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EAST WEST BANCORP INC - Quarter Report: 2015 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
Mark One
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to              
 
Commission file number 000-24939
 
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
95-4703316
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)
 
(626) 768-6000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
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: 143,900,919 shares as of October 31, 2015.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
 
Certain matters discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) contain or incorporate statements that East West Bancorp, Inc. (the “Company”) believes are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 3b-6 promulgated thereunder. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.
 
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference, some of which are beyond our control, include, but are not limited to:
 
our ability to compete effectively against other financial institutions in our banking markets;
changes in the commercial and consumer real estate markets;
changes in our costs of operation, compliance and expansion;
changes in the U.S. economy, including inflation, employment levels, rate of growth and general business conditions;
changes in government interest rate policies;
changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, the Federal Deposit Insurance Corporation (“FDIC”), the U.S. Securities and Exchange Commission (“SEC”) and the Consumer Financial Protection Bureau;
changes in the economy of and monetary policy in the People’s Republic of China;
changes in accounting standards as may be required by the Financial Accounting Standards Board or other regulatory agencies and its impact on critical accounting policies and assumptions;
changes in the equity and debt securities markets;
future credit quality and performance, including our expectations regarding future credit losses and allowance levels;
changes in legislative or regulatory initiatives affecting our business;
fluctuations of our stock price;
fluctuations in foreign currency exchange rates that could have a material adverse effect on our results of operations and financial condition;
success and timing of our business strategies;
impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions;
impact of potential federal tax increases and spending cuts;
impact of adverse judgments or settlements in litigation;
impact of regulatory enforcement actions;
changes in our ability to receive dividends from our subsidiaries;
impact of political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
continuing consolidation in the financial services industry;
our capital requirements and our ability to generate capital internally or raise capital on favorable terms; and
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on our business, business practices and cost of operations.


3



For a more detailed discussion of some of the factors that might cause such differences, see the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 2, 2015 (the “2014 Form 10-K”), under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “ITEM 1A. RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

4



PART I — FINANCIAL INFORMATION 

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS
 

 
 

Cash and cash equivalents
$
1,875,703

 
$
1,039,885

Short-term investments
258,028

 
338,714

Securities purchased under resale agreements (“resale agreements”)
1,400,000

 
1,225,000

Available-for-sale investment securities, at fair value
2,952,277

 
2,626,617

Loans held for sale
349,375

 
45,950

Loans held-for-investment (net of allowance for loan losses of $264,430 in 2015
and $261,679 in 2014)
22,381,302

 
21,468,270

Investment in Federal Home Loan Bank stock, at cost
18,156

 
31,239

Investment in Federal Reserve Bank stock, at cost
54,786

 
54,451

Investments in qualified affordable housing partnerships, net (1)
170,213

 
178,962

Premises and equipment (net of accumulated depreciation of $96,254 in 2015
and $85,409 in 2014)
169,771

 
180,900

Goodwill
469,433

 
469,433

Other assets (1)
1,020,632

 
1,084,171

TOTAL (1)
$
31,119,676

 
$
28,743,592

LIABILITIES
 

 
 

Customer deposits:
 

 
 

Noninterest-bearing
$
8,374,192

 
$
7,381,030

Interest-bearing
18,384,858

 
16,627,744

Total deposits
26,759,050

 
24,008,774

Short-term borrowings
3,146

 

Federal Home Loan Bank advances
318,872

 
317,241

Securities sold under repurchase agreements (“repurchase agreements”)
150,000

 
795,000

Long-term debt
211,024

 
225,848

Accrued expenses and other liabilities
606,469

 
540,618

Total liabilities
28,048,561

 
25,887,481

COMMITMENTS AND CONTINGENCIES (Note 12)


 


STOCKHOLDERS’ EQUITY
 

 
 

Common stock, $0.001 par value, 200,000,000 shares authorized; 164,204,681 and 163,772,218
shares issued in 2015 and 2014, respectively; 143,869,954 and 143,582,229 shares outstanding
in 2015 and 2014, respectively.
164

 
164

Additional paid in capital
1,695,265

 
1,677,767

Retained earnings (1)
1,809,913

 
1,604,141

Treasury stock at cost—20,334,727 shares in 2015 and 20,189,989 shares in 2014.
(436,057
)
 
(430,198
)
Accumulated other comprehensive income, net of tax
1,830

 
4,237

Total stockholders’ equity (1)
3,071,115

 
2,856,111

TOTAL (1)
$
31,119,676

 
$
28,743,592


(1) Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects Accounting Standards Update (“ASU”) 2014-01. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.





See accompanying Notes to Consolidated Financial Statements.


5



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data, shares in thousands)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME
 

 
 

 
 
 
 
Loans receivable, including fees
$
244,372

 
$
262,258

 
$
719,987

 
$
793,313

Available-for-sale investment securities
10,279

 
11,364

 
29,947

 
36,130

Resale agreements
4,411

 
5,344

 
13,940

 
14,756

Investment in Federal Home Loan Bank and Federal Reserve Bank stock
1,380

 
1,477

 
4,922

 
4,903

Due from banks and short-term investments
4,190

 
5,505

 
14,542

 
17,461

Total interest and dividend income
264,632

 
285,948

 
783,338

 
866,563

INTEREST EXPENSE
 

 
 

 
 
 
 
Customer deposits
18,519

 
17,158

 
53,677

 
48,609

Short-term borrowings
35

 

 
53

 

Federal Home Loan Bank advances
1,074

 
1,027

 
3,156

 
3,087

Repurchase agreements
3,555

 
9,578

 
19,494

 
29,845

Long-term debt
1,160

 
1,211

 
3,460

 
3,632

Total interest expense
24,343

 
28,974

 
79,840

 
85,173

Net interest income before provision for credit losses
240,289

 
256,974

 
703,498

 
781,390

Provision for credit losses
7,736

 
15,225

 
16,217

 
30,158

Net interest income after provision for credit losses
232,553

 
241,749

 
687,281

 
751,232

NONINTEREST INCOME (LOSS)
 

 
 

 
 
 
 
Branch fees
9,982

 
9,515

 
29,157

 
28,480

Letters of credit fees and foreign exchange income
7,468

 
10,298

 
24,999

 
26,094

Ancillary loan fees
4,839

 
2,874

 
10,307

 
7,867

Wealth management fees
4,374

 
3,845

 
14,310

 
12,105

Derivative commission income
4,274

 
4,319

 
12,037

 
9,542

Changes in FDIC indemnification asset and receivable/payable
(3,883
)
 
(39,647
)
 
(18,973
)
 
(150,839
)
Net gains on sales of loans
4,888

 
7,726

 
19,719

 
20,715

Net gains on sales of available-for-sale investment securities
17,036

 
2,514

 
26,994

 
6,603

Dividend and other investment income
495

 
4,132

 
1,902

 
5,381

Other fees and other operating income
4,708

 
4,766

 
18,448

 
14,533

Total noninterest income (loss)
54,181

 
10,342

 
138,900

 
(19,519
)
NONINTEREST EXPENSE
 

 
 

 
 
 
 
Compensation and employee benefits
66,185

 
58,111

 
193,298

 
172,469

Occupancy and equipment expense
15,362

 
15,842

 
45,990

 
48,227

Amortization of tax credit and other investments (1)
12,269

 
26,749

 
21,565

 
33,731

Amortization of premiums on deposits acquired
2,310

 
2,597

 
7,038

 
7,721

Deposit insurance premiums and regulatory assessments
4,726

 
5,247

 
13,723

 
16,761

Other real estate owned (income) expense
(1,374
)
 
(1,422
)
 
(7,481
)
 
695

Legal expense
2,099

 
32,500

 
13,103

 
45,403

Data processing
2,602

 
2,211

 
7,596

 
13,351

Consulting expense
4,983

 
2,982

 
9,596

 
6,359

Repurchase agreements’ extinguishment costs
15,193

 

 
21,818

 

Other operating expense
23,390

 
21,975

 
69,699

 
62,568

Total noninterest expense (1)
147,745

 
166,792

 
395,945

 
407,285

INCOME BEFORE INCOME TAXES (1)
138,989

 
85,299

 
430,236

 
324,428

INCOME TAX EXPENSE (BENEFIT) (1)
44,892

 
(6,601
)
 
137,364

 
74,052

NET INCOME (1)
$
94,097

 
$
91,900

 
$
292,872

 
$
250,376

EARNINGS PER SHARE 
 

 
 

 
 
 
 
     BASIC  (1)
$
0.65

 
$
0.64

 
$
2.04

 
$
1.75

     DILUTED  (1)
$
0.65

 
$
0.64

 
$
2.03

 
$
1.74

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
 

 
 

 
 
 
 
     BASIC
143,861

 
143,210

 
143,788

 
142,791

     DILUTED
144,590

 
143,810

 
144,468

 
143,377

DIVIDENDS DECLARED PER COMMON SHARE
$
0.20

 
$
0.18

 
$
0.60

 
$
0.54

 
(1) Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.

See accompanying Notes to Consolidated Financial Statements.

6



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income (1)
$
94,097

 
$
91,900

 
$
292,872

 
$
250,376

Other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

Net change in unrealized gains on available-for-sale investment securities
3,246

 
107

 
4,439

 
28,031

Foreign currency translation adjustments
(6,846
)
 

 
(6,846
)
 

Other comprehensive (loss) income
(3,600
)
 
107

 
(2,407
)
 
28,031

COMPREHENSIVE INCOME (1)
$
90,497

 
$
92,007

 
$
290,465

 
$
278,407

 
(1) Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.


See accompanying Notes to Consolidated Financial Statements.


7



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except share data)
(Unaudited) 
 
Common
Stock
 
Additional
Paid In
Capital
Common
Stock
 
Retained
Earnings (1)
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
(Loss) Income,
Net of Tax
 
Total
Stockholders’
Equity (1)
BALANCE, JANUARY 1, 2014 (1)
$
163

 
$
1,571,670

 
$
1,362,278

 
$
(537,279
)
 
$
(30,459
)
 
$
2,366,373

Net income (1)

 

 
250,376

 

 

 
250,376

Other comprehensive income

 

 

 

 
28,031

 
28,031

Stock compensation costs

 
10,382

 

 

 

 
10,382

Tax benefit from stock compensation plans, net

 
3,916

 

 

 

 
3,916

Issuance of 398,012 shares of common stock pursuant
to various stock compensation plans and agreements

 
1,249

 

 

 

 
1,249

Issuance of 18,909 shares of common stock pursuant
to Director retainer fee

 
630

 

 

 

 
630

Cancellation of 17,337 shares of common stock due to
forfeitures of issued restricted stock

 
323

 

 
(323
)
 

 

208,440 shares of restricted stock surrendered due to
employee tax liability

 

 

 
(7,532
)
 

 
(7,532
)
Common stock dividends

 

 
(77,978
)
 

 

 
(77,978
)
Issuance of 5,583,093 shares pursuant to MetroCorp
Bancshares, Inc. acquisition

 
73,044

 

 
117,786

 

 
190,830

Warrant acquired pursuant to MetroCorp Bancshares, Inc.
acquisition

 
4,855

 

 

 

 
4,855

BALANCE, SEPTEMBER 30, 2014 (1)
$
163

 
$
1,666,069

 
$
1,534,676

 
$
(427,348
)
 
$
(2,428
)
 
$
2,771,132

BALANCE, JANUARY 1, 2015 (1)
$
164

 
$
1,677,767

 
$
1,604,141

 
$
(430,198
)
 
$
4,237

 
$
2,856,111

Net income

 

 
292,872

 

 

 
292,872

Other comprehensive loss

 

 

 

 
(2,407
)
 
(2,407
)
Stock compensation costs

 
11,702

 

 

 

 
11,702

Tax benefit from stock compensation plans, net

 
3,227

 

 

 

 
3,227

Issuance of 414,623 shares of common stock pursuant
to various stock compensation plans and agreements

 
1,769

 

 

 

 
1,769

Issuance of 17,840 shares of common stock pursuant
to Director retainer fee

 
800

 

 

 

 
800

144,738 shares of restricted stock surrendered due to
employee tax liability

 

 

 
(5,859
)
 

 
(5,859
)
Common stock dividends

 

 
(87,100
)
 

 

 
(87,100
)
BALANCE, SEPTEMBER 30, 2015
$
164

 
$
1,695,265

 
$
1,809,913

 
$
(436,057
)
 
$
1,830

 
$
3,071,115

 
(1) Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Companys investments in qualified affordable housing projects ASU 2014-01. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.


See accompanying Notes to Consolidated Financial Statements.

8



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income (1)
$
292,872

 
$
250,376

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

 
 

Depreciation and amortization (1)
52,810

 
79,110

(Accretion) of discount and amortization of premiums, net
(47,890
)
 
(155,365
)
Changes in FDIC indemnification asset and receivable/payable
18,973

 
150,839

Stock compensation costs
11,702

 
10,382

Deferred tax benefit (expense)
118,079

 
(13,399
)
Tax benefit from stock compensation plans, net
(3,227
)
 
(3,916
)
Provision for credit losses
16,217

 
30,158

Net gains on sales of loans
(19,719
)
 
(20,715
)
Net gains on sales of available-for-sale investment securities
(26,994
)
 
(6,603
)
Net gains on sales of other real estate owned and premises and equipment
(13,350
)
 
(7,863
)
Originations and purchases of loans held for sale
(623
)
 
(92,475
)
Proceeds from sales and paydowns/payoffs in loans held for sale
2,232

 
186,498

Repurchase agreements extinguishment costs
21,818

 

Net (payments to) proceeds from FDIC shared-loss agreements
(12,038
)
 
787

Net change in accrued interest receivable and other assets (1)
(28,957
)
 
(170,671
)
Net change in accrued expenses and other liabilities
39,157

 
4,811

Other net operating activities
525

 
1,293

Total adjustments (1)
128,715

 
(7,129
)
Net cash provided by operating activities
421,587

 
243,247

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisitions, net of cash paid

 
138,465

Net (increase) decrease in:
 

 
 

Loans receivable
(2,422,217
)
 
(2,520,300
)
Short-term investments
75,940

 
(78,946
)
Investments in qualified affordable housing partnerships, tax credit and other investments
(48,204
)
 
(62,009
)
Purchases of:
 

 
 

Resale agreements
(1,645,000
)
 
(925,000
)
Available-for-sale investment securities
(2,190,503
)
 
(504,820
)
Loans receivable
(17,431
)
 
(16,446
)
Proceeds from sale of:
 

 
 

Available-for-sale investment securities
1,328,487

 
395,630

Loans receivable
1,264,606

 
577,391

Other real estate owned
33,921

 
53,960

Paydowns and maturities of resale agreements
1,370,000

 
550,000

Repayments, maturities and redemptions of available-for-sale investment securities
558,669

 
353,031

Redemption of Federal Home Loan Bank stock
13,083

 
30,349

Surrender of life insurance policies
156

 
49,111

Other net investing activities
1,497

 
(13,778
)
Net cash used in investing activities
(1,676,996
)
 
(1,973,362
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Net increase in:
 

 
 

Deposits
2,765,985

 
2,080,497

Short-term borrowings
3,271

 

Proceeds from:
 

 
 

Issuance of common stock pursuant to various stock plans and agreements
1,769

 
1,249

Payment for:
 

 
 

Repayment of Federal Home Loan Bank advances

 
(10,000
)
Repayment of long-term debt
(15,000
)
 
(25,310
)
Extinguishment of repurchase agreements
(566,818
)
 
(15,000
)
Repurchase of vested shares due to employee tax liability
(5,859
)
 
(7,532
)
Cash dividends
(86,850
)
 
(77,772
)
Tax benefit from stock compensation plans, net
3,227

 
3,916

Net cash provided by financing activities
2,099,725

 
1,950,048

Effect of exchange rate changes on cash and cash equivalents
(8,498
)
 

NET INCREASE IN CASH AND CASH EQUIVALENTS
835,818

 
219,933

CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
1,039,885

 
895,820

CASH AND CASH EQUIVALENTS, END OF THE PERIOD
$
1,875,703

 
$
1,115,753


(1) Prior periods were restated to reflect the retrospective application of adopting the new accounting guidance related to the Company’s investments in qualified affordable housing projects ASU 2014-01. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for additional information.

See accompanying Notes to Consolidated Financial Statements.

9



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
81,739

 
$
85,534

Income tax payments, net of refunds
$
(20,367
)
 
$
279,954

Noncash investing and financing activities:
 

 
 

Loans transferred to loans held for sale, net
$
1,549,934

 
$
675,511

Transfers to other real estate owned
$
8,059

 
$
42,175

Loans to facilitate sales of other real estate owned
$
1,750

 
$
2,000

Issuance of stock related to acquisition
$

 
$
190,830



See accompanying Notes to Consolidated Financial Statements.


10



EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1BASIS OF PRESENTATION

The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (referred to herein as “East West Bank” or the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and balances have been eliminated in consolidation. As of September 30, 2015, East West has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”), one of which was the result of the acquisition of MetroCorp Bancshares, Inc. (“MetroCorp”) during the three months ended March 31, 2014, as discussed in Note 3Business Combination to the Consolidated Financial Statements. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Trusts are not consolidated into the Company.

The unaudited interim Consolidated Financial Statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices within the banking industry, reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim period financial statements. Certain prior year balances and notes have been reclassified to conform to current period presentation.

The Company restated prior period financial statements to reflect the impact of the retrospective application of Accounting Standards Update (“ASU”) 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for details.

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 financial statements are issued for inclusion in the accompanying financial statements. The unaudited 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, 2014, as filed with the U.S. Securities and Exchange Commission on March 2, 2015 (the “2014 Form 10-K”).


NOTE 2CURRENT ACCOUNTING DEVELOPMENTS

New Accounting Pronouncements Adopted

In January 2014, the FASB issued ASU 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the amortization expense in the income statement as a component of income tax expense. The Company adopted this guidance in the first quarter of 2015 with retrospective application to all periods presented. See Note 10Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net to the Consolidated Financial Statements for details regarding this adoption.

In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs that would require a transfer of mortgage loans collateralized by residential real estate properties to other real estate owned (“OREO”). The guidance also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in residential real estate mortgage loans that are in process of foreclosure. The Company adopted this guidance in the first quarter of 2015 with prospective application. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements as this guidance was consistent with the Company’s prior practice. See Note 9Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements for details regarding this adoption.


11



Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate.  ASU 2014-09 establishes a principles-based approach to recognizing revenue that applies to all contracts other than those covered by other authoritative GAAP guidance. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows are also required.  ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoption is not permitted. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis to improve targeted areas of the consolidation guidance and reduce the number of consolidation models. The Company may either apply the amendments retrospectively or use a modified retrospective approach. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 simplifies the presentation of debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts. The Company should apply the new guidance retrospectively to all prior periods. ASU 2015-03 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 amends ASC 350-40 and requires the Company to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the Company should account for the fees related to the software license element consistent with how the acquisition of other software licenses are accounted for under ASC 350-40. If the arrangement does not contain a software license, the Company should account for the arrangement as a service contract. The Company may either apply the new guidance prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. ASU 2015-05 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.


NOTE 3BUSINESS COMBINATION

On January 17, 2014, the Company completed the acquisition of MetroCorp, parent of MetroBank, N.A. and Metro United Bank. The purchase consideration was satisfied with two thirds East West stock and one third cash. The fair value of the consideration transferred in the acquisition of MetroCorp was $291.4 million, which consisted of 5,583,093 shares of East West common stock fair valued at $190.8 million at the date of acquisition and $89.4 million in cash, $2.4 million of additional cash to MetroCorp stock option holders and a MetroCorp warrant, fair valued at $8.8 million, assumed by the Company. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. At the acquisition date, the Company recorded total fair value of assets and liabilities acquired of $1.70 billion and $1.41 billion, respectively. Goodwill from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. The Company recorded $121.0 million of goodwill at the MetroCorp acquisition date. During the three months ended December 31, 2014, the Company recorded additional tax and bank owned life insurance adjustments of $10.3 million and $0.7 million, respectively, related to the MetroCorp acquisition, increasing goodwill to $132.0 million.

Refer to Note 2Business Combination in Item 8 of the Company’s 2014 Form 10-K for additional details related to the MetroCorp acquisition.



12



NOTE 4FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities are 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 in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
Level 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.

In determining the appropriate hierarchy levels, the Company performs an analysis of the assets and liabilities that are subject to fair value disclosure. These assets and liabilities are reported on the Consolidated Balance Sheets at their fair values as of September 30, 2015 and December 31, 2014. 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.


13



The following tables present both financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of September 30, 2015
($ in thousands)
 
Fair Value Measurements
September 30, 2015
 
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
 
$
752,605

 
$
752,605

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
701,844

 

 
701,844

 

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

 
 

 
 
 
 

Commercial mortgage-backed securities
 
273,350

 

 
273,350

 

Residential mortgage-backed securities
 
754,898

 

 
754,898

 

Municipal securities
 
206,825

 

 
206,825

 

Other residential mortgage-backed securities:
 
 

 
 

 
 
 
 

Investment grade
 
66,537

 

 
66,537

 

Other commercial mortgage-backed securities:
 
 

 
 

 
 
 
 

Investment grade
 

 

 

 

Corporate debt securities:
 
 

 
 

 
 
 
 

Investment grade
 
141,126

 

 
141,126

 

Non-investment grade
 
10,524

 

 
10,524

 

Other securities
 
44,568

 
36,224

 
8,344

 

Total available-for-sale investment securities
 
$
2,952,277

 
$
788,829

 
$
2,163,448

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and caps
 
$
86,954

 
$

 
$
86,954

 
$

Foreign exchange contracts
 
$
9,745

 
$

 
$
9,745

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(3,339
)
 
$

 
$
(3,339
)
 
$

Interest rate swaps and caps
 
$
(87,330
)
 
$

 
$
(87,330
)
 
$

Foreign exchange contracts
 
$
(12,373
)
 
$

 
$
(12,373
)
 
$

 
 
 
 
 
 
 
 
 


14



 
 
 
 
 
 
 
 
 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 31, 2014
($ in thousands)
 
Fair Value Measurements
December 31,  2014
 
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
 
$
873,435

 
$
873,435

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
311,024

 

 
311,024

 

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

 
 

 
 
 
 

Commercial mortgage-backed securities
 
141,420

 

 
141,420

 

Residential mortgage-backed securities
 
791,088

 

 
791,088

 

Municipal securities
 
250,448

 

 
250,448

 

Other residential mortgage-backed securities:
 
 

 
 

 
 
 
 

Investment grade
 
53,918

 

 
53,918

 

Other commercial mortgage-backed securities:
 
 

 
 

 
 
 
 

Investment grade
 
34,053

 

 
34,053

 

Corporate debt securities:
 
 

 
 

 
 
 
 

Investment grade
 
115,182

 

 
115,182

 

Non-investment grade
 
14,681

 

 
8,153

 
6,528

Other securities
 
41,368

 
32,357

 
9,011

 

Total available-for-sale investment securities
 
$
2,626,617

 
$
905,792

 
$
1,714,297

 
$
6,528

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Foreign exchange options
 
$
6,136

 
$

 
$
6,136

 
$

Interest rate swaps and caps
 
$
41,534

 
$

 
$
41,534

 
$

Foreign exchange contracts
 
$
8,118

 
$

 
$
8,118

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(9,922
)
 
$

 
$
(9,922
)
 
$

Interest rate swaps and caps
 
$
(41,779
)
 
$

 
$
(41,779
)
 
$

Foreign exchange contracts
 
$
(9,163
)
 
$

 
$
(9,163
)
 
$

Embedded derivative liabilities
 
$
(3,392
)
 
$

 
$

 
$
(3,392
)
 
 
 
 
 
 
 
 
 


15



At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.  The following tables present a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
 
2015
 
2014
($ in thousands)
 
Corporate Debt Securities:
Non-Investment Grade
 
Embedded Derivative
Liabilities
 
Corporate Debt Securities:
Non-Investment Grade
 
Embedded Derivative
Liabilities
Beginning balance
 
$

 
$

 
$
7,917

 
$
(3,362
)
Total gains (losses) for the period:
 
 

 
 

 
 

 
 

Included in earnings (1)
 

 

 

 
(64
)
Included in other comprehensive income (2)
 

 

 
1,009

 

Purchases, issues, sales, settlements:
 
 
 
 
 
 

 
 

Purchases
 

 

 

 

Issues
 

 

 

 

Sales
 

 

 

 

Settlements
 

 

 
(17
)
 

Transfer from investment grade to non-investment grade
 

 

 

 

Transfers in and/or out of Level 3
 

 

 

 

Ending balance
 
$

 
$

 
$
8,909

 
$
(3,426
)
Changes in unrealized losses included in earnings relating to assets and liabilities held for the period
 
$

 
$

 
$

 
$
64

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
($ in thousands)
 
Corporate Debt Securities:
Non-Investment Grade
 
Embedded Derivative
Liabilities
 
Corporate Debt Securities:
Non-Investment Grade
 
Embedded Derivative
Liabilities
Beginning balance
 
$
6,528

 
$
(3,392
)
 
$
6,371

 
$
(3,655
)
Total gains (losses) for the period:
 
 

 
 

 
 

 
 
Included in earnings (1)
 
960

 
(20
)
 

 
229

Included in other comprehensive income (2)
 
922

 

 
2,652

 

Purchases, issues, sales, settlements:
 
 
 
 
 
 

 
 

Purchases
 

 

 

 

Issues
 

 

 

 

Sales
 
(7,219
)
 

 

 

Settlements
 
(98
)
 
3,412

 
(114
)
 

Transfer from investment grade to non-investment grade
 

 

 

 

Transfers in and/or out of Level 3
 
(1,093
)
 

 

 

Ending balance
 
$

 
$

 
$
8,909

 
$
(3,426
)
Changes in unrealized gains included in earnings relating to assets and liabilities held for the period
 
$

 
$

 
$

 
$
(229
)
 
 
 
 
 
 
 
 
 
(1)
Realized gains or losses of corporate debt securities and embedded derivative liabilities are included in net gains on sales of investment securities and other operating expense, respectively, in the consolidated statements of income.
(2)
Unrealized gains or losses on available-for-sale investment securities are reported in other comprehensive income, net of tax, in the Consolidated Statements of Comprehensive Income.
 

16



Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable 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 measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the three months ended September 30, 2015 and 2014. During the nine months ended September 30, 2015, the Company transferred $1.1 million of assets measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability on certain pooled trust preferred securities. There were no transfers of assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2014.

The following table presents quantitative information about significant unobservable inputs used in the valuation of assets and liabilities measured on a recurring basis classified as Level 3 as of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range of 
Inputs
 
Weighted
 Average
December 31, 2014
 
 

 
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
Corporate debt securities:
 
 

 
 
 
 
 
 
 
 
Non-investment grade
 
$
6,528

 
Discounted cash flow
 
Constant prepayment rate
 
0.00% - 1.00%
 
0.73%
 
 
 

 
 
 
Constant default rate
 
0.75% - 1.20%
 
0.87%
 
 
 

 
 
 
Loss severity
 
85.00%
 
85.00%
 
 
 

 
 
 
Discount margin
 
4.50% - 7.50%
 
6.94%
Embedded derivative liabilities
 
$
(3,392
)
 
Discounted cash flow
 
Credit risk
 
0.12% - 0.14%
 
0.13%
 
 
 
 
 
 
 
 
 
 
 

Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans, OREO, and loans held for sale. These fair value adjustments result from impairments recognized during the period on certain non-PCI loans, application of fair value less cost to sell on OREO and application of lower of cost or market (“LOCOM”) valuation on loans held for sale.


17



The following tables present the carrying amounts of all assets that were still held as of September 30, 2015 and December 31, 2014 for which a nonrecurring fair value measurement was recorded:
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of September 30, 2015
($ 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 Real Estate (“CRE”)
 
$
16,516

 
$

 
$

 
$
16,516

Commercial and Industrial (“C&I”)
 
46,772

 

 

 
46,772

Residential
 
17,343

 

 

 
17,343

Consumer
 
1,186

 

 

 
1,186

Total non-PCI impaired loans
 
$
81,817

 
$

 
$

 
$
81,817

OREO
 
$
7,275

 
$

 
$

 
$
7,275

Loans held for sale
 
$
33,441

 
$

 
$
33,441

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2014
($ 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:
 
 

 
 

 
 

 
 

CRE
 
$
26,089

 
$

 
$

 
$
26,089

C&I
 
16,581

 

 

 
16,581

Residential
 
25,034

 

 

 
25,034

Consumer
 
107

 

 

 
107

Total non-PCI impaired loans
 
$
67,811

 
$

 
$

 
$
67,811

OREO
 
$
17,521

 
$

 
$

 
$
17,521

 
 
 
 
 
 
 
 
 

The following table presents fair value adjustments of certain assets measured on a nonrecurring basis recognized during the three and nine months ended and still held as of September 30, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands)
 
2015
 
2014
 
2015
 
2014
Non-PCI impaired loans:
 
 

 
 

 
 

 
 

CRE
 
$
101

 
$
(281
)
 
$
(845
)
 
$
1,049

C&I
 
(707
)
 
(3,916
)
 
(9,806
)
 
(9,919
)
Residential
 
(314
)
 
(538
)
 
(565
)
 
(475
)
Consumer
 
(59
)
 
(1
)
 
(59
)
 
(1
)
Total non-PCI impaired loans
 
$
(979
)
 
$
(4,736
)
 
$
(11,275
)
 
$
(9,346
)
OREO
 
$
(1,556
)
 
$
(2,135
)
 
$
(1,739
)
 
$
(2,379
)
Loans held for sale
 
$

 
$

 
$
(517
)
 
$

 
 
 
 
 
 
 
 
 


18



The following table presents quantitative information about significant unobservable inputs used in the valuation of assets measured on a nonrecurring basis classified as Level 3 as of September 30, 2015 and December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range of 
Inputs
 
Weighted 
Average
September 30, 2015
 
 

 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
25,044

 
Discounted cash flow
 
Discount rate
 
0% - 98%
 
22%
 
 
$
56,773

 
Market comparables
 
Discount rate (1)
 
0% - 100%
 
22%
OREO
 
$
7,275

 
Appraisal
 
Selling cost
 
8%
 
8%
December 31, 2014
 
 

 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
11,499

 
Discounted cash flow
 
Discount rate
 
0% - 81%
 
49%
 
 
$
56,312

 
Market comparables
 
Discount rate (1)
 
0% - 100%
 
4%
OREO
 
$
17,521

 
Appraisal
 
Selling cost
 
8%
 
8%
 
 
 
 
 
 
 
 
 
 
 
(1)
Discount rate is adjusted for factors such as liquidation cost of collateral and selling costs.

The following tables present the carrying and fair values per the fair value hierarchy of certain financial instruments, excluding those measured at fair value on a recurring basis, as of September 30, 2015 and December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
($ in thousands)
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,875,703

 
$
1,875,703

 
$

 
$

 
$
1,875,703

Short-term investments
 
$
258,028

 
$

 
$
258,028

 
$

 
$
258,028

Securities purchased under resale agreements (“resale agreements”)
 
$
1,400,000

 
$

 
$
1,398,488

 
$

 
$
1,398,488

Loans held for sale
 
$
349,375

 
$

 
$
353,095

 
$

 
$
353,095

Loans receivable, net
 
$
22,381,302

 
$

 
$

 
$
21,947,953

 
$
21,947,953

Investment in Federal Home Loan Bank (“FHLB”) stock
 
$
18,156

 
$

 
$
18,156

 
$

 
$
18,156

Investment in Federal Reserve Bank stock
 
$
54,786

 
$

 
$
54,786

 
$

 
$
54,786

Accrued interest receivable
 
$
85,388

 
$

 
$
85,388

 
$

 
$
85,388

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposit accounts:
 
 

 
 

 
 

 
 

 
 

Demand, savings and money market deposits
 
$
20,105,272

 
$

 
$
20,105,272

 
$

 
$
20,105,272

Time deposits
 
$
6,653,778

 
$

 
$
6,640,017

 
$

 
$
6,640,017

Short-term borrowings
 
$
3,146

 
$

 
$
3,146

 
$

 
$
3,146

FHLB advances
 
$
318,872

 
$

 
$
332,478

 
$

 
$
332,478

Securities sold under repurchase agreements (“repurchase agreements”)
 
$
150,000

 
$

 
$
209,930

 
$

 
$
209,930

Accrued interest payable
 
$
9,403

 
$

 
$
9,403

 
$

 
$
9,403

Long-term debt
 
$
211,024

 
$

 
$
187,630

 
$

 
$
187,630

 
 
 
 
 
 
 
 
 
 
 


19



 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
($ in thousands)
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,039,885

 
$
1,039,885

 
$

 
$

 
$
1,039,885

Short-term investments
 
$
338,714

 
$

 
$
338,714

 
$

 
$
338,714

Resale agreements
 
$
1,225,000

 
$

 
$
1,191,060

 
$

 
$
1,191,060

Loans held for sale
 
$
45,950

 
$

 
$
45,950

 
$

 
$
45,950

Loans receivable, net
 
$
21,468,270

 
$

 
$

 
$
20,997,379

 
$
20,997,379

Investment in FHLB stock
 
$
31,239

 
$

 
$
31,239

 
$

 
$
31,239

Investment in Federal Reserve Bank stock
 
$
54,451

 
$

 
$
54,451

 
$

 
$
54,451

Accrued interest receivable
 
$
88,303

 
$

 
$
88,303

 
$

 
$
88,303

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposit accounts:
 
 

 
 

 
 

 
 

 
 

Demand, savings and money market deposits
 
$
17,896,035

 
$

 
$
17,896,035

 
$

 
$
17,896,035

Time deposits
 
$
6,112,739

 
$

 
$
6,095,217

 
$

 
$
6,095,217

FHLB advances
 
$
317,241

 
$

 
$
336,302

 
$

 
$
336,302

Repurchase agreements
 
$
795,000

 
$

 
$
870,434

 
$

 
$
870,434

Accrued interest payable
 
$
11,303

 
$

 
$
11,303

 
$

 
$
11,303

Long-term debt
 
$
225,848

 
$

 
$
205,777

 
$

 
$
205,777

 
 
 
 
 
 
 
 
 
 
 

The following is a description of the valuation methodologies and significant assumptions used in estimating fair value:

Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. As such, the estimated fair value is classified as Level 1.

Short-Term Investments — The fair value of short-term investments generally approximates their book value due to their short maturities. In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Resale Agreements — The fair value of resale agreements is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates.  In addition, due to the observable nature of the inputs used in deriving the estimated fair values, these instruments are classified as Level 2.

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

Loans Held for Sale — The Company’s loans held for sale are carried at the LOCOM. These loans are comprised of single-family and student loans.  The fair value of loans held for sale is derived from current market prices and comparative current sales. As such, the Company records any fair value adjustments on a nonrecurring basis. Loans held for sale are classified as Level 2.


20



Non-PCI Impaired Loans — The Company evaluates non-PCI impaired loans on a nonrecurring basis. The fair value of non-PCI impaired loans is measured using the market comparables technique. For CRE loans and C&I loans, the fair value is based on each loan’s observable market price or the fair value of the collateral less cost to sell, if the loan is collateral dependent. The fair value of collateral is based on third party appraisals or evaluations which are reviewed by the Company’s appraisal department. Updated appraisals and evaluations are generally obtained within the last 12 months. For certain impaired loans, the Company utilizes the discounted cash flow approach and applies a discount rate derived from historical data. For impaired loans with an unpaid balance below a certain threshold, the Company applies historical loss rates to derive the fair value. The significant unobservable inputs used in the fair value measurement of non-PCI impaired loans are discount rates applied based on the liquidation cost of collateral and selling costs. On a quarterly basis, all nonperforming assets are reviewed to assess whether the current carrying value is supported by the collateral or cash flow and to ensure that the current carrying value is appropriate. Non-PCI impaired loans are classified as Level 3.

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

OREO — The Company’s OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans receivable, which are recorded at estimated fair value less the cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less the cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals, broker price opinions or accepted written offers. Refer to the “Non-PCI Impaired Loans” section above for a detailed discussion on the Company’s policies and procedures related to appraisals and evaluations. The Company uses the market comparables valuation technique to measure the fair value of OREO properties. The significant unobservable input used is the selling cost. OREO properties are classified as Level 3.

Investment in FHLB Stock and Federal Reserve Bank Stock — The carrying amounts of the Company’s investments in FHLB Stock and Federal Reserve Bank Stock approximate fair value. The valuation of these investments is classified as Level 2.  Ownership of these securities is restricted to member banks and the securities do not have a readily determinable fair value.  Purchases and sales of these securities are at par value.

Accrued Interest Receivable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Foreign Exchange Options — The Company entered into foreign exchange option contracts with major investment firms in 2010. The settlement amount is determined based upon the performance of the Chinese currency Renminbi (“RMB”) relative to the U.S. Dollar (“USD”) over the 5-year term of the contracts. The performance amount is computed based on the average quarterly value of the RMB compared to the USD as compared to the initial value. The fair value of these derivative contracts is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, currency rate and time remaining to maturity. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment to the valuation of the foreign exchange options. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of the option contracts is classified as Level 2.

Interest Rate Swaps and Caps — The Company enters into interest rate swap and cap contracts with institutional counterparties to hedge against interest rate swap and cap 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 cap 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 interest rate swap and cap contracts is based on a discounted cash flow approach. The counterparty’s credit risk is considered in the valuation of interest rate swaps and caps. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps and caps is classified as Level 2.


21



Foreign Exchange Contracts — The Company enters into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. These contracts economically hedge against foreign exchange rate fluctuations.  The Company also enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company assumes minimal foreign exchange rate risk as the contract with the customer and the institutional party mirror each other. The fair value is determined at each reporting period based on changes in the foreign exchange rate. The counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. The valuation of these contracts is classified as Level 2 due to the observable nature of the inputs used in deriving the fair value.

Customer Deposits — The fair value of deposits with no stated maturity, such as demand deposits, interest checking, savings, and money market deposits, approximates the carrying amount as the amounts are payable on demand at the measurement date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. For time deposits, the fair value is based on the discounted value of contractual cash flows using current market rates for instruments with similar maturities. Due to the observable nature of the inputs used in deriving the estimated fair values, time deposits are classified as Level 2.

Short-Term Borrowings — The fair value of short-term borrowings generally approximates their book value due to their short maturities.  Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

FHLB Advances — The fair value of FHLB advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair values, these instruments are classified as Level 2.

Repurchase Agreements — As of September 30, 2015 and December 31, 2014, all of the repurchase agreements were long-term in nature and the fair values of the repurchase agreements were calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair values, these instruments are classified as Level 2.

Accrued Interest Payable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Long-Term Debt — The fair value of long-term debt is estimated by discounting the cash flows through maturity based on current market rates the Company would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value, long-term debt is classified as Level 2.

Embedded Derivative Liabilities — Under ASC 815, a certificate of deposit that pays interest based on changes in foreign exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e., the certificate of deposit). The Company issues certain certificates of deposit that have a term of five years and pay interest based on the performance of the RMB relative to the USD. The fair value of these embedded derivatives was based on the discounted cash flow approach. The liabilities are divided between the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion, the Company applied a risk premium comparable to an agency security risk premium. For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a risk premium based on the Company’s institutional credit rating. Total credit valuation adjustments were considered nominal to the valuation of embedded derivative liabilities. Increases (decreases), if any, of those inputs in isolation would result in a lower (higher) fair value measurement.  The valuation of the embedded derivative liabilities falls within Level 3 of the fair value hierarchy since the significant inputs used in deriving the fair value of these derivative contracts are not directly observable.

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



22



NOTE 5STOCK-BASED COMPENSATION

Pursuant to the Company’s 1998 Stock Incentive Plan, as amended, the Company issues stock options, restricted stock awards and restricted stock units (“RSUs”) to employees. The Company did not issue any stock options during the three and nine months ended September 30, 2015 and 2014.

The restricted stock awards vest ratably over three years, cliff vest after three years, or vest at a rate of 50% each at the fourth and fifth year of continued employment from the date of the grant. The RSUs vest ratably over three years or cliff vest after three or five years of continued employment from the date of the grant. The restricted stock entitles the recipient to receive cash dividends equivalent to any dividends paid on the underlying common stock during the period the restricted stock is outstanding and, as such, are considered participating securities as discussed in Note 13Stockholders’ Equity and Earnings Per Share to the Consolidated Financial Statements. All restricted stock awards have vested as of September 30, 2015. While a portion of the restricted stock awards and RSUs are time-vesting awards, others vest subject to the attainment of specified performance goals. All restricted stock awards and RSUs are subject to forfeiture until vested.

The Company recognized the following stock compensation expense and related net tax benefit associated with its various employee share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
($ in thousands)
 
2015
 
2014
 
2015
 
2014
Compensation expense related to restricted stock awards
 
$
4,050

 
$
3,637

 
$
11,702

 
$
10,382

Net tax benefit recognized in equity for stock compensation plans
 
$
31

 
$
129

 
$
3,227

 
$
3,916

 
 
 
 
 
 
 
 
 

The following table presents a summary of the activity for the Company’s time-based and performance-based restricted stock awards as of September 30, 2015, including changes during the nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
September 30, 2015
 
Restricted Stock and RSU Awards
 
Time-Based
 
Performance-Based
 
Shares
 
Weighted
Average
Price
 
Shares
 
Weighted
Average
Price
Outstanding at beginning of period
751,020

 
$
30.61

 
518,553

 
$
29.64

Granted
466,125

 
40.35

 
149,284

 
39.95

Vested
(218,363
)
 
23.41

 
(144,445
)
 
22.05

Forfeited
(57,278
)
 
36.41

 

 

Outstanding at end of period
941,504

 
$
36.75

 
523,392

 
$
35.64

 
 
 
 
 
 
 
 

As of September 30, 2015, total unrecognized compensation cost related to time-based and performance-based restricted stock awards amounted to $25.6 million and $9.5 million, respectively. These costs are expected to be recognized over a weighted average period of 2.08 years and 1.88 years, respectively.


NOTE 6RESALE AND REPURCHASE AGREEMENTS

Resale Agreements

Resale agreements are recorded at the balances at which the securities were acquired. The market values of the underlying securities collateralizing the related receivable of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterparty when deemed appropriate. Gross resale agreements were $1.70 billion and $1.43 billion as of September 30, 2015 and December 31, 2014, respectively. The weighted average interest rates were 1.45% and 1.55% as of September 30, 2015 and December 31, 2014, respectively.


23



Repurchase Agreements

Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded at the balances at which the securities were sold. The collateral for these agreements are primarily comprised of U.S. government agency and U.S. government sponsored enterprise debt and mortgage-backed securities. The Company may have to provide additional collateral for the repurchase agreements, as necessary. Gross repurchase agreements were $450.0 million as of September 30, 2015 and $995.0 million as of December 31, 2014. The weighted average interest rates were 2.55% and 3.70% as of September 30, 2015 and December 31, 2014, respectively. The Company recorded $15.2 million and $21.8 million of extinguishment charges related to the extinguishment of $445.0 million and $545.0 million of repurchase agreements during the three and nine months ended September 30, 2015, respectively. In comparison, there were no extinguishment charges recorded during the three and nine months ended September 30, 2014.

Balance Sheet Offsetting

The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheets when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45. Collateral accepted include securities that are not recognized on the Consolidated Balance Sheets. Collateral pledged consist of securities that are not netted on the Consolidated Balance Sheets against the related collateralized liability. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, but is usually delivered to and held by the third party trustees. The following tables present resale and repurchase agreements included on the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
As of September 30, 2015
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of Assets Presented
on the
Consolidated Balance Sheet
 
Gross Amounts Not Offset on 
the Consolidated Balance Sheet
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
1,700,000

 
$
(300,000
)
 
$
1,400,000

 
$

 
$
(1,396,476
)
(1) 
$
3,524

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts
of Recognized
Liabilities
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of Liabilities Presented
on the
Consolidated Balance Sheet
 
Gross Amounts Not Offset on
the Consolidated Balance Sheet
 
 
Liabilities
 
 
 
 
Financial
Instruments
 
Collateral
Posted
 
Net Amount
Repurchase agreements
 
$
450,000

 
$
(300,000
)
 
$
150,000

 
$

 
$
(150,000
)
(2) 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
As of December 31, 2014
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of Assets Presented
on the
Consolidated Balance Sheet
 
Gross Amounts Not Offset on 
the Consolidated Balance Sheet
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
1,425,000

 
$
(200,000
)
 
$
1,225,000

 
$
(425,000
)
(3) 
$
(797,172
)
(1) 
$
2,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts
of Recognized
Liabilities
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of Liabilities Presented
on the
Consolidated Balance Sheet
 
Gross Amounts Not Offset on
the Consolidated Balance Sheet
 
 
Liabilities
 
 
 
 
Financial
Instruments
 
Collateral 
Posted
 
Net Amount
Repurchase agreements
 
$
995,000

 
$
(200,000
)
 
$
795,000

 
$
(425,000
)
(3) 
$
(370,000
)
(2) 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty.
(2)
Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability owed to each counterparty.
(3)
Includes financial instruments subject to enforceable master netting arrangements that are not permitted to be offset under ASC 210-20-45 but would be eligible for offsetting to the extent an event of default has occurred.



24



NOTE 7AVAILABLE-FOR-SALE INVESTMENT SECURITIES

The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and fair value by major categories of available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2015
 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
750,032

 
$
2,581

 
$
(8
)
 
$
752,605

U.S. government agency and U.S. government sponsored enterprise debt securities
 
701,919

 
1,544

 
(1,619
)
 
701,844

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
271,171

 
2,584

 
(405
)
 
273,350

Residential mortgage-backed securities
 
746,632

 
10,081

 
(1,815
)
 
754,898

Municipal securities
 
203,832

 
4,604

 
(1,611
)
 
206,825

Other residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
65,706

 
947

 
(116
)
 
66,537

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
142,216

 
22

 
(1,112
)
 
141,126

Non-investment grade (1)
 
11,525

 

 
(1,001
)
 
10,524

Other securities
 
44,280

 
693

 
(405
)
 
44,568

Total available-for-sale investment securities
 
$
2,937,313

 
$
23,056

 
$
(8,092
)
 
$
2,952,277

December 31, 2014
 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
873,101

 
$
1,971

 
$
(1,637
)
 
$
873,435

U.S. government agency and U.S. government sponsored enterprise debt securities
 
311,927

 
490

 
(1,393
)
 
311,024

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
140,957

 
1,056

 
(593
)
 
141,420

Residential mortgage-backed securities
 
785,412

 
9,754

 
(4,078
)
 
791,088

Municipal securities
 
245,408

 
6,202

 
(1,162
)
 
250,448

Other residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
52,694

 
1,359

 
(135
)
 
53,918

Other commercial mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
34,000

 
53

 

 
34,053

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
116,236

 

 
(1,054
)
 
115,182

Non-investment grade (1)
 
17,881

 

 
(3,200
)
 
14,681

Other securities
 
41,691

 
393

 
(716
)
 
41,368

Total available-for-sale investment securities
 
$
2,619,307

 
$
21,278

 
$
(13,968
)
 
$
2,626,617

 
 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities rated BBB- or higher by S&P or Baa3 or higher by Moody’s are considered investment grade. Conversely, available-for-sale investment securities rated lower than BBB- by S&P or lower than Baa3 by Moody’s are considered non-investment grade.


25



Realized Gains and Losses

The following table presents the proceeds, gross realized gains, and gross realized losses related to the sales of available-for-sale investment securities for the three and nine months ended September 30, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
($ in thousands)
 
2015
 
2014
 
2015
 
2014
 
Proceeds from sales
 
$
855,425

 
$
43,788

 
$
1,328,487

 
$
395,630

 
Gross realized gains
 
$
17,036

 
$
2,514

 
$
26,994

 
$
6,730

 
Gross realized losses
 
$

 
$

 
$

 
$
127

(1) 
Related tax expense
 
$
7,155

 
$
1,056

 
$
11,337

 
$
2,773

 
 
 
 
 
 
 
 
 
 
 
(1)
The gross $127 thousand of losses resulted from the available-for-sale investment securities acquired from MetroCorp which were sold immediately after the acquisition closed.

Declines in the fair value of securities below their cost that are deemed to be an other-than-temporary impairment (“OTTI”) are recognized in earnings to the extent the impairment is related to credit losses. The following table presents a rollforward of the amounts related to the OTTI credit losses recognized in earnings for the three and nine months ended September 30, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
($ in thousands)
 
2015
 
2014
 
2015
 
2014
 
Beginning balance
 
$
106,688

 
$
115,511

 
$
112,338

 
$
115,511

 
Addition of OTTI previously not recognized
 

 

 

 

 
Additional increases to the amount related to the credit loss
for which an OTTI was previously recognized
 

 

 

 

 
Reduction for securities sold
 
(74,765
)
 

 
(80,415
)
 

 
Ending balance
 
$
31,923

 
$
115,511

 
$
31,923

 
$
115,511