EAST WEST BANCORP INC - Quarter Report: 2014 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Mark One

 

 

For the quarterly period ended March 31, 2014

 

or

 

 

For the transition period from                  to              

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

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.

 

 

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: 143,390,858 shares of common stock as of April 30, 2014.

 

 

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	59
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	84
	Item 4.	Controls and Procedures	84
PART II - OTHER INFORMATION			84
	Item 1.	Legal Proceedings	84
	Item 1A.	Risk Factors	84
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
	Item 3.	Defaults Upon Senior Securities	85
	Item 4.	Mine Safety Disclosures	85
	Item 5.	Other Information	85
	Item 6.	Exhibits	86
SIGNATURE			86

 

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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, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 may 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 integrate the former MetroCorp Bancshares, Inc. (“MetroCorp”) operations and to achieve the projected synergies of this acquisition;

·                                          our ability to manage the loan portfolios acquired from Federal Deposit Insurance Corporation (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;

·                                          effect of government budget cuts and government shut down;

·                                          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 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 2013 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.

 

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PART I — FINANCIAL INFORMATION

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		March 31, 2014			December 31, 2013
ASSETS
Cash and cash equivalents		$	1,884,855		$	895,820
Short-term investments		323,266			257,473
Securities purchased under resale agreements		1,200,000			1,300,000
Investment securities available-for-sale, at fair value (with amortized cost of $2,504,755 at March 31, 2014 and $2,786,490 at December 31, 2013)		2,474,744			2,733,797
Loans held for sale		577,353			204,970
Loans receivable, excluding covered loans (net of allowance for loan losses of $245,618 at March 31, 2014 and $241,930 at December 31, 2013)		17,053,444			15,412,715
Covered loans (net of allowance for loan losses of $6,518 at March 31, 2014 and $7,745 at December 31, 2013)		2,028,806			2,187,898
Total loans receivable, net		19,082,250			17,600,613
FDIC indemnification asset		27,552			74,708
Other real estate owned, net		28,421			18,900
Other real estate owned covered, net		30,610			21,373
Total other real estate owned		59,031			40,273
Investment in Federal Home Loan Bank stock, at cost		52,110			62,330
Investment in Federal Reserve Bank stock, at cost		50,370			48,333
Investment in affordable housing partnerships		189,303			164,776
Premises and equipment, net		185,214			177,710
Accrued interest receivable		102,802			116,314
Due from customers on acceptances		22,407			21,236
Premiums on deposits acquired, net		53,013			46,920
Goodwill		458,467			337,438
Cash surrender value of life insurance policies		128,772			112,650
Other assets		529,517			534,707
TOTAL		$	27,401,026		$	24,730,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing		$	6,636,874		$	5,821,899
Interest-bearing		16,191,183			14,591,019
Total deposits		22,828,057			20,412,918
Federal Home Loan Bank advances		315,620			315,092
Securities sold under repurchase agreements		1,005,316			995,000
Bank acceptances outstanding		22,407			21,236
Long-term debt		240,675			226,868
Accrued expenses and other liabilities		364,731			394,729
Total liabilities		24,776,806			22,365,843
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 163,454,195 and 163,098,008 shares issued in 2014 and 2013, respectively; 143,367,652 and 137,630,896 shares outstanding in 2014 and 2013, respectively		163			163
Additional paid in capital		1,656,867			1,571,670
Retained earnings		1,410,921			1,360,130
Treasury stock, at cost – 20,086,543 shares in 2014 and 25,467,112 shares in 2013		(426,694		)	(537,279		)
Accumulated other comprehensive loss, net of tax		(17,037		)	(30,459		)
Total stockholders’ equity		2,624,220			2,364,225
TOTAL		$	27,401,026		$	24,730,068

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended
		March 31,
		2014			2013
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees		$	261,571		$	217,159
Investment securities		12,276			10,210
Securities purchased under resale agreements		4,853			5,529
Investment in Federal Home Loan Bank stock		1,123			529
Investment in Federal Reserve Bank stock		748			720
Due from banks and short-term investments		5,602			4,276
Total interest and dividend income		286,173			238,423
INTEREST EXPENSE
Customer deposit accounts		15,882			16,854
Federal Home Loan Bank advances		1,045			1,039
Securities sold under repurchase agreements		10,078			10,529
Long-term debt		1,202			710
Total interest expense		28,207			29,132
Net interest income before provision for loan losses		257,966			209,291
Provision for (reversal of) loan losses, excluding covered loans		7,954			(762		)
(Reversal of) provision for loan losses on covered loans		(1,021		)	5,089
Net interest income after provision for loan losses		251,033			204,964
NONINTEREST LOSS
Decrease in FDIC indemnification asset and receivable		(53,634		)	(31,899		)
Branch fees		9,446			7,654
Net gain on sales of investment securities		3,418			5,577
Letters of credit fees and commissions		6,167			5,062
Foreign exchange income		689			2,336
Ancillary loan fees		2,472			2,052
Income from life insurance policies		1,151			968
Net gain on sales of loans		6,196			94
Other operating income		9,179			6,057
Total noninterest loss		(14,916		)	(2,099		)
NONINTEREST EXPENSE
Compensation and employee benefits		59,277			45,731
Occupancy and equipment expense		15,851			13,808
Amortization of investments in affordable housing partnerships and other investments		5,964			4,283
Amortization of premiums on deposits acquired		2,500			2,409
Deposit insurance premiums and regulatory assessments		5,702			3,782
Loan related expenses		2,575			3,584
Other real estate owned expense (gain on sale)		1,334			(984		)
Legal expense		3,799			4,444
Data processing		8,200			2,437
Deposit related expenses		1,704			1,574
Consulting expense		1,049			454
Other operating expenses		16,472			14,833
Total noninterest expense		124,427			96,355
INCOME BEFORE PROVISION FOR INCOME TAXES		111,690			106,510
PROVISION FOR INCOME TAXES		34,949			34,419
NET INCOME		$	76,741		$	72,091
PREFERRED STOCK DIVIDENDS		—			1,714
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	76,741		$	70,377
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
BASIC		$	0.54		$	0.51
DILUTED		$	0.54		$	0.50
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC		141,962			137,648
DILUTED		142,632			143,519
DIVIDENDS DECLARED PER COMMON SHARE		$	0.18		$	0.15

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2014			2013
Net income		$	76,741		$	72,091
Other comprehensive income, net of tax:
Unrealized gain on investment securities available-for-sale:
Unrealized holding gains arising during period		15,422			4,741
Reclassification adjustment for net gains included in net income		(1,983		)	(3,235		)
Unrealized (losses) gains on other investments		(17		)	10
Reclassification adjustment for net gains included in net income		—			—
Other comprehensive income		13,422			1,516
COMPREHENSIVE INCOME		$	90,163		$	73,607

 

See accompanying notes to condensed consolidated financial statements.

 

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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, 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
BALANCE, JANAURY 1, 2014		$	—		$	—		$	163		$	1,571,670		$	1,360,130		$	(537,279	)	$	(30,459	)	$	2,364,225
Net income														76,741									76,741
Other comprehensive income																				13,422			13,422
Stock compensation costs											3,180												3,180
Tax benefit from stock compensation plans, net											3,708												3,708
Issuance of 356,187 shares of common stock pursuant to various stock compensation plans and agreements											283												283
Cancellation of 7,233 shares of common stock due to forfeitures of issued restricted stock											127						(127		)				—
195,291 shares of restricted stock surrendered due to employee tax liability																	(7,074		)				(7,074		)
Common stock dividends														(25,950		)							(25,950		)
Issuance of 5,583,093 shares pursuant to MetroCorp acquisition											73,044						117,786						190,830
Warrant acquired pursuant to MetroCorp acquisition											4,855												4,855
BALANCE, MARCH 31, 2014		$	—		$	—		$	163		$	1,656,867		$	1,410,921		$	(426,694	)	$	(17,037	)	$	2,624,220

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	76,741		$	72,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,892			23,908
(Accretion) of discount and amortization of premiums, net		(56,020		)	(48,390		)
Decrease in FDIC indemnification asset and receivable		53,634			31,899
Stock compensation costs		3,180			2,504
Tax benefit from stock compensation plans, net		(3,708		)	(2,602		)
Provision for loan losses		6,933			4,327
Impairment on other real estate owned		490			1,321
Net gain on sales of investment securities, loans and other assets		(10,458		)	(8,592		)
Originations and purchases of loans held for sale		(60,492		)	(43,604		)
Proceeds from sales of loans held for sale		38,050			6,272
Net proceeds from FDIC shared-loss agreements		4,139			33,890
Net change in accrued interest receivable and other assets		25,984			(12,525		)
Net change in accrued expenses and other liabilities		(63,610		)	20,557
Other net operating activities		(287		)	(656		)
Total adjustments		(40,273		)	8,309
Net cash provided by operating activities		36,468			80,400
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash paid		138,465			—
Net increase in:
Loans		(734,560		)	(147,933		)
Short-term investments		(65,793		)	(12,651		)
Purchases of:
Securities purchased under resale agreements		—			(250,000		)
Investment securities available-for-sale		(138,149		)	(267,882		)
Loans receivable		(974		)	(106,206		)
Investments in affordable housing partnerships and other investments		(27,510		)	(8,386		)
Proceeds from sale of:
Investment securities available-for-sale		330,231			196,853
Loans receivable		47,852			22,566
Loans held for sale originated for investment		97,716			—
Other real estate owned		4,986			22,313
Repayments, maturities and redemptions of investment securities available-for-sale		151,358			87,889
Paydowns, maturities and termination of securities purchased under resale agreements		100,000			300,000
Redemption of Federal Home Loan Bank stock		12,930			10,480
Surrender of life insurance policies		14,769			—
Other net investing activities		(5,512		)	(4,929		)
Net cash used in investing activities		(74,191		)	(157,886		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in:
Deposits		1,096,290			626,348
Short-term borrowings		—			(20,000		)
Proceeds from:
Issuance of common stock pursuant to various stock plans and agreements		283			442
Payment for:
Termination of securities purchased under resale agreements		(15,000		)	—
Repayment of FHLB advances		(10,000		)	—
Repayment of long-term debt		(15,310		)	—
Repurchase of vested shares due to employee tax liability		(7,074		)	(8,365		)
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan		—			(87,000		)
Cash dividends		(26,139		)	(22,782		)
Tax benefit from stock compensation plans, net		3,708			2,602
Net cash provided by financing activities		1,026,758			491,245
NET INCREASE IN CASH AND CASH EQUIVALENTS		989,035			413,759
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		895,820			1,323,106
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,884,855		$	1,736,865
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	27,803		$	28,885
Income tax payments, net of refunds		70,723			1,716
Noncash investing and financing activities:
Loans transferred to loans held for sale, net		433,841			21,855
Transfers to other real estate owned		15,628			23,230
Issuance of stock related to acquisition		190,830			—

 

See accompanying notes to condensed consolidated financial statements.

 

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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 six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”), one of which was the result of the acquisition of MetroCorp Bancshares, Inc. during the first quarter of 2014 which is discussed at Note 3 to the Company’s condensed consolidated financial statements. 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, 2014 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, 2013.

 

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

 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Standards

 

In January 2014, the FASB issued ASU 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-10 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). ASU 2014-01 is effective for interim and annual periods beginning after December 15, 2014 and if elected, should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when creditors should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned. ASU 2014-04 is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.

 

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NOTE 3 — BUSINESS COMBINATION

 

On January 17, 2014, the Company completed the acquisition of MetroCorp Bancshares, Inc. (“MetroCorp”) parent of MetroBank, N.A. and Metro United Bank. MetroCorp, headquartered in Houston, Texas operated 19 branch locations within Texas and California under its two banks. The Company acquired MetroCorp to further expand its presence, primarily in the State of Texas, within the markets of Houston and Dallas, and in California, within the San Diego market. The purchase consideration was satisfied with two thirds in East West Bancorp stock and one third in cash. The fair value of the consideration transferred in the acquisition of MetroCorp was $291.4 million, which consisted of 5,583,093 shares of East West Bancorp common stock fair valued at $190.8 million at the date of acquisition and $89.4 million in cash, $2.4 million of additional cash to MetroCorp stock option holders and a MetroCorp warrant, fair valued at $8.8 million, assumed by the Bank.

 

Goodwill from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. As a result of the business combination, the Company recorded goodwill of $121.0 million.

 

The total fair value of assets acquired was $1.70 billion, which included $230.3 million in cash and cash due from banks, $64.3 million in investment securities available for sale, $2.7 million FHLB stock, $1.19 billion in loans receivable, $8.6 million in fixed assets, $8.6 million in premiums on deposits acquired, $9.4 million in other real estate owned (“OREO”), $30.0 million in bank owned life insurance, $13.0 million in deferred tax assets and $16.7 million in other assets. The total fair value of liabilities acquired was $1.41 billion, which included $1.32 billion in deposits, $10.0 million in FHLB advances, $25.9 million in repurchase agreements, $29.1 million in junior subordinated debt and $22.7 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the January 17, 2014 acquisition date. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. We have included the financial results of the business combinations in the condensed consolidated statement of income beginning on the acquisition date.

 

NOTE 4 — 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, foreign exchange options and interest rate swaps.

 

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·                                          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 is not solely based on observable market inputs and requires management judgment or estimation. This category typically includes pooled trust preferred securities, loans with a fair value measurement, OREO and derivatives payable.

 

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 loans with a fair value measurement, 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, 2014 and December 31, 2013. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. There were no transfers for assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the first three months of 2014 and 2013.

 

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		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of March 31, 2014
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		March 31,			Assets			Inputs			Inputs
		2014			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	428,253		$	428,253		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		384,685			—			384,685			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		119,107			—			119,107			—
Residential mortgage-backed securities		824,105			—			824,105			—
Municipal securities		283,897			—			283,897			—
Other residential mortgage-backed securities:
Investment grade		57,007			—			57,007			—
Other commercial mortgage-backed securities:
Investment grade		51,419			—			51,419			—
Corporate debt securities:
Investment grade		209,691			—			209,691			—
Non-investment grade		15,512			—			8,795			6,717
Other securities		101,068			—			101,068			—
Total investment securities available-for-sale		$	2,474,744		$	428,253		$	2,039,774		$	6,717
Foreign exchange options		$	5,915		$	—		$	5,915		$	—
Interest rate swaps		26,293			—			26,293			—
Foreign exchange contracts		4,378			—			4,378			—
Derivative liabilities		(46,778		)	—			(43,380		)	(3,398		)

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of December 31, 2013
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		December 31,			Assets			Inputs			Inputs
		2013			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	491,632		$	491,632		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		394,323			—			394,323			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		178,870			—			178,870			—
Residential mortgage-backed securities		885,237			—			885,237			—
Municipal securities		280,979			—			280,979			—
Other residential mortgage-backed securities:
Investment grade		46,327			—			46,327			—
Other commercial mortgage-backed securities:
Investment grade		51,617			—			51,617			—
Corporate debt securities:
Investment grade		309,995			—			309,995			—
Non-investment grade		15,101			—			8,730			6,371
Other securities		79,716			—			79,716			—
Total investment securities available-for-sale		$	2,733,797		$	491,632		$	2,235,794		$	6,371
Foreign exchange options		$	6,290		$	—		$	6,290		$	—
Interest rate swaps		28,078			—			28,078			—
Foreign exchange contracts		6,181			—			6,181			—
Derivative liabilities		(50,262		)	—			(46,607		)	(3,655		)

 

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