EAST WEST BANCORP INC - Quarter Report: 2015 March (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 March 31, 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: 143,846,255 shares of common stock as of April 30, 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,” “remain,” 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 include, but are not limited to:
• | changes in our borrowers’ performance on loans; |
• | changes in the commercial and consumer real estate markets; |
• | changes in our costs of operation, compliance and expansion; |
• | changes in the U.S. economy, including inflation; |
• | changes in government interest rate policies; |
• | changes in laws or the regulatory environment including regulatory reform initiatives; |
• | changes in the economy of and monetary policy in the People’s Republic of China; |
• | changes in critical accounting policies and judgments; |
• | changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; |
• | changes in the equity and debt securities markets; |
• | changes in competitive pressures on financial institutions; |
• | future credit quality and performance, including our expectations regarding future loan losses and allowance levels; |
• | effect of government budget cuts and government shut down; |
• | fluctuations of our stock price; |
• | success and timing of our business strategies; |
• | impact of reputational risk created by these developments on matters such as business generation and retention, funding and liquidity; |
• | impact of potential federal tax increases and spending cuts; |
• | impact of adverse judgments or settlements in litigation against the Company; |
• | changes in our ability to receive dividends from our subsidiaries; |
• | impact of political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions; and |
• | our capital requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms. |
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 Securities and Exchange Commission on March 2, 2015 (the “2014 Annual Report”), 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.
3
PART I — FINANCIAL INFORMATION
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
March 31, 2015 | December 31, 2014 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 1,886,199 | $ | 1,039,885 | |||
Short-term investments | 325,350 | 338,714 | |||||
Securities purchased under resale agreements | 1,550,000 | 1,225,000 | |||||
Available-for-sale investment securities, at fair value | 2,841,085 | 2,626,365 | |||||
Loans held for sale | 196,111 | 45,950 | |||||
Loans (net of allowance for loan losses of $257,738 in 2015 and $261,679 in 2014) | 21,116,931 | 21,468,270 | |||||
Other real estate owned, net | 32,692 | 32,111 | |||||
Investment in Federal Home Loan Bank stock, at cost | 28,603 | 31,239 | |||||
Investment in Federal Reserve Bank stock, at cost | 54,556 | 54,451 | |||||
Investment in qualified affordable housing partnerships, net (1) | 182,719 | 178,962 | |||||
Premises and equipment (net of accumulated depreciation of $88,826 in 2015 and $85,409 in 2014) | 176,438 | 180,900 | |||||
Goodwill | 469,433 | 469,433 | |||||
Other assets (1) | 1,046,718 | 1,052,312 | |||||
TOTAL (1) | $ | 29,906,835 | $ | 28,743,592 | |||
LIABILITIES | |||||||
Customer deposits: | |||||||
Noninterest-bearing | $ | 8,120,644 | $ | 7,381,030 | |||
Interest-bearing | 17,042,189 | 16,627,744 | |||||
Total deposits | 25,162,833 | 24,008,774 | |||||
Federal Home Loan Bank advances | 317,777 | 317,241 | |||||
Securities sold under repurchase agreements | 695,000 | 795,000 | |||||
Long-term debt | 220,905 | 225,848 | |||||
Accrued expenses and other liabilities | 571,557 | 540,618 | |||||
Total liabilities | 26,968,072 | 25,887,481 | |||||
COMMITMENTS AND CONTINGENCIES (Note 12) | |||||||
STOCKHOLDERS’ EQUITY | |||||||
Common stock, $0.001 par value, 200,000,000 shares authorized; 164,151,409 and 163,772,218 shares issued in 2015 and 2014, respectively; 143,820,549 and 143,582,229 shares outstanding in 2015 and 2014, respectively. | 164 | 164 | |||||
Additional paid in capital | 1,685,699 | 1,677,767 | |||||
Retained earnings (1) | 1,675,234 | 1,604,141 | |||||
Treasury stock at cost—20,330,860 shares in 2015 and 20,189,989 shares in 2014. | (435,889 | ) | (430,198 | ) | |||
Accumulated other comprehensive income, net of tax | 13,555 | 4,237 | |||||
Total stockholders’ equity (1) | 2,938,763 | 2,856,111 | |||||
TOTAL (1) | $ | 29,906,835 | $ | 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 Standard Update ("ASU") 2014-01. See Note 10 of the Notes to Consolidated Financial Statements for additional information.
See accompanying notes to consolidated financial statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data, shares in thousands)
(Unaudited)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
INTEREST AND DIVIDEND INCOME | |||||||
Loans receivable, including fees | $ | 241,566 | $ | 261,571 | |||
Available-for-sale investment securities | 10,184 | 12,276 | |||||
Securities purchased under resale agreements | 4,849 | 4,853 | |||||
Investment in Federal Home Loan Bank and Federal Reserve Bank stock | 1,236 | 1,871 | |||||
Due from banks and short-term investments | 5,426 | 5,602 | |||||
Total interest and dividend income | 263,261 | 286,173 | |||||
INTEREST EXPENSE | |||||||
Customer deposits | 16,963 | 15,882 | |||||
Federal Home Loan Bank advances | 1,033 | 1,045 | |||||
Securities sold under repurchase agreements | 8,406 | 10,078 | |||||
Long-term debt | 1,142 | 1,202 | |||||
Total interest expense | 27,544 | 28,207 | |||||
Net interest income before provision for loan losses | 235,717 | 257,966 | |||||
Provision for loan losses | 4,987 | 6,933 | |||||
Net interest income after provision for loan losses | 230,730 | 251,033 | |||||
NONINTEREST INCOME (LOSS) | |||||||
Branch fees | 9,384 | 9,446 | |||||
Letters of credit fees and foreign exchange income | 8,706 | 6,856 | |||||
Ancillary loan fees | 2,656 | 2,472 | |||||
Wealth management fees | 5,179 | 3,028 | |||||
Derivative commission fee income | 5,306 | 2,760 | |||||
Changes in FDIC indemnification asset and receivable/payable | (8,422 | ) | (53,634 | ) | |||
Net gains on sales of loans | 9,551 | 6,196 | |||||
Net gains on sales of available-for-sale investment securities | 4,404 | 3,418 | |||||
Other operating income | 7,362 | 4,542 | |||||
Total noninterest income (loss) | 44,126 | (14,916 | ) | ||||
NONINTEREST EXPENSE | |||||||
Compensation and employee benefits | 64,253 | 59,277 | |||||
Occupancy and equipment expense | 15,443 | 15,851 | |||||
Amortization of tax credit and other investments (1) | 6,299 | 1,492 | |||||
Amortization of premiums on deposits acquired | 2,391 | 2,500 | |||||
Deposit insurance premiums and regulatory assessments | 5,656 | 5,702 | |||||
Loan related expenses | 2,340 | 2,575 | |||||
Other real estate owned (income) expense | (1,026 | ) | 1,334 | ||||
Legal expense | 6,870 | 3,799 | |||||
Data processing | 2,617 | 8,200 | |||||
Other operating expenses | 23,187 | 19,224 | |||||
Total noninterest expense (1) | 128,030 | 119,954 | |||||
INCOME BEFORE INCOME TAXES (1) | 146,826 | 116,163 | |||||
INCOME TAX EXPENSE (1) | 46,799 | 41,992 | |||||
NET INCOME (1) | $ | 100,027 | $ | 74,171 | |||
EARNINGS PER SHARE (1) | |||||||
BASIC (1) | $ | 0.70 | $ | 0.52 | |||
DILUTED (1) | $ | 0.69 | $ | 0.52 | |||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | |||||||
BASIC | 143,655 | 141,962 | |||||
DILUTED | 144,349 | 142,632 | |||||
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.20 | $ | 0.18 |
(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 10 of the Notes to Consolidated Financial Statements for additional information.
See accompanying notes to consolidated financial statements.
5
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Net income (1) | $ | 100,027 | $ | 74,171 | |||
Other comprehensive income, net of tax: | |||||||
Net change in unrealized gains on available-for-sale investment securities | 9,325 | 13,439 | |||||
Net change in unrealized losses on other investments | (7 | ) | (17 | ) | |||
Other comprehensive income | 9,318 | 13,422 | |||||
COMPREHENSIVE INCOME (1) | $ | 109,345 | $ | 87,593 |
(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 10 of the Notes to Consolidated Financial Statements for additional information.
See accompanying notes to consolidated financial statements.
6
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 | ||||||||||||||||||
BALANCE, JANUARY 1, 2014 (1) | $ | 163 | $ | 1,571,670 | $ | 1,362,278 | $ | (537,279 | ) | $ | (30,459 | ) | $ | 2,366,373 | |||||||||
Net income (1) | — | — | 74,171 | — | — | 74,171 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 13,422 | 13,422 | |||||||||||||||||
Stock compensation costs | — | 3,180 | — | — | — | 3,180 | |||||||||||||||||
Tax benefit from stock compensation plans, net | — | 3,708 | — | — | — | 3,708 | |||||||||||||||||
Issuance of 356,187 shares of common stock pursuant to various stock compensation plans and agreements | — | 283 | — | — | — | 283 | |||||||||||||||||
Cancellation of 7,233 shares of common stock due to forfeitures of issued restricted stock | — | 127 | — | (127 | ) | — | — | ||||||||||||||||
195,291 shares of restricted stock surrendered due to employee tax liability | — | — | — | (7,074 | ) | — | (7,074 | ) | |||||||||||||||
Common stock dividends | — | — | (25,950 | ) | — | — | (25,950 | ) | |||||||||||||||
Issuance of 5,583,093 shares pursuant to MetroCorp acquisition | — | 73,044 | — | 117,786 | — | 190,830 | |||||||||||||||||
Warrant acquired pursuant to MetroCorp acquisition | — | 4,855 | — | — | — | 4,855 | |||||||||||||||||
BALANCE, MARCH 31, 2014 (1) | $ | 163 | $ | 1,656,867 | $ | 1,410,499 | $ | (426,694 | ) | $ | (17,037 | ) | $ | 2,623,798 | |||||||||
BALANCE, JANUARY 1, 2015 (1) | $ | 164 | $ | 1,677,767 | $ | 1,604,141 | $ | (430,198 | ) | $ | 4,237 | $ | 2,856,111 | ||||||||||
Net income | — | — | 100,027 | — | — | 100,027 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 9,318 | 9,318 | |||||||||||||||||
Stock compensation costs | — | 3,954 | — | — | — | 3,954 | |||||||||||||||||
Tax benefit from stock compensation plans, net | — | 3,145 | — | — | — | 3,145 | |||||||||||||||||
Issuance of 379,191 shares of common stock pursuant to various stock compensation plans and agreements | — | 833 | — | — | — | 833 | |||||||||||||||||
140,871 shares of restricted stock surrendered due to employee tax liability | — | — | — | (5,691 | ) | — | (5,691 | ) | |||||||||||||||
Common stock dividends | — | — | (28,934 | ) | — | — | (28,934 | ) | |||||||||||||||
BALANCE, MARCH 31, 2015 | $ | 164 | $ | 1,685,699 | $ | 1,675,234 | $ | (435,889 | ) | $ | 13,555 | $ | 2,938,763 |
(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 10 of the Notes to Consolidated Financial Statements for additional information.
See accompanying notes to consolidated financial statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income (1) | $ | 100,027 | $ | 74,171 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization (1) | 17,422 | 17,420 | |||||
(Accretion) of discount and amortization of premiums, net | (18,600 | ) | (56,020 | ) | |||
Changes in FDIC indemnification asset and receivable/payable | 8,422 | 53,634 | |||||
Stock compensation costs | 3,954 | 3,180 | |||||
Tax benefit from stock compensation plans, net | (3,145 | ) | (3,708 | ) | |||
Provision for loan losses | 4,987 | 6,933 | |||||
Net gain on sales of available-for-sale investment securities, loans and other assets | (17,788 | ) | (10,458 | ) | |||
Originations and purchases of loans held for sale | — | (60,492 | ) | ||||
Proceeds from sales and paydowns/payoffs in loans held for sale | 457 | 40,781 | |||||
Net (payments to) proceeds from FDIC shared-loss agreements | (1,810 | ) | 4,139 | ||||
Net change in accrued interest receivable and other assets (1) | 5,980 | 41,713 | |||||
Net change in accrued expenses and other liabilities | 26,413 | (63,610 | ) | ||||
Other net operating activities | (781 | ) | 203 | ||||
Total adjustments (1) | 25,511 | (26,285 | ) | ||||
Net cash provided by operating activities | 125,538 | 47,886 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Acquisitions, net of cash paid | — | 138,465 | |||||
Net (increase) decrease in: | |||||||
Loans | (454,194 | ) | (734,560 | ) | |||
Short-term investments | 13,364 | (65,793 | ) | ||||
Securities purchased under resale agreements | (425,000 | ) | 100,000 | ||||
Purchases of: | |||||||
Available-for-sale investment securities | (517,477 | ) | (138,149 | ) | |||
Loans receivable | (1,609 | ) | (974 | ) | |||
Premises and equipment | (1,741 | ) | — | ||||
Investments in qualified affordable housing partnerships, tax credit and other investments | (20,861 | ) | (27,510 | ) | |||
Proceeds from sale of: | |||||||
Available-for-sale investment securities | 180,501 | 330,231 | |||||
Loans receivable | 679,775 | 134,150 | |||||
Other real estate owned | 4,513 | 4,986 | |||||
Premises and equipment | 4,345 | — | |||||
Repayments, maturities and redemptions of available-for-sale investment securities | 138,422 | 151,358 | |||||
Redemption of Federal Home Loan Bank stock | 2,636 | 12,930 | |||||
Surrender of life insurance policies | 156 | 14,769 | |||||
Other net investing activities | (105 | ) | (5,512 | ) | |||
Net cash used in investing activities | (397,275 | ) | (85,609 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Net increase (decrease) in: | |||||||
Deposits | 1,154,059 | 1,096,290 | |||||
Securities sold under repurchase agreements | — | (15,000 | ) | ||||
Proceeds from: | |||||||
Issuance of common stock pursuant to various stock plans and agreements | 833 | 283 | |||||
Payment for: | |||||||
Repayment of Federal Home Loan Bank advances | — | (10,000 | ) | ||||
Repayment of long-term debt | (5,000 | ) | (15,310 | ) | |||
Repurchase of vested shares due to employee tax liability | (5,691 | ) | (7,074 | ) | |||
Cash dividends | (29,295 | ) | (26,139 | ) | |||
Tax benefit from stock compensation plans, net | 3,145 | 3,708 | |||||
Net cash provided by financing activities | 1,118,051 | 1,026,758 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 846,314 | 989,035 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | 1,039,885 | 895,820 | |||||
CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 1,886,199 | $ | 1,884,855 | |||
SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 26,707 | $ | 27,803 | |||
Income tax payments, net of refunds | $ | 18,458 | $ | 70,723 | |||
Noncash investing and financing activities: | |||||||
Loans transferred to loans held for sale, net | $ | 820,473 | $ | 478,982 | |||
Transfers to other real estate owned | $ | 3,828 | $ | 15,628 | |||
Issuance of stock related to acquisition | $ | — | $ | 190,830 |
(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 10 of the Notes to Consolidated Financial Statements for additional information.
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 |
The 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 (the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and balances have been eliminated in the consolidations. As of March 31, 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 first quarter of 2014, as discussed in Note 3 to the Company’s 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 interim consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry, are unaudited and reflect all adjustments that, in the opinion of management, are necessary for a fair statement of financial statements for the interim periods. 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 10 to the Company’s 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 included in the Company’s 2014 Annual Report.
NOTE 2 — | CURRENT 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 10 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 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 our prior practice. See Note 9 for details regarding this adoption.
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, 2016 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.
9
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 effect 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 would 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 effect on its consolidated financial statements.
NOTE 3 — | BUSINESS COMBINATION |
There were no business combinations during the quarter ended March 31, 2015.
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 fourth quarter of 2014, the Company recorded additional tax and BOLI adjustments of $10.3 million and $0.7 million, respectively related to the MetroCorp acquisition, resulting in an increase to goodwill to $132.0 million.
Refer to Note 2 — Business Combinations in Item 8 of the Company’s 2014 Form 10-K for additional details related to the MetroCorp acquisition.
NOTE 4 — | FAIR 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 inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
• | Level 1 — 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. |
10
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 March 31, 2015 and December 31, 2014. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
The following tables present both financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:
Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of March 31, 2015 | ||||||||||||||||
($ in thousands) | Fair Value Measurements March 31, 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 | $ | 1,172,226 | $ | 1,172,226 | $ | — | $ | — | ||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 411,966 | — | 411,966 | — | ||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | 95,235 | — | 95,235 | — | ||||||||||||
Residential mortgage-backed securities | 727,356 | — | 727,356 | — | ||||||||||||
Municipal securities | 191,246 | — | 191,246 | — | ||||||||||||
Other residential mortgage-backed securities: | ||||||||||||||||
Investment grade | 51,501 | — | 51,501 | — | ||||||||||||
Corporate debt securities: | ||||||||||||||||
Investment grade | 140,401 | — | 140,401 | — | ||||||||||||
Non-investment grade | 9,501 | — | 9,501 | — | ||||||||||||
Other securities | 41,653 | 32,477 | 9,176 | — | ||||||||||||
Total available-for-sale investment securities | $ | 2,841,085 | $ | 1,204,703 | $ | 1,636,382 | $ | — | ||||||||
Derivative assets: | ||||||||||||||||
Foreign exchange options | $ | 3,683 | $ | — | $ | 3,683 | $ | — | ||||||||
Interest rate swaps and caps | $ | 66,060 | $ | — | $ | 66,060 | $ | — | ||||||||
Foreign exchange contracts | $ | 13,340 | $ | — | $ | 13,340 | $ | — | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate swaps on certificates of deposits | $ | (6,370 | ) | $ | — | $ | (6,370 | ) | $ | — | ||||||
Interest rate swaps and caps | $ | (66,914 | ) | $ | — | $ | (66,914 | ) | $ | — | ||||||
Foreign exchange contracts | $ | (13,080 | ) | $ | — | $ | (13,080 | ) | $ | — | ||||||
Embedded derivative liabilities | $ | (3,412 | ) | $ | — | $ | — | $ | (3,412 | ) | ||||||
11
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 | 41,116 | 32,105 | 9,011 | — | ||||||||||||
Total available-for-sale investment securities | $ | 2,626,365 | $ | 905,540 | $ | 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 | $ | 8,123 | $ | — | $ | 8,123 | $ | — | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate swaps on certificates of deposits | $ | (9,922 | ) | $ | — | $ | (9,922 | ) | $ | — | ||||||
Interest rate swaps and caps | $ | (41,779 | ) | $ | — | $ | (41,779 | ) | $ | — | ||||||
Foreign exchange contracts | $ | (9,171 | ) | $ | — | $ | (9,171 | ) | $ | — | ||||||
Embedded derivative liabilities | $ | (3,392 | ) | $ | — | $ | — | $ | (3,392 | ) | ||||||
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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, respectively, 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. During the three months ended March 31, 2015, the Company transferred $1.1 million of assets measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability on certain pooled trust preferred securities. There were no transfers of assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the three months ended March 31, 2014.
At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The following tables present a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014:
2015 | 2014 | |||||||||||||||
($ in thousands) | Corporate Debt Securities: Non-Investment Grade | Embedded Derivatives Liabilities | Corporate Debt Securities: Non-Investment Grade | Embedded Derivatives Liabilities | ||||||||||||
Beginning balance, January 1 | $ | 6,528 | $ | (3,392 | ) | $ | 6,371 | $ | (3,655 | ) | ||||||
Total gains or (losses) for the period: | ||||||||||||||||
Included in earnings (1) | 960 | (20 | ) | — | 257 | |||||||||||
Included in other comprehensive income (unrealized)(2) | 922 | — | 434 | — | ||||||||||||
Purchases, issues, sales, settlements: | ||||||||||||||||
Purchases | — | — | — | — | ||||||||||||
Issues | — | — | — | — | ||||||||||||
Sales | (7,219 | ) | — | — | — | |||||||||||
Settlements | (98 | ) | — | (88 | ) | — | ||||||||||
Transfer from investment grade to non-investment grade | — | — | — | — | ||||||||||||
Transfers in and/or out of Level 3 | (1,093 | ) | — | — | — | |||||||||||
Ending balance, March 31 | $ | — | $ | (3,412 | ) | $ | 6,717 | $ | (3,398 | ) | ||||||
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of March 31 | $ | — | $ | 20 | $ | — | $ | (257 | ) | |||||||
(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. |
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 March 31, 2015 and December 31, 2014:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique(s) | Unobservable Input(s) | Range of Inputs | Weighted Average | |||||||
March 31, 2015 | ||||||||||||
Embedded derivative liabilities | $ | (3,412 | ) | Discounted cash flow | Credit risk | 0.03% - 0.07% | 0.06% | |||||
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% | |||||
13
Assets measured at fair value on a nonrecurring basis using significant unobservable inputs include certain non-purchased credit impaired loans (“Non-PCI loans”) and OREO. The inputs and assumptions for nonrecurring Level 3 fair value measurements include adjustments to external and internal appraisals for changes in the market, assumptions by appraiser embedded into appraisals, probability weighting of broker price opinions, and management’s adjustments for other relevant factors and market trends. See Note 9 for a detailed discussion of non-PCI loans.
The following tables present assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014:
Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 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”) | $ | 13,648 | $ | — | $ | — | $ | 13,648 | ||||||||
Commercial and Industrial (“C&I”) | 11,356 | — | — | 11,356 | ||||||||||||
Residential | 14,306 | — | — | 14,306 | ||||||||||||
Consumer | 107 | — | — | 107 | ||||||||||||
Total non-PCI impaired loans | $ | 39,417 | $ | — | $ | — | $ | 39,417 | ||||||||
OREO | $ | 1,676 | $ | — | $ | — | $ | 1,676 | ||||||||
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 months ended and still held as of March 31, 2015 and 2014:
Three Months Ended March 31, | ||||||||
($ in thousands) | 2015 | 2014 | ||||||
Non-PCI impaired loans: | ||||||||
CRE | $ | 841 | $ | (464 | ) | |||
C&I | (2,470 | ) | (6,530 | ) | ||||
Residential | (239 | ) | (365 | ) | ||||
Consumer | — | — | ||||||
Total non-PCI impaired loans | $ | (1,868 | ) | $ | (7,359 | ) | ||
OREO | $ | (277 | ) | $ | (526 | ) | ||
14
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 March 31, 2015 and December 31, 2014:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique(s) | Unobservable Input(s) | Range of Inputs | Weighted Average | |||||||
March 31, 2015 | ||||||||||||
Non-PCI impaired loans | $ | 3,578 | Discounted cash flow | Discount rate | 0% - 86% | 58% | ||||||
$ | 35,839 | Market comparables | Discount rate (1) | 0% - 100% | 7% | |||||||
OREO | $ | 1,676 | 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 March 31, 2015 and December 31, 2014:
March 31, 2015 | ||||||||||||||||||||
($ in thousands) | Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | |||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,886,199 | $ | 1,886,199 | $ | — | $ | — | $ | 1,886,199 | ||||||||||
Short-term investments | $ | 325,350 | $ | — | $ | 325,350 | $ | — | $ | 325,350 | ||||||||||
Securities purchased under resale agreements | $ | 1,550,000 | $ | — | $ | 1,597,101 | $ | — | $ | 1,597,101 | ||||||||||
Loans held for sale | $ | 196,111 | $ | — | $ | 196,111 | $ | — | $ | 196,111 | ||||||||||
Loans receivable, net | $ | 21,116,931 | $ | — | $ | — | $ | 20,905,743 | $ | 20,905,743 | ||||||||||
Investment in Federal Home Loan Bank stock | $ | 28,603 | $ | — | $ | 28,603 | $ | — | $ | 28,603 | ||||||||||
Investment in Federal Reserve Bank stock | $ | 54,556 | $ | — | $ | 54,556 | $ | — | $ | 54,556 | ||||||||||
Accrued interest receivable | $ | 86,186 | $ | — | $ | 86,186 | $ | — | $ | 86,186 | ||||||||||
Financial Liabilities: | ||||||||||||||||||||
Customer deposit accounts: | ||||||||||||||||||||
Demand, savings and money market deposits | $ | 18,786,462 | $ | — | $ | 18,786,462 | $ | — | $ | 18,786,462 | ||||||||||
Time deposits | $ | 6,376,371 | $ | — | $ | — | $ | 6,358,260 | $ | 6,358,260 | ||||||||||
Federal Home Loan Bank advances | $ | 317,777 | $ | — | $ | 334,286 | $ | — | $ | 334,286 | ||||||||||
Securities sold under repurchase agreements | $ | 695,000 | $ | — | $ | 751,270 | $ | — | $ | 751,270 | ||||||||||
Accrued interest payable | $ | 12,141 | $ | — | $ | 12,141 | $ | — | $ | 12,141 | ||||||||||
Long-term debt | $ | 220,905 | $ | — | $ | 207,906 | $ | — | $ | 207,906 | ||||||||||
15
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 | ||||||||||
Securities purchased under 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 Federal Home Loan Bank 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 | ||||||||||
Federal Home Loan Bank advances | $ | 317,241 | $ | — | $ | 336,302 | $ | — | $ | 336,302 | ||||||||||
Securities sold under 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 of financial instruments.
Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the short-term nature of these instruments, 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. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Securities purchased under resale agreements (“Resale Agreements”) — Resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of securities purchased under resale agreements with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. Due to the observable nature of the inputs used in deriving the estimated fair 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 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 lower of cost or fair value. 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.
16
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 obtained on a regular basis or at least annually. On a quarterly basis, all appraisals and evaluations of nonperforming assets are reviewed to assess the current carrying value and to ensure that the current carrying value is appropriate. 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 liquidation cost of collateral and selling costs. 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 Federal Home Loan Bank (“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 as of March 31, 2015 and December 31, 2014. 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 as of March 31, 2015 and December 31, 2014. 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.
17
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 contract with the institutional party mirror each other. The fair value is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts as of March 31, 2015 and December 31, 2014. 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 carrying amount approximates fair value for demand and interest checking deposits, savings deposits, and certain money market deposits as the amounts are payable on demand as of the balance sheet 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 the rates offered by the Company. Due to the unobservable nature of the inputs used in deriving the estimated fair values, time deposits are classified as Level 3.
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.
Securities under repurchase agreements (“Repurchase Agreements”) — For repurchase agreements with original maturities of 90 days or less, the carrying amount approximates fair value due to the short-term nature of these instruments. As of March 31, 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 — During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against foreign exchange fluctuations in certain certificates of deposits available to its customers. These certificates of deposits have a term of 5 years and pay interest based on the performance of the RMB relative to the USD. 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 fair value of these embedded derivatives is 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 on derivative liabilities were nominal as of March 31, 2015 and December 31, 2014. 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.
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NOTE 5 — | STOCK-BASED COMPENSATION |
The Company issues stock options and restricted stock awards to employees under share-based compensation plans. During the three months ended March 31, 2015 and 2014, total compensation expense related to restricted stock awards reduced income before taxes by $4.0 million and $3.2 million, respectively. The net tax benefit recognized in equity for stock compensation plans was $3.1 million and $3.7 million for the three months ended March 31, 2015 and 2014, respectively.
As of March 31, 2015, there were 3,050,063 shares available to be issued, subject to the Company’s current 1998 Stock Incentive Plan, as amended.
Stock Options — The Company issues fixed stock options to certain employees, officers, and directors. Stock options are issued at the current market price on the date of grant with a four-year vesting period and contractual term of seven years. The Company issues new shares upon the exercise of stock options. The Company did not issue any stock options during the three months ended March 31, 2015 and 2014.
The following table presents the activity for the Company’s stock options as of and for the three months ended March 31, 2015:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (In thousands) | ||||||||||
Outstanding at beginning of period | 42,116 | $ | 20.75 | — | $ | — | |||||||
Granted | — | — | — | — | |||||||||
Exercised | (39,751 | ) | 21.09 | — | — | ||||||||
Expired | — | — | — | — | |||||||||
Outstanding at end of period | 2,365 | $ | 14.95 | 0.77 years | $ | 60 | |||||||
Vested or expected to vest at end of period | 2,365 | $ | 14.95 | 0.77 years | $ | 60 | |||||||
Exercisable at end of period | 2,365 | $ | 14.95 | 0.77 years | $ | 60 | |||||||
The Company received $838 thousand and $283 thousand during the three months ended March 31, 2015 and 2014, respectively, in cash proceeds from stock option exercises. The intrinsic value of the options exercised was $693 thousand and $194 thousand for the three months ended March 31, 2015 and 2014, respectively. The net tax benefit recognized from stock option exercises was $291 thousand for the three months ended March 31, 2015 compared to $82 thousand for the three months ended March 31, 2014.
As of March 31, 2015, all stock options are fully vested and all compensation cost related to stock options has been recognized.
Restricted Stock Awards — In addition to stock options, the Company also grants restricted stock awards to directors, officers and employees. The restricted stock awards vest ratably in three years or cliff vest in three or five years of continued employment from the date of grant. Additionally, some of the restricted stock awards include a Company financial performance requirement for vesting. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock when the restrictions are released and the shares are issued. Restricted stock awards are forfeited if officers and employees terminate employment prior to the lapsing of restrictions or if established financial goals are not achieved. The Company records forfeitures of issued restricted stock as treasury share repurchases.
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The following table presents a summary of the activity for the Company’s time-based and performance-based restricted stock awards as of March 31, 2015, including changes during the three months ended March 31, 2015:
March 31, 2015 | |||||||||||||
Restricted Stock 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 | 411,802 | 38.85 | 149,284 | 39.95 | |||||||||
Vested | (207,495 | ) | 23.27 | (144,445 | ) | 22.05 | |||||||
Forfeited | (13,119 | ) | 34.05 | — | — | ||||||||
Outstanding at end of period | 942,208 | $ | 35.78 | 523,392 | $ | 35.64 | |||||||
There were no restricted stock grants to outside directors during the three months ended March 31, 2015 and 2014.
Restricted stock awards are valued at the closing price of the Company’s stock on the date of award. The weighted average fair values of time-based restricted stock awards granted during the three months ended March 31, 2015 and 2014 were $38.85 and $36.83, respectively. The weighted average fair value of performance-based restricted stock awards granted during the three months ended March 31, 2015 and 2014 were $39.95 and $36.85, respectively. The total fair value of time-based restricted stock awards vested during the three months ended March 31, 2015 and 2014 was $8.4 million and $14.6 million, respectively. The total fair value of performance-based restricted stock awards vested during the three months ended March 31, 2015 and 2014 were $5.8 million and $2.7 million, respectively.
As of March 31, 2015, total unrecognized compensation cost related to time-based and performance-based restricted stock awards amounted to $29.3 million and $12.3 million, respectively. This cost is expected to be recognized over a weighted average period of 2.41 years and 2.29 years, respectively.
NOTE 6 — | SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SOLD UNDER REPURCHASE AGREEMENTS |
Resale agreements
Resale agreements are recorded at the amounts 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 $1.85 billion and $1.43 billion as of March 31, 2015 and December 31, 2014, respectively. The weighted average interest rates were 1.42% and 1.55% as of March 31, 2015 and December 31, 2014, respectively.
Repurchase agreements
Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The collaterals for these agreements are mainly 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 $995.0 million as of March 31, 2015 and December 31, 2014. The weighted average interest rate was 3.70% as of March 31, 2015 and December 31, 2014.
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Balance Sheet Offsetting
The Company’s resale agreements and repurchase agreements are transacted under legally enforceable master repurchase agreements that give the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets repurchase and resale transactions with the same counterparty on the consolidated balance sheets where it has a legally enforceable master netting agreement and when the transactions are eligible for netting under ASC 210-20-45. Collateral pledged consists of securities which are not netted on the consolidated balance sheets against the related collateralized liability. Collateral accepted includes securities that are not recognized on the consolidated balance sheets. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by the third party trustees. The following tables present resale and repurchase agreements included on the consolidated balance sheets as of March 31, 2015 and December 31, 2014:
($ in thousands) | As of March 31, 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 | $ | 1,850,000 | $ | (300,000 | ) | $ | 1,550,000 | $ | (350,000 | ) | (1) | $ | (1,195,203 | ) | (2) | $ | 4,797 | |||||||
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 | $ | (300,000 | ) | $ | 695,000 | $ | (350,000 | ) | (1) | $ | (345,000 | ) | (3) | $ | — | |||||||
($ 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 | ) | (1) | $ | (797,172 | ) | (2) | $ | 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 | ) | (1) | $ | (370,000 | ) | (3) | $ | — | |||||||
(1) | 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. |
(2) | 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. |
(3) | 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. |
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NOTE 7 — | AVAILABLE-FOR-SALE INVESTMENT SECURITIES |
The following tables present 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 | ||||||||||||
March 31, 2015 | ||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Treasury securities | $ | 1,162,801 | $ | 9,586 | $ | (161 | ) | $ | 1,172,226 | |||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 411,275 | 1,143 | (452 | ) | 411,966 | |||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | 94,330 | 1,242 | (337 | ) | 95,235 | |||||||||||
Residential mortgage-backed securities | 717,693 | 11,274 | (1,611 | ) | 727,356 | |||||||||||
Municipal securities | 187,244 | 4,800 | (798 | ) | 191,246 | |||||||||||
Other residential mortgage-backed securities: | ||||||||||||||||
Investment grade (1) | 50,297 | 1,310 | (106 | ) | 51,501 | |||||||||||
Corporate debt securities: | ||||||||||||||||
Investment grade (1) | 141,140 | — | (739 | ) | 140,401 | |||||||||||
Non-investment grade (1) | 11,524 | — | (2,023 | ) | 9,501 | |||||||||||
Other securities | 41,543 | 436 | (326 | ) | 41,653 | |||||||||||
Total available-for-sale investment securities | $ | 2,817,847 | $ | 29,791 | $ | (6,553 | ) | $ | 2,841,085 | |||||||
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 | 41,589 | 243 | (716 | ) | 41,116 | |||||||||||
Total available-for-sale investment securities | $ | 2,619,205 | $ | 21,128 | $ | (13,968 | ) | $ | 2,626,365 | |||||||
(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. |
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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 months ended March 31, 2015 and 2014:
Three Months Ended March 31, | |||||||||
($ in thousands) | 2015 | 2014 | |||||||
Proceeds from sales | $ | 180,501 | $ | 330,231 | |||||
Gross realized gains | $ | 4,404 | $ | 3,545 | |||||
Gross realized losses | $ | — | $ | 127 | (1) | ||||
Related tax expense | $ | 1,850 | $ | 1,436 | |||||
(1) | The gross $127 thousand of losses resulted from the available-for-sale investment securities acquired from MetroCorp which were sold immediately after the acquisition closed. |
Declines in the fair value of securities below their cost that are deemed to be an other-than-temporary impairment (“OTTI”) are recognized in earnings to the extent the impairment is related to credit losses. The following table presents a rollforward of the amounts related to the OTTI credit losses recognized in earnings for the three months ended March 31, 2015 and 2014:
Three Months Ended March 31, | ||||||||
($ in thousands) | 2015 | 2014 | ||||||
Beginning balance | $ | 112,338 | $ | 115,511 | ||||
Addition of OTTI that was not previously recognized | — | — | ||||||
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized | — | — | ||||||
Reduction for securities sold | (5,650 | ) | — | |||||
Ending balance | $ | 106,688 | $ | 115,511 | ||||
The Company believes that it is not more likely than not that the Company will be required to sell the securities above before recovery of their amortized cost basis. No OTTI credit losses were recognized for the three months ended March 31, 2015 and 2014. For the three months ended March 31, 2015, the Company realized a gain of $960 thousand from the sale of a non-investment grade corporate debt security with previously recognized OTTI credit losses of $5.7 million. There were no sale transactions related to non-investment grade investment securities with previously recognized OTTI credit losses for the three months ended March 31, 2014.
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Unrealized Losses
The following tables present the Company’s investment portfolio’s gross unrealized losses and related fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2015 and December 31, 2014:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
($ in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 61,684 | $ | (37 | ) | $ | 50,860 | $ | (124 | ) | $ | 112,544 | $ | (161 | ) | |||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 144,114 | (383 | ) | 24,927 | (69 | ) | 169,041 | (452 | ) | |||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 14,119 | (141 | ) | 13,541 | (196 | ) | 27,660 | (337 | ) | |||||||||||||||
Residential mortgage-backed securities | 40,969 | (97 | ) | 103,488 | (1,514 | ) | 144,457 | (1,611 | ) | |||||||||||||||
Municipal securities | 26,905 | (335 | ) | 15,783 | (463 | ) | 42,688 | (798 | ) | |||||||||||||||
Other residential mortgage-backed securities: | ||||||||||||||||||||||||
Investment grade | — | — | 6,985 | (106 | ) | 6,985 | (106 | ) | ||||||||||||||||
Corporate debt securities: | ||||||||||||||||||||||||
Investment grade | — | — | 90,401 | (739 | ) | 90,401 | (739 | ) | ||||||||||||||||
Non-investment grade | — | — | 9,501 | (2,023 | ) | 9,501 | (2,023 | ) | ||||||||||||||||
Other securities | 8,674 | (326 | ) | — | — | 8,674 | (326 | ) | ||||||||||||||||
Total available-for-sale investment securities | $ | 296,465 | $ | (1,319 | ) | $ | 315,486 | $ | (5,234 | ) | $ | 611,951 | $ | (6,553 | ) | |||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
($ in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 170,260 | $ | (266 | ) | $ | 163,800 | $ | (1,371 | ) | $ | 334,060 | $ | (1,637 | ) | |||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 69,438 | (504 | ) | 124,104 | (889 | ) | 193,542 | (1,393 | ) | |||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 45,405 | (257 | ) | 16,169 | (336 | ) | 61,574 | (593 | ) | |||||||||||||||
Residential mortgage-backed securities | 81,927 | (270 | ) | 241,047 | (3,808 | ) | 322,974 | (4,078 | ) | |||||||||||||||
Municipal securities | 6,391 | (26 | ) | 61,107 | (1,136 | ) | 67,498 | (1,162 | ) | |||||||||||||||
Other residential mortgage-backed securities: | ||||||||||||||||||||||||
Investment grade | — | — | 7,217 | (135 | ) | 7,217 | (135 | ) | ||||||||||||||||
Corporate debt securities: | ||||||||||||||||||||||||
Investment grade | 25,084 | (12 | ) | 90,098 | (1,042 | ) | 115,182 | (1,054 | ) | |||||||||||||||
Non-investment grade | — | — | 14,681 | (3,200 | ) | 14,681 | (3,200 | ) | ||||||||||||||||
Other securities | 15,885 | (716 | ) | — | — | 15,885 | (716 | ) | ||||||||||||||||
Total available-for-sale investment securities | $ | 414,390 | $ | (2,051 | ) | $ | 718,223 | $ | (11,917 | ) | $ | 1,132,613 | $ | (13,968 | ) | |||||||||
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At each reporting date, the Company examines all individual securities that are in an unrealized loss position for OTTI. Specific investment related factors, such as the nature of the investments, the severity and duration of the loss, the probability of collecting all amounts due, the analysis of the issuers of the securities and whether there has been any cause for default on the securities and any change in the rating of the securities by various rating agencies, are examined to assess impairment. Additionally, the Company evaluates whether the creditworthiness of the issuer calls the realization of contractual cash flows into question. The Company takes into consideration the financial resources, intent and its overall ability to hold the securities and not be required to sell them until their fair values recover.
The majority of the total unrealized losses related to securities are related to non-investment grade corporate debt securities, residential agency mortgage-backed securities, and municipal securities. As of March 31, 2015, non-investment grade corporate debt securities, residential agency mortgage-backed securities, and municipal securities represented less than 1%, 26%, and 7%, respectively, of the total available-for-sale investment securities portfolio. As of December 31, 2014, non-investment grade corporate debt securities, residential agency mortgage-backed securities, and municipal securities represented 1%, 30%, and 10%, respectively, of the total available-for-sale investment securities portfolio. The unrealized losses on these securities were primarily attributed to yield curve movement, together with the widened liquidity spread and credit spread. The issuers of these securities have not, to the Company's knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.
Management believes the impairments detailed in the tables of gross unrealized losses above are temporary and are not impaired due to reasons of credit quality. Accordingly, no impairment loss has been recorded in the Company’s consolidated statements of income for the three months ended March 31, 2015 and 2014.
Available-for-Sale Investment Securities Maturities
The following table presents the scheduled maturities of available-for-sale investment securities as of March 31, 2015:
($ in thousands) | Amortized Cost | Fair Value | ||||||
Due within one year | $ | 435,764 | $ | 434,493 | ||||
Due after one year through five years | 1,275,954 | 1,289,312 | ||||||
Due after five years through ten years | 311,367 | 311,157 | ||||||
Due after ten years | 794,762 | 806,123 | ||||||
Total available-for-sale investment securities | $ | 2,817,847 | $ |