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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 March 31, 2019

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 every Interactive Data File required to be submitted 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 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
¨
 
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

Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.001 Par Value
 
EWBC
 
Nasdaq “Global Select Market”

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 145,545,510 shares as of April 30, 2019.
 




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)
 
 
 
March 31,
2019
 
December 31,
2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
462,254

 
$
516,291

Interest-bearing cash with banks
 
3,323,071

 
2,485,086

Cash and cash equivalents
 
3,785,325

 
3,001,377

Interest-bearing deposits with banks
 
134,000

 
371,000

Securities purchased under resale agreements (“resale agreements”)
 
1,035,000

 
1,035,000

Securities:
 
 
 
 
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $448,964 in 2019 and $435,833 in 2018)
 
2,640,158

 
2,741,847

Restricted equity securities, at cost
 
74,736

 
74,069

Loans held-for-sale
 

 
275

Loans held-for-investment (net of allowance for loan losses of $317,894 in 2019 and $311,322 in 2018; includes assets pledged as collateral of $20,952,709 in 2019 and $20,590,035 in 2018)
 
32,545,392

 
32,073,867

Investments in qualified affordable housing partnerships, net
 
197,470

 
184,873

Investments in tax credit and other investments, net
 
217,445

 
231,635

Premises and equipment (net of accumulated depreciation of $122,396 in 2019 and $118,547 in 2018)
 
124,300

 
119,180

Goodwill
 
465,697

 
465,547

Operating lease right-of-use assets
 
104,289

 

Other assets
 
767,621

 
743,686

TOTAL
 
$
42,091,433

 
$
41,042,356

LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
10,011,533

 
$
11,377,009

Interest-bearing
 
26,262,439

 
24,062,619

Total deposits
 
36,273,972

 
35,439,628

Short-term borrowings
 
39,550

 
57,638

Federal Home Loan Bank (“FHLB”) advances
 
344,657

 
326,172

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

 
50,000

Long-term debt and finance lease liabilities
 
152,433

 
146,835

Operating lease liabilities
 
112,843

 

Accrued expenses and other liabilities
 
526,048

 
598,109

Total liabilities
 
37,499,503

 
36,618,382

COMMITMENTS AND CONTINGENCIES (Note 12)
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.001 par value, 200,000,000 shares authorized; 166,484,022 and 165,867,587 shares issued in 2019 and 2018, respectively
 
166

 
166

Additional paid-in capital
 
1,798,958

 
1,789,811

Retained earnings
 
3,305,054

 
3,160,132

Treasury stock, at cost — 20,982,721 shares in 2019 and 20,906,224 shares in 2018
 
(479,265
)
 
(467,961
)
Accumulated other comprehensive loss (“AOCI”), net of tax
 
(32,983
)
 
(58,174
)
Total stockholders’ equity
 
4,591,930

 
4,423,974

TOTAL
 
$
42,091,433

 
$
41,042,356

 

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 March 31,
 
 
2019
 
2018
INTEREST AND DIVIDEND INCOME
 
 
 
 
Loans receivable, including fees
 
$
423,534

 
$
337,904

Available-for-sale investment securities
 
15,748

 
15,456

Resale agreements
 
7,846

 
6,934

Restricted equity securities
 
713

 
634

Interest-bearing cash and deposits with banks
 
15,470

 
10,945

Total interest and dividend income
 
463,311

 
371,873

INTEREST EXPENSE
 
 
 
 
Deposits
 
92,005

 
39,136

Federal funds purchased and other short-term borrowings
 
616

 
7

FHLB advances
 
2,979

 
2,260

Repurchase agreements
 
3,492

 
2,306

Long-term debt and finance lease liabilities
 
1,758

 
1,471

Total interest expense
 
100,850

 
45,180

Net interest income before provision for credit losses

362,461

 
326,693

Provision for credit losses
 
22,579

 
20,218

Net interest income after provision for credit losses
 
339,882

 
306,475

NONINTEREST INCOME
 
 
 
 
Lending fees
 
14,796

 
14,012

Deposit account fees
 
9,641

 
10,430

Foreign exchange income
 
5,015

 
1,171

Wealth management fees
 
3,812

 
2,953

Interest rate contracts and other derivative income
 
3,216

 
6,690

Net gains on sales of loans
 
915

 
1,582

Net gains on sales of available-for-sale investment securities
 
1,561

 
2,129

Net gain on sale of business
 

 
31,470

Other income
 
3,175

 
4,007

Total noninterest income
 
42,131

 
74,444

NONINTEREST EXPENSE
 
 
 
 
Compensation and employee benefits
 
102,299

 
95,234

Occupancy and equipment expense
 
17,318

 
16,880

Deposit insurance premiums and regulatory assessments
 
3,088

 
6,273

Legal expense
 
2,225

 
2,255

Data processing
 
3,157

 
3,401

Consulting expense
 
2,059

 
2,352

Deposit related expense
 
3,504

 
2,679

Computer software expense
 
6,078

 
5,054

Other operating expense
 
22,289

 
17,607

Amortization of tax credit and other investments
 
24,905

 
17,400

Total noninterest expense
 
186,922

 
169,135

INCOME BEFORE INCOME TAXES
 
195,091

 
211,784

INCOME TAX EXPENSE
 
31,067

 
24,752

NET INCOME
 
$
164,024

 
$
187,032

EARNINGS PER SHARE (“EPS”)
 
 
 
 
BASIC
 
$
1.13

 
$
1.29

DILUTED
 
$
1.12

 
$
1.28

WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
BASIC
 
145,256

 
144,664

DILUTED
 
145,921

 
145,939

 



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 March 31,
 
 
2019
 
2018
Net income
 
$
164,024

 
$
187,032

Other comprehensive income (loss), net of tax:
 
 
 
 
Net changes in unrealized gains (losses) on available-for-sale investment securities
 
22,011

 
(18,812
)
Foreign currency translation adjustments
 
3,180

 
6,798

Other comprehensive income (loss)
 
25,191

 
(12,014
)
COMPREHENSIVE INCOME
 
$
189,215

 
$
175,018

 



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, 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
 

 

 
187,032

 

 

 
187,032

Other comprehensive loss
 

 

 

 

 
(12,014
)
 
(12,014
)
Net activity of common stock pursuant to various stock compensation plans and agreements
 
329,465

 
6,158

 

 
(14,946
)
 

 
(8,788
)
Cash dividends on common stock ($0.20 per share)
 

 

 
(29,266
)
 

 

 
(29,266
)
BALANCE, MARCH 31, 2018
 
144,872,525

 
$
1,761,653

 
$
2,740,179

 
$
(467,273
)
 
$
(55,804
)
 
$
3,978,755

BALANCE, JANUARY 1, 2019
 
144,961,363

 
$
1,789,977

 
$
3,160,132

 
$
(467,961
)
 
$
(58,174
)
 
$
4,423,974

Cumulative effect of change in accounting principle related to leases (3)
 

 

 
14,668

 

 

 
14,668

Net income
 

 

 
164,024

 

 

 
164,024

Other comprehensive income
 

 

 

 

 
25,191

 
25,191

Warrants exercised
 
180,226

 
1,711

 

 
2,732

 

 
4,443

Net activity of common stock pursuant to various stock compensation plans and agreements
 
359,712

 
7,436

 

 
(14,036
)
 

 
(6,600
)
Cash dividends on common stock ($0.23 per share)
 

 

 
(33,770
)
 

 

 
(33,770
)
BALANCE, MARCH 31, 2019
 
145,501,301

 
$
1,799,124

 
$
3,305,054

 
$
(479,265
)
 
$
(32,983
)
 
$
4,591,930

 
(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.
(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.
(3)
Represents the impact of the adoption of ASU 2016-02, Leases (Topic 842) and subsequent ASUs in the first quarter of 2019. Refer to Note 2Current Accounting Developments and Note 11 Leases to the Consolidated Financial Statements in this Form 10-Q 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)
 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
164,024

 
$
187,032

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

 
 

Depreciation and amortization
 
39,498

 
29,858

Accretion of discount and amortization of premiums, net
 
(4,414
)
 
(2,680
)
Stock compensation costs
 
7,444

 
6,158

Deferred income tax (benefit) expense
 
(406
)
 
677

Provision for credit losses
 
22,579

 
20,218

Net gains on sales of loans
 
(915
)
 
(1,582
)
Net gains on sales of available-for-sale investment securities
 
(1,561
)
 
(2,129
)
Net gains on sales of fixed assets
 

 
(1,086
)
Net gain on sale of business
 

 
(31,470
)
Loans held-for-sale:
 
 
 
 
Originations and purchases
 
(2,167
)
 
(4,617
)
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale
 
2,454

 
2,545

Proceeds from distributions received from equity method investees
 
1,150

 
887

Net change in accrued interest receivable and other assets
 
(27,639
)
 
14,465

Net change in accrued expenses and other liabilities
 
(60,806
)
 
(570
)
Other net operating activities
 

 
148

Total adjustments
 
(24,783
)
 
30,822

Net cash provided by operating activities
 
139,241

 
217,854

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Net (increase) decrease in:
 
 

 
 

Investments in qualified affordable housing partnerships, tax credit and other investments
 
(33,261
)
 
(22,799
)
Interest-bearing deposits with banks
 
245,375

 
(71,203
)
Available-for-sale investment securities:
 
 
 
 
Proceeds from sales
 
151,339

 
214,790

Proceeds from repayments, maturities and redemptions
 
55,712

 
87,677

Purchases
 
(69,805
)
 
(157,933
)
Loans held-for-investment:
 
 
 
 
Proceeds from sales of loans originally classified as held-for-investment
 
92,887

 
112,964

Purchases
 
(147,938
)
 
(80,077
)
Other changes in loans held-for-investment, net
 
(409,930
)
 
(619,671
)
Premises and equipment:
 
 

 
 

Purchases
 
(3,336
)
 
(1,757
)
Payment on sale of business, net of cash transferred
 

 
(503,687
)
Proceeds from sales of other real estate owned (“OREO”)
 

 
2,716

Proceeds from distributions received from equity method investees
 
1,005

 
629

Other net investing activities
 
(729
)
 
(1,967
)
Net cash used in investing activities
 
(118,681
)
 
(1,040,318
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase in deposits
 
800,053

 
964,380

Net (decrease) increase in short-term borrowings
 
(19,514
)
 
30,215

FHLB advances:
 
 
 
 
Proceeds
 
300,000

 

Repayment
 
(282,000
)
 

Repayment of long-term debt and finance lease liabilities
 
(217
)
 
(5,000
)
Common stock:
 
 
 
 
Stocks tendered for payment of withholding taxes
 
(14,036
)
 
(14,946
)
Cash dividends paid
 
(34,916
)
 
(30,235
)
Net cash provided by financing activities
 
749,370

 
944,414

Effect of exchange rate changes on cash and cash equivalents
 
14,018

 
18,396

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
783,948

 
140,346

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
3,001,377

 
2,174,592

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
3,785,325

 
$
2,314,938

 


See accompanying Notes to Consolidated Financial Statements.

7



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
97,930

 
$
43,218

Income taxes, net
 
$
303

 
$
10,084

Noncash investing and financing activities:
 
 

 
 

Loans transferred from held-for-investment to held-for-sale
 
$
92,228

 
$
155,767

 
 
 
 
 



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 March 31, 2019, 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, Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. (“EWIS”). In the third quarter of 2017, the Company sold the insurance brokerage business of EWIS, which remains a subsidiary of East West and continues to maintain its insurance broker license. In the first quarter of 2019, the Company acquired Enstream Capital Markets, LLC, a non-public broker dealer entity, as a wholly-owned subsidiary of the Company.

The unaudited interim Consolidated Financial Statements are presented in accordance with United States generally accepted accounting principles (“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, 2018, filed with the United States Securities and Exchange Commission on February 27, 2019 (the “Company’s 2018 Form 10-K”).


9



Note 2Current Accounting Developments

New Accounting Pronouncements Adopted
Standard
Required Date of Adoption
Description
Effects on Financial Statements
Standards Adopted in 2019
ASU 2016-02, Leases (Topic 842) and subsequent related ASUs
January 1, 2019 for leases standards other than ASU 2019-01.

January 1, 2020 for ASU 2019-01
Early adoption is permitted.
ASC Topic 842, Leases, supersedes ASC Topic 840, Leases. This ASU 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. The ASU also expands the qualitative and quantitative lease disclosures.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides companies the option to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt ASU 2016-02. Companies that elect this transition option recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.

In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors, which include amendments related to 1) sales taxes and other similar taxes collected from lessees; 2) lessor costs paid directly by a lessee; and 3) the recognition of variable payments for contracts with lease and nonlease components.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which addresses issues related to 1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; 2) presentation on the statement of cash flows — sales-type and direct financing leases; and 3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections.
The Company adopted all the new lease standards on January 1, 2019 using the alternative transition method, which allows the adoption of the accounting standard prospectively without revising comparable prior periods’ financial information.

On January 1, 2019, the Company recognized $109.1 million and $117.7 million increase in right-of-use assets and associated lease liabilities, respectively, based on the present value of the expected remaining operating lease payments. In addition, the Company also recognized a cumulative-effect adjustment of $14.7 million to increase beginning balance of retained earnings as of January 1, 2019 related to the deferred gains on our prior sale and leaseback transactions that occurred prior to the date of adoption. The impact to the Company’s Common Equity Tier 1 capital ratio was a reduction of approximately 4 bps. The adoption of the new leases standards did not have a material impact on the Company’s Consolidated Statement of Income.
ASU 2018-09, Codification Improvements
Amendments that do not require transition guidance: effective immediately upon issuance in July, 2018.

Amendments that require transition guidance: January 1, 2019.
This ASU makes improvements to various Codification Topics. Some of the improvements include: 1) clarifying that the excess tax benefits for share-based compensation awards should be recognized in the period in which the amount of the deduction is determined; 2) one of the criteria “the intent to set off” under ASC 210-20-45-1 is not required to offset derivative assets and liabilities for certain amounts arising from derivative instruments recognized at fair value and executed with the same counterparty under a master netting agreement; and 3) clarifying the measurement of certain financial instruments.
The Company adopted the amendments that are effective on January 1, 2019. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
January 1, 2019

Early adoption (including adoption in an interim period) is permitted for entities that already adopted ASU 2017-12.
This ASU amends ASC Topic 815, Derivatives and Hedging, by adding the OIS rate based on SOFR to the list of United States (“U.S.”) benchmark interest rates that are eligible to be hedged to facilitate the London Interbank Offered Rate to SOFR transition. The guidance should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.
The Company adopted ASU 2018-16 prospectively on January 1, 2019. The adoption of this guidance did not impact existing hedges but may impact new hedge relationships that are benchmarked against the SOFR OIS rate.

10



Recent Accounting Pronouncements
Standard
Required Date of Adoption
Description
Effects on Financial Statements
Standards Not Yet Adopted
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
January 1, 2020

Early adoption is permitted on January 1, 2019.
The ASU introduces a new current expected credit loss (“CECL”) impairment model that 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. This ASU 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). 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 this ASU 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. The Company is completing model development and implementation and is in the process of evaluating qualitative factors. The Company will continue to address any gaps in interpretations, methodology, data and operational processes from review, model validation, and parallel runs during the remainder of 2019. The Company expects to adopt this ASU on January 1, 2020.
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 1, 2020

Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017.
The ASU simplifies 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. This guidance should be applied prospectively.
The Company does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements. The Company expects to adopt this ASU on January 1, 2020.
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
January 1, 2020

Early adoption is permitted.
The ASU amends ASC Topic 350-40 to align the accounting for costs incurred in a cloud computing arrangement with the guidance on developing internal use software. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
The Company does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements. The Company expects to adopt this ASU on January 1, 2020.


11



Note 3Dispositions

On March 17, 2018, the Bank completed the sale of its eight Desert Community Bank (“DCB”) branches located in the High Desert area of Southern California to Flagstar Bank, a wholly-owned subsidiary of Flagstar Bancorp, Inc. 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 during the three months ended March 31, 2018, which was reported as Net gain on sale of business on the Consolidated Statement of Income.

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.

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. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation, and “To Be Announced” prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service providers also include material event notices.


12



On a monthly basis, the Company validates the pricing provided by the third-party pricing service to ensure that the fair value determination is consistent with the applicable accounting guidance and the assets are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service to prices from other available independent sources for the same securities. When variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews documentation received from the third-party pricing service regarding the valuation inputs and methodology used for each category of securities.

The third-party pricing service providers may not provide pricing for all securities. Under such circumstances, the Company requests market quotes from various independent external brokers and utilizes the average market quotes. These are viewed as observable inputs in the current marketplace and are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation technique are reviewed.

Equity Securities — Equity securities were comprised of mutual funds as of both March 31, 2019 and December 31, 2018. The Company uses net asset value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.

Interest Rate Contracts The Company enters into interest rate swap and option contracts with its borrowers to lock in attractive intermediate and long-term interest rates, resulting in the customer obtaining a synthetic fixed rate loan. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions. 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 rates. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own 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 March 31, 2019 and December 31, 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 Contracts The Company enters into 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. As of March 31, 2019 and December 31, 2018, the Company held foreign currency swap 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 swap contracts were designated as net investment hedges. The fair value of foreign currency 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 spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.


13



Credit Contracts — The Company may periodically enter into credit risk participation agreement (“RPA”) contracts to manage the credit exposure on interest rate contracts associated with syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. 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. The majority of the inputs used to value the RPAs are observable. Accordingly, RPAs fall within Level 2.

Equity Contracts — The Company obtains equity warrants to purchase preferred and common stock of technology and life sciences companies, as part of the loan origination process. As of March 31, 2019 and December 31, 2018, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company values these warrants based on the Black-Scholes option pricing model. For equity 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 Company applies proxy volatilities based on the industry sectors of the private companies. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. 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. Since both option volatility and liquidity discount assumptions are subject to management judgment, measurement uncertainty is inherent in the valuation of private companies’ equity warrants. Given that the Company holds long positions in all equity warrants, an increase in volatility assumption would generally result in an increase in fair value measurement. A higher liquidity discount would result in a decrease in fair value measurement. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.

Commodity Contracts — The Company enters into energy commodity contracts in the form of 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.

14



The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
 
($ in thousands)
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of March 31, 2019
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
520,440

 
$

 
$

 
$
520,440

U.S. government agency and U.S. government sponsored enterprise debt securities
 

 
182,536

 

 
182,536

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 


Commercial mortgage-backed securities
 

 
426,291

 

 
426,291

Residential mortgage-backed securities
 

 
886,825

 

 
886,825

Municipal securities
 

 
76,004

 

 
76,004

Non-agency mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 

 
42,299

 

 
42,299

Residential mortgage-backed securities
 

 
9,455

 

 
9,455

Corporate debt securities
 

 
11,094

 

 
11,094

Foreign bonds
 

 
472,669

 

 
472,669

Asset-backed securities
 

 
12,545

 

 
12,545

Total available-for-sale investment securities
 
$
520,440

 
$
2,119,718

 
$

 
$
2,640,158

 
 
 
 
 
 
 
 
 
Investments in tax credit and other investments:
 
 
 
 
 
 
 
 
Equity securities with readily determinable fair value (1)
 
$
21,051

 
$
9,886

 
$

 
$
30,937

Total investments in tax credit and other investments
 
$
21,051

 
$
9,886

 
$

 
$
30,937

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
96,256

 
$

 
$
96,256

Foreign exchange contracts
 

 
30,085

 

 
30,085

Credit contracts
 

 
1

 

 
1

Equity contracts
 

 
1,759

 
442

 
2,201

Commodity contracts
 

 
7,239

 

 
7,239

Gross derivative assets
 
$

 
$
135,340

 
$
442

 
$
135,782

Netting adjustments (2)
 
$

 
$
(40,038
)
 
$

 
$
(40,038
)
Net derivative assets
 
$

 
$
95,302

 
$
442

 
$
95,744

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
76,572

 
$

 
$
76,572

Foreign exchange contracts
 

 
24,918

 

 
24,918

Credit contracts
 

 
81

 

 
81

Commodity contracts
 

 
8,016

 

 
8,016

Gross derivative liabilities
 
$

 
$
109,587

 
$

 
$
109,587

Netting adjustments (2)
 
$

 
$
(56,102
)
 
$

 
$
(56,102
)
Net derivative liabilities
 
$

 
$
53,485

 
$

 
$
53,485

 
(1)
Equity securities with readily determinable fair value were comprised of mutual funds.
(2)
Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 7Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.

15



 
($ in thousands)
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of December 31, 2018
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
564,815

 
$

 
$

 
$
564,815

U.S. government agency and U.S. government sponsored enterprise debt securities
 

 
217,173

 

 
217,173

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

 
408,603

 

 
408,603

Residential mortgage-backed securities
 

 
946,693

 

 
946,693

Municipal securities
 

 
82,020

 

 
82,020

Non-agency mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 

 
26,052

 

 
26,052

Residential mortgage-backed securities
 

 
9,931

 

 
9,931

Corporate debt securities
 

 
10,869

 

 
10,869

Foreign bonds
 

 
463,048

 

 
463,048

Asset-backed securities
 

 
12,643

 

 
12,643

Total available-for-sale investment securities
 
$
564,815

 
$
2,177,032

 
$

 
$
2,741,847

 
 
 
 
 
 
 
 
 
Investment in tax credit and other investments:
 
 
 
 
 
 
 
 
Equity securities with readily determinable fair value (1)
 
$
20,678

 
$
10,531

 
$

 
$
31,209

Total investments in tax credit and other investments
 
$
20,678

 
$
10,531

 
$

 
$
31,209

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
69,818

 
$

 
$
69,818

Foreign exchange contracts
 

 
21,624

 

 
21,624

Credit contracts
 

 
1

 

 
1

Equity contracts
 

 
1,278

 
673

 
1,951

Commodity contracts
 

 
14,422

 

 
14,422

Gross derivative assets
 
$

 
$
107,143

 
$
673

 
$
107,816

Netting adjustments (2)
 
$

 
$
(45,146
)
 
$

 
$
(45,146
)
Net derivative assets
 
$

 
$
61,997

 
$
673

 
$
62,670

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$

 
$
75,133

 
$

 
$
75,133

Foreign exchange contracts
 

 
19,940

 

 
19,940

Credit contracts
 

 
164

 

 
164

Commodity contracts
 

 
23,068

 

 
23,068

Gross derivative liabilities
 
$

 
$
118,305

 
$

 
$
118,305

Netting adjustments (2)
 
$

 
$
(38,402
)
 
$

 
$
(38,402
)
Net derivative liabilities
 
$

 
$
79,903

 
$

 
$
79,903

 
(1)
Equity securities with readily determinable fair value were comprised of mutual funds.
(2)
Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 7Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.

16



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 March 31, 2019 and December 31, 2018, the only asset measured on a recurring basis that was classified as Level 3 was equity warrants issued by private companies. The following table presents a reconciliation of the beginning and ending balances of these warrants for the three months ended March 31, 2019 and 2018:
 
($ in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Equity warrants
 
 
 
 
Beginning balance
 
$
673

 
$
679

Total (losses) gains included in earnings (1)
 
(231
)
 
244

Issuances
 

 
8

Ending balance
 
$
442


$
931

 
(1)
Includes unrealized (losses) gains of $(43) thousand and $244 thousand for the three months ended March 31, 2019 and 2018, respectively. Unrealized gains and losses of equity warrants were included in Lending fees on the Consolidated Statement of Income.

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 March 31, 2019. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique
 
Unobservable
Inputs
 
Range of Inputs
 
Weighted-
Average (1)
Derivative assets:
 
 
 
 
 
 
 
 
 
 
Equity warrants
 
$
442

 
Black-Scholes option pricing model
 
Volatility
 
41% — 49%
 
47%
 
 
 
 
 
 
Liquidity discount
 
47%
 
47%
 
(1)
Weighted-average is calculated based on fair value of equity warrants as of March 31, 2019.

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 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-PCI loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, and loans held-for-sale. Nonrecurring fair value adjustments result from impairment on certain non-PCI loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or application of 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 that 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.
A specific reserve is established 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.


17



Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — These investments are evaluated for impairment on an annual basis, at a minimum, as well as upon the occurrence of a triggering event indicating that the investment in question is other-than-temporarily-impaired. This evaluation involves comparing the expected future tax benefits against the current carrying value of the investment. Expected future tax benefit schedules are provided by the partnerships’ general partners on a quarterly basis. Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments are impaired when it is more likely than not that the carrying amount of the investments will not be realized through the future recognition of tax credits and other tax benefits. Investments in tax credit and other investments are classified as Level 3.

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 March 31, 2019 and December 31, 2018:
 
($ in thousands)
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of March 31, 2019
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
Measurements
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Commercial and industrial (“C&I”)
 
$

 
$

 
$
15,388

 
$
15,388

Commercial real estate (“CRE”)
 

 

 
785

 
785

Consumer:
 
 
 
 
 
 
 
 
Home equity lines of credit (“HELOCs”)
 

 

 
918

 
918

Total non-PCI impaired loans
 
$

 
$

 
$
17,091

 
$
17,091

 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2018
($ in thousands)
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
Measurements
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
C&I
 
$

 
$

 
$
26,873

 
$
26,873

CRE
 

 

 
3,434

 
3,434

Consumer:
 
 
 
 
 
 
 
 
Single-family residential
 

 

 
2,551

 
2,551

Total non-PCI impaired loans
 
$

 
$

 
$
32,858

 
$
32,858

 


18



The following table presents the increase (decrease) in value of assets for which a fair value adjustment has been included on the Consolidated Statement of Income for the three months ended March 31, 2019 and 2018:
 
($ in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Non-PCI impaired loans:
 
 
 
 
Commercial:
 
 
 
 
C&I
 
$
(2,734
)
 
$
(13,899
)
CRE
 
2

 
(95
)
Consumer:
 
 
 
 
Single-family residential
 

 
15

HELOCs
 
(78
)
 

Total non-PCI impaired loans
 
$
(2,810
)
 
$
(13,979
)
Impairment on tax credit investments
 
$
(6,978
)
 
$

 

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 March 31, 2019 and December 31, 2018:
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range of 
Input(s)
 
Weighted-
Average (1)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
8,423

 
Discounted cash flows
 
Discount
 
4% — 12%
 
7%
 
 
$
918

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
7,750

 
Fair value of collateral
 
Discount
 
50% — 65%
 
65%
Tax credit investments
 
$

 
Individual analysis of each investment
 
Expected future tax
benefits and
distributions
 
NM
 
NM
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
16,921

 
Discounted cash flows
 
Discount
 
4% — 7%
 
6%
 
 
$
1,687

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
2,751

 
Fair value of collateral
 
Discount
 
15% — 50%
 
21%
 
 
$
11,499

 
Fair value of collateral
 
Contract value
 
NM
 
NM
 
NM — Not meaningful.
(1)
Weighted-average is based on the relative fair value of the respective assets as of March 31, 2019 and December 31, 2018.

19



Disclosures about Fair Value of Financial Instruments

The following tables present the fair value estimates for financial instruments as of March 31, 2019 and December 31, 2018, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable 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.
 
($ in thousands)
 
March 31, 2019
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,785,325

 
$
3,785,325

 
$

 
$

 
$
3,785,325

Interest-bearing deposits with banks
 
$
134,000

 
$

 
$
134,000

 
$

 
$
134,000

Resale agreements (1)
 
$
1,035,000

 
$

 
$
1,025,288

 
$

 
$
1,025,288

Restricted equity securities, at cost
 
$
74,736

 
$

 
$
74,736

 
$

 
$
74,736

Loans held-for-investment, net
 
$
32,545,392

 
$

 
$

 
$
32,775,546

 
$
32,775,546

Mortgage servicing rights
 
$
7,754

 
$

 
$

 
$
11,099

 
$
11,099

Accrued interest receivable
 
$
157,335

 
$

 
$
157,335

 
$

 
$
157,335

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Demand, checking, savings and money market deposits
 
$
26,427,303

 
$

 
$
26,427,303

 
$

 
$
26,427,303

Time deposits
 
$
9,846,669

 
$

 
$
9,876,954

 
$

 
$
9,876,954

Short-term borrowings
 
$
39,550

 
$

 
$
39,550

 
$

 
$
39,550

FHLB advances
 
$
344,657

 
$

 
$
352,610

 
$

 
$
352,610

Repurchase agreements (1)
 
$
50,000

 
$

 
$
107,103

 
$

 
$
107,103

Long-term debt
 
$
146,900

 
$

 
$
152,531

 
$

 
$
152,531

Accrued interest payable
 
$
25,814

 
$

 
$
25,814

 
$

 
$
25,814

 
 
($ in thousands)
 
December 31, 2018
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,001,377

 
$
3,001,377

 
$

 
$

 
$
3,001,377

Interest-bearing deposits with banks
 
$
371,000

 
$

 
$
371,000

 
$

 
$
371,000

Resale agreements (1)
 
$
1,035,000

 
$

 
$
1,016,724

 
$

 
$
1,016,724

Restricted equity securities, at cost
 
$
74,069

 
$

 
$
74,069

 
$

 
$
74,069

Loans held-for-sale
 
$
275

 
$

 
$
275

 
$

 
$
275

Loans held-for-investment, net
 
$
32,073,867

 
$

 
$

 
$
32,273,157

 
$
32,273,157

Mortgage servicing rights
 
$
7,836

 
$

 
$

 
$
11,427

 
$
11,427

Accrued interest receivable
 
$
146,262

 
$

 
$
146,262

 
$

 
$
146,262

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Demand, checking, savings and money market deposits
 
$
26,370,562

 
$

 
$
26,370,562

 
$

 
$
26,370,562

Time deposits
 
$
9,069,066

 
$

 
$
9,084,597

 
$

 
$
9,084,597

Short-term borrowings
 
$
57,638

 
$

 
$
57,638

 
$

 
$
57,638

FHLB advances
 
$
326,172

 
$

 
$
334,793

 
$

 
$
334,793

Repurchase agreements (1)
 
$
50,000

 
$

 
$
87,668

 
$

 
$
87,668

Long-term debt
 
$
146,835

 
$

 
$
152,556

 
$

 
$
152,556

Accrued interest payable
 
$
22,893

 
$

 
$
22,893

 
$

 
$
22,893

 
(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 both March 31, 2019 and December 31, 2018, $400.0 million out of $450.0 million of gross repurchase agreements were eligible for netting against gross resale agreements.


20



Note 5 Securities Purchased under Resale Agreements and Sold under Repurchase Agreements

Resale Agreements

Resale agreements are recorded as receivables for the cash paid based on the values at which the securities are acquired. The market values of the underlying securities collateralizing the related receivables of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterparties or excess collateral may be returned by the Company to the counterparties when deemed appropriate. Gross resale agreements were $1.44 billion as of both March 31, 2019 and December 31, 2018. The weighted-average yields were 2.80% and 2.52% for the three months ended March 31, 2019 and 2018, respectively.

Repurchase Agreements

Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the securities are sold. As of March 31, 2019, the collateral for the repurchase agreements was comprised of U.S. Treasury securities and U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities. The Company may have to provide additional collateral to the counterparties, or the counterparties may return excess collateral to the Company, for the repurchase agreements when necessary. Gross repurchase agreements were $450.0 million as of both March 31, 2019 and December 31, 2018. The weighted-average interest rates were 5.01% and 3.95% for the three months ended March 31, 2019 and 2018, respectively.

The following table presents the gross repurchase agreements that will mature in the five years succeeding March 31, 2019 and thereafter:
 
 
 
($ in thousands)
 
Repurchase
Agreements
Remainder of 2019