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FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS | 6 Months Ended
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Jun. 30, 2015
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 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. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. 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. These assets and liabilities are reported on the consolidated balance sheets at their fair values as of June 30, 2015 and December 31, 2014. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements. The following tables present both financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of June 30, 2015
($ in thousands) |  | Fair Value Measurements June 30, 2015 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Available-for-sale investment securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 1,200,111 |  |  | $ | 1,200,111 |  |  | $ | — |  |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 424,863 |  |  | — |  |  | 424,863 |  |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 187,388 |  |  | — |  |  | 187,388 |  |  | — |
Residential mortgage-backed securities |  | 688,712 |  |  | — |  |  | 688,712 |  |  | — |
Municipal securities |  | 206,422 |  |  | — |  |  | 206,422 |  |  | — |
Other residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 61,908 |  |  | — |  |  | 61,908 |  |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 156,978 |  |  | — |  |  | 156,978 |  |  | — |
Non-investment grade |  | 10,025 |  |  | — |  |  | 10,025 |  |  | — |
Other securities |  | 45,739 |  |  | 35,534 |  |  | 10,205 |  |  | — |
Total available-for-sale investment securities |  | $ | 2,982,146 |  |  | $ | 1,235,645 |  |  | $ | 1,746,501 |  |  | $ | — |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate swaps and caps |  | $ | 44,424 |  |  | $ | — |  |  | $ | 44,424 |  |  | $ | — |
Foreign exchange contracts |  | $ | 11,044 |  |  | $ | — |  |  | $ | 11,044 |  |  | $ | — |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit |  | $ | (8,177 | ) |  | $ | — |  |  | $ | (8,177 | ) |  | $ | — |
Interest rate swaps and caps |  | $ | (43,810 | ) |  | $ | — |  |  | $ | (43,810 | ) |  | $ | — |
Foreign exchange contracts |  | $ | (10,186 | ) |  | $ | — |  |  | $ | (10,186 | ) |  | $ | — |
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of December 31, 2014
($ in thousands) |  | Fair Value Measurements December 31, 2014 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Available-for-sale investment securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 873,435 |  |  | $ | 873,435 |  |  | $ | — |  |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 311,024 |  |  | — |  |  | 311,024 |  |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 141,420 |  |  | — |  |  | 141,420 |  |  | — |
Residential mortgage-backed securities |  | 791,088 |  |  | — |  |  | 791,088 |  |  | — |
Municipal securities |  | 250,448 |  |  | — |  |  | 250,448 |  |  | — |
Other residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 53,918 |  |  | — |  |  | 53,918 |  |  | — |
Other commercial mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 34,053 |  |  | — |  |  | 34,053 |  |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 115,182 |  |  | — |  |  | 115,182 |  |  | — |
Non-investment grade |  | 14,681 |  |  | — |  |  | 8,153 |  |  | 6,528 |
Other securities |  | 41,116 |  |  | 32,105 |  |  | 9,011 |  |  | — |
Total available-for-sale investment securities |  | $ | 2,626,365 |  |  | $ | 905,540 |  |  | $ | 1,714,297 |  |  | $ | 6,528 |
Derivative assets: |  |  |  |  |  |  |  |
Foreign exchange options |  | $ | 6,136 |  |  | $ | — |  |  | $ | 6,136 |  |  | $ | — |
Interest rate swaps and caps |  | $ | 41,534 |  |  | $ | — |  |  | $ | 41,534 |  |  | $ | — |
Foreign exchange contracts |  | $ | 8,118 |  |  | $ | — |  |  | $ | 8,118 |  |  | $ | — |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit |  | $ | (9,922 | ) |  | $ | — |  |  | $ | (9,922 | ) |  | $ | — |
Interest rate swaps and caps |  | $ | (41,779 | ) |  | $ | — |  |  | $ | (41,779 | ) |  | $ | — |
Foreign exchange contracts |  | $ | (9,163 | ) |  | $ | — |  |  | $ | (9,163 | ) |  | $ | — |
Embedded derivative liabilities |  | $ | (3,392 | ) |  | $ | — |  |  | $ | — |  |  | $ | (3,392 | )
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 present 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 and six months ended June 30, 2015 and 2014:
|  | Three Months Ended June 30,
|  | 2015 |  | 2014
($ in thousands) |  | Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities |  | Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities
Beginning balance, April 1 |  | $ | — |  |  | $ | (3,412 | ) |  | $ | 6,717 |  |  | $ | (3,398 | )
Total gains for the period: |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  | — |  |  | — |  |  | — |  |  | 36 |
Included in other comprehensive income (unrealized)(2) |  | — |  |  | — |  |  | 1,209 |  |  | — |
Purchases, issues, sales, settlements: |  |  |  |  |  |  |  |  |  |
Purchases |  | — |  |  | — |  |  | — |  |  | — |
Issues |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | — |  |  | 3,412 |  |  | (9 | ) |  | — |
Transfer from investment grade to non-investment grade |  | — |  |  | — |  |  | — |  |  | — |
Transfers in and/or out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |
Ending balance, June 30 |  | $ | — |  |  | $ | — |  |  | $ | 7,917 |  |  | $ | (3,362 | )
Changes in unrealized gains included in earnings relating to assets and liabilities held at the end of June 30 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (36 | )
|  | Six Months Ended June 30,
|  | 2015 |  | 2014
($ in thousands) |  | Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities |  | Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities
Beginning balance, January 1 |  | $ | 6,528 |  |  | $ | (3,392 | ) |  | $ | 6,371 |  |  | $ | (3,655 | )
Total gains or (losses) for the period: |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  | 960 |  |  | (20 | ) |  |  |  |  | 293 |
Included in other comprehensive income (unrealized)(2) |  | 922 |  |  | — |  |  | 1,643 |  |  | — |
Purchases, issues, sales, settlements: |  |  |  |  |  |  |  |  |  |
Purchases |  | — |  |  | — |  |  | — |  |  | — |
Issues |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | (7,219 | ) |  | — |  |  | — |  |  | — |
Settlements |  | (98 | ) |  | 3,412 |  |  | (97 | ) |  | — |
Transfer from investment grade to non-investment grade |  | — |  |  | — |  |  | — |  |  | — |
Transfers in and/or out of Level 3 |  | (1,093 | ) |  | — |  |  | — |  |  | — |
Ending balance, June 30 |  | $ | — |  |  | $ | — |  |  | $ | 7,917 |  |  | $ | (3,362 | )
Changes in unrealized gains included in earnings relating to assets and liabilities held at the end of June 30 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (293 | )
(1) | Realized gains or losses of corporate debt securities and embedded derivative liabilities are included in net gains on sales of investment securities and other operating expense, respectively, in the consolidated statements of income.
(2) | Unrealized gains or losses on available-for-sale investment securities are reported in other comprehensive income, net of tax, in the consolidated statements of comprehensive income.
Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable in the current marketplace. The Company’s policy, with respect to transfers between levels of the fair value hierarchy, is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers of assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the three months ended June 30, 2015 and 2014. During the six months ended June 30, 2015, the Company transferred $1.1 million of assets measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability on certain pooled trust preferred securities. There were no transfers of assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the six months ended June 30, 2014. The following table presents quantitative information about significant unobservable inputs used in the valuation of assets and liabilities measured on a recurring basis classified as Level 3 as of December 31, 2014:
($ in thousands) |  | Fair Value Measurements (Level 3) |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
Available-for-sale investment securities: |  |  |  |  |  |  |  |  |  |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |
Non-investment grade |  | $ | 6,528 |  |  | Discounted cash flow |  | Constant prepayment rate |  | 0.00% - 1.00% |  | 0.73%
|  |  |  |  |  |  | Constant default rate |  | 0.75% - 1.20% |  | 0.87%
|  |  |  |  |  |  | Loss severity |  | 85.00% |  | 85.00%
|  |  |  |  |  |  | Discount margin |  | 4.50% - 7.50% |  | 6.94%
Embedded derivative liabilities |  | $ | (3,392 | ) |  | Discounted cash flow |  | Credit risk |  | 0.12% - 0.14% |  | 0.13%
Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans, OREO, and loans held for sale. These fair value adjustments result from impairments recognized during the period on certain non-PCI loans, application of fair value less cost to sell on OREO and application of lower of cost or market (“LOCOM”) valuation on loans held for sale. The following tables present the carrying amounts of all assets that were still held as of June 30, 2015 and December 31, 2014 for which a nonrecurring fair value measurement was recorded:
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of June 30, 2015
($ in thousands) |  | Fair Value Measurements |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Non-PCI impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial Real Estate (“CRE”) |  | $ | 14,641 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,641 |
Commercial and Industrial (“C&I”) |  | 43,138 |  |  | — |  |  | — |  |  | 43,138 |
Residential |  | 15,104 |  |  | — |  |  | — |  |  | 15,104 |
Consumer |  | 608 |  |  | — |  |  | — |  |  | 608 |
Total non-PCI impaired loans |  | $ | 73,491 |  |  | $ | — |  |  | $ | — |  |  | $ | 73,491 |
OREO |  | $ | 3,848 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,848 |
Loans held for sale |  | $ | 33,719 |  |  | $ | — |  |  | $ | 33,719 |  |  | $ | — |
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2014
($ in thousands) |  | Fair Value Measurements |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Non-PCI impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
CRE |  | $ | 26,089 |  |  | $ | — |  |  | $ | — |  |  | $ | 26,089 |
C&I |  | 16,581 |  |  | — |  |  | — |  |  | 16,581 |
Residential |  | 25,034 |  |  | — |  |  | — |  |  | 25,034 |
Consumer |  | 107 |  |  | — |  |  | — |  |  | 107 |
Total non-PCI impaired loans |  | $ | 67,811 |  |  | $ | — |  |  | $ | — |  |  | $ | 67,811 |
OREO |  | $ | 17,521 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,521 |
The following table presents fair value adjustments of certain assets measured on a nonrecurring basis recognized during the three and six months ended and still held as of June 30, 2015 and 2014:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Non-PCI impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
CRE |  | $ | (445 | ) |  | $ | 1,865 |  |  | $ | (905 | ) |  | $ | 1,376 |
C&I |  | (6,454 | ) |  | (9,642 | ) |  | (9,303 | ) |  | (11,705 | )
Residential |  | (216 | ) |  | 413 |  |  | (341 | ) |  | 27 |
Consumer |  | (1 | ) |  | — |  |  | (1 | ) |  | — |
Total non-PCI impaired loans |  | $ | (7,116 | ) |  | $ | (7,364 | ) |  | $ | (10,550 | ) |  | $ | (10,302 | )
OREO |  | $ | (200 | ) |  | $ | (69 | ) |  | $ | (258 | ) |  | $ | (595 | )
Loans held for sale |  | $ | (517 | ) |  | $ | — |  |  | $ | (517 | ) |  | $ | — |
The following table presents quantitative information about significant unobservable inputs used in the valuation of assets measured on a nonrecurring basis classified as Level 3 as of June 30, 2015 and December 31, 2014:
($ in thousands) |  | Fair Value Measurements (Level 3) |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average
June 30, 2015 |  |  |  |  |  |  |  |  |  |  |
Non-PCI impaired loans |  | $ | 34,095 |  |  | Discounted cash flow |  | Discount rate |  | 0% - 89% |  | 33%
|  | $ | 39,396 |  |  | Market comparables |  | Discount rate (1) |  | 0% - 100% |  | 17%
OREO |  | $ | 3,848 |  |  | Appraisal |  | Selling cost |  | 8% |  | 8%
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
Non-PCI impaired loans |  | $ | 11,499 |  |  | Discounted cash flow |  | Discount rate |  | 0% - 81% |  | 49%
|  | $ | 56,312 |  |  | Market comparables |  | Discount rate (1) |  | 0% - 100% |  | 4%
OREO |  | $ | 17,521 |  |  | Appraisal |  | Selling cost |  | 8% |  | 8%
(1) | Discount rate is adjusted for factors such as liquidation cost of collateral and selling costs.
The following tables present the carrying and fair values per the fair value hierarchy of certain financial instruments, excluding those measured at fair value on a recurring basis, as of June 30, 2015 and December 31, 2014:
|  | June 30, 2015
($ in thousands) |  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,877,914 |  |  | $ | 1,877,914 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,877,914 |
Short-term investments |  | $ | 274,838 |  |  | $ | — |  |  | $ | 274,838 |  |  | $ | — |  |  | $ | 274,838 |
Securities purchased under resale agreements (“resale agreements”) |  | $ | 1,100,000 |  |  | $ | — |  |  | $ | 1,091,775 |  |  | $ | — |  |  | $ | 1,091,775 |
Loans held for sale |  | $ | 195,427 |  |  | $ | — |  |  | $ | 197,813 |  |  | $ | — |  |  | $ | 197,813 |
Loans receivable, net |  | $ | 21,697,435 |  |  | $ | — |  |  | $ | — |  |  | $ | 21,460,209 |  |  | $ | 21,460,209 |
Investment in Federal Home Loan Bank (“FHLB”) stock |  | $ | 18,155 |  |  | $ | — |  |  | $ | 18,155 |  |  | $ | — |  |  | $ | 18,155 |
Investment in Federal Reserve Bank stock |  | $ | 54,675 |  |  | $ | — |  |  | $ | 54,675 |  |  | $ | — |  |  | $ | 54,675 |
Accrued interest receivable |  | $ | 81,575 |  |  | $ | — |  |  | $ | 81,575 |  |  | $ | — |  |  | $ | 81,575 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer deposit accounts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand, savings and money market deposits |  | $ | 18,872,270 |  |  | $ | — |  |  | $ | 18,872,270 |  |  | $ | — |  |  | $ | 18,872,270 |
Time deposits |  | $ | 6,655,950 |  |  | $ | — |  |  | $ | 6,640,165 |  |  | $ | — |  |  | $ | 6,640,165 |
Short-term borrowings |  | $ | 3,271 |  |  | $ | — |  |  | $ | 3,271 |  |  | $ | — |  |  | $ | 3,271 |
FHLB advances |  | $ | 318,322 |  |  | $ | — |  |  | $ | 334,284 |  |  | $ | — |  |  | $ | 334,284 |
Securities sold under repurchase agreements (“repurchase agreements”) |  | $ | 400,000 |  |  | $ | — |  |  | $ | 388,498 |  |  | $ | — |  |  | $ | 388,498 |
Accrued interest payable |  | $ | 10,762 |  |  | $ | — |  |  | $ | 10,762 |  |  | $ | — |  |  | $ | 10,762 |
Long-term debt |  | $ | 215,964 |  |  | $ | — |  |  | $ | 193,157 |  |  | $ | — |  |  | $ | 193,157 |
|  | December 31, 2014
($ in thousands) |  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,039,885 |  |  | $ | 1,039,885 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,039,885 |
Short-term investments |  | $ | 338,714 |  |  | $ | — |  |  | $ | 338,714 |  |  | $ | — |  |  | $ | 338,714 |
Resale agreements |  | $ | 1,225,000 |  |  | $ | — |  |  | $ | 1,191,060 |  |  | $ | — |  |  | $ | 1,191,060 |
Loans held for sale |  | $ | 45,950 |  |  | $ | — |  |  | $ | 45,950 |  |  | $ | — |  |  | $ | 45,950 |
Loans receivable, net |  | $ | 21,468,270 |  |  | $ | — |  |  | $ | — |  |  | $ | 20,997,379 |  |  | $ | 20,997,379 |
Investment in FHLB stock |  | $ | 31,239 |  |  | $ | — |  |  | $ | 31,239 |  |  | $ | — |  |  | $ | 31,239 |
Investment in Federal Reserve Bank stock |  | $ | 54,451 |  |  | $ | — |  |  | $ | 54,451 |  |  | $ | — |  |  | $ | 54,451 |
Accrued interest receivable |  | $ | 88,303 |  |  | $ | — |  |  | $ | 88,303 |  |  | $ | — |  |  | $ | 88,303 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer deposit accounts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand, savings and money market deposits |  | $ | 17,896,035 |  |  | $ | — |  |  | $ | 17,896,035 |  |  | $ | — |  |  | $ | 17,896,035 |
Time deposits |  | $ | 6,112,739 |  |  | $ | — |  |  | $ | 6,095,217 |  |  | $ | — |  |  | $ | 6,095,217 |
FHLB advances |  | $ | 317,241 |  |  | $ | — |  |  | $ | 336,302 |  |  | $ | — |  |  | $ | 336,302 |
Repurchase agreements |  | $ | 795,000 |  |  | $ | — |  |  | $ | 870,434 |  |  | $ | — |  |  | $ | 870,434 |
Accrued interest payable |  | $ | 11,303 |  |  | $ | — |  |  | $ | 11,303 |  |  | $ | — |  |  | $ | 11,303 |
Long-term debt |  | $ | 225,848 |  |  | $ | — |  |  | $ | 205,777 |  |  | $ | — |  |  | $ | 205,777 |
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 approximates their book value due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. Resale Agreements — Resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of 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 values, these instruments are classified as Level 2. Available-for-Sale Investment Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investment securities; such items are classified as Level 1. Level 1 available-for-sale investment securities mainly include U.S. Treasury securities. The fair values of other available-for-sale investment securities are generally determined by independent external pricing service providers who have experience in valuing these securities, or by 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 available-for-sale investment securities valued using such methods are classified as Level 2. Loans Held for Sale — The Company’s loans held for sale are carried at the LOCOM. These loans are comprised of single-family and 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-PCI Impaired Loans — The Company evaluates non-PCI impaired loans on a nonrecurring basis. The fair value of non-PCI impaired loans is measured using the market comparables technique. For CRE loans and C&I 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. The fair value of collateral is based on third party appraisals or evaluations which are reviewed by the Company’s appraisal department. Updated appraisals and evaluations are generally obtained within the last 12 months. 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. For certain impaired loans, the Company utilizes the discounted cash flow approach and applies a discount rate derived from historical data. For impaired loans with an unpaid balance below a certain threshold, the Company applies historical loss rates to derive the fair value. The significant unobservable inputs used in the fair value measurement of non-PCI impaired loans are discount rates applied based on the liquidation cost of collateral and selling costs. Non-PCI impaired loans are classified as Level 3. Loans Receivable, Net — The fair value of loans is determined based on a discounted cash flow approach considered for an exit 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 values, these instruments are classified as Level 3. OREO — 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. Refer to the “Non-PCI Impaired Loans” section above for a detailed discussion on the Company’s policies and procedures related to appraisals and evaluations. 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. Investment in FHLB Stock and Federal Reserve Bank Stock — The carrying amounts of the Company’s investments in FHLB Stock and Federal Reserve Bank Stock approximate 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 in 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. 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 2. 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. These products allow 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 and cap contracts is based on a discounted cash flow approach. The counterparty’s credit risk is considered in the valuation of interest rate swaps and caps. 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 institutional party mirror each other. The fair value is determined at each reporting period based on changes in the foreign exchange rate. The counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. 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 fair value of deposits with no stated maturity, such as demand deposits, interest checking, savings, and money market deposits, approximates the carrying amount as the amounts are payable on demand at the measurement 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 current market rates for instruments with similar maturities. Due to the observable nature of the inputs used in deriving the estimated fair values, time deposits are classified as Level 2. Short-Term Borrowings — The fair value of short-term borrowings generally approximates their book value due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. FHLB 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 values, these instruments are classified as Level 2. Repurchase Agreements — As of June 30, 2015 and December 31, 2014, all of the repurchase agreements were long-term in nature and the fair values of the repurchase agreements were 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 values, these instruments are 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, long-term debt is classified as Level 2. Embedded Derivative Liabilities — Under ASC 815, a certificate of deposit that pays interest based on changes in foreign exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e., the certificate of deposit). The Company issues certain certificates of deposit that have a term of five years and pay interest based on the performance of the RMB relative to the USD. The fair value of these embedded derivatives was based on the discounted cash flow approach. The liabilities are divided between 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’s institutional credit rating. Total credit valuation adjustments were considered nominal to the valuation of embedded derivative liabilities. Increases (decreases), if any, of those inputs in isolation would result in a lower (higher) fair value measurement. The valuation of the embedded 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 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 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: 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 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 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 5: 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=35750535&loc=d3e13504-108611 Reference 6: 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=35750535&loc=d3e13433-108611 + Details
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