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 and interest rate swaps.

· 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, impaired loans, other real estate owned (“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 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 September 30, 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 for assets measured on a recurring basis in and out of Levels 1 and 3 or Levels 2 and 3 during the first nine months of 2013 and 2012.

	Assets (Liabilities) Measured at Fair Value on a Recurring Basis
	as of September 30, 2013
				Quoted Prices in		Significant
	Fair Value			Active Markets		Other			Significant
	Measurements			for Identical		Observable			Unobservable
	September 30,			Assets		Inputs			Inputs
	2013			(Level 1)		(Level 2)			(Level 3)
	(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	525,707		$	525,707	$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities	403,061			—		403,061			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities	179,258			—		179,258			—
Residential mortgage-backed securities	977,950			—		977,950			—
Municipal securities	250,006			—		250,006			—
Other residential mortgage-backed securities:
Investment grade	14,692			—		14,692			—
Other commercial mortgage-backed securities:
Investment grade	51,293			—		51,293			—
Corporate debt securities:
Investment grade	465,928			—		465,928			—
Non-investment grade	14,942			—		8,810			6,132
Other securities	9,924			—		9,924			—
Total investment securities available-for-sale	$	2,892,761		$	525,707	$	2,360,922		$	6,132
Foreign exchange options	$	5,955		$	—	$	5,955		$	—
Interest rate swaps	25,931			—		25,931			—
Short-term foreign exchange contracts	4,068			—		4,068			—
Derivative liabilities	(38,552		)	—		(35,041		)	(3,511		)

	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		)

Assets measured at fair value on a nonrecurring basis using significant unobservable inputs include certain impaired loans and OREO. The inputs and assumptions for nonrecurring Level 3 fair value measurements for impaired loans and OREO include adjustments to external and internal appraisals for change in the market, assumptions by appraiser embedded into appraisals, probability weighting of brokered price opinions, and management’s adjustments for other relevant factors and market trends.

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Three Months Ended September 30, 2013
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Three Months Ended
	September 30,		Assets		Inputs		Inputs		September 30,
	2013		(Level 1)		(Level 2)		(Level 3)		2013
	(In thousands)
Non-covered impaired loans:
Total residential	$	10,980	$	—	$	—	$	10,980	$	(96	)
Total commercial real estate	33,486		—		—		33,486		1,412
Total commercial and industrial	14,370		—		—		14,370		(7,172		)
Total consumer	—		—		—		—		—
Total non-covered impaired loans	$	58,836	$	—	$	—	$	58,836	$	(5,856	)
Non-covered OREO	$	300	$	—	$	—	$	300	$	(17	)
Covered OREO (1)	$	2,250	$	—	$	—	$	2,250	$	(219	)

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Three Months Ended September 30, 2012
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Three Months Ended
	September 30,		Assets		Inputs		Inputs		September 30,
	2012		(Level 1)		(Level 2)		(Level 3)		2012
	(In thousands)
Non-covered impaired loans:
Total residential	$	24,978	$	—	$	—	$	24,978	$	(4,509	)
Total commercial real estate	13,671		—		—		13,671		(6,414		)
Total commercial and industrial	9,557		—		—		9,557		(1,379		)
Total consumer	—		—		—		—		—
Total non-covered impaired loans	$	48,206	$	—	$	—	$	48,206	$	(12,302	)
Non-covered OREO	$	5,528	$	—	$	—	$	5,528	$	(1,470	)
Covered OREO (1)	$	8,688	$	—	$	—	$	8,688	$	(1,597	)

(1) Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $219 thousand in losses, or $44 thousand, and 20% of the $1.6 million in losses, or $319 thousand, for the three months ended September 30, 2013 and 2012, respectively.

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Nine Months Ended September 30, 2013
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Nine Months Ended
	September 30,		Assets		Inputs		Inputs		September 30,
	2013		(Level 1)		(Level 2)		(Level 3)		2013
	(In thousands)
Non-covered impaired loans:
Total residential	$	9,257	$	—	$	—	$	9,257	$	(677	)
Total commercial real estate	23,201		—		—		23,201		(1,706		)
Total commercial and industrial	19,938		—		—		19,938		(8,599		)
Total consumer	286		—		—		286		(112		)
Total non-covered impaired loans	$	52,682	$	—	$	—	$	52,682	$	(11,094	)
Non-covered OREO	$	12,998	$	—	$	—	$	12,998	$	(1,420	)
Covered OREO (1)	$	12,780	$	—	$	—	$	12,780	$	(1,344	)

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Nine Months Ended September 30, 2012
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Nine Months Ended
	September 30,		Assets		Inputs		Inputs		September 30,
	2012		(Level 1)		(Level 2)		(Level 3)		2012
	(In thousands)
Non-covered impaired loans:
Total residential	$	31,090	$	—	$	—	$	31,090	$	(6,660	)
Total commercial real estate	24,730		—		—		24,730		(8,527		)
Total commercial and industrial	9,835		—		—		9,835		(9,827		)
Total consumer	379		—		—		379		(321		)
Total non-covered impaired loans	$	66,034	$	—	$	—	$	66,034	$	(25,335	)
Non-covered OREO	$	7,286	$	—	$	—	$	7,286	$	(4,145	)
Covered OREO (1)	$	15,919	$	—	$	—	$	15,919	$	(9,286	)
Loans held for sale	$	—	$	—	$	—	$	—	$	(4,730	)

(1) Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $1.3 million in losses, or $269 thousand, and 20% of the $9.3 million in losses, or $1.9 million, for the nine months ended September 30, 2013 and 2012, respectively.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The following tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and nine months ended September 30, 2013 and 2012:

	Investment Securities Available-for-Sale
	Corporate Debt Securities
	Non-Investment Grade			Derivatives Payable
	(In thousands)
Opening balance, July 1, 2013	$	5,517		$	(3,257	)
Total gains or (losses) for the period: (1)
Included in earnings	—			(254		)
Included in other comprehensive income (unrealized) (2)	619			—
Purchases, issues, sales, settlements (3)
Purchases	—			—
Issues	—			—
Sales	—			—
Settlements	(4		)	—
Transfer from investment grade to non-investment grade	—			—
Transfers in and/or out of Level 3	—			—
Closing balance, September 30, 2013	$	6,132		$	(3,511	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2013	$	—		$	254

	Investment Securities Available-for-Sale
	Corporate Debt Securities
	Non-Investment Grade			Derivatives Payable
	(In thousands)
Opening balance, July 1, 2012	$	2,422		$	(2,814	)
Total gains or (losses) for the period: (1)
Included in earnings	—			(120		)
Included in other comprehensive income (unrealized) (2)	1,428			—
Purchases, issues, sales, settlements (3)
Purchases	—			—
Issues	—			—
Sales	—			—
Settlements	(1		)	—
Transfer from investment grade to non-investment grade	—			—
Transfers in and/or out of Level 3	—			—
Closing balance, September 30, 2012	$	3,849		$	(2,934	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2012	$	—		$	120

(1) Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities. Realized gains or losses are reported in the condensed consolidated statements of income.

(2) Unrealized gains or losses on investment securities are reported in accumulated other comprehensive income (loss), net of tax, in the condensed consolidated statements of comprehensive income.

(3) Purchases, issuances, sales, and settlements represent Level 3 assets and liabilities that were either purchased, issued, sold, or settled during the period. The amounts are recorded at their end of period fair values.

	Investment Securities Available-for-Sale
	Corporate Debt Securities
	Non-Investment Grade			Derivatives Payable
	(In thousands)
Beginning balance, January 1, 2013	$	4,800		$	(3,052	)
Total gains or (losses) for the period: (1)
Included in earnings	—			(459		)
Included in other comprehensive income (unrealized) (2)	1,406			—
Purchases, issues, sales, settlements (3)
Purchases	—			—
Issues	—			—
Sales	—			—
Settlements	(74		)	—
Transfer from investment grade to non-investment grade	—			—
Transfers in and/or out of Level 3	—			—
Closing balance, September 30, 2013	$	6,132		$	(3,511	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2013	$	—		$	459

	Investment Securities Available-for-Sale
	Corporate Debt Securities
	Non-Investment Grade			Derivatives Payable
	(In thousands)
Beginning balance, January 1, 2012	$	2,235		$	(2,634	)
Total gains or (losses) for the period: (1)
Included in earnings	(99		)	(300		)
Included in other comprehensive income (unrealized) (2)	1,758			—
Purchases, issues, sales, settlements (3)
Purchases	—			—
Issues	—			—
Sales	—			—
Settlements	(45		)	—
Transfer from investment grade to non-investment grade	—			—
Transfers in and/or out of Level 3	—			—
Closing balance, September 30, 2012	$	3,849		$	(2,934	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of September 30, 2012	$	99		$	300

(2) Unrealized gains or losses on investment securities are reported in accumulated other comprehensive income (loss), net of tax, in the condensed consolidated statements of comprehensive income.

Valuation Methodologies

Investment Securities Available-for-Sale — The fair values of available-for-sale investment securities are generally determined by prices obtained from independent external pricing service providers who have experience in valuing these securities or by comparison to the average of at least two quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values.

The Company’s Level 3 available-for-sale securities include four pooled trust preferred securities. The fair values of these investment securities represent less than 1% of the total available-for-sale investment securities. The fair values of the pooled trust preferred securities have traditionally been based on the average of at least two quoted market prices obtained from independent external brokers since broker quotes in an active market are given the highest priority. As a result of the continued illiquidity in the pooled trust preferred securities market, it is the Company’s view that current broker prices (which are typically non-binding) on certain pooled trust preferred securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the fair value of these securities. As such, the Company considered what weight, if any, to place on transactions that are not orderly when estimating fair value.

For the pooled trust preferred securities, the fair value was derived based on discounted cash flow analyses (the income method) prepared by management. In order to determine the appropriate discount rate used in calculating fair values derived from the income method for the pooled trust preferred securities, the Company has made assumptions using an exit price approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit risk and liquidity risk premium, specific nonperformance, and default experience in the collateral underlying the securities. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for credit risk and liquidity risk. The actual Level 3 unobservable assumption rates used as of September 30, 2013 include: a constant prepayment rate of 0% for year 1-5 and 1% thereafter, a constant default rate of 1.2% for year 1-5 and 0.75% thereafter, and a recovery assumption of 0% for existing deferrals/defaults and 15% for future deferrals with a recovery lag of 60 months. Losses arising during the period, if any, are recognized in noninterest income.

Derivative Liabilities — The Company’s derivative liabilities include derivatives payable that fall within Level 3 and all other derivative liabilities which fall within Level 2. The derivatives payable are recorded in conjunction with certain certificates of deposit (“host instrument”). These CDs pay interest based on changes in either the Chinese currency Renminbi (“RMB”) or the Hang Seng China Enterprises Index (“HSCEI”), as designated, and are included in interest-bearing deposits on the condensed consolidated balance sheets. CDs paying interest based on changes in the HSCEI matured during the fourth quarter of 2012. The fair value of these embedded derivatives is based on the income approach. The payable is divided by the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion the Company applied a risk premium comparable to an agency security risk premium. For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a risk premium based on our institutional credit rating, which resulted in a $1.3 million adjustment to the valuation of the derivative liabilities for the nine months ended September 30, 2013. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. The valuation of the derivatives payable falls within Level 3 of the fair value hierarchy since the significant inputs used in deriving the fair value of these derivative contracts are not directly observable. The actual Level 3 unobservable input used as of September 30, 2013 was a credit risk adjustment with a range of 1.08% to 1.15%. The Level 2 derivative liabilities are mostly comprised of the offsetting interest rate swaps with other counterparties. Refer to “Interest Rate Swaps” within this footnote for complete discussion.

Equity Swap Agreements — The Company has entered into equity swap agreements to hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers. This deposit product has a term of 5 years and matured during the fourth quarter of 2012. It paid interest based on the performance of the HSCEI. The fair value of these equity swap agreements is based on the income approach. The fair value is based on the change in the value of the HSCEI and the volatility of the call option over the life of the individual swap agreement. The option value is derived based on the volatility, the interest rate and the time remaining to maturity of the call option. The valuation of equity swap agreements falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of these derivative contracts. The fair value of the derivative contracts is provided by a third party.

Foreign Exchange Options — The Company has entered into foreign exchange option contracts with major investment firms. The settlement amount is determined based upon the performance of the Chinese currency RMB relative to the U.S. Dollar (“USD”) over the 5-year term of the contract. The performance amount is computed based on the average quarterly value of the RMB per the USD as compared to the initial value. The fair value of the derivative contract is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, currency rate and time remaining to maturity. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment to the valuation of the foreign exchange options for the nine months ended September 30, 2013. The valuation of the option contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

Interest Rate Swaps — The Company has entered into pay-fixed, receive-variable swap contracts with institutional counterparties to hedge against interest rate swap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into a pay-fixed, receive-variable swap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company has also entered into pay-variable, receive-fixed swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of the interest rate swap contracts is based on a discounted cash flow approach. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment to the valuation of the interest rate swaps for the nine months ended September 30, 2013. The valuation of the interest rate swap falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

Short-term Foreign Exchange Contracts — The Company entered into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. These contracts economically hedge against foreign exchange rate fluctuations. The Company enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company does not assume any foreign exchange rate risk as the contract with the customer and the contract with the institutional party mirror each other. The fair value is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts for the nine months ended September 30, 2013. The valuation of the contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

Impaired Loans — We evaluate loan impairment according to the provisions of ASC 310-10-35, Receivables-Overall - Subsequent Measurement. Under ASC 310-10-35, loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan and the loan is classified as nonperforming and uncollectible, the deficiency is charged-off against the allowance for loan losses. Also, in accordance with ASC 310-10-35, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the general valuation allowance for loan losses required for the period.

The Company’s impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent valuation information received. Appraisals are obtained from third party appraisers and reviewed by management. Evaluations are obtained from third-parties or prepared internally and are also reviewed by management. Updated appraisals and evaluations are obtained on a regular basis or as necessary. Further, on a quarterly basis, all appraisals and evaluations of nonperforming assets are reviewed to assess the current carrying value and to ensure that the current carrying value is appropriate. In calculating the discount to be applied to an appraisal or evaluation, if necessary, the Company considers the location of collateral, the property type, and third party comparable sales. If it is assessed by management that the current value is not appropriate, adjustments to the carrying value will be calculated and a charge-off or a specific valuation allowance may be recorded to reduce the loan to the appropriate adjusted carrying value. The fair values may be adjusted as needed based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation. Impaired loans are classified as Level 3 assets in the fair value hierarchy.

Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans and are recorded at estimated fair value less cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals, broker price opinions or accepted written offers. These valuations are reviewed and approved by the Company’s appraisal department, credit review department, or OREO department. Updated appraisals and evaluations are obtained on a regular basis or at least annually. Further, on a quarterly basis, all appraisals and evaluations of nonperforming assets are reviewed to assess the current carrying value and to ensure that the current carrying value is appropriate. In calculating the discount to be applied to an appraisal or evaluation, if necessary, the Company considers the location of collateral, the property type, and third party comparable sales. If it is assessed by management that the current value is not appropriate, adjustments to the carrying value will be calculated and a charge-off may be taken to reduce the OREO to the appropriate adjusted carrying value. The fair values may be adjusted as needed based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation. OREO properties are classified as Level 3 assets in the fair value hierarchy.

Loans Held for Sale — The Company’s loans held for sale are carried at the lower of cost or market value. These loans are currently comprised of mostly student loans. For these loans, the fair value of loans held for sale is derived from current market prices and comparative current sales. For the remainder of the loans held for sale, which fall within Level 2, the fair value is derived from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral. As such, the Company records any fair value adjustments on a nonrecurring basis.

Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments as of September 30, 2013 and December 31, 2012 were as follows:

	September 30, 2013				December 31, 2012
	Carrying				Carrying
	Amount or				Amount or
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	1,322,383	$	1,322,383	$	1,323,106	$	1,323,106
Short-term investments	293,092		293,092		366,378		366,378
Securities purchased under resale agreements	1,300,000		1,282,855		1,450,000		1,442,302
Investment securities available-for-sale	2,892,761		2,892,761		2,607,029		2,607,029
Loans held for sale	232,309		240,648		174,317		180,349
Loans receivable, net	16,698,291		15,914,095		14,645,785		14,743,218
Investment in Federal Home Loan Bank stock	75,426		75,426		107,275		107,275
Investment in Federal Reserve Bank stock	48,212		48,212		48,003		48,003
Accrued interest receivable	113,350		113,350		94,837		94,837
Foreign exchange options	85,614		5,955		85,614		5,011
Interest rate swaps	1,496,204		25,931		1,190,793		36,943
Short-term foreign exchange contracts	291,876		4,068		112,459		896
Financial Liabilities:
Customer deposit accounts:
Demand, savings and money market deposits	14,448,785		14,448,785		12,187,740		12,187,740
Time deposits	5,910,355		5,955,631		6,121,614		6,115,530
Federal Home Loan Bank advances	314,557		307,998		312,975		333,060
Securities sold under repurchase agreements	995,000		1,153,869		995,000		1,173,830
Other borrowings	—		—		20,000		20,000
Accrued interest payable	10,509		10,509		10,855		10,855
Long-term debt	187,178		141,092		137,178		83,762
Derivative liabilities	1,929,944		38,552		1,392,494		42,060

The following table shows the level in the fair value hierarchy for the estimated fair values of only financial instruments that are not already on the condensed consolidated balance sheets at fair value at September 30, 2013 and December 31, 2012.

	September 30, 2013
	Estimated
	Fair Value
	Measurements		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	1,322,383	$	1,322,383	$	—	$	—
Short-term investments	293,092		—		293,092		—
Securities purchased under resale agreements	1,282,855		—		1,282,855		—
Loans held for sale	240,648		—		240,648		—
Loans receivable, net	15,914,095		—		—		15,914,095
Investment in Federal Home Loan Bank stock	75,426		—		75,426		—
Investment in Federal Reserve Bank stock	48,212		—		48,212		—
Accrued interest receivable	113,350		—		113,350		—
Financial Liabilities:
Customer deposit accounts:
Demand, savings and money market deposits	14,448,785		—		14,448,785		—
Time deposits	5,955,631		—		—		5,955,631
Federal Home Loan Bank advances	307,998		—		307,998		—
Securities sold under repurchase agreements	1,153,869		—		1,153,869		—
Other borrowings	—		—		—		—
Accrued interest payable	10,509		—		10,509		—
Long-term debt	141,092		—		141,092		—

	December 31, 2012
	Estimated
	Fair Value
	Measurements		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	1,323,106	$	1,323,106	$	—	$	—
Short-term investments	366,378		—		366,378		—
Securities purchased under resale agreements	1,442,302		—		1,442,302		—
Loans held for sale	180,349		—		180,349		—
Loans receivable, net	14,743,218		—		—		14,743,218
Investment in Federal Home Loan Bank stock	107,275		—		107,275		—
Investment in Federal Reserve Bank stock	48,003		—		48,003		—
Accrued interest receivable	94,837		—		94,837		—
Financial Liabilities:
Customer deposit accounts:
Demand, savings and money market deposits	12,187,740		—		12,187,740		—
Time deposits	6,115,530		—		—		6,115,530
Federal Home Loan Bank advances	333,060		—		333,060		—
Securities sold under repurchase agreements	1,173,830		—		1,173,830		—
Other borrowings	20,000		—		20,000		—
Accrued interest payable	10,855		—		10,855		—
Long-term debt	83,762		—		83,762		—

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below:

Cash and Cash Equivalents — The carrying amounts approximate fair values due to the short-term nature of these instruments. Due to the short-term nature, the estimated fair value is considered to be within Level 1 of the fair value hierarchy.

Short-Term Investments — The fair values of short-term investments generally approximate their book values due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Securities Purchased Under Resale Agreements — Securities purchased under resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of securities purchased under resale agreements with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Investment Securities Available-for-Sale — The fair values of the investment securities available-for-sale are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values. For pooled trust preferred securities, fair values are based on discounted cash flow analyses. Due to the unobservable inputs used within the discounted cash flow analysis, the estimate for pooled trust preferred securities is considered to be within Level 3 of the fair value hierarchy. The remainder of the portfolio is classified within Level 1 and Level 2, as discussed earlier in this footnote.

Loans Held for Sale — The fair value of loans held for sale is derived from current market prices and comparative current sales or from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral, as applicable. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Loans Receivable, net (includes covered and non-covered loans) — The fair value of loans is determined based on a discounted cash flow approach considered for an entry price value. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within any of the loan portfolios. It is management’s opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair valuation of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.

Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock — The carrying amount approximates fair value, as the stock may be sold back to the Federal Home Loan Bank and the Federal Reserve Bank at carrying value. The valuation of these investments is considered to be within Level 2 of the fair value hierarchy, as the restrictions and value of the investments are the same for all financial institutions which are required to hold these investments.

Accrued Interest Receivable — The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.

Equity Swap Agreements — Equity swap agreements matured during the fourth quarter of 2012. The fair value of the derivative contracts is provided by a third party and is determined based on the change in value of the HSCEI and the volatility of the call option over the life of the individual swap agreement. The option value is derived based on the volatility of the option, interest rate, and time remaining to maturity. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Foreign Exchange Options — The fair value of the derivative contracts is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, and time remaining to maturity. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Interest Rate Swaps — The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Short-term Foreign Exchange Contracts — The fair value of short-term foreign exchange contracts is determined based on the change in foreign exchange rate. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Customer Deposit Accounts — The carrying amounts approximate fair value for demand and interest checking deposits, savings deposits, and certain money market accounts as the amounts are payable on demand at the reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy. For time deposits, the cash flows are based on the contractual runoff and are discounted by the Bank’s current offering rates, plus spread. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.

Federal Home Loan Bank Advances — The fair value of Federal Home Loan Bank (“FHLB”) advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Securities Sold Under Repurchase Agreements — For securities sold under repurchase agreements with original maturities of 90 days or less, the carrying amounts approximate fair values due to the short-term nature of these instruments. At September 30, 2013 and December 31, 2012, most of the securities sold under repurchase agreements are long-term in nature and the fair values of securities sold under repurchase agreements are calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates, and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Other Borrowings — The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.

Accrued Interest Payable — The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.

Long-Term Debt — The fair values of long-term debt are estimated by discounting the cash flows through maturity based on current market rates the Bank would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

Derivatives Liabilities — The Company’s derivative liabilities include “derivatives payable” and all other derivative liabilities. The Company’s derivatives payable are recorded in conjunction with certain certificates of deposit (“host instrument”). These CDs pay interest based on changes in RMB or the HSCEI, as designated. CDs paying interest based on changes in the HSCEI matured during the fourth quarter of 2012. The fair value of derivatives payable is estimated using the income approach. Additionally, we considered our own credit risk in determining the valuation. The other derivative liabilities are mostly comprised of the off-setting interest rate swaps. The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of the interest rate swaps within derivative liabilities, the estimate is considered to be within Level 2 of the fair value hierarchy. Due to the unobservable nature of the inputs used in deriving the estimated fair value of derivatives payable within derivative liabilities, this estimate is considered to be within Level 3 of the fair value hierarchy.

The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.