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FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS | NOTE 3 — 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 fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is 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 Company’s 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 financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of September 30, 2016
($ 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)
Available-for-sale investment securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 456,448 |  |  | $ | 456,448 |  |  | $ | — |  |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 383,331 |  |  | — |  |  | 383,331 |  |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 326,818 |  |  | — |  |  | 326,818 |  |  | — |
Residential mortgage-backed securities |  | 1,194,838 |  |  | — |  |  | 1,194,838 |  |  | — |
Municipal securities |  | 152,293 |  |  | — |  |  | 152,293 |  |  | — |
Non-agency residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 52,957 |  |  | — |  |  | 52,957 |  |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 281,987 |  |  | — |  |  | 281,987 |  |  | — |
Non-investment grade |  | 8,778 |  |  | — |  |  | 8,778 |  |  | — |
Foreign bonds: |  |  |  |  |  |  |  |
Investment grade |  | 337,434 |  |  | — |  |  | 337,434 |  |  | — |
Other securities |  | 41,740 |  |  | 31,939 |  |  | 9,801 |  |  | — |
Total available-for-sale investment securities |  | $ | 3,236,624 |  |  | $ | 488,387 |  |  | $ | 2,748,237 |  |  | $ | — |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate swaps and options |  | $ | 144,293 |  |  | $ | — |  |  | $ | 144,293 |  |  | $ | — |
Foreign exchange contracts |  | $ | 6,065 |  |  | $ | — |  |  | $ | 6,065 |  |  | $ | — |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit |  | $ | (2,137 | ) |  | $ | — |  |  | $ | (2,137 | ) |  | $ | — |
Foreign currency forward contracts |  | $ | (78 | ) |  | $ | — |  |  | $ | (78 | ) |  | $ | — |
Interest rate swaps and options |  | $ | (146,623 | ) |  | $ | — |  |  | $ | (146,623 | ) |  | $ | — |
Foreign exchange contracts |  | $ | (3,334 | ) |  | $ | — |  |  | $ | (3,334 | ) |  | $ | — |
Credit risk participation agreements (“RPAs”) |  | $ | (8 | ) |  | $ | — |  |  | $ | (8 | ) |  | $ | — |
|  | Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of December 31, 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)
Available-for-sale investment securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 998,515 |  |  | $ | 998,515 |  |  | $ | — |  |  | $ | — |
U.S. government agency and U.S. government sponsored enterprise debt securities |  | 768,849 |  |  | — |  |  | 768,849 |  |  | — |
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | 351,662 |  |  | — |  |  | 351,662 |  |  | — |
Residential mortgage-backed securities |  | 997,396 |  |  | — |  |  | 997,396 |  |  | — |
Municipal securities |  | 175,649 |  |  | — |  |  | 175,649 |  |  | — |
Non-agency residential mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 62,393 |  |  | — |  |  | 62,393 |  |  | — |
Corporate debt securities: |  |  |  |  |  |  |  |  |  |  |  |
Investment grade |  | 279,432 |  |  | — |  |  | 279,432 |  |  | — |
Non-investment grade |  | 9,642 |  |  | — |  |  | 9,642 |  |  | — |
Foreign bonds: |  |  |  |  |  |  |  |
Investment grade |  | 89,795 |  |  | 4,514 |  |  | 85,281 |  |  | — |
Other securities |  | 39,893 |  |  | 31,121 |  |  | 8,772 |  |  | — |
Total available-for-sale investment securities |  | $ | 3,773,226 |  |  | $ | 1,034,150 |  |  | $ | 2,739,076 |  |  | $ | — |
Derivative assets: |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | 2,365 |  |  | $ | — |  |  | $ | 2,365 |  |  | $ | — |
Interest rate swaps and options |  | $ | 67,215 |  |  | $ | — |  |  | $ | 67,215 |  |  | $ | — |
Foreign exchange contracts |  | $ | 10,254 |  |  | $ | — |  |  | $ | 10,254 |  |  | $ | — |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate swaps on certificates of deposit |  | $ | (5,213 | ) |  | $ | — |  |  | $ | (5,213 | ) |  | $ | — |
Interest rate swaps and options |  | $ | (67,325 | ) |  | $ | — |  |  | $ | (67,325 | ) |  | $ | — |
Foreign exchange contracts |  | $ | (9,350 | ) |  | $ | — |  |  | $ | (9,350 | ) |  | $ | — |
RPAs |  | $ | (4 | ) |  | $ | — |  |  | $ | (4 | ) |  | $ | — |
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. There were no assets or liabilities measured using significant unobservable inputs (Level 3) on a recurring basis for the three and nine months ended September 30, 2016. The following table presents 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 nine months ended September 30, 2015:
($ in thousands) |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2015 |  | 2015
| Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities |  | Corporate Debt Securities: Non-Investment Grade |  | Embedded Derivative Liabilities
Beginning balance |  | $ | — |  |  | $ | — |  |  | $ | 6,528 |  |  | $ | (3,392 | )
Total gains (losses) for the period: |  |  |  |  |  |  |  |  |  |
Included in earnings (1) |  | — |  |  | — |  |  | 960 |  |  | (20 | )
Included in other comprehensive income (2) |  | — |  |  | — |  |  | 922 |  |  | — |
Sales and settlements: |  |  |  |  |  |  |  |  |  |
Sales |  | — |  |  | — |  |  | (7,219 | ) |  | — |
Settlements |  | — |  |  | — |  |  | (98 | ) |  | 3,412 |
Transfers in and/or out of Level 3 |  | — |  |  | — |  |  | (1,093 | ) |  | — |
Ending balance |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Changes in unrealized losses included in earnings relating to assets and liabilities held for the period |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
(1) | Net gains or losses (realized and unrealized) of corporate debt securities and embedded derivative liabilities are included in Net gains on sales of available-for-sale investment securities and Other operating expense, respectively, on 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, on 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 become 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 for the three and nine months ended September 30, 2016, and three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company transferred $1.1 million of pooled trust preferred securities measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability. Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans that were impaired, OREO and loans held-for-sale. These fair value adjustments result from impairments recognized during the period on certain non-PCI impaired loans, application of fair value less cost to sell on OREO and application of lower of cost or market (“LOCOM”) valuation on loans held-for-sale. The following tables present the carrying amounts of assets included in the Consolidated Balance Sheets that had fair value changes during the year-to-date period measured on a nonrecurring basis:
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of September 30, 2016
($ 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”) |  | $ | 20,904 |  |  | $ | — |  |  | $ | — |  |  | $ | 20,904 |
Commercial and industrial (“C&I”) |  | 58,854 |  |  | — |  |  | — |  |  | 58,854 |
Residential |  | 2,305 |  |  | — |  |  | — |  |  | 2,305 |
Consumer |  | 594 |  |  | — |  |  | — |  |  | 594 |
Total non-PCI impaired loans |  | $ | 82,657 |  |  | $ | — |  |  | $ | — |  |  | $ | 82,657 |
OREO |  | $ | 2,760 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,760 |
Loans held-for-sale |  | $ | 26,931 |  |  | $ | — |  |  | $ | 26,931 |  |  | $ | — |
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 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: |  |  |  |  |  |  |  |  |  |  |  |
CRE |  | $ | 17,252 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,252 |
C&I |  | 35,558 |  |  | — |  |  | — |  |  | 35,558 |
Residential |  | 16,472 |  |  | — |  |  | — |  |  | 16,472 |
Consumer |  | 1,180 |  |  | — |  |  | — |  |  | 1,180 |
Total non-PCI impaired loans |  | $ | 70,462 |  |  | $ | — |  |  | $ | — |  |  | $ | 70,462 |
OREO |  | $ | 4,929 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,929 |
Loans held-for-sale |  | $ | 29,238 |  |  | $ | — |  |  | $ | 29,238 |  |  | $ | — |
The following table presents fair value adjustments of assets measured on a nonrecurring basis recognized during the three and nine months ended and which were included in the Consolidated Balance Sheets as of September 30, 2016 and 2015:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
($ in thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Non-PCI impaired loans: |  |  |  |  |  |  |  |  |  |
CRE |  | $ | (282 | ) |  | $ | 101 |  |  | $ | 1,741 |  |  | $ | (845 | )
C&I |  | 77 |  |  | (707 | ) |  | (5,497 | ) |  | (9,806 | )
Residential |  | (14 | ) |  | (314 | ) |  | (14 | ) |  | (565 | )
Consumer |  | — |  |  | (59 | ) |  | 17 |  |  | (59 | )
Total non-PCI impaired loans |  | $ | (219 | ) |  | $ | (979 | ) |  | $ | (3,753 | ) |  | $ | (11,275 | )
OREO |  | $ | (41 | ) |  | $ | (1,556 | ) |  | $ | (994 | ) |  | $ | (1,739 | )
Loans held-for-sale |  | $ | — |  |  | $ | — |  |  | $ | (2,351 | ) |  | $ | (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 September 30, 2016 and December 31, 2015:
($ in thousands) |  | Fair Value Measurements (Level 3) |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range of Inputs |  | Weighted Average
September 30, 2016 |  |  |  |  |  |  |  |  |  |  |
Non-PCI impaired loans |  | $ | 55,097 |  |  | Discounted cash flow |  | Discount rate |  | 0% — 45% |  | 4%
|  | $ | 27,560 |  |  | Market comparables |  | Discount rate (1) |  | 0% — 100% |  | 2%
OREO |  | $ | 2,760 |  |  | Appraisal |  | Selling cost |  | 8% |  | 8%
December 31, 2015 |  |  |  |  |  |  |  |  |  |
Non-PCI impaired loans |  | $ | 27,522 |  |  | Discounted cash flow |  | Discount rate |  | 0% — 87% |  | 30%
|  | $ | 42,940 |  |  | Market comparables |  | Discount rate (1) |  | 0% — 100% |  | 17%
OREO |  | $ | 4,929 |  |  | Appraisal |  | Selling cost |  | 8% |  | 8%
(1) | Discount rate is adjusted for factors such as liquidation cost of collateral and selling cost.
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 September 30, 2016 and December 31, 2015:
($ in thousands) |  | September 30, 2016
| Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,666,832 |  |  | $ | 1,666,832 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,666,832 |
Short-term investments |  | $ | 307,473 |  |  | $ | — |  |  | $ | 307,473 |  |  | $ | — |  |  | $ | 307,473 |
Resale agreements (1) |  | $ | 1,500,000 |  |  | $ | — |  |  | $ | 1,496,965 |  |  | $ | — |  |  | $ | 1,496,965 |
Held-to-maturity investment security |  | $ | 154,461 |  |  | $ | — |  |  | $ | — |  |  | $ | 154,296 |  |  | $ | 154,296 |
Loans held-for-sale |  | $ | 47,719 |  |  | $ | — |  |  | $ | 47,719 |  |  | $ | — |  |  | $ | 47,719 |
Loans held-for-investment, net |  | $ | 24,476,150 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,349,603 |  |  | $ | 24,349,603 |
Investment in FHLB stock |  | $ | 17,250 |  |  | $ | — |  |  | $ | 17,250 |  |  | $ | — |  |  | $ | 17,250 |
Investment in Federal Reserve Bank stock |  | $ | 55,355 |  |  | $ | — |  |  | $ | 55,355 |  |  | $ | — |  |  | $ | 55,355 |
Accrued interest receivable |  | $ | 88,343 |  |  | $ | — |  |  | $ | 88,343 |  |  | $ | — |  |  | $ | 88,343 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand, interest checking, savings and money market deposits |  | $ | 22,994,054 |  |  | $ | — |  |  | $ | 22,994,054 |  |  | $ | — |  |  | $ | 22,994,054 |
Time deposits |  | $ | 5,598,387 |  |  | $ | — |  |  | $ | 5,603,591 |  |  | $ | — |  |  | $ | 5,603,591 |
Short-term borrowings |  | $ | 36,992 |  |  | $ | — |  |  | $ | 36,992 |  |  | $ | — |  |  | $ | 36,992 |
FHLB advances |  | $ | 321,084 |  |  | $ | — |  |  | $ | 333,437 |  |  | $ | — |  |  | $ | 333,437 |
Repurchase agreements (1) |  | $ | 200,000 |  |  | $ | — |  |  | $ | 263,948 |  |  | $ | — |  |  | $ | 263,948 |
Long-term debt |  | $ | 191,265 |  |  | $ | — |  |  | $ | 195,801 |  |  | $ | — |  |  | $ | 195,801 |
Accrued interest payable |  | $ | 7,516 |  |  | $ | — |  |  | $ | 7,516 |  |  | $ | — |  |  | $ | 7,516 |
(1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of September 30, 2016, $250.0 million out of $450.0 million of repurchase agreements was eligible for netting against resale agreements.
($ in thousands) |  | December 31, 2015
| Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,360,887 |  |  | $ | 1,360,887 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,360,887 |
Short-term investments |  | $ | 299,916 |  |  | $ | — |  |  | $ | 299,916 |  |  | $ | — |  |  | $ | 299,916 |
Resale agreements (1) |  | $ | 1,600,000 |  |  | $ | — |  |  | $ | 1,533,961 |  |  | $ | — |  |  | $ | 1,533,961 |
Loans held-for-sale |  | $ | 31,958 |  |  | $ | — |  |  | $ | 31,958 |  |  | $ | — |  |  | $ | 31,958 |
Loans held-for-investment, net |  | $ | 23,378,789 |  |  | $ | — |  |  | $ | — |  |  | $ | 23,000,817 |  |  | $ | 23,000,817 |
Investment in FHLB stock |  | $ | 28,770 |  |  | $ | — |  |  | $ | 28,770 |  |  | $ | — |  |  | $ | 28,770 |
Investment in Federal Reserve Bank stock |  | $ | 54,932 |  |  | $ | — |  |  | $ | 54,932 |  |  | $ | — |  |  | $ | 54,932 |
Accrued interest receivable |  | $ | 89,243 |  |  | $ | — |  |  | $ | 89,243 |  |  | $ | — |  |  | $ | 89,243 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Customer deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand, interest checking, savings and money market deposits |  | $ | 20,859,086 |  |  | $ | — |  |  | $ | 20,859,086 |  |  | $ | — |  |  | $ | 20,859,086 |
Time deposits |  | $ | 6,616,895 |  |  | $ | — |  |  | $ | 6,606,942 |  |  | $ | — |  |  | $ | 6,606,942 |
FHLB advances |  | $ | 1,019,424 |  |  | $ | — |  |  | $ | 1,032,000 |  |  | $ | — |  |  | $ | 1,032,000 |
Long-term debt |  | $ | 206,084 |  |  | $ | — |  |  | $ | 186,593 |  |  | $ | — |  |  | $ | 186,593 |
Accrued interest payable |  | $ | 8,848 |  |  | $ | — |  |  | $ | 8,848 |  |  | $ | — |  |  | $ | 8,848 |
(1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of December 31, 2015, the carrying amount of $450.0 million of repurchase agreements was eligible for netting against resale agreements, resulting in no repurchase agreements’ balances reported.
The following is a description of the valuation methodologies and significant assumptions used to measure financial assets and liabilities at fair value and to estimate fair value for certain financial instruments not recorded at fair value. The description also includes the level of the fair value hierarchy in which the assets or liabilities are classified. Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. As such, 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. In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. Resale Agreements — The fair value of resale agreements is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. Held-to-Maturity Investment Security — The fair value of the held-to-maturity investment security is determined by the discount cash flow approach. The discount rate is derived from conditional prepayment rate, constant default rate, loss severity and discount margin. Due to the significant unobservable inputs, the held-to-maturity investment security is classified as Level 3. 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 the average 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 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-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 or discounted cash flow techniques. 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. All appraisals include an “as is” market value without conditions as of the effective date of the appraisal. Updated appraisals and evaluations are generally obtained within the last 12 months. For certain impaired loans, the Company utilizes the discounted cash flow approach and applies a discount rate derived from historical data. 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 cost. On a quarterly basis, all nonperforming assets are reviewed to assess whether the current carrying value is supported by the collateral or cash flow and to ensure that the current carrying value is appropriate. Non-PCI impaired loans are classified as Level 3. Loans Held-for-Investment, net — The fair value of loans held-for-investment 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 that reflect the 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, 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 held-for-investment, 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. Please 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. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. The Company uses the market comparable 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. Interest Rate Swaps and Options — The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option 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 option 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 swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. The fair value of interest rate options is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps). The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. In addition, to comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, model-derived credit spreads. As of September 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts’ positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative valuations in Level 2 of the fair value hierarchy due to the observable nature of the significant inputs utilized. 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 because the contracts 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. These are over the counter contracts where quoted market prices are not readily available. Valuation is measured using conventional valuation methodologies with observable market data. Valuation depends on the type of derivative and the nature of the underlying rate and contractual terms including period of maturity, price and index upon which the derivative’s value is based. Key inputs include foreign exchange rates (spot and/or forward rates), volatility of currencies, and the correlation of such inputs. The counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign contracts is classified as Level 2. 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 value, time deposits 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 value, these instruments are classified as Level 2. Repurchase Agreements — The fair value of the repurchase agreements is 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, 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. Foreign currency forward contracts — The Company enters into foreign currency forward contracts to hedge its net investment in East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market exchange rate. Inputs include spot rates, forward rates, and the interest rate curve of the domestic and foreign currency. Interest rate forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. RPAs — The Company enters into RPAs, under which the Company assumes its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The credit spreads of the borrowers used in the calculation are estimated by the Company based on current market conditions, including consideration of current borrowing spreads for similar customers and transactions, review of existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. The Company has determined that the majority of the inputs used to value RPAs fall within Level 2 of the fair value hierarchy. 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=49121117&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=49121117&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=49121117&loc=d3e13433-108611 + Details
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