,400 |  | Appraisal |  | No Discount |  |  |  |  |
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |
Non-covered impaired loans |  | $ | 57,751 |  | Market comparables |  | Discount rate(1) |  | 0% - 100% |  | 13% |
Non-covered OREO |  | 13,031 |  | Appraisal |  | Selling cost |  | 8% |  | 8% |
Covered OREO |  | 17,284 |  | Appraisal |  | No Discount |  |  |  |  |
(1) Discount rate is adjusted for factors such as liquidation cost of collateral and selling cost. ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair values of certain financial instruments and the methods and significant assumptions used to estimate such fair values. The carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013 were as follows:
|  | September 30, 2014 |
|  | Carrying |  |  |  |  |  |  |  | Estimated |
|  | Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value |
|  | (In thousands) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,115,753 |  | $ | 1,115,753 |  | $ | — |  | $ | — |  | $ | 1,115,753 |
Short-term investments |  | 336,419 |  | — |  | 336,419 |  | — |  | 336,419 |
Securities purchased under resale agreements |  | 1,475,000 |  | — |  | 1,443,390 |  | — |  | 1,443,390 |
Investment securities available-for-sale |  | 2,592,667 |  | 603,647 |  | 1,980,111 |  | 8,909 |  | 2,592,667 |
Loans held for sale |  | 239,649 |  | — |  | 258,512 |  | — |  | 258,512 |
Loans receivable, net |  | 20,733,516 |  | — |  | — |  | 19,933,809 |  | 19,933,809 |
Investment in Federal Home Loan Bank stock |  | 34,691 |  | — |  | 34,691 |  | — |  | 34,691 |
Investment in Federal Reserve Bank stock |  | 54,324 |  | — |  | 54,324 |  | — |  | 54,324 |
Accrued interest receivable |  | 96,054 |  | — |  | 96,054 |  | — |  | 96,054 |
Foreign exchange options |  | 6,155 |  | — |  | 6,155 |  | — |  | 6,155 |
Interest rate swaps and caps |  | 29,170 |  | — |  | 29,170 |  | — |  | 29,170 |
Foreign exchange contracts |  | 9,204 |  | — |  | 9,204 |  | — |  | 9,204 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Customer deposit accounts: |  |  |  |  |  |  |  |  |  |  |
Demand, savings and money market deposits |  | 17,676,394 |  | — |  | 17,676,394 |  | — |  | 17,676,394 |
Time deposits |  | 6,135,870 |  | — |  | — |  | 6,116,966 |  | 6,116,966 |
Federal Home Loan Bank advances |  | 316,699 |  | — |  | 333,681 |  | — |  | 333,681 |
Securities sold under repurchase agreements |  | 805,106 |  | — |  | 879,564 |  | — |  | 879,564 |
Accrued interest payable |  | 10,817 |  | — |  | 10,817 |  | — |  | 10,817 |
Long-term debt |  | 230,790 |  | — |  | 201,209 |  | — |  | 201,209 |
Derivative liabilities |  | 54,086 |  | — |  | 50,660 |  | 3,426 |  | 54,086 |
|  | December 31, 2013 |
|  | Carrying |  |  |  |  |  |  |  | Estimated |
|  | Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value |
|  | (In thousands) |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 895,820 |  | $ | 895,820 |  | $ | — |  | $ | — |  | $ | 895,820 |
Short-term investments |  | 257,473 |  | — |  | 257,473 |  | — |  | 257,473 |
Securities purchased under resale agreements |  | 1,300,000 |  | — |  | 1,279,406 |  | — |  | 1,279,406 |
Investment securities available-for-sale |  | 2,733,797 |  | 491,632 |  | 2,235,794 |  | 6,371 |  | 2,733,797 |
Loans held for sale |  | 204,970 |  | — |  | 212,469 |  | — |  | 212,469 |
Loans receivable, net |  | 17,600,613 |  | — |  | — |  | 16,741,674 |  | 16,741,674 |
Investment in Federal Home Loan Bank stock |  | 62,330 |  | — |  | 62,330 |  | — |  | 62,330 |
Investment in Federal Reserve Bank stock |  | 48,333 |  | — |  | 48,333 |  | — |  | 48,333 |
Accrued interest receivable |  | 116,314 |  | — |  | 116,314 |  | — |  | 116,314 |
Foreign exchange options |  | 6,290 |  | — |  | 6,290 |  | — |  | 6,290 |
Interest rate swaps and caps |  | 28,078 |  | — |  | 28,078 |  | — |  | 28,078 |
Foreign exchange contracts |  | 6,181 |  | — |  | 6,181 |  | — |  | 6,181 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Customer deposit accounts: |  |  |  |  |  |  |  |  |  |  |
Demand, savings and money market deposits |  | 14,588,570 |  | — |  | 14,588,570 |  | — |  | 14,588,570 |
Time deposits |  | 5,824,348 |  | — |  | — |  | 5,791,659 |  | 5,791,659 |
Federal Home Loan Bank advances |  | 315,092 |  | — |  | 308,521 |  | — |  | 308,521 |
Securities sold under repurchase agreements |  | 995,000 |  | — |  | 1,134,774 |  | — |  | 1,134,774 |
Accrued interest payable |  | 11,178 |  | — |  | 11,178 |  | — |  | 11,178 |
Long-term debt |  | 226,868 |  | — |  | 184,415 |  | — |  | 184,415 |
Derivative liabilities |  | 50,262 |  | — |  | 46,607 |  | 3,655 |  | 50,262 |
The following is a description of the valuation methodologies and significant assumptions used in estimating fair value of financial instruments. Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the short-term nature of these instruments, the estimated fair value is classified as Level 1. Short-Term Investments — The fair value of short-term investments generally approximate their book value due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 2. Securities Purchased Under Resale Agreements — Securities purchased under resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of securities purchased under resale agreements with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 2. Investment Securities Available-for-Sale — When available, the Company uses quoted market prices to determine the fair value of investment securities available-for-sale; such items are classified as Level 1. Examples include U.S. treasury securities. The fair values of other investment securities are generally determined by independent external pricing service providers who have experience in valuing these securities and by comparison to and/or average of quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values. The investment securities valued using such methods are classified as Level 2. The Company’s Level 3 available-for-sale securities include four pooled trust preferred securities. The fair values of these investment securities represent less than 1% of the total available-for-sale investment securities. The fair values of the pooled trust preferred securities have traditionally been based on the average of at least two quoted market prices obtained from independent external brokers since broker quotes in an active market are given the highest priority. As a result of the continued illiquidity in the pooled trust preferred securities market, it is the Company’s view that current broker prices (which are typically non-binding) on certain pooled trust preferred securities are not representative of the fair value of these securities. As such, the Company considered what weight, if any, to place on transactions that are not orderly when estimating fair value. For the pooled trust preferred securities, the fair value was derived based on discounted cash flow analyses (the income method) prepared by management. In order to determine the appropriate discount rate used in calculating fair values derived from the income method for the pooled trust preferred securities, the Company has made assumptions using an exit price approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit risk and liquidity risk premium, specific nonperformance, and default experience in the collateral underlying the securities. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for credit risk and liquidity risk. The actual Level 3 unobservable assumption rates used as of September 30, 2014 include: constant prepayment rate, constant default rate, loss severity for deferrals/defaults, and discount margin. Loans Held for Sale — The Company’s loans held for sale are carried at the lower of cost or fair value. These loans are mainly comprised of student loans. The fair value of loans held for sale is derived from current market prices and comparative current sales. As such, the Company records any fair value adjustments on a nonrecurring basis. Loans held for sale are classified as Level 2. Non-covered Impaired Loans — The Company evaluates non-covered impaired loans on a nonrecurring basis. The fair value of non-covered impaired loans is measured using the market comparables technique. For commercial real estate loans and commercial and industrial loans, the fair value is based on each loan’s observable market price or the fair value of the collateral less cost to sell, if the loan is collateral dependent. For residential loans with an unpaid balance below a certain threshold, the Company applies historical loss rates to derive the fair value. Non-covered impaired loans are classified as Level 3. The significant unobservable inputs used in the fair value measurement of non-covered impaired loans are liquidation cost, selling cost, and historical loss rate. Loans, net (includes covered and non-covered) — The fair value of loans is determined based on a discounted cash flow approach considered for an entry price value. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within any of the loan portfolios. It is management’s opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair value valuation of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 3. Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock — The carrying amount approximates fair value. The valuation of these investments is classified as Level 2. Ownership of these securities is restricted to member banks and the securities do not have a readily determinable fair value. Purchases and sales of these securities are at par value. Accrued Interest Receivable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. Foreign Exchange Options — The Company entered into foreign exchange option contracts with major investment firms during the year ended December 31, 2010. The settlement amount is determined based upon the performance of the Chinese currency Renminbi (“RMB”) relative to the U.S. Dollar (“USD”) over the 5-year term of the contracts. The performance amount is computed based on the average quarterly value of the RMB compared to the USD as compared to the initial value. The fair value of these derivative contracts is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, currency rate and time remaining to maturity. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment to the valuation of the foreign exchange options for the nine months ended September 30, 2014. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of the option contracts is classified as Level 3. Interest Rate Swaps and Caps — The Company enters into interest rate swap and cap contracts with institutional counterparties to hedge against interest rate swap and cap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into an interest rate swap or cap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of interest rate swap contracts is based on a discounted cash flow approach. The counterparty’s credit risk is considered in the valuation of interest rate swaps as of September 30, 2014. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps and caps is classified as Level 2. Foreign Exchange Contracts — The Company enters into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. These contracts economically hedge against foreign exchange rate fluctuations. The Company also enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company assumes minimal foreign exchange rate risk as the contract with the customer and the contract with the institutional party mirror each other. The fair value is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts for the nine months ended September 30, 2014. The valuation of these contracts is classified as Level 2 due to the observable nature of the inputs used in deriving the fair value. The Company also enters into long-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. The fair value is determined at each reporting period based on the change in the foreign exchange rate. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment to the valuation of the long-term foreign exchange contract for the nine months ended September 30, 2014. The valuation of these contracts is classified as Level 2 due to the observable nature of the inputs used in deriving the fair value. Customer Deposits — The carrying amount approximates fair value for demand and interest checking deposits, savings deposits, and certain money market deposits as the amounts are payable on demand as of the balance sheet date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. For time deposits, the fair value is based on the discounted value of contractual cash flows using the rates offered by the Company. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 3. Federal Home Loan Bank Advances — The fair value of FHLB advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 2. Securities Sold Under Repurchase Agreements — For securities sold under repurchase agreements with original maturities of 90 days or less, the carrying amount approximates fair value due to the short-term nature of these instruments. At September 30, 2014 and December 31, 2013, most of the securities sold under repurchase agreements are long-term in nature and the fair values of securities sold under repurchase agreements are calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates, and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 2. Accrued Interest Payable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. Long-Term Debt — The fair value of long-term debt is estimated by discounting the cash flows through maturity based on current market rates the Company would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is classified as Level 2. Derivative Liabilities — The Company’s derivative liabilities fall within Level 3 and Level 2. The derivatives liabilities are recorded in conjunction with certain certificates of deposit (“host instrument”). These certificates of deposits pay interest based on changes in the RMB, and are included in interest-bearing deposits on the Company’s consolidated balance sheets. The fair value of these embedded derivatives is based on the discounted cash flow approach. The liabilities are divided by the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion the Company applied a risk premium comparable to an agency security risk premium. For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a risk premium based on the Company institutional credit rating. Total credit valuation adjustments on derivative liabilities were $575 thousand for the nine months ended September 30, 2014. Increases (decreases), if any, of those inputs in isolation would result in a lower (higher) fair value measurement. The valuation of the derivative liabilities falls within Level 3 of the fair value hierarchy since the significant inputs used in deriving the fair value of these derivative contracts are not directly observable. The actual Level 3 unobservable input used as of September 30, 2014 was a credit risk adjustment. The Level 2 derivative liabilities are mostly comprised of the offsetting interest rate swaps and caps with other counterparties. Refer to “Interest Rate Swaps and Caps” within this note for complete discussion. Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans receivable, which are recorded at estimated fair value less the cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less the cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals, broker price opinions or accepted written offers. These valuations are reviewed and approved by the Company’s appraisal department, credit review department, or OREO department. Updated appraisals and evaluations are obtained on a regular basis or at least annually. Further, on a quarterly basis, all appraisals and evaluations of nonperforming assets are reviewed to assess the current carrying value and to ensure that the current carrying value is appropriate. The Company uses the market comparables valuation technique to measure the fair value of OREO properties. The significant unobservable input used is the selling cost. OREO properties are classified as Level 3. The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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