EAST WEST BANCORP INC - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Mark One

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

or

 

¨         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to           

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	95-4703316
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101

(Address of principal executive offices) (Zip Code)

 

(626) 768-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer ¨

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 136,174,881 shares of common stock as of April 30, 2013.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION		4
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4.	Controls and Procedures	80
PART II - OTHER INFORMATION		81
Item 1.	Legal Proceedings	81
Item 1A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	82
Item 6.	Exhibits	82
SIGNATURE		82

 

2

Table of Contents

 

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report contain or incorporate statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

 

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

·                                          our ability to manage the loan portfolio acquired from FDIC-assisted acquisitions within the limits of the loss protection provided by the FDIC;

·                                          changes in our borrowers’ performance on loans;

·                                          changes in the commercial and consumer real estate markets;

·                                          changes in our costs of operation, compliance and expansion;

·                                          changes in the U.S. economy, including inflation;

·                                          changes in government interest rate policies;

·                                          changes in laws or the regulatory environment;

·                                          changes in the economy of and monetary policy in the People’s Republic of China;

·                                          changes in critical accounting policies and judgments;

·                                          changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies;

·                                          changes in the equity and debt securities markets;

·                                          changes in competitive pressures on financial institutions;

·                                          effect of additional provision for loan losses;

·                                          fluctuations of our stock price;

·                                          success and timing of our business strategies;

·                                          impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity;

·                                          impact of the European debt crisis;

·                                          impact of potential federal tax increases and spending cuts;

·                                          impact of adverse judgments or settlements in litigation against the Company;

·                                          changes in our ability to receive dividends from our subsidiaries; and

·                                          political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions.

 

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2012 Form 10-K under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

 

3

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		March 31,			December 31,
		2013			2012
ASSETS
Cash and cash equivalents		$	1,736,865		$	1,323,106
Short-term investments		379,029			366,378
Securities purchased under resale agreements		1,400,000			1,450,000
Investment securities available-for-sale, at fair value (with amortized cost of $2,578,384 at March 31, 2013 and $2,599,018 at December 31, 2012)		2,588,993			2,607,029
Loans held for sale		226,635			174,317
Loans receivable, excluding covered loans (net of allowance for loan losses of $228,796 at March 31, 2013 and $229,382 at December 31, 2012)		12,119,903			11,710,190
Covered loans (net of allowance for loan losses of $10,110 at March 31, 2013 and $5,153 at December 31, 2012)		2,752,269			2,935,595
Total loans receivable, net		14,872,172			14,645,785
FDIC indemnification asset		276,834			316,313
Other real estate owned, net		32,324			32,911
Other real estate owned covered, net		28,567			26,808
Total other real estate owned		60,891			59,719
Investment in Federal Home Loan Bank stock, at cost		96,795			107,275
Investment in Federal Reserve Bank stock, at cost		48,036			48,003
Investment in affordable housing partnerships		181,928			185,645
Premises and equipment, net		109,485			107,517
Accrued interest receivable		103,392			94,837
Due from customers on acceptances		22,662			28,612
Premiums on deposits acquired, net		53,875			56,285
Goodwill		337,438			337,438
Cash surrender value of life insurance policies		110,860			110,133
Other assets		496,065			517,718
TOTAL		$	23,101,955		$	22,536,110
LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing		$	4,838,523		$	4,535,877
Interest-bearing		14,097,179			13,773,477
Total deposits		18,935,702			18,309,354
Federal Home Loan Bank advances		313,494			312,975
Securities sold under repurchase agreements		995,000			995,000
Other borrowings		—			20,000
Bank acceptances outstanding		22,662			28,612
Long-term debt		137,178			137,178
Accrued expenses and other liabilities		354,800			350,869
Total liabilities		20,758,836			20,153,988
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative convertible, 200,000 shares issued and 85,710 shares outstanding in 2013 and 2012		83,027			83,027
Common stock, $0.001 par value, 200,000,000 shares authorized; 157,354,024 and 157,160,193 shares issued in 2013 and 2012, respectively; 136,578,350 and 140,294,092 shares outstanding in 2013 and 2012, respectively		157			157
Additional paid in capital		1,470,674			1,464,739
Retained earnings		1,201,126			1,151,828
Treasury stock, at cost – 20,775,674 shares in 2013 and 16,866,101 shares in 2012		(418,050		)	(322,298		)
Accumulated other comprehensive income, net of tax		6,185			4,669
Total stockholders’ equity		2,343,119			2,382,122
TOTAL		$	23,101,955		$	22,536,110

 

See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended
		March 31,
		2013			2012
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees		$	217,159		$	221,039
Investment securities		10,210			21,232
Securities purchased under resale agreements		5,529			4,314
Investment in Federal Home Loan Bank stock		529			220
Investment in Federal Reserve Bank stock		720			713
Due from banks and short-term investments		4,276			6,532
Total interest and dividend income		238,423			254,050
INTEREST EXPENSE
Customer deposit accounts		16,854			20,164
Federal funds purchased		—			2
Federal Home Loan Bank advances		1,039			2,142
Securities sold under repurchase agreements		10,529			11,722
Long-term debt		710			1,102
Total interest expense		29,132			35,132
Net interest income before provision for loan losses		209,291			218,918
(Reversal of) provision for loan losses, excluding covered loans		(762		)	16,479
Provision for loan losses on covered loans		5,089			1,621
Net interest income after provision for loan losses		204,964			200,818
NONINTEREST (LOSS) INCOME
Impairment loss on investment securities		—			(5,165		)
Less: Noncredit-related impairment loss recorded in other comprehensive income		—			5,066
Net impairment loss on investment securities recognized in earnings		—			(99		)
Decrease in FDIC indemnification asset and receivable		(31,899		)	(5,418		)
Branch fees		7,654			7,662
Net gain on sales of investment securities		5,577			483
Letters of credit fees and commissions		5,062			4,275
Foreign exchange income		2,336			1,796
Ancillary loan fees		2,052			2,008
Income from life insurance policies		968			990
Net gain on sales of loans		94			5,179
Other operating income		6,057			4,864
Total noninterest (loss) income		(2,099		)	21,740
NONINTEREST EXPENSE
Compensation and employee benefits		45,731			46,409
Occupancy and equipment expense		13,808			13,518
Amortization of investments in affordable housing partnerships and other investments		4,283			4,466
Amortization of premiums on deposits acquired		2,409			2,873
Deposit insurance premiums and regulatory assessments		3,782			3,992
Loan related expenses		3,584			4,481
Other real estate owned (gain on sale) expense		(984		)	10,865
Legal expense		4,444			7,173
Prepayment penalty for FHLB advances		—			1,321
Data processing		2,437			2,464
Deposit related expenses		1,574			1,427
Consulting expense		454			1,467
Other operating expenses		14,833			14,307
Total noninterest expense		96,355			114,763
INCOME BEFORE PROVISION FOR INCOME TAXES		106,510			107,795
PROVISION FOR INCOME TAXES		34,419			39,712
NET INCOME		72,091			68,083
PREFERRED STOCK DIVIDENDS		1,714			1,714
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	70,377		$	66,369
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
BASIC		$	0.51		$	0.46
DILUTED		$	0.50		$	0.45
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC		137,648			145,347
DILUTED		143,519			151,996
DIVIDENDS DECLARED PER COMMON SHARE		$	0.15		$	0.10

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2013			2012
Net income		$	72,091		$	68,083
Other comprehensive income, net of tax:
Unrealized gain on investment securities available-for-sale:
Unrealized holding gains arising during period		4,741			20,270
Reclassification adjustment for net gains included in net income		(3,235		)	(280		)
Noncredit-related impairment loss on securities		—			(2,938		)
Unrealized gains on other investments		10			10
Reclassification adjustment for net gains included in net income		—			—
Other comprehensive income		1,516			17,062
COMPREHENSIVE INCOME		$	73,607		$	85,145

 

See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

					Additional						Additional									Accumulated
					Paid In						Paid In									Other
					Capital						Capital									Comprehensive			Total
		Preferred			Preferred			Common			Common			Retained			Treasury			Income (Loss),			Stockholders’
		Stock			Stock			Stock			Stock			Earnings			Stock			Net of Tax			Equity
BALANCE, JANAURY 1, 2012		$	—		$	83,027		$	157		$	1,443,883		$	934,617		$	(116,001	)	$	(33,940	)	$	2,311,743
Net income														68,083									68,083
Other comprehensive income																				17,062			17,062
Stock compensation costs											3,637												3,637
Tax benefit from stock compensation plans, net											29												29
Issuance of 205,103 shares of common stock pursuant to various stock compensation plans and agreements											1,539												1,539
Cancellation of 47,489 shares of common stock due to forfeitures of issued restricted stock											883						(883		)				—
60,073 shares of restricted stock surrendered due to employee tax liability																	(1,313		)				(1,313		)
Preferred stock dividends														(1,714		)							(1,714		)
Common stock dividends														(14,791		)							(14,791		)
Purchase of 4,554,827 shares of treasury stock pursuant to the Stock Repurchase Program																	(100,978		)				(100,978		)
BALANCE, MARCH 31, 2012		$	—		$	83,027		$	157		$	1,449,971		$	986,195		$	(219,175	)	$	(16,878	)	$	2,283,297
BALANCE, JANAURY 1, 2013		$	—		$	83,027		$	157		$	1,464,739		$	1,151,828		$	(322,298	)	$	4,669		$	2,382,122
Net income														72,091									72,091
Other comprehensive income																				1,516			1,516
Stock compensation costs											2,504												2,504
Tax benefit from stock compensation plans, net											2,602												2,602
Issuance of 193,831 shares of common stock pursuant to various stock compensation plans and agreements											442												442
Cancellation of 22,050 shares of common stock due to forfeitures of issued restricted stock											387						(387		)				—
344,423 shares of restricted stock surrendered due to employee tax liability																	(8,365		)				(8,365		)
Preferred stock dividends														(1,714		)							(1,714		)
Common stock dividends														(21,079		)							(21,079		)
Purchase of 3,543,100 shares of treasury stock pursuant to the Stock Repurchase Program																	(87,000		)				(87,000		)
BALANCE, MARCH 31, 2013		$	—		$	83,027		$	157		$	1,470,674		$	1,201,126		$	(418,050	)	$	6,185		$	2,343,119

 

See accompanying notes to condensed consolidated financial statements.

 

7

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	72,091		$	68,083
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,908			19,459
(Accretion) of discount and amortization of premiums, net		(48,390		)	(34,660		)
Decrease in FDIC indemnification asset and receivable		31,899			5,418
Stock compensation costs		2,504			3,637
Deferred tax expense (benefit)		312			(20,159		)
Provision for loan losses		4,327			18,100
Impairment on other real estate owned		1,321			7,389
Net gain on sales of investment securities, loans and other assets		(8,592		)	(7,014		)
Prepayment penalty for Federal Home Loan Bank advances, net		—			1,321
Originations and purchases of loans held for sale		(43,604		)	(15,782		)
Proceeds from sales of loans held for sale		6,272			—
Net proceeds from FDIC shared-loss agreements		33,890			39,358
Net change in accrued interest receivable and other assets		(12,525		)	(27,165		)
Net change in accrued expenses and other liabilities		20,557			40,427
Other net operating activities		(3,570		)	(713		)
Total adjustments		8,309			29,616
Net cash provided by operating activities		80,400			97,699
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in:
Loans		(147,933		)	68,532
Short-term investments		(12,651		)	(115,742		)
Federal funds sold		—			(30,000		)
Purchases of:
Securities purchased under resale agreements		(250,000		)	—
Investment securities available-for-sale		(267,882		)	(8,018		)
Loans receivable		(106,206		)	(116,486		)
Investments in affordable housing partnerships		(8,386		)	(17,850		)
Proceeds from sale of:
Investment securities available-for-sale		196,853			260,261
Loans receivable		22,566			27,639
Loans held for sale originated for investment		—			52,559
Other real estate owned		22,313			22,791
Repayments, maturities and redemptions of investment securities available-for-sale		87,889			138,650
Paydowns, maturities and termination of securities purchased under resale agreements		300,000			136,434
Redemption of Federal Home Loan Bank stock		10,480			6,391
Other net investing activities		(4,929		)	(832		)
Net cash (used in) provided by investing activities		(157,886		)	424,329
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in:
Deposits		626,348			(113,801		)
Short-term borrowings		(20,000		)	(25,208		)
Proceeds from:
Issuance of common stock pursuant to various stock plans and agreements		442			1,539
Payment for:
Repayment of FHLB advances		—			(23,003		)
Modification of Federal Home Loan Bank advances		—			(37,678		)
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan		(87,000		)	(100,978		)
Cash dividends		(22,782		)	(16,495		)
Other net financing activities		(5,763		)	(1,284		)
Net cash provided by (used in) financing activities		491,245			(316,908		)
Effect of exchange rate changes on cash and cash equivalents		—			(451		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		413,759			204,669
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,323,106			1,431,185
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,736,865		$	1,635,854
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	28,885		$	34,140
Income tax payments, net of refunds		1,716			23,422
Noncash investing and financing activities:
Loans transferred to loans held for sale, net		21,855			40,800
Transfers to other real estate owned		23,230			39,572
Loans to facilitate sales of other real estate owned and short sales		—			400

 

See accompanying notes to condensed consolidated financial statements.

 

8

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (“East West Bank” or the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has seven wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

 

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments that, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months ended March 31, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Events subsequent to the condensed consolidated balance sheet date have been evaluated through the date the financial statements are issued for inclusion in the accompanying financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Certain prior year balances have been reclassified to conform to current year presentation.

 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Standards

 

In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The standard instructs that when a reporting entity recognizes an indemnification asset, it should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amended guidance is effective for interim and annual periods beginning on or after December 15, 2012. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements, as the Company had applied this methodology prior to the issuance of this ASU.

 

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-01 applies to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The amended guidance is effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

9

Table of Contents

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 enhances the reporting of reclassifications out of accumulated other comprehensive income by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The amendments are effective for interim and annual periods beginning on or after December 15, 2012. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

NOTE 3 — FAIR VALUE

 

Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

·                                          Level 1 — Quoted prices for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Level 1 financial instruments typically include U.S. Treasury securities.

 

·                                          Level 2 — 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 2 financial instruments typically include U.S. Government debt and agency mortgage-backed securities, municipal securities, corporate debt securities, single issuer trust preferred securities, equity swap agreements, foreign exchange options, interest rate swaps, impaired loans and other real estate owned (“OREO”).

 

·                                          Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category typically includes pooled trust preferred securities, impaired loans and derivatives payable.

 

10

Table of Contents

 

The Company records investment securities available-for-sale, equity swap agreements, derivative liabilities, foreign exchange options, interest rate swaps and short-term foreign exchange contracts at fair value on a recurring basis. Certain other assets such as impaired loans, other real estate owned, loans held for sale, goodwill, premiums on acquired deposits and other investments are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.

 

In determining the appropriate hierarchy levels, the Company performs a detailed analysis of assets and liabilities that are subject to fair value disclosure. The following tables present both financial and nonfinancial assets and liabilities that are measured at fair value on a recurring and nonrecurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of March 31, 2013 and December 31, 2012. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. There were no transfers in and out of Levels 1 and 3 or Levels 2 and 3 during the first three months of 2013 and 2012.

 

11

Table of Contents

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of March 31, 2013
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		March 31,			Assets			Inputs			Inputs
		2013			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	470,764		$	470,764		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		197,537			—			197,537			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		145,044			—			145,044			—
Residential mortgage-backed securities		1,035,415			—			1,035,415			—
Municipal securities		206,758			—			206,758			—
Other commercial mortgage-backed securities:											—
Investment grade		51,359			—			51,359			—
Corporate debt securities:
Investment grade		453,323			—			453,323			—
Non-investment grade		18,000			—			12,716			5,284
Other securities		10,793			—			10,793			—
Total investment securities available-for-sale		$	2,588,993		$	470,764		$	2,112,945		$	5,284
Foreign exchange options		$	5,340		$	—		$	5,340		$	—
Interest rate swaps		34,192			—			34,192			—
Short-term foreign exchange contracts		1,303			—			1,303			—
Derivative liabilities		(41,024		)	—			(37,791		)	(3,233		)

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of December 31, 2012
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		December 31,			Assets			Inputs			Inputs
		2012			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	460,677		$	460,677		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		197,855			—			197,855			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		180,665			—			180,665			—
Residential mortgage-backed securities		1,144,085			—			1,144,085			—
Municipal securities		167,093			—			167,093			—
Other commercial mortgage-backed securities:											—
Investment grade		17,084			—			17,084			—
Corporate debt securities:
Investment grade		411,983			—			411,983			—
Non-investment grade		17,417			—			12,617			4,800
Other securities		10,170			—			10,170			—
Total investment securities available-for-sale		$	2,607,029		$	460,677		$	2,141,552		$	4,800
Foreign exchange options		$	5,011		$	—		$	5,011		$	—
Interest rate swaps		36,943			—			36,943			—
Short-term foreign exchange contracts		896			—			896			—
Derivative liabilities		(42,060		)	—			(39,008		)	(3,052		)

 

12