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Fair Value Measurement and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurement and Fair Value of Financial Instruments | Fair Value Measurement and Fair Value of Financial Instruments Under applicable accounting standards, the Company measures a portion of its assets and liabilities at fair value. These assets and liabilities are predominantly recorded at fair value on a recurring basis. From time to time, certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only as required through the application of an accounting method such as lower of cost or fair value or write-down of individual assets. The Company categorizes its assets and liabilities into three levels based on the established fair value hierarchy and conducts a review of fair value hierarchy classifications on a quarterly basis. For more information regarding the fair value hierarchy and how the Company measures fair value, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Fair Value to the Consolidated Financial Statements in the Company’s 2022 Form 10-K. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments within the fair value hierarchy. Available-for-Sale Debt Securities — The fair value of AFS debt securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectations and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include newly issued data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, inputs used by third-party pricing service providers also include material event notices. On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service providers to prices from other available independent sources for the same securities. When significant variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the valuation inputs and methodology furnished by third-party pricing service providers for each security category. When a quoted price in an active market exists for the identical security, this price is used to determine the fair value and the AFS debt security is classified as Level 1. Level 1 AFS debt securities consist of U.S. Treasury securities. When pricing is unavailable from third-party pricing service providers for certain securities, the Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. In addition, the Company obtains market quotes from other official published sources. As these valuations are based on observable inputs in the current marketplace, they are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation techniques are reviewed periodically. Equity Securities — Equity securities consisted of mutual funds as of both September 30, 2023 and December 31, 2022. The Company invested in these mutual funds for Community Reinvestment Act (“CRA”) purposes. The Company uses net asset value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically, but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2. Interest Rate Contracts — Interest rate contracts consist of interest rate swaps and options. The fair value of the 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 fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own 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 model-derived credit spreads, which are Level 3 inputs. Considering the observable nature of all other significant inputs utilized, the Company classifies these derivative instruments as Level 2. Foreign Exchange Contracts — The fair value of foreign exchange contracts is determined at each reporting period based on changes in the foreign exchange rates. 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. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result 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 exchange contracts is classified as Level 2. As of both September 30, 2023 and December 31, 2022, the Bank held foreign currency non-deliverable forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency non-deliverable forward contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include the spot and forward rates of the contractual currencies. Foreign exchange 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. Credit Contracts — Credit contracts utilized by the Company are comprised of credit risk participation agreements (“RPAs”) entered into by the Company with institutional counterparties. The fair value of the RPAs is calculated by determining the total expected asset or 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. Due to the observable nature of all other significant inputs used in deriving the estimated fair value, credit contracts are classified as Level 2. Equity Contracts — Equity contracts consist of warrants to purchase common or preferred stock of public and private companies, and any liability-classified contingent issuable shares of the Company. The fair value of the warrants is based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate, and market-observable company-specific equity volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The Company applies proxy volatilities based on the industry sectors of the private companies. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Since both option volatility and liquidity discount assumptions are subject to management’s judgment, measurement uncertainty is inherent in the valuation of private company warrants. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement of uncertainty analysis on the option volatility and liquidity discount assumptions is performed. In connection with the Company’s acquisition of a 49.99% equity interest in Rayliant Global Advisors Limited (“Rayliant”) during the third quarter of 2023, the Company granted performance restricted stock units (“PRSUs”) as part of its consideration. The vesting of these equity contracts is contingent on Rayliant meeting certain financial performance targets, and they are accounted for as a derivative liability. The fair value of these liability-classified equity contracts varies based on the operating revenue and operating EBITDA of Rayliant to be achieved during the future performance period. Due to the unobservable nature of the input assumptions, these equity contracts are classified as Level 3. For additional information on the equity contracts, refer to Note 6 — Derivatives and Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities to the Consolidated Financial Statements in this Form 10-Q. Commodity Contracts — Commodity contracts consist of swaps and options referencing commodity products. The fair value of the commodity option contracts is determined using the Black-Scholes model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fair value of the commodity 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) based on the market prices of the commodity. The fixed cash flows are predetermined based on the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized. The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
|  | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2023
($ in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value
AFS debt securities: |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 904,101 |  |  | $ | — |  |  | $ | — |  |  | $ | 904,101 |
U.S. government agency and U.S. government-sponsored enterprise debt securities |  | — |  |  | 447,464 |  |  | — |  |  | 447,464 |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | — |  |  | 462,332 |  |  | — |  |  | 462,332 |
Residential mortgage-backed securities |  | — |  |  | 1,694,342 |  |  | — |  |  | 1,694,342 |
Municipal securities |  | — |  |  | 243,556 |  |  | — |  |  | 243,556 |
Non-agency mortgage-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | — |  |  | 365,320 |  |  | — |  |  | 365,320 |
Residential mortgage-backed securities |  | — |  |  | 570,787 |  |  | — |  |  | 570,787 |
Corporate debt securities |  | — |  |  | 475,434 |  |  | — |  |  | 475,434 |
Foreign government bonds |  | — |  |  | 222,790 |  |  | — |  |  | 222,790 |
Asset-backed securities |  | — |  |  | 43,757 |  |  | — |  |  | 43,757 |
Collateralized loan obligations (“CLOs”) |  | — |  |  | 609,954 |  |  | — |  |  | 609,954 |
Total AFS debt securities |  | $ | 904,101 |  |  | $ | 5,135,736 |  |  | $ | — |  |  | $ | 6,039,837 |
Investments in qualified affordable housing partnerships, tax credit and other investments, net: |  |  |  |  |  |  |  |
Equity securities |  | $ | 19,447 |  |  | $ | 4,154 |  |  | $ | — |  |  | $ | 23,601 |
Total investments in qualified affordable housing partnerships, tax credit and other investments, net |  | $ | 19,447 |  |  | $ | 4,154 |  |  | $ | — |  |  | $ | 23,601 |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | 624,087 |  |  | $ | — |  |  | $ | 624,087 |
Foreign exchange contracts |  | — |  |  | 100,377 |  |  | — |  |  | 100,377 |
Equity contracts |  | — |  |  | — |  |  | 352 |  |  | 352 |
Commodity contracts |  | — |  |  | 137,500 |  |  | — |  |  | 137,500 |
Gross derivative assets |  | $ | — |  |  | $ | 861,964 |  |  | $ | 352 |  |  | $ | 862,316 |
Netting adjustments (1) |  | $ | — |  |  | $ | (530,331) |  |  | $ | — |  |  | $ | (530,331) |
Net derivative assets |  | $ | — |  |  | $ | 331,633 |  |  | $ | 352 |  |  | $ | 331,985 |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | 712,302 |  |  | $ | — |  |  | $ | 712,302 |
Foreign exchange contracts |  | — |  |  | 77,099 |  |  | — |  |  | 77,099 |
Equity contracts (2) |  | — |  |  | — |  |  | 15,119 |  |  | 15,119 |
Credit contracts |  | — |  |  | 12 |  |  | — |  |  | 12 |
Commodity contracts |  | — |  |  | 143,855 |  |  | — |  |  | 143,855 |
Gross derivative liabilities |  | $ | — |  |  | $ | 933,268 |  |  | $ | 15,119 |  |  | $ | 948,387 |
Netting adjustments (1) |  | $ | — |  |  | $ | (262,873) |  |  | $ | — |  |  | $ | (262,873) |
Net derivative liabilities |  | $ | — |  |  | $ | 670,395 |  |  | $ | 15,119 |  |  | $ | 685,514 |
|  | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2022
($ in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value
AFS debt securities: |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 606,203 |  |  | $ | — |  |  | $ | — |  |  | $ | 606,203 |
U.S. government agency and U.S. government-sponsored enterprise debt securities |  | — |  |  | 461,607 |  |  | — |  |  | 461,607 |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | — |  |  | 500,269 |  |  | — |  |  | 500,269 |
Residential mortgage-backed securities |  | — |  |  | 1,762,195 |  |  | — |  |  | 1,762,195 |
Municipal securities |  | — |  |  | 257,099 |  |  | — |  |  | 257,099 |
Non-agency mortgage-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | — |  |  | 398,329 |  |  | — |  |  | 398,329 |
Residential mortgage-backed securities |  | — |  |  | 649,224 |  |  | — |  |  | 649,224 |
Corporate debt securities |  | — |  |  | 526,274 |  |  | — |  |  | 526,274 |
Foreign government bonds |  | — |  |  | 227,053 |  |  | — |  |  | 227,053 |
Asset-backed securities |  | — |  |  | 49,076 |  |  | — |  |  | 49,076 |
CLOs |  | — |  |  | 597,664 |  |  | — |  |  | 597,664 |
Total AFS debt securities |  | $ | 606,203 |  |  | $ | 5,428,790 |  |  | $ | — |  |  | $ | 6,034,993 |
Investments in qualified affordable housing partnerships, tax credit and other investments, net: |  |  |  |  |  |  |  |
Equity securities |  | $ | 19,777 |  |  | $ | 4,177 |  |  | $ | — |  |  | $ | 23,954 |
Total investments in qualified affordable housing partnerships, tax credit and other investments, net |  | $ | 19,777 |  |  | $ | 4,177 |  |  | $ | — |  |  | $ | 23,954 |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | 440,283 |  |  | $ | — |  |  | $ | 440,283 |
Foreign exchange contracts |  | — |  |  | 53,109 |  |  | — |  |  | 53,109 |
Equity contracts |  | — |  |  | — |  |  | 323 |  |  | 323 |
Commodity contracts |  | — |  |  | 261,613 |  |  | — |  |  | 261,613 |
Gross derivative assets |  | $ | — |  |  | $ | 755,005 |  |  | $ | 323 |  |  | $ | 755,328 |
Netting adjustments (1) |  | $ | — |  |  | $ | (614,783) |  |  | $ | — |  |  | $ | (614,783) |
Net derivative assets |  | $ | — |  |  | $ | 140,222 |  |  | $ | 323 |  |  | $ | 140,545 |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | 584,516 |  |  | $ | — |  |  | $ | 584,516 |
Foreign exchange contracts |  | — |  |  | 44,117 |  |  | — |  |  | 44,117 |
Credit contracts |  | — |  |  | 23 |  |  | — |  |  | 23 |
Commodity contracts |  | — |  |  | 258,608 |  |  | — |  |  | 258,608 |
Gross derivative liabilities |  | $ | — |  |  | $ | 887,264 |  |  | $ | — |  |  | $ | 887,264 |
Netting adjustments (1) |  | $ | — |  |  | $ | (242,745) |  |  | $ | — |  |  | $ | (242,745) |
Net derivative liabilities |  | $ | — |  |  | $ | 644,519 |  |  | $ | — |  |  | $ | 644,519 |
(1)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information. (2)Equity contracts classified as derivative liabilities consist of PRSUs granted as part of EWBC’s consideration in its investment in Rayliant. For the three and nine months ended September 30, 2023 and 2022, Level 3 fair value measurements that were measured on a recurring basis consisted of warrant equity contracts issued by private companies and liability-classified contingent issuable shares of the Company. The following table provides a reconciliation of the beginning and ending balances of these equity contracts for the three and nine months ended September 30, 2023 and 2022:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
($ in thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Equity contracts |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 263 |  |  | $ | 357 |  |  | $ | 323 |  |  | $ | 215 |  |  |  |  |
Total (losses) gains included in earnings (1) |  | (3) |  |  | (12) |  |  | (63) |  |  | 39 |  |  |  |  |
Issuances |  | 92 |  |  | — |  |  | 92 |  |  | 91 |  |  |  |  |
Ending balance |  | $ | 352 |  |  | $ | 345 |  |  | $ | 352 |  |  | $ | 345 |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Equity contracts (2) |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  |
Issuances |  | 15,119 |  |  | — |  |  | 15,119 |  |  | — |  |  |  |  |
Ending balance |  | $ | 15,119 |  |  | $ | — |  |  | $ | 15,119 |  |  | $ | — |  |  |  |  |
(1)Includes unrealized (losses) gains recorded in Lending fees on the Consolidated Statement of Income. (2)Equity contracts classified as derivative liabilities consist of PRSUs granted as part of EWBC’s consideration in its investment in Rayliant. The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of September 30, 2023 and December 31, 2022. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
($ in thousands) |  | Fair Value Measurements (Level 3) |  | Valuation Technique |  | Unobservable Inputs |  | Range of Inputs |  | Weighted-Average of Inputs |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |
Equity contracts |  | $ | 352 |  |  | Black-Scholes option pricing model |  | Equity volatility |  | 41% — 51% |  | 46 | % | (1)
|  |  |  |  |  | Liquidity discount |  | 47% |  | 47 | % |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |
Equity contracts (2) |  | $ | 15,119 |  |  | Internal model |  | Payout % designated based on operating revenue and operating EBITDA of investee |  | 84% |  | 84 | % |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |
Equity contracts |  | $ | 323 |  |  | Black-Scholes option pricing model |  | Equity volatility |  | 42% — 60% |  | 54 | % | (1)
|  |  |  |  |  | Liquidity discount |  | 47% |  | 47 | % |
(1)The calculation for the weighted-average of inputs for the derivative asset equity contracts is based on the fair value of equity contracts as of both September 30, 2023 and December 31, 2022. (2)Equity contracts classified as derivative liabilities consist of PRSUs granted as part of EWBC’s consideration in its investment in Rayliant. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Assets measured at fair value on a nonrecurring basis include certain individually evaluated loans held-for-investment, investments in qualified affordable housing partnerships, tax credit and other investments, other real estate owned (“OREO”), loans held-for-sale, and other nonperforming assets. Nonrecurring fair value adjustments result from the impairment on certain individually evaluated loans held-for-investment and investments in qualified affordable housing partnerships, tax credit and other investments, from write-downs of OREO and other nonperforming assets, or from the application of lower of cost or fair value on loans held-for-sale. Individually Evaluated Loans Held-for-Investment — Individually evaluated loans held-for-investment are classified as Level 3 assets. The following two methods are used to derive the fair value of individually evaluated loans held-for-investment: •Discounted cash flow valuation techniques that consist of developing an expected stream of cash flows over the life of the loans, and then calculating the present value of the loans by discounting the expected cash flows at a designated discount rate. •When the repayment of an individually evaluated loan is dependent on the sale of the collateral, the fair value of the loan is determined based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal valuation if a third-party appraisal is not required by regulations, or is unavailable. An internal valuation utilizes one or more valuation techniques such as the income, market and/or cost approaches. Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — The Company conducts due diligence on its investments in qualified affordable housing partnerships, tax credit and other investments prior to the initial investment date and through the placed-in-service date. After these investments are either acquired or placed into service, the Company continues its periodic monitoring process to ensure book values are realizable and that there is no significant tax credit recapture risk. This monitoring process includes reviewing the investment entity’s quarterly financial statements and annual tax returns, the annual financial statements of the guarantor (if any) and a comparison of the actual performance of the investment against the financial projections prepared at the time the investment was made. The Company assesses its tax credit and other investments for possible other-than-temporary impairment on an annual basis or when events or circumstances suggest that the carrying amount of the investments may not be realizable. These circumstances can include, but are not limited to the following factors: •expected future cash flows that are less than the carrying amoun t of the investment; •changes in the economic, market or technological environment that could adversely affect the investee’s operations; •the potential for tax credit recapture; and •other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment. All available information is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, Investments — Equity Method and Joint Ventures, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary. Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3. Loans Held-for-Sale — Loans held-for-investment subsequently transferred to held-for-sale are recorded at the lower of cost or fair value upon transfer. Loans held-for-sale may be measured at fair value on a nonrecurring basis when fair value is less than cost. Fair value is generally determined based on available market data for similar loans and therefore, are classified as Level 2. Other Nonperforming Assets — Other nonperforming assets are recorded at fair value upon transfer from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimated recovery of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. The fair value measurement of other nonperforming assets is classified within one of the three levels in a valuation hierarchy based upon the observability of inputs to the valuation as of the measurement date. The following tables present the carrying amounts of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of September 30, 2023 and December 31, 2022:
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of September 30, 2023
($ in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Fair Value Measurements
Loans held-for-investment: |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |
Commercial and industrial (“C&I”) |  | $ | — |  |  | $ | — |  |  | $ | 22,788 |  |  | $ | 22,788 |
Commercial real estate (“CRE”): |  |  |  |  |  |  |  |
Construction and land |  | — |  |  | — |  |  | 11,141 |  |  | 11,141 |
Total commercial |  | — |  |  | — |  |  | 33,929 |  |  | 33,929 |
Consumer: |  |  |  |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |  |
Home equity lines of credit (“HELOCs”) |  | — |  |  | — |  |  | 1,204 |  |  | 1,204 |
Total consumer |  | — |  |  | — |  |  | 1,204 |  |  | 1,204 |
Total loans held-for-investment |  | $ | — |  |  | $ | — |  |  | $ | 35,133 |  |  | $ | 35,133 |
Investments in qualified affordable housing partnerships, tax credit and other investments, net |  | $ | — |  |  | $ | — |  |  | $ | 1,038 |  |  | $ | 1,038 |
|  | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2022
($ in thousands) |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Fair Value Measurements
Loans held-for-investment: |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |
C&I |  | $ | — |  |  | $ | — |  |  | $ | 40,011 |  |  | $ | 40,011 |
CRE: |  |  |  |  |  |  |  |
CRE |  | — |  |  | — |  |  | 31,380 |  |  | 31,380 |
Total commercial |  | — |  |  | — |  |  | 71,391 |  |  | 71,391 |
Consumer: |  |  |  |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |  |
HELOCs |  | — |  |  | — |  |  | 1,223 |  |  | 1,223 |
Total consumer |  | — |  |  | — |  |  | 1,223 |  |  | 1,223 |
Total loans held-for-investment |  | $ | — |  |  | $ | — |  |  | $ | 72,614 |  |  | $ | 72,614 |
The following table presents the increase (decrease) in the fair value of certain assets held at the end of the respective reporting periods, for which a nonrecurring fair value adjustment was recognized for the three and nine months ended September 30, 2023 and 2022:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
($ in thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |  |
Loans held-for-investment: |  |  |  |  |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |
C&I |  | $ | 366 |  |  | $ | (15,265) |  |  | $ | (4,437) |  |  | $ | (30,011) |  |  |  |  |
CRE: |  |  |  |  |  |  |  |  |  |  |  |
CRE |  | — |  |  | (118) |  |  | — |  |  | 2,212 |  |  |  |  |
Multifamily residential |  | — |  |  | (5,931) |  |  | — |  |  | (5,939) |  |  |  |  |
Construction and land |  | (10,413) |  |  | — |  |  | (10,413) |  |  | — |  |  |  |  |
Total commercial |  | (10,047) |  |  | (21,314) |  |  | (14,850) |  |  | (33,738) |  |  |  |  |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |
HELOCs |  | (41) |  |  | 81 |  |  | (41) |  |  | 166 |  |  |  |  |
Total consumer |  | (41) |  |  | 81 |  |  | (41) |  |  | 166 |  |  |  |  |
Total loans held-for-investment |  | $ | (10,088) |  |  | $ | (21,233) |  |  | $ | (14,891) |  |  | $ | (33,572) |  |  |  |  |
Investments in qualified affordable housing partnerships, tax credit and other investments, net |  | $ | (790) |  |  | $ | — |  |  | $ | (1,577) |  |  | $ | — |  |  |  |  |
Other nonperforming assets |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (6,861) |  |  |  |  |
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of September 30, 2023 and December 31, 2022:
($ in thousands) |  | Fair Value Measurements (Level 3) |  | Valuation Techniques |  | Unobservable Inputs |  | Range of Inputs |  | Weighted-Average of Inputs (1) |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
Loans held-for-investment |  | $ | 13,955 |  |  | Fair value of collateral |  | Discount |  | 15% — 75% |  | 48 | % | (1)
|  | $ | 6,134 |  |  | Fair value of collateral |  | Contract value |  | NM |  | NM |
|  | $ | 15,044 |  |  | Fair value of property |  | Selling cost |  | 8% |  | 8 | % |
Investments in qualified affordable housing partnerships, tax credit and other investments, net |  | $ | 1,038 |  |  | Individual analysis of each investment |  | Expected future tax benefits and distributions |  | NM |  | NM |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Loans held-for-investment |  | $ | 23,322 |  |  | Discounted cash flows |  | Discount |  | 4% — 6% |  | 4 | % | (1)
|  | $ | 17,912 |  |  | Fair value of collateral |  | Discount |  | 15% — 75% |  | 37 | % | (1)
|  | $ | 31,380 |  |  | Fair value of property |  | Selling cost |  | 8% |  | 8 | % |
NM — Not meaningful. (1)The calculation for the weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2023 and December 31, 2022. Disclosures about the Fair Value of Financial Instruments The following tables present the fair value estimates for financial instruments as of September 30, 2023 and December 31, 2022, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable, restricted equity securities, at cost, and mortgage servicing rights that are included in Other assets, and accrued interest payable which is included in Accrued expenses and other liabilities. These financial instruments are measured on an amortized cost basis on the Company’s Consolidated Balance Sheet.
|  | September 30, 2023
($ in thousands) |  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,561,178 |  |  | $ | 4,561,178 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,561,178 |
Interest-bearing deposits with banks |  | $ | 17,213 |  |  | $ | — |  |  | $ | 17,213 |  |  | $ | — |  |  | $ | 17,213 |
Resale agreements |  | $ | 785,000 |  |  | $ | — |  |  | $ | 672,250 |  |  | $ | — |  |  | $ | 672,250 |
HTM debt securities |  | $ | 2,964,235 |  |  | $ | 470,618 |  |  | $ | 1,837,430 |  |  | $ | — |  |  | $ | 2,308,048 |
Restricted equity securities, at cost |  | $ | 79,522 |  |  | $ | — |  |  | $ | 79,522 |  |  | $ | — |  |  | $ | 79,522 |
Loans held-for-sale |  | $ | 4,762 |  |  | $ | — |  |  | $ | 4,762 |  |  | $ | — |  |  | $ | 4,762 |
Loans held-for-investment, net |  | $ | 50,251,661 |  |  | $ | — |  |  | $ | — |  |  | $ | 48,992,846 |  |  | $ | 48,992,846 |
Mortgage servicing rights |  | $ | 5,208 |  |  | $ | — |  |  | $ | — |  |  | $ | 9,821 |  |  | $ | 9,821 |
Accrued interest receivable |  | $ | 317,881 |  |  | $ | — |  |  | $ | 317,881 |  |  | $ | — |  |  | $ | 317,881 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Demand, checking, savings and money market deposits |  | $ | 38,435,954 |  |  | $ | — |  |  | $ | 38,435,954 |  |  | $ | — |  |  | $ | 38,435,954 |
Time deposits |  | $ | 16,651,077 |  |  | $ | — |  |  | $ | 16,547,883 |  |  | $ | — |  |  | $ | 16,547,883 |
Short-term borrowings |  | $ | 4,500,000 |  |  | $ | — |  |  | $ | 4,500,000 |  |  | $ | — |  |  | $ | 4,500,000 |
Long-term debt |  | $ | 148,173 |  |  | $ | — |  |  | $ | 144,214 |  |  | $ | — |  |  | $ | 144,214 |
Accrued interest payable |  | $ | 150,890 |  |  | $ | — |  |  | $ | 150,890 |  |  | $ | — |  |  | $ | 150,890 |
|  | December 31, 2022
($ in thousands) |  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 3,481,784 |  |  | $ | 3,481,784 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,481,784 |
Interest-bearing deposits with banks |  | $ | 139,021 |  |  | $ | — |  |  | $ | 139,021 |  |  | $ | — |  |  | $ | 139,021 |
Resale agreements |  | $ | 792,192 |  |  | $ | — |  |  | $ | 693,656 |  |  | $ | — |  |  | $ | 693,656 |
HTM debt securities |  | $ | 3,001,868 |  |  | $ | 471,469 |  |  | $ | 1,983,702 |  |  | $ | — |  |  | $ | 2,455,171 |
Restricted equity securities, at cost |  | $ | 78,624 |  |  | $ | — |  |  | $ | 78,624 |  |  | $ | — |  |  | $ | 78,624 |
Loans held-for-sale |  | $ | 25,644 |  |  | $ | — |  |  | $ | 25,644 |  |  | $ | — |  |  | $ | 25,644 |
Loans held-for-investment, net |  | $ | 47,606,785 |  |  | $ | — |  |  | $ | — |  |  | $ | 46,670,690 |  |  | $ | 46,670,690 |
Mortgage servicing rights |  | $ | 6,235 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,917 |  |  | $ | 10,917 |
Accrued interest receivable |  | $ | 263,430 |  |  | $ | — |  |  | $ | 263,430 |  |  | $ | — |  |  | $ | 263,430 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Demand, checking, savings and money market deposits |  | $ | 42,637,316 |  |  | $ | — |  |  | $ | 42,637,316 |  |  | $ | — |  |  | $ | 42,637,316 |
Time deposits |  | $ | 13,330,533 |  |  | $ | — |  |  | $ | 13,228,777 |  |  | $ | — |  |  | $ | 13,228,777 |
Repurchase agreements |  | $ | 300,000 |  |  | $ | — |  |  | $ | 304,097 |  |  | $ | — |  |  | $ | 304,097 |
Long-term debt |  | $ | 147,950 |  |  | $ | — |  |  | $ | 143,483 |  |  | $ | — |  |  | $ | 143,483 |
Accrued interest payable |  | $ | 37,198 |  |  | $ | — |  |  | $ | 37,198 |  |  | $ | — |  |  | $ | 37,198 |

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X
- 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/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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