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Section 1: 10-Q (10-Q)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended June 30, 2018
 
Commission file number 000-24939

 EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
 
95-4703316
(I.R.S. Employer Identification No.)
 
 
 
135 North Los Robles Ave., 7th Floor, Pasadena, California 91101
 (Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:
(626) 768-6000
 
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 ¨
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ¨ No x

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 144,913,002 shares as of July 31, 2018.

 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
 
 
 
June 30,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
415,653

 
$
457,181

Interest-bearing cash with banks
 
1,881,818

 
1,717,411

Cash and cash equivalents
 
2,297,471

 
2,174,592

Interest-bearing deposits with banks
 
360,900

 
398,422

Securities purchased under resale agreements (“resale agreements”)
 
975,000

 
1,050,000

Securities:
 
 
 
 
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $436,773 in 2018 and $534,327 in 2017)
 
2,707,444

 
3,016,752

Restricted equity securities, at cost
 
73,524

 
73,521

Loans held-for-sale
 
14,658

 
85

Loans held-for-investment (net of allowance for loan losses of $301,550 in 2018 and $287,128 in 2017; includes assets pledged as collateral of $19,634,818 in 2018 and $18,880,598 in 2017)
 
29,928,829

 
28,688,590

Investments in qualified affordable housing partnerships, net
 
152,556

 
162,824

Investments in tax credit and other investments, net
 
242,595

 
224,551

Premises and equipment (net of accumulated depreciation of $112,426 in 2018 and $111,898 in 2017)
 
122,072

 
121,209

Goodwill
 
465,547

 
469,433

Branch assets held-for-sale
 

 
91,318

Other assets
 
732,358

 
678,952

TOTAL
 
$
38,072,954

 
$
37,150,249

LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
10,739,333

 
$
10,887,306

Interest-bearing
 
22,036,799

 
20,727,757

Total deposits
 
32,776,132

 
31,615,063

Branch liability held-for-sale
 

 
605,111

Short-term borrowings
 
58,523

 

Federal Home Loan Bank (“FHLB”) advances
 
325,020

 
323,891

Securities sold under repurchase agreements (“repurchase agreements”)
 
50,000

 
50,000

Long-term debt
 
161,704

 
171,577

Accrued expenses and other liabilities
 
587,291

 
542,656

Total liabilities
 
33,958,670

 
33,308,298

COMMITMENTS AND CONTINGENCIES (Note 11)
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.001 par value, 200,000,000 shares authorized; 165,576,339 and 165,214,770 shares issued in 2018 and 2017, respectively
 
166

 
165

Additional paid-in capital
 
1,754,711

 
1,755,330

Retained earnings
 
2,883,201

 
2,576,302

Treasury stock, at cost — 20,671,710 shares as of both 2018 and 2017
 
(452,327
)
 
(452,327
)
Accumulated other comprehensive loss (“AOCI”), net of tax
 
(71,467
)
 
(37,519
)
Total stockholders’ equity
 
4,114,284

 
3,841,951

TOTAL
 
$
38,072,954

 
$
37,150,249

 


See accompanying Notes to Consolidated Financial Statements.

3



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 

 
 

Loans receivable, including fees
 
$
365,555

 
$
293,039

 
$
703,459

 
$
565,100

Investment securities
 
15,059

 
13,861

 
30,515

 
29,108

Resale agreements
 
7,182

 
7,853

 
14,116

 
17,321

Restricted equity securities
 
800

 
470

 
1,434

 
1,247

Interest-bearing cash and deposits with banks
 
11,715

 
7,552

 
22,660

 
12,668

Total interest and dividend income
 
400,311

 
322,775

 
772,184

 
625,444

INTEREST EXPENSE
 
 
 
 
 
 

 
 

Deposits
 
51,265

 
27,045

 
90,401

 
50,717

Federal funds purchased and other short-term borrowings
 
124

 
252

 
131

 
665

FHLB advances
 
2,552

 
1,761

 
4,812

 
3,791

Repurchase agreements
 
3,042

 
2,273

 
5,348

 
5,416

Long-term debt
 
1,649

 
1,353

 
3,120

 
2,642

Total interest expense
 
58,632

 
32,684

 
103,812

 
63,231

Net interest income before provision for credit losses

341,679

 
290,091

 
668,372

 
562,213

Provision for credit losses
 
15,536

 
10,685

 
35,754

 
17,753

Net interest income after provision for credit losses
 
326,143

 
279,406

 
632,618

 
544,460

NONINTEREST INCOME
 
 
 
 
 
 

 
 

Branch fees
 
10,140

 
10,321

 
20,570

 
20,245

Letters of credit fees and foreign exchange income
 
15,673

 
12,365

 
25,275

 
23,806

Ancillary loan fees and other income
 
5,841

 
5,907

 
11,422

 
10,889

Wealth management fees
 
4,501

 
3,381

 
7,454

 
7,716

Derivative fees and other income
 
6,570

 
3,765

 
13,260

 
6,271

Net gains on sales of loans
 
2,354

 
1,546

 
3,936

 
4,300

Net gains on sales of available-for-sale investment securities
 
210

 
2,720

 
2,339

 
5,194

Net gains on sales of fixed assets
 
1,114

 
1,042

 
2,200

 
73,049

Net gain on sale of business
 

 

 
31,470

 

Other fees and operating income
 
1,865

 
6,197

 
4,786

 
11,602

Total noninterest income
 
48,268

 
47,244

 
122,712

 
163,072

NONINTEREST EXPENSE
 
 
 
 
 
 

 
 

Compensation and employee benefits
 
93,865

 
80,744

 
189,099

 
165,347

Occupancy and equipment expense
 
16,707

 
15,554

 
33,587

 
31,194

Deposit insurance premiums and regulatory assessments
 
5,832

 
5,779

 
12,105

 
11,708

Legal expense
 
2,837

 
2,552

 
5,092

 
5,614

Data processing
 
3,327

 
3,058

 
6,728

 
6,005

Consulting expense
 
5,120

 
4,769

 
7,472

 
6,688

Deposit related expense
 
2,922

 
2,505

 
5,601

 
4,870

Computer software expense
 
5,549

 
5,462

 
10,603

 
9,430

Other operating expense
 
20,779

 
20,670

 
38,386

 
38,755

Amortization of tax credit and other investments
 
20,481

 
27,872

 
37,881

 
42,232

Total noninterest expense
 
177,419

 
168,965

 
346,554

 
321,843

INCOME BEFORE INCOME TAXES
 
196,992

 
157,685

 
408,776

 
385,689

INCOME TAX EXPENSE
 
24,643

 
39,355

 
49,395

 
97,623

NET INCOME
 
$
172,349

 
$
118,330

 
$
359,381

 
$
288,066

EARNINGS PER SHARE (“EPS”)
 
 
 
 
 
 
 
 
BASIC
 
$
1.19

 
$
0.82

 
$
2.48

 
$
2.00

DILUTED
 
$
1.18

 
$
0.81

 
$
2.46

 
$
1.98

WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
 
 
 
 
BASIC
 
144,899

 
144,485

 
144,782

 
144,368

DILUTED
 
146,091

 
145,740

 
146,046

 
145,774

CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

 



See accompanying Notes to Consolidated Financial Statements.

4



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
172,349

 
$
118,330

 
$
359,381

 
$
288,066

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Net changes in unrealized (losses) gains on available-for-sale investment securities
 
(8,841
)
 
6,201

 
(27,653
)
 
9,822

Foreign currency translation adjustments
 
(6,822
)
 
3,136

 
(24
)
 
4,143

Other comprehensive (loss) income
 
(15,663
)
 
9,337

 
(27,677
)
 
13,965

COMPREHENSIVE INCOME
 
$
156,686

 
$
127,667

 
$
331,704

 
$
302,031

 



See accompanying Notes to Consolidated Financial Statements.

5



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)
(Unaudited)
 
 
 
Common Stock and
Additional Paid-in Capital
 
Retained
Earnings
 
Treasury
Stock
 
AOCI,
Net of Tax
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
 
 
 
BALANCE, JANUARY 1, 2017
 
144,167,451

 
$
1,727,598

 
$
2,187,676

 
$
(439,387
)
 
$
(48,146
)
 
$
3,427,741

Net income
 

 

 
288,066

 

 

 
288,066

Other comprehensive income
 

 

 

 

 
13,965

 
13,965

Stock compensation costs
 

 
10,115

 

 

 

 
10,115

Net activity of common stock pursuant to various stock compensation plans and agreements
 
318,875

 
1,008

 

 
(12,259
)
 

 
(11,251
)
Cash dividends on common stock
 

 

 
(58,375
)
 

 

 
(58,375
)
BALANCE, JUNE 30, 2017
 
144,486,326

 
$
1,738,721

 
$
2,417,367

 
$
(451,646
)
 
$
(34,181
)
 
$
3,670,261

BALANCE, JANUARY 1, 2018
 
144,543,060

 
$
1,755,495

 
$
2,576,302

 
$
(452,327
)
 
$
(37,519
)
 
$
3,841,951

Cumulative effect of change in accounting principle related to marketable equity securities (1)
 

 

 
(545
)
 

 
385

 
(160
)
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2)
 

 

 
6,656

 

 
(6,656
)
 

Net income
 

 

 
359,381

 

 

 
359,381

Other comprehensive loss
 

 

 

 

 
(27,677
)
 
(27,677
)
Stock compensation costs
 

 
13,215

 

 

 

 
13,215

Net activity of common stock pursuant to various stock compensation plans and agreements
 
361,569

 
(13,833
)
 

 

 

 
(13,833
)
Cash dividends on common stock
 

 

 
(58,593
)
 

 

 
(58,593
)
BALANCE, JUNE 30, 2018
 
144,904,629

 
$
1,754,877

 
$
2,883,201

 
$
(452,327
)
 
$
(71,467
)
 
$
4,114,284

 
(1)
Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018. Refer to Note 2Current Accounting Developments to the Consolidated Financial Statements for additional information.
(2)
Represents amounts reclassified from AOCI to retained earnings due to the early adoption of ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2018. Refer to Note 2Current Accounting Developments to the Consolidated Financial Statements for additional information.


See accompanying Notes to Consolidated Financial Statements.

6



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
359,381

 
$
288,066

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
62,329

 
79,166

Accretion of discount and amortization of premiums, net
 
(9,910
)
 
(13,348
)
Stock compensation costs
 
13,215

 
10,115

Deferred income tax expense
 
1,320

 
3,699

Provision for credit losses
 
35,754

 
17,753

Net gains on sales of loans
 
(3,936
)
 
(4,300
)
Net gains on sales of available-for-sale investment securities
 
(2,339
)
 
(5,194
)
Net gains on sales of premises and equipment
 
(2,200
)
 
(73,049
)
Net gain on sale of business
 
(31,470
)
 

Originations and purchases of loans held-for-sale
 
(11,547
)
 
(9,806
)
Proceeds from sales and paydowns/payoffs in loans held-for-sale
 
10,759

 
9,984

Proceeds from distributions received from equity method investees
 
1,814

 
1,185

Net change in accrued interest receivable and other assets
 
(32,226
)
 
94,438

Net change in accrued expenses and other liabilities
 
44,016

 
(14,986
)
Other net operating activities
 
(93
)
 
(733
)
Total adjustments
 
75,486

 
94,924

Net cash provided by operating activities
 
434,867

 
382,990

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Net (increase) decrease in:
 
 

 
 

Loans held-for-investment
 
(1,147,156
)
 
(1,660,828
)
Interest-bearing deposits with banks
 
28,525

 
31,060

Investments in qualified affordable housing partnerships, tax credit and other investments
 
(41,444
)
 
(73,286
)
Payment for sale of business, net of cash transferred
 
(503,687
)
 

Purchases of:
 
 

 
 

Resale agreements
 
(100,000
)
 
(550,000
)
Available-for-sale investment securities
 
(235,360
)
 
(272,698
)
Loans held-for-investment
 
(389,912
)
 
(368,698
)
Premises and equipment
 
(7,612
)
 
(4,990
)
Proceeds from sale of:
 
 

 
 

Available-for-sale investment securities
 
256,875

 
551,889

Loans held-for-investment
 
274,785

 
361,380

Other real estate owned (“OREO”)
 
3,595

 
5,298

Premises and equipment
 

 
116,021

Paydowns and maturities of resale agreements
 
175,000

 
950,000

Proceeds from distributions received from equity method investees
 
1,725

 
2,634

Repayments, maturities and redemptions of available-for-sale investment securities
 
211,303

 
244,770

Other net investing activities
 
(2,200
)
 
21,005

Net cash used in investing activities
 
(1,475,563
)
 
(646,443
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase (decrease) in:
 
 

 
 

Deposits
 
1,195,796

 
1,245,282

Short-term borrowings
 
59,895

 
(36,521
)
Proceeds from:
 
 
 
 
Issuance of common stock pursuant to various stock compensation plans and agreements
 
1,328

 
1,008

Payments for:
 
 

 
 

Repayment of long-term debt
 
(10,000
)
 
(10,000
)
Repurchase of vested shares due to employee tax liability
 
(15,161
)
 
(12,259
)
Cash dividends on common stock
 
(59,243
)
 
(58,949
)
Net cash provided by financing activities
 
1,172,615

 
1,128,561

Effect of exchange rate changes on cash and cash equivalents
 
(9,040
)
 
8,865

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
122,879

 
873,973

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
2,174,592

 
1,878,503

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
2,297,471

 
$
2,752,476

 




See accompanying Notes to Consolidated Financial Statements.

7



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid
 
$
99,176

 
$
63,416

Income taxes paid, net
 
$
67,431

 
$
14,799

Noncash investing and financing activities:
 
 

 
 

Loans transferred from held-for-investment to held-for-sale
 
$
285,631

 
$
343,977

 
 
 
 
 



See accompanying Notes to Consolidated Financial Statements.

8



EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 Basis of Presentation
 
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank and East West’s subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of June 30, 2018, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Trusts are not included on the Consolidated Financial Statements.

The unaudited interim Consolidated Financial Statements are presented in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking industry. They reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim period Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.

The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission on February 27, 2018 (the “Company’s 2017 Form 10-K”).

Note 2Current Accounting Developments
    
New Accounting Pronouncements Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue for contracts to provide goods or services to customers. The guidance also requires new quantitative and qualitative disclosures including the disaggregation of revenues and descriptions of performance obligations. The Company’s revenue is comprised of net interest income and noninterest income. The scope of this new guidance explicitly excludes net interest income, as well as other revenues from financial instruments including loans, leases, securities and derivatives. Accordingly, the majority of the Company’s revenues are not affected. In addition, the new guidance does not materially impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s previously existing accounting for contracts within the scope of the new standard. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method where there was no cumulative effect adjustment to retained earnings as a result of adopting this new guidance. Overall, the guidance did not have a material impact on the Company’s consolidated financial statements. The Company has provided a disaggregation of the significant categories of revenues within the scope of this guidance and expanded the qualitative disclosures of the Company’s noninterest income. See Note 12 — Revenue from Contracts with Customers for additional information.


9



In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. With the exception of the amendments related to equity investments without readily determinable fair values and the use of exit price to measure the fair value of financial instruments for disclosure purposes that were adopted prospectively, the Company adopted all other amendments of the standard effective January 1, 2018 on a modified retrospective basis. The guidance requires investments in marketable equity securities to be accounted for at fair value with unrealized gains or losses reflected in earnings. As of the date of adoption, the Company reclassified approximately $31.9 million of marketable equity securities that were previously classified as Available-for-sale investment securities, at fair value to Investments in tax credits and other investments, net. In addition, the Company recorded a cumulative-effect adjustment as of January 1, 2018 that reduced retained earnings by $545 thousand and increased AOCI by $385 thousand. The guidance also provides a measurement alternative for equity securities without readily determinable fair values to be measured at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer. Such price changes (if any) are reflected in earnings beginning in the period of adoption. As of January 1, 2018, the Company elected the measurement alternative for its privately held cost method investments, which was not a material amount. The Company’s investments in the Federal Reserve Bank of San Francisco (“FRB”) and FHLB stock are not subject to this guidance and continue to be accounted for at cost. In addition, the guidance eliminates the requirement to disclose methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the Consolidated Balance Sheet. Furthermore, for purposes of disclosing the fair value of financial instruments carried at amortized cost, the Company has updated its valuation methods as necessary to conform to an exit price concept as required by the guidance as of January 1, 2018.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on eight specific issues related to classification on the Consolidated Statement of Cash Flows. The specific issues cover cash payments for debt prepayment or debt extinguishment costs; cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowings; contingent consideration payments that are not made soon after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; and beneficial interests received in securitization transactions. The guidance also clarifies that in instances of cash flows with multiple aspects that cannot be separately identified, the classification should be based on the activity that is likely to be the predominant source or use of the cash flows. The Company adopted this guidance in the first quarter of 2018 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires the Company to include those amounts that are deemed to be restricted cash and restricted cash equivalents in its cash and cash equivalents balances on the Consolidated Statement of Cash Flows. In addition, the Company is required to explain the changes in the combined total of restricted and unrestricted balances on the Consolidated Statement of Cash Flows. The Company adopted this guidance in the first quarter of 2018 on a retrospective basis. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which narrows the definition of a business by adding an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets (a “set”). If the screen is met, the set is not a business. ASU 2017-01 also specifies the minimum inputs and processes required for a set to be considered a business, and it removes the requirement to evaluate a market participant’s ability to replace missing elements when all of the inputs or processes that the seller used in operating a business were not obtained. The Company adopted this guidance in the first quarter of 2018 prospectively. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The guidance does not require any accounting changes for debt securities held at a discount. The discount continues to be amortized as an adjustment of yield over the contractual life (to maturity) of the instrument. ASU 2017-08 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method, with the cumulative-effect adjustment recognized to retained earnings as of the beginning of the period of adoption. The Company early adopted this guidance in the first quarter of 2018. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.


10



In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The Company adopted the guidance in the first quarter of 2018 prospectively. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns the Company’s risk management activities and financial reporting for hedging relationships through changes to both the description and measurement guidance for qualifying hedging relationships. The guidance also changes the presentation of hedge results, expands and refines hedge accounting for both nonfinancial and financial risk components, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item on the Consolidated Financial Statements. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method. The Company early adopted this guidance in the first quarter of 2018, and the adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Under current U.S. GAAP, deferred tax assets and liabilities are to be adjusted for the effect of a change in tax laws or rates in net income of the reporting period that includes the enactment date. This accounting treatment resulted in the tax effect of items within AOCI not reflecting the appropriate tax rate. This guidance permits companies to reclassify the stranded tax effects resulting from the Tax Act from AOCI to retained earnings. The guidance is effective on January 1, 2019, with early adoption permitted. The Company early adopted this guidance in the first quarter of 2018 retrospectively. The Company has identified the unrealized losses for available-for-sale securities to be the only item in AOCI with stranded tax effects, and made a policy election to reclassify the related stranded tax effects using the “investment-by-investment” approach. The adoption of the guidance resulted in a cumulative-effect adjustment as of January 1, 2018 that increased retained earnings by $6.7 million and reduced AOCI by the same amount.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. The guidance requires lessees to recognize right-of-use assets and related lease liabilities for all leases with lease terms of more than 12 months on the Consolidated Balance Sheet, and provide quantitative and qualitative disclosures regarding key information about the leasing arrangements. For short-term leases with a term of 12 months or less, lessees can make a policy election not to recognize lease assets and lease liabilities. Lessor accounting is largely unchanged. ASU 2016-02 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method through a cumulative-effect adjustment. The Company has completed its review of its existing lease contracts and service contracts that may include embedded leases and is in the process of implementing a new system to address this guidance. The Company expects the adoption of this guidance to result in additional assets and liabilities, as the Company will be required to recognize operating leases on its Consolidated Balance Sheet. The Company does not expect a material impact to its recognition of operating lease expense on its Consolidated Statement of Income and is in the process of evaluating the impacts of adopting the new guidance on its disclosures.


11



In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new current expected credit loss (“CECL”) impairment model applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loan receivables, available-for-sale and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. While the Company is still evaluating the impact on its Consolidated Financial Statements, the Company expects that ASU 2016-13 may result in an increase in the allowance for credit losses due to the following factors: 1) the allowance for credit losses provides for expected credit losses over the remaining expected life of the loan portfolio, and will consider expected future changes in macroeconomic conditions; 2) the nonaccretable difference on the purchased credit impaired (“PCI”) loans will be recognized as an allowance, offset by an increase in the carrying value of the PCI loans; and 3) an allowance may be established for estimated credit losses on available-for-sale debt securities. The Company’s implementation efforts include, but are not limited to, identifying key interpretive issues, assessing its processes, identifying the system requirements against the new guidance to determine what modifications may be required, evaluating modeling methodologies for its portfolio segments and assessing potential macroeconomic factors that will be used to determine the reasonable and supportable forecast period.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. ASU 2017-04 is effective on January 1, 2020 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements.

Note 3Dispositions and Held-for-Sale

In the first quarter of 2017, the Company completed the sale and leaseback of a commercial property in San Francisco, California for cash consideration of $120.6 million, and entered into a leaseback with the buyer for part of the property, consisting of a retail branch and office facilities. The net book value of the property was $31.6 million at the time of the sale, resulting in a pre-tax gain of $85.4 million after considering $3.6 million in selling costs. As the leaseback is an operating lease, $71.7 million of the gain was recognized on the closing date, and $13.7 million was deferred and will be recognized over the term of the lease agreement.

The Company reports a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specific criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less costs to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation and amortization expense are not recorded with respect to the assets of a business after it is classified as held-for-sale.

On November 11, 2017, the Bank entered into a Purchase and Assumption Agreement to sell all of its eight Desert Community Bank (“DCB”) branches located in the High Desert area of Southern California, and related assets and liability to Flagstar Bank, a wholly-owned subsidiary of Flagstar Bancorp, Inc. The Company determined that this transaction met the criteria for held-for-sale as of December 31, 2017. Branch assets held-for-sale as of December 31, 2017 were largely comprised of $78.1 million in loans held-for-sale and $8.0 million in premises and equipment, net. Branch liability held-for-sale as of December 31, 2017 was comprised of $605.1 million in deposits.

The sale of the Bank’s eight DCB branches was completed on March 17, 2018. The assets and liability of the DCB branches that were sold in this transaction primarily consisted of $613.7 million of deposits, $59.1 million of loans, $9.0 million of cash and cash equivalents and $7.9 million of premises and equipment. The transaction resulted in a net cash payment of $499.9 million by the Company to Flagstar Bank. After transaction costs, the sale resulted in a pre-tax gain of $31.5 million in the six months ended June 30, 2018, which was reported as Net gain on sale of business on the Consolidated Statement of Income.


12




Note 4 Fair Value Measurement and Fair Value of Financial Instruments

Fair Value Determination

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value of financial instruments, 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 an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
Level 1
Valuation is based on quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based on quoted prices for similar instruments traded in active markets; quoted prices for identical or similar instruments traded in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
Level 3
Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.

Level 3 Assets and Liabilities Valuation Process

The Company generally determines the fair value of Level 3 assets and liabilities by using internal valuation methodologies, which primarily include discounted cash flows techniques that require both observable and unobservable inputs. Unobservable inputs (such as volatility and liquidity discount) are generally derived from historic performance of similar instruments or determined from previous market trades in similar instruments. Such inputs can be derived from similar portfolios with known historic experience or recent trades where particular unobservable inputs may be implied. The Company compares each unobservable input to historic experience and other third-party data where available. The models developed under internal valuation methodologies are subject to review according to the Company’s risk management policies and procedures, which include model validation. Model validation assesses the adequacy and appropriateness of the model, including reviewing its supporting documentation and key components such as inputs, logic, processing components and output results. Validation also includes ensuring significant unobservable model inputs are appropriate given observable market transactions or other market data within the same or similar asset classes. The Company has ongoing monitoring procedures in place for Level 3 assets and liabilities that use internal valuation methodologies, which include but are not limited to the following:

review of valuation results against expectations, including review of significant or unusual value fluctuations; and
quarterly analysis related to market data, where available.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.

Available-for-Sale Investment Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investment securities, which are classified as Level 1. Level 1 available-for-sale investment securities are primarily comprised of U.S. Treasury securities. The fair value of other available-for-sale investment securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by the average quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company reviewed the methodologies used to develop the resulting fair value. The available-for-sale investment securities valued using such methods are classified as Level 2.


13



Equity Securities — Equity securities were comprised of mutual funds as of both June 30, 2018 and December 31, 2017. The Company uses Net Asset Value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.

Interest Rate Swaps and Options The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option products offered to bank customers. These products allow borrowers to lock in attractive intermediate and long-term interest rates by entering into an interest rate swap or option contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps).  In addition, to comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize model-derived credit spreads, which are Level 3 inputs. As of June 30, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.

Foreign Exchange Forwards, Spot and Swaps The Company enters into short-term foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered into with its customers, the Company entered into offsetting foreign exchange contracts with third party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. The fair value is determined at each reporting period based on changes in the foreign exchange rates. These are over-the-counter contracts where quoted market prices are not readily available. Valuation is measured using conventional valuation methodologies with observable market data. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts are classified as Level 2. During the six months ended June 30, 2018, the Company entered into foreign currency forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China. These foreign currency forward contracts were designated as net investment hedges. As of December 31, 2017, foreign exchange forward contracts were used to economically hedge the Company’s net investment in East West Bank (China) Limited. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include forward rates and the interest rate curves of the domestic and foreign currency. Interest rate forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Credit Risk Participation Agreements — The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.


14



Equity Warrants — The Company obtained warrants to purchase preferred and common stock of technology and life sciences companies as part of the loan origination process. As of June 30, 2018 and December 31, 2017, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company valued these warrants based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a sensitivity analysis on the option volatility and liquidity discount assumptions is performed.

Commodity Swaps and Options — The Company enters into energy commodity swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black’s model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fixed cash flows are predetermined based on the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.

15



The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of June 30, 2018
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
629,270

 
$
629,270

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
240,042

 

 
240,042

 

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
337,237

 

 
337,237

 

Residential mortgage-backed securities
 
936,447

 

 
936,447

 

Municipal securities
 
73,619

 

 
73,619

 

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
7,835

 

 
7,835

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Investment grade
 
11,001

 

 
11,001

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
459,433

 

 
459,433

 

Asset-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
12,560

 

 
12,560

 

Total available-for-sale investment securities
 
$
2,707,444

 
$
629,270

 
$
2,078,174

 
$

 
 
 
 
 
 
 
 
 
Investments in tax credit and other investments:
 


 
 
 
 
 
 
Equity securities with readily determinable fair value (1)
 
$
30,929

 
$
20,431

 
$
10,498

 
$

Total investments in tax credit and other investments
 
$
30,929

 
$
20,431

 
$
10,498

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
64,225

 
$

 
$
64,225

 
$

Foreign exchange forwards, spot and swaps

 
11,724

 

 
11,724

 

RPAs
 
1

 

 
1

 

Equity warrants
 
1,878

 

 
1,230

 
648

Commodity swaps and options
 
3,628

 

 
3,628

 

Total derivative assets
 
$
81,456

 
$

 
$
80,808

 
$
648

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
100,025

 
$

 
$
100,025

 
$

Foreign exchange forwards, spot and swaps
 
11,281

 

 
11,281

 

RPAs
 
77

 

 
77

 

Commodity swaps and options
 
3,159

 

 
3,159

 

Total derivative liabilities
 
$
114,542

 
$

 
$
114,542

 
$

 
 
 
 
 
 
 
 
 
(1)
Equity securities with readily determinable fair value were comprised of mutual funds as of June 30, 2018.

16



 
($ in thousands)
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 31, 2017
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
640,280

 
$
640,280

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
203,392

 

 
203,392

 

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
318,957

 

 
318,957

 

Residential mortgage-backed securities
 
1,190,271

 

 
1,190,271

 

Municipal securities
 
99,982

 

 
99,982

 

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
9,117

 

 
9,117

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Investment grade
 
37,003

 

 
37,003

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
486,408

 

 
486,408

 

Other securities
 
31,342

 
20,735

 
10,607

 

Total available-for-sale investment securities
 
$
3,016,752

 
$
661,015

 
$
2,355,737

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
58,633

 
$

 
$
58,633

 
$

Foreign exchange forwards, spot and swaps
 
5,840

 

 
5,840

 

RPAs
 
1

 

 
1

 

Equity warrants
 
1,672

 

 
993

 
679

Total derivative assets
 
$
66,146

 
$

 
$
65,467

 
$
679

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
6,799

 
$

 
$
6,799

 
$

Interest rate swaps and options
 
57,958

 

 
57,958

 

Foreign exchange forwards, spot and swaps
 
10,170

 

 
10,170

 

RPAs
 
8

 

 
8

 

Total derivative liabilities
 
$
74,935

 
$

 
$
74,935

 
$

 
 
 
 
 
 
 
 
 


17



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. As of June 30, 2018 and December 31, 2017, the only assets measured on a recurring basis that were classified as Level 3 were equity warrants issued by private companies. The following table presents a reconciliation of the beginning and ending balances for these warrants for the three and six months ended June 30, 2018:
 
 
 
($ in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
Equity warrants
 
 
 
 
Beginning balance
 
$
931

 
$
679

Total (losses) gains included in earnings (1)
 
(76
)
 
168

Issuances
 
26

 
34

Settlements
 
(233
)
 
(233
)
Ending balance
 
$
648


$
648

 
 
 
 
 
(1)
Includes unrealized (losses) gains of $(13) thousand and $231 thousand for the three and six months ended June 30, 2018, respectively. The realized/unrealized (losses) gains are included in Ancillary loan fees and other income on the Consolidated Statement of Income.

Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair value of the assets and liabilities become observable or unobservable in the current marketplace. The Company’s policy, with respect to transfers between levels of the fair value hierarchy, is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers of assets and liabilities measured on a recurring basis into and out of Level 1, Level 2 or Level 3 during the three and six months ended June 30, 2018 and 2017.

The following table presents quantitative information about the significant unobservable inputs used in the valuation of assets measured on a recurring basis classified as Level 3 as of June 30, 2018. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique
 
Unobservable
Input(s)
 
Weighted-
Average
Derivative assets:
 
 
 
 
 
 
 
 
Equity warrants
 
$
648

 
Black-Scholes option pricing model
 
Volatility
 
47%
 
 
 
 
 
 
Liquidity discount
 
47%
 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

From time to time, the Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. The adjustments to fair value generally require the assets to be recorded at the lower of cost or fair value, or assessed for impairment.

Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans that were impaired, OREO and loans held-for-sale. These fair value adjustments result from impairment on certain non-PCI loans, application of fair value less costs to sell on OREO or lower of cost or fair value on loans held-for-sale.

Non-PCI Impaired Loans — The Company typically adjusts the carrying amount of impaired loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. Impaired loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of impaired loans:

Discounted cash flows valuation techniques generally consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate.
The Company establishes a specific reserve for an impaired loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal evaluation if a third-party appraisal is not required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.

18



Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.

The following tables present the carrying amounts of assets included on the Consolidated Balance Sheet that had fair value changes measured on a nonrecurring basis as of June 30, 2018 and December 31, 2017:
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of June 30, 2018
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
Commercial and industrial (“C&I”)
 
$
18,574

 
$

 
$

 
$
18,574

Commercial real estate (“CRE”)
 
3,053

 

 

 
3,053

Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 
2,584

 

 

 
2,584

Home equity lines of credit (“HELOCs”)
 
924

 

 

 
924

Total non-PCI impaired loans
 
$
25,135

 
$

 
$

 
$
25,135

 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2017
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
C&I
 
$
31,404

 
$

 
$

 
$
31,404

CRE
 
2,667

 

 

 
2,667

Construction and land
 
3,973

 

 

 
3,973

Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 
144

 

 

 
144

Total non-PCI impaired loans
 
$
38,188

 
$

 
$

 
$
38,188

OREO
 
$
9

 
$

 
$

 
$
9

 


19



The following table presents the total change in value of assets for which a fair value adjustment has been included on the Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 and held as of those dates:
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
C&I
 
$
4,544

 
$
(14,060
)
 
$
595

 
$
(11,418
)
CRE
 
66

 
193

 
(23
)
 
118

Multifamily residential
 

 
(106
)
 

 
(107
)
Construction and land
 

 

 

 
(147
)
Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 

 
76

 
15

 
158

HELOCs
 
(73
)
 
24

 
(73
)
 
25

Total non-PCI impaired loans nonrecurring fair value gains (losses)
 
$
4,537

 
$
(13,873
)
 
$
514

 
$
(11,371
)
OREO nonrecurring fair value losses
 
$

 
$

 
$

 
$
(285
)
 

The following table presents the quantitative information about the significant unobservable inputs used in the valuation of assets measured on a nonrecurring basis classified as Level 3 as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range(s) of 
Input(s)
 
Weighted-
Average
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
21,048

 
Discounted cash flows
 
Discount
 
4% — 7%
 
6%
 
 
$
3,167

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
318

 
Fair value of collateral
 
Discount
 
15%
 
15%
 
 
$
602

 
Fair value of collateral
 
Contract value
 
NM
 
NM
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
22,802

 
Discounted cash flows
 
Discount
 
4% — 10%
 
6%
 
 
$
9,773

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
3,207

 
Fair value of collateral
 
Discount
 
20% — 32%
 
29%
 
 
$
2,406

 
Fair value of collateral
 
Contract value
 
NM
 
NM
OREO
 
$
9

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
NM — Not meaningful.


20



Disclosures about Fair Value of Financial Instruments

The following tables present the fair value estimates for financial instruments as of June 30, 2018 and December 31, 2017, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in Note 4Fair Value Measurement and Fair Value of Financial Instruments. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet. During the first quarter of 2018, the Company adopted ASU 2016-01 and has updated its valuation methods as necessary to conform to an “exit price” concept as required by ASU 2016-01.
 
($ in thousands)
 
June 30, 2018
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,297,471

 
$
2,297,471

 
$

 
$

 
$
2,297,471

Interest-bearing deposits with banks
 
$
360,900

 
$

 
$
360,900

 
$

 
$
360,900

Resale agreements (1)
 
$
975,000

 
$

 
$
946,643

 
$

 
$
946,643

Restricted equity securities, at cost
 
$
73,524

 
$

 
$
73,524

 
$

 
$
73,524

Loans held-for-sale
 
$
14,658

 
$

 
$
14,658

 
$

 
$
14,658

Loans held-for-investment, net
 
$
29,928,829

 
$

 
$

 
$
30,073,212

 
$
30,073,212

Mortgage servicing rights
 
$
7,865

 
$

 
$

 
$
12,111

 
$
12,111

Accrued interest receivable
 
$
128,339

 
$

 
$
128,339

 
$

 
$
128,339

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Demand, checking, savings and money market deposits
 
$
24,916,109

 
$

 
$
24,916,109

 
$

 
$
24,916,109

Time deposits
 
$
7,860,023

 
$

 
$
7,835,585

 
$

 
$
7,835,585

Short-term borrowings
 
$
58,523

 
$

 
$
58,523

 
$

 
$
58,523

FHLB advances
 
$
325,020

 
$

 
$
337,544

 
$

 
$
337,544

Repurchase agreements (1)
 
$
50,000

 
$

 
$
114,944

 
$

 
$
114,944

Long-term debt
 
$
161,704

 
$

 
$
167,573

 
$

 
$
167,573

Accrued interest payable
 
$
15,360

 
$

 
$
15,360

 
$

 
$
15,360

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of June 30, 2018, $400.0 million out of $450.0 million of repurchase agreements were eligible for netting against resale agreements.

21



 
($ in thousands)
 
December 31, 2017
 
Carrying
Amount