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EAST WEST BANCORP INC - Quarter Report: 2016 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q


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


For the quarterly period ended September 30, 2016
 

Commission file number 000-24939


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

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


Registrant’s telephone number, including area code:
(626) 768-6000
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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: 144,164,156 shares as of October 31, 2016.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q (“Form 10-Q”) contain or incorporate statements that East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company” or “EWBC”) 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, 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 differences, some of which are beyond the Company’s control, include, but are not limited to:

the Company’s ability to compete effectively against other financial institutions in its banking markets;
changes in the commercial and consumer real estate markets;
changes in the Company’s 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”), the Consumer Financial Protection Bureau and the California Department of Business Oversight — Division of Financial Institutions;
changes in the economy of and monetary policy in the People’s Republic of China;
changes in income tax laws and regulations;
changes in accounting standards as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies and their impact on critical accounting policies and assumptions;
changes in the equity and debt securities markets;
future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;
fluctuations of the Company’s stock price;
fluctuations in foreign currency exchange rates;
success and timing of the Company’s business strategies;
ability of the Company to adopt and successfully integrate new technologies into its business in a strategic manner;
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 the Company’s ability to receive dividends from its subsidiaries;
impact of political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
impact of natural or man-made disasters or calamities or conflicts;
continuing consolidation in the financial services industry;
the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Company’s business, business practices and cost of operations;
impact of adverse changes to the Company’s credit ratings from the major credit rating agencies;
impact of failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused;

3



adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
the effect of the current low interest rate environment or changes in interest rates on the Company’s net interest income and net interest margin;
the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; and
a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increased funding costs, reduced investor demand for mortgage loans and declines in asset values and/or recognition of other-than-temporary impairment (“OTTI”) on securities held in the Company’s available-for-sale investment securities portfolio.

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 year ended December 31, 2015, filed with the SEC on February 26, 2016 (the “Company’s 2015 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, except shares)
 
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,666,832

 
$
1,360,887

Short-term investments
 
307,473

 
299,916

Securities purchased under resale agreements (“resale agreements”)
 
1,500,000

 
1,600,000

Available-for-sale investment securities, at fair value
 
3,236,624

 
3,773,226

Held-to-maturity investment security, at cost (fair value of $154,296 in 2016)
 
154,461

 

Loans held-for-sale
 
47,719

 
31,958

Loans held-for-investment (net of allowance for loan losses of $255,812 in 2016 and $264,959 in 2015)
 
24,476,150

 
23,378,789

Investment in Federal Home Loan Bank (“FHLB”) stock, at cost
 
17,250

 
28,770

Investment in Federal Reserve Bank stock, at cost
 
55,355

 
54,932

Investments in qualified affordable housing partnerships, net
 
173,045

 
193,978

Premises and equipment (net of accumulated depreciation of $110,668 in 2016 and $100,060 in 2015)
 
162,482

 
166,993

Goodwill
 
469,433

 
469,433

Other assets
 
988,451

 
992,040

TOTAL
 
$
33,255,275

 
$
32,350,922

LIABILITIES
 
 

 
 

Customer deposits:
 
 

 
 

Noninterest-bearing
 
$
9,524,021

 
$
8,656,805

Interest-bearing
 
19,068,420

 
18,819,176

Total deposits
 
28,592,441

 
27,475,981

Short-term borrowings
 
36,992

 

FHLB advances
 
321,084

 
1,019,424

Securities sold under repurchase agreements (“repurchase agreements”)
 
200,000

 

Long-term debt
 
191,265

 
206,084

Accrued expenses and other liabilities
 
535,439

 
526,483

Total liabilities
 
29,877,221

 
29,227,972

COMMITMENTS AND CONTINGENCIES (Note 10)
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.001 par value, 200,000,000 shares authorized; 164,567,479 and 164,246,517 shares issued in 2016 and 2015, respectively.
 
164

 
164

Additional paid-in capital
 
1,718,249

 
1,701,295

Retained earnings
 
2,106,121

 
1,872,594

Treasury stock at cost — 20,434,175 shares in 2016 and 20,337,284 shares in 2015.
 
(439,306
)
 
(436,162
)
Accumulated other comprehensive loss (“AOCI”), net of tax
 
(7,174
)
 
(14,941
)
Total stockholders’ equity
 
3,378,054

 
3,122,950

TOTAL
 
$
33,255,275

 
$
32,350,922

 



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,
 
 
2016
 
2015
 
2016
 
2015
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 

 
 

Loans receivable, including fees
 
$
255,316

 
$
244,372

 
$
763,189

 
$
719,987

Investment securities
 
13,388

 
10,279

 
37,433

 
29,947

Resale agreements
 
7,834

 
4,411

 
22,479

 
13,940

Investment in FHLB and Federal Reserve Bank stock
 
611

 
1,380

 
2,008

 
4,922

Due from banks and short-term investments
 
3,168

 
4,190

 
10,245

 
14,542

Total interest and dividend income
 
280,317

 
264,632

 
835,354

 
783,338

INTEREST EXPENSE
 
 
 
 
 
 

 
 

Customer deposits
 
21,049

 
18,519

 
60,708

 
53,677

Short-term borrowings
 
212

 
35

 
390

 
53

FHLB advances
 
1,361

 
1,074

 
4,153

 
3,156

Repurchase agreements
 
2,319

 
3,555

 
6,441

 
19,494

Long-term debt
 
1,228

 
1,160

 
3,726

 
3,460

Total interest expense
 
26,169

 
24,343

 
75,418

 
79,840

Net interest income before provision for credit losses

254,148

 
240,289

 
759,936

 
703,498

Provision for credit losses
 
9,525

 
7,736

 
17,018

 
16,217

Net interest income after provision for credit losses
 
244,623

 
232,553

 
742,918

 
687,281

NONINTEREST INCOME
 
 
 
 
 
 

 
 

Branch fees
 
10,408

 
9,982

 
30,983

 
29,157

Letters of credit fees and foreign exchange income
 
10,908

 
7,468

 
31,404

 
24,999

Ancillary loan fees
 
6,135

 
4,839

 
13,997

 
10,307

Wealth management fees
 
4,033

 
4,374

 
9,862

 
14,310

Derivative commission income
 
5,375

 
4,274

 
12,005

 
12,037

Net gains on sales of loans
 
2,158

 
4,888

 
6,967

 
19,719

Net gains on sales of available-for-sale investment securities
 
1,790

 
17,036

 
8,468

 
26,994

Changes in FDIC indemnification asset and receivable/payable
 

 
(3,883
)
 

 
(18,973
)
Other fees and operating income
 
8,534

 
5,203

 
20,432

 
20,350

Total noninterest income
 
49,341

 
54,181

 
134,118

 
138,900

NONINTEREST EXPENSE
 
 
 
 
 
 

 
 

Compensation and employee benefits
 
75,042

 
66,185

 
220,166

 
193,298

Occupancy and equipment expense
 
15,456

 
15,362

 
45,619

 
45,990

Amortization of tax credit and other investments
 
32,618

 
12,269

 
60,779

 
21,565

Amortization of premiums on deposits acquired
 
2,023

 
2,310

 
6,177

 
7,038

Deposit insurance premiums and regulatory assessments
 
6,450

 
4,726

 
17,341

 
13,723

Other real estate owned (“OREO”) (income) expense
 
(67
)
 
(1,374
)
 
1,484

 
(7,481
)
Legal expense
 
5,361

 
2,099

 
12,714

 
13,103

Data processing
 
2,729

 
2,602

 
8,712

 
7,596

Consulting expense
 
4,594

 
4,983

 
19,027

 
9,596

Deposit related expenses
 
3,082

 
2,538

 
7,675

 
7,402

Computer software expense
 
3,331

 
2,355

 
9,267

 
6,404

Repurchase agreements’ extinguishment costs
 

 
15,193

 

 
21,818

Other operating expense
 
19,881

 
18,497

 
57,024

 
55,893

Total noninterest expense
 
170,500

 
147,745

 
465,985

 
395,945

INCOME BEFORE INCOME TAXES
 
123,464

 
138,989

 
411,051

 
430,236

INCOME TAX EXPENSE
 
13,321

 
44,892

 
90,108

 
137,364

NET INCOME
 
$
110,143

 
$
94,097

 
$
320,943

 
$
292,872

EARNINGS PER SHARE (“EPS”)
 
 
 
 
 
 
 
 
BASIC
 
$
0.76

 
$
0.65

 
$
2.23

 
$
2.04

DILUTED
 
$
0.76

 
$
0.65

 
$
2.21

 
$
2.03

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
 
 
 
 
BASIC
 
144,122

 
143,861

 
144,061

 
143,788

DILUTED
 
145,238

 
144,590

 
145,086

 
144,468

DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

 



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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
110,143

 
$
94,097

 
$
320,943

 
$
292,872

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Net change in unrealized (losses) gains on available-for-sale investment securities
 
(4,907
)
 
3,246

 
12,993

 
4,439

Foreign currency translation adjustments
 
(555
)
 
(6,846
)
 
(5,226
)
 
(6,846
)
Other comprehensive (loss) income
 
(5,462
)
 
(3,600
)
 
7,767

 
(2,407
)
COMPREHENSIVE INCOME
 
$
104,681

 
$
90,497

 
$
328,710

 
$
290,465

 



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 and Additional Paid-in Capital
 
Retained
Earnings
 
Treasury
Stock
 
AOCI,
net of tax
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
 
 
 
BALANCE, JANUARY 1, 2015
 
143,582,229

 
$
1,677,931

 
$
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

Net activity of common stock pursuant to various stock compensation plans and agreements
 
287,725

 
2,569

 

 
(5,859
)
 

 
(3,290
)
Common stock dividends
 

 

 
(87,100
)
 

 

 
(87,100
)
BALANCE, SEPTEMBER 30, 2015
 
143,869,954

 
$
1,695,429

 
$
1,809,913

 
$
(436,057
)
 
$
1,830

 
$
3,071,115

BALANCE, JANUARY 1, 2016
 
143,909,233

 
$
1,701,459

 
$
1,872,594

 
$
(436,162
)
 
$
(14,941
)
 
$
3,122,950

Net income
 

 

 
320,943

 

 

 
320,943

Other comprehensive income
 

 

 

 

 
7,767

 
7,767

Stock compensation costs
 

 
13,973

 

 

 

 
13,973

Tax benefit from stock compensation plans, net
 

 
1,019

 

 

 

 
1,019

Net activity of common stock pursuant to various stock compensation plans and agreements
 
224,071

 
1,962

 

 
(3,144
)
 

 
(1,182
)
Common stock dividends
 

 

 
(87,416
)
 

 

 
(87,416
)
BALANCE, SEPTEMBER 30, 2016
 
144,133,304

 
$
1,718,413

 
$
2,106,121

 
$
(439,306
)
 
$
(7,174
)
 
$
3,378,054

 



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,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
320,943

 
$
292,872

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

 
 

Depreciation and amortization
 
98,561

 
52,810

Accretion of discount and amortization of premiums, net
 
(37,881
)
 
(47,890
)
Changes in FDIC indemnification asset and receivable/payable
 

 
18,973

Stock compensation costs
 
13,973

 
11,702

Deferred tax expenses
 
3,730

 
118,079

Tax benefit from stock compensation plans, net
 
(1,019
)
 
(3,227
)
Provision for credit losses
 
17,018

 
16,217

Net gains on sales of loans
 
(6,967
)
 
(19,719
)
Net gains on sales of available-for-sale investment securities
 
(8,468
)
 
(26,994
)
Net gains on sales of premises and equipment and OREO
 
(3,300
)
 
(13,350
)
Originations and purchases of loans held-for-sale
 
(10,901
)
 
(623
)
Proceeds from sales and paydowns/payoffs in loans held-for-sale
 
15,065

 
2,232

Repurchase agreements’ extinguishment costs
 

 
21,818

Net payments to FDIC shared-loss agreements
 

 
(12,038
)
Net change in accrued interest receivable and other assets
 
(1,570
)
 
(28,957
)
Net change in accrued expenses and other liabilities
 
19,217

 
39,157

Other net operating activities
 
(797
)
 
525

Total adjustments
 
96,661

 
128,715

Net cash provided by operating activities
 
417,604

 
421,587

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Net (increase) decrease in:
 
 

 
 

Loans held-for-investment
 
(317,142
)
 
(1,873,612
)
Short-term investments
 
(13,469
)
 
75,940

Investments in qualified affordable housing partnerships, tax credit and other investments
 
(57,742
)
 
(48,204
)
Purchases of:
 
 

 
 

Resale agreements
 
(1,150,000
)
 
(1,645,000
)
Available-for-sale investment securities
 
(1,330,724
)
 
(2,190,503
)
Loans held-for-investment (including loan participations)
 
(1,497,218
)
 
(572,558
)
Proceeds from sales of:
 
 

 
 

Available-for-sale investment securities
 
1,008,256

 
1,328,487

Loans held-for-investment (including loan participations)
 
545,256

 
1,271,128

OREO
 
3,271

 
33,921

Paydowns and maturities of resale agreements
 
1,450,000

 
1,370,000

Repayments, maturities and redemptions of available-for-sale investment securities
 
870,965

 
558,669

Other net investing activities
 
15,278

 
14,736

Net cash used in investing activities
 
(473,269
)
 
(1,676,996
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase in:
 
 

 
 

Deposits
 
1,130,022

 
2,765,985

Short-term borrowings
 
37,699

 
3,271

Proceeds from:
 
 

 
 

Issuance of common stock pursuant to various stock compensation plans and agreements
 
1,962

 
1,769

Payments for:
 
 

 
 

Repayment of FHLB advances
 
(700,000
)
 

Repayment of long-term debt
 
(15,000
)
 
(15,000
)
Extinguishment of repurchase agreements
 

 
(566,818
)
Repurchase of vested shares due to employee tax liability
 
(3,144
)
 
(5,859
)
Cash dividends
 
(86,984
)
 
(86,850
)
Tax benefit from stock compensation plans, net
 
1,019

 
3,227

Net cash provided by financing activities
 
365,574

 
2,099,725

Effect of exchange rate changes on cash and cash equivalents
 
(3,964
)
 
(8,498
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
305,945

 
835,818

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
1,360,887

 
1,039,885

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
1,666,832

 
$
1,875,703

 



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,
 
 
2016
 
2015
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid (received) during the period for:
 
 

 
 

Interest
 
$
76,750

 
$
81,739

Income tax payments/(refunds), net
 
$
20,652

 
$
(20,367
)
Noncash investing and financing activities:
 
 

 
 

Loans held-for-investment transferred to loans held-for-sale, net
 
$
720,670

 
$
1,556,456

Transfers to OREO
 
$
6,086

 
$
8,059

Loans to facilitate sale of OREO
 
$

 
$
1,750

Held-to-maturity investment security retained from securitization of loans
 
$
160,135

 
$

Dividends payable
 
$
432

 
$
250

 



See accompanying Notes to Consolidated Financial Statements.

10



EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1 BASIS OF PRESENTATION
 
The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West and its 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, 2016, East West has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with 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 United States Generally Accepted Accounting Principles (“U.S. 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 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 2015 Form 10-K.


NOTE 2CURRENT ACCOUNTING DEVELOPMENTS  

NEW ACCOUNTING PRONOUNCEMENTS ADOPTED 

In February 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis that changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amended guidance 1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; 2) eliminates the presumption that a general partner should consolidate a limited partnership; 3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4) provides a scope exception from consolidation guidance for reporting entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a7 of the Investment Company Act of 1940 for registered money market funds. The Company adopted this amended guidance in the first quarter of 2016 and the adoption of this guidance did not have a material impact on the Company’s 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 adopted this guidance retrospectively in the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company’s 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 acquisitions 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 adopted this guidance prospectively to all arrangements entered into or materially modified in the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
 

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.  ASU 2014-09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, 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 permitted for interim and annual periods beginning after December 15, 2016. The Company’s preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements. However, there are many aspects of the new accounting guidance that are still being interpreted and the FASB has recently issued updates to certain aspects of the guidance. The results of our materiality analysis may change based on the conclusion reached as to the application of the new guidance.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the Consolidated Balance Sheet or in the footnotes. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in other comprehensive income. The Company has not elected to measure any of its liabilities at fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted except for certain specific changes under the fair value option guidance. To adopt the amendments, the Company is required to make a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the fiscal year in which the guidance is effective. However, the amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the adoption date. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. ASU 2016-02 requires lessees to recognize all leases longer than twelve months on the Consolidated Balance Sheet as lease assets and lease liabilities and quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with an option to early adopt. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship provided that all other hedge accounting criteria in ASC 815 continue to be met. This clarification applies to both cash flow and fair value hedging relationships. ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with an option to early adopt. The Company has an option to adopt the amendments of this ASU either on a prospective basis or modified retrospective basis. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments that requires an entity to use a four step decision model when assessing contingent call (put) options that can accelerate the payment of principal on debt instruments to determine whether they are clearly and closely related to their debt hosts. ASU 2016-06 will be effective for interim and annual reporting periods beginning after December 15, 2016 and must be implemented using a modified retrospective basis. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.


12



In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, to eliminate the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The amendments in ASU 2016-07 also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in AOCI at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and should be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to introduce a new approach based on expected losses to estimate credit losses on certain types of financial instruments, which modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new “expected credit loss” impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loans and lease losses and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Earlier adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on the classification of certain cash receipts and payments in the consolidated statement of cash flows in order to reduce diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 3 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. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
Level 1
Valuation is based on quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based on quoted prices for similar instruments 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. 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 financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of September 30, 2016
($ 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)
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
456,448

 
$
456,448

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
383,331

 

 
383,331

 

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
326,818

 

 
326,818

 

Residential mortgage-backed securities
 
1,194,838

 

 
1,194,838

 

Municipal securities
 
152,293

 

 
152,293

 

Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

Investment grade
 
52,957

 

 
52,957

 

Corporate debt securities:
 
 

 
 

 
 

 
 

Investment grade
 
281,987

 

 
281,987

 

Non-investment grade
 
8,778

 

 
8,778

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
337,434

 

 
337,434

 

Other securities
 
41,740

 
31,939

 
9,801

 

Total available-for-sale investment securities
 
$
3,236,624

 
$
488,387

 
$
2,748,237

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
144,293

 
$

 
$
144,293

 
$

Foreign exchange contracts
 
$
6,065

 
$

 
$
6,065

 
$

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(2,137
)
 
$

 
$
(2,137
)
 
$

Foreign currency forward contracts
 
$
(78
)
 
$

 
$
(78
)
 
$

Interest rate swaps and options
 
$
(146,623
)
 
$

 
$
(146,623
)
 
$

Foreign exchange contracts
 
$
(3,334
)
 
$

 
$
(3,334
)
 
$

Credit risk participation agreements (“RPAs”)
 
$
(8
)
 
$

 
$
(8
)
 
$

 
 
 
 
 
 
 
 
 
 

14



 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 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)
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
998,515

 
$
998,515

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
768,849

 

 
768,849

 

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
351,662

 

 
351,662

 

Residential mortgage-backed securities
 
997,396

 

 
997,396

 

Municipal securities
 
175,649

 

 
175,649

 

Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

Investment grade
 
62,393

 

 
62,393

 

Corporate debt securities:
 
 

 
 

 
 

 
 

Investment grade
 
279,432

 

 
279,432

 

Non-investment grade
 
9,642

 

 
9,642

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
89,795

 
4,514

 
85,281

 

Other securities
 
39,893

 
31,121

 
8,772

 

Total available-for-sale investment securities
 
$
3,773,226

 
$
1,034,150

 
$
2,739,076

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
2,365

 
$

 
$
2,365

 
$

Interest rate swaps and options
 
$
67,215

 
$

 
$
67,215

 
$

Foreign exchange contracts
 
$
10,254

 
$

 
$
10,254

 
$

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(5,213
)
 
$

 
$
(5,213
)
 
$

Interest rate swaps and options
 
$
(67,325
)
 
$

 
$
(67,325
)
 
$

Foreign exchange contracts
 
$
(9,350
)
 
$

 
$
(9,350
)
 
$

RPAs
 
$
(4
)
 
$

 
$
(4
)
 
$

 
 
 
 
 
 
 
 
 


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. There were no assets or liabilities measured using significant unobservable inputs (Level 3) on a recurring basis for the three and nine months ended September 30, 2016. The following table presents 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:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2015
 
Corporate
Debt
Securities:
Non-Investment
 Grade
 
Embedded
Derivative 
Liabilities
 
Corporate
Debt
Securities:
Non-Investment
 Grade
 
Embedded
Derivative 
Liabilities
Beginning balance
 
$

 
$

 
$
6,528

 
$
(3,392
)
Total gains (losses) for the period:
 
 
 
 
 
 

 
 

Included in earnings (1)
 

 

 
960

 
(20
)
Included in other comprehensive income (2)
 

 

 
922

 

Sales and settlements:
 
 
 
 
 
 

 
 

Sales
 

 

 
(7,219
)
 

Settlements
 

 

 
(98
)
 
3,412

Transfers in and/or out of Level 3
 

 

 
(1,093
)
 

Ending balance
 
$

 
$

 
$

 
$

Changes in unrealized losses included in earnings relating to assets and liabilities held for the period
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
(1)
Net gains or losses (realized and unrealized) of corporate debt securities and embedded derivative liabilities are included in Net gains on sales of available-for-sale investment securities and Other operating expense, respectively, on 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, on the Consolidated Statements of Comprehensive Income.

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 become 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 for the three and nine months ended September 30, 2016, and three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company transferred $1.1 million of pooled trust preferred securities measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability.

Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans that were impaired, OREO and loans held-for-sale.  These fair value adjustments result from impairments recognized during the period on certain non-PCI impaired 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.


16



The following tables present the carrying amounts of assets included in the Consolidated Balance Sheets that had fair value changes during the year-to-date period measured on a nonrecurring basis:
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of September 30, 2016
($ 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”)
 
$
20,904

 
$

 
$

 
$
20,904

Commercial and industrial (“C&I”)
 
58,854

 

 

 
58,854

Residential
 
2,305

 

 

 
2,305

Consumer
 
594

 

 

 
594

Total non-PCI impaired loans
 
$
82,657

 
$

 
$

 
$
82,657

OREO
 
$
2,760

 
$

 
$

 
$
2,760

Loans held-for-sale
 
$
26,931

 
$

 
$
26,931

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 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:
 
 

 
 

 
 

 
 

CRE
 
$
17,252

 
$

 
$

 
$
17,252

C&I
 
35,558

 

 

 
35,558

Residential
 
16,472

 

 

 
16,472

Consumer
 
1,180

 

 

 
1,180

Total non-PCI impaired loans
 
$
70,462

 
$

 
$

 
$
70,462

OREO
 
$
4,929

 
$

 
$

 
$
4,929

Loans held-for-sale
 
$
29,238

 
$

 
$
29,238

 
$

 
 
 
 
 
 
 
 
 

The following table presents fair value adjustments of assets measured on a nonrecurring basis recognized during the three and nine months ended and which were included in the Consolidated Balance Sheets as of September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands)
 
2016
 
2015
 
2016
 
2015
Non-PCI impaired loans:
 
 
 
 
 
 

 
 

CRE
 
$
(282
)
 
$
101

 
$
1,741

 
$
(845
)
C&I
 
77

 
(707
)
 
(5,497
)
 
(9,806
)
Residential
 
(14
)
 
(314
)
 
(14
)
 
(565
)
Consumer
 

 
(59
)
 
17

 
(59
)
Total non-PCI impaired loans
 
$
(219
)
 
$
(979
)
 
$
(3,753
)
 
$
(11,275
)
OREO
 
$
(41
)
 
$
(1,556
)
 
$
(994
)
 
$
(1,739
)
Loans held-for-sale
 
$

 
$

 
$
(2,351
)
 
$
(517
)
 
 
 
 
 
 
 
 
 


17



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, 2016 and December 31, 2015:
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range of Inputs
 
Weighted 
Average
September 30, 2016
 
 

 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
55,097

 
Discounted cash flow
 
Discount rate
 
0%  45%
 
4%
 
 
$
27,560

 
Market comparables
 
Discount rate (1)
 
0%  100%
 
2%
OREO
 
$
2,760

 
Appraisal
 
Selling cost
 
8%
 
8%
December 31, 2015
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
27,522

 
Discounted cash flow
 
Discount rate
 
0%  87%
 
30%
 
 
$
42,940

 
Market comparables
 
Discount rate (1)
 
0%  100%
 
17%
OREO
 
$
4,929

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

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, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,666,832

 
$
1,666,832

 
$

 
$

 
$
1,666,832

Short-term investments
 
$
307,473

 
$

 
$
307,473

 
$

 
$
307,473

Resale agreements (1)
 
$
1,500,000

 
$

 
$
1,496,965

 
$

 
$
1,496,965

Held-to-maturity investment security
 
$
154,461

 
$

 
$

 
$
154,296

 
$
154,296

Loans held-for-sale
 
$
47,719

 
$

 
$
47,719

 
$

 
$
47,719

Loans held-for-investment, net
 
$
24,476,150

 
$

 
$

 
$
24,349,603

 
$
24,349,603

Investment in FHLB stock
 
$
17,250

 
$

 
$
17,250

 
$

 
$
17,250

Investment in Federal Reserve Bank stock
 
$
55,355

 
$

 
$
55,355

 
$

 
$
55,355

Accrued interest receivable
 
$
88,343

 
$

 
$
88,343

 
$

 
$
88,343

Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposits:
 
 

 
 

 
 

 
 

 
 

Demand, interest checking, savings and money market deposits
 
$
22,994,054

 
$

 
$
22,994,054

 
$

 
$
22,994,054

Time deposits
 
$
5,598,387

 
$

 
$
5,603,591

 
$

 
$
5,603,591

Short-term borrowings
 
$
36,992

 
$

 
$
36,992

 
$

 
$
36,992

FHLB advances
 
$
321,084

 
$

 
$
333,437

 
$

 
$
333,437

Repurchase agreements (1)
 
$
200,000

 
$

 
$
263,948

 
$

 
$
263,948

Long-term debt
 
$
191,265

 
$

 
$
195,801

 
$

 
$
195,801

Accrued interest payable
 
$
7,516

 
$

 
$
7,516

 
$

 
$
7,516

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of September 30, 2016, $250.0 million out of $450.0 million of repurchase agreements was eligible for netting against resale agreements.


18



 
($ in thousands)
 
December 31, 2015
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,360,887

 
$
1,360,887

 
$

 
$

 
$
1,360,887

Short-term investments
 
$
299,916

 
$

 
$
299,916

 
$

 
$
299,916

Resale agreements (1)
 
$
1,600,000

 
$

 
$
1,533,961

 
$

 
$
1,533,961

Loans held-for-sale
 
$
31,958

 
$

 
$
31,958

 
$

 
$
31,958

Loans held-for-investment, net
 
$
23,378,789

 
$

 
$

 
$
23,000,817

 
$
23,000,817

Investment in FHLB stock
 
$
28,770

 
$

 
$
28,770

 
$

 
$
28,770

Investment in Federal Reserve Bank stock
 
$
54,932

 
$

 
$
54,932

 
$

 
$
54,932

Accrued interest receivable
 
$
89,243

 
$

 
$
89,243

 
$

 
$
89,243

Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposits:
 
 

 
 

 
 

 
 

 
 

Demand, interest checking, savings and money market deposits
 
$
20,859,086

 
$

 
$
20,859,086

 
$

 
$
20,859,086

Time deposits
 
$
6,616,895

 
$

 
$
6,606,942

 
$

 
$
6,606,942

FHLB advances
 
$
1,019,424

 
$

 
$
1,032,000

 
$

 
$
1,032,000

Long-term debt
 
$
206,084

 
$

 
$
186,593

 
$

 
$
186,593

Accrued interest payable
 
$
8,848

 
$

 
$
8,848

 
$

 
$
8,848

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of December 31, 2015, the carrying amount of $450.0 million of repurchase agreements was eligible for netting against resale agreements, resulting in no repurchase agreements’ balances reported.

The following is a description of the valuation methodologies and significant assumptions used to measure financial assets and liabilities at fair value and to estimate fair value for certain financial instruments not recorded at fair value. The description also includes the level of the fair value hierarchy in which the assets or liabilities are classified.
 
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 value, these instruments are classified as Level 2.

Held-to-Maturity Investment Security — The fair value of the held-to-maturity investment security is determined by the discount cash flow approach. The discount rate is derived from conditional prepayment rate, constant default rate, loss severity and discount margin. Due to the significant unobservable inputs, the held-to-maturity investment security is classified as Level 3.
 
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 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 mainly comprised of 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.
 

19



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 or discounted cash flow techniques. 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. All appraisals include an “as is” market value without conditions as of the effective date of the appraisal. 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. 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 cost. 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 Held-for-Investment, net — The fair value of loans held-for-investment 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 that reflect the 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 value, 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 held-for-investment, 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. Please 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. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. The Company uses the market comparable 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.

Interest Rate Swaps and Options — The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option products offered to bank customers. These products allow borrowers to lock in attractive intermediate and long-term interest rates by entering into an interest rate swap or option contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments).  The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves.  The fair value of interest rate options is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps).  The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. In addition, to comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, model-derived credit spreads. As of September 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts’ positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative valuations in Level 2 of the fair value hierarchy due to the observable nature of the significant inputs utilized.
 

20



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 because the contracts 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. These are over the counter contracts where quoted market prices are not readily available.  Valuation is measured using conventional valuation methodologies with observable market data.  Valuation depends on the type of derivative and the nature of the underlying rate and contractual terms including period of maturity, price and index upon which the derivative’s value is based. Key inputs include foreign exchange rates (spot and/or forward rates), volatility of currencies, and the correlation of such inputs. The counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign contracts is classified as Level 2.
 
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 value, time deposits 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 value, these instruments are classified as Level 2.

Repurchase Agreements — The fair value of the repurchase agreements is calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value, 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.
 
Foreign currency forward contracts — The Company enters into foreign currency forward contracts to hedge its net investment in East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market exchange rate. Inputs include spot rates, forward rates, and the interest rate curve of the domestic and foreign currency. Interest rate forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

RPAs — The Company enters into RPAs, under which the Company assumes its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The credit spreads of the borrowers used in the calculation are estimated by the Company based on current market conditions, including consideration of current borrowing spreads for similar customers and transactions, review of existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. The Company has determined that the majority of the inputs used to value RPAs fall within Level 2 of the fair value hierarchy.


21



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.

NOTE 4
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SOLD UNDER 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 $1.75 billion and $2.05 billion as of September 30, 2016 and December 31, 2015, respectively. The weighted average interest rates were 1.70% and 1.61% as of September 30, 2016 and December 31, 2015, respectively.
 
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 the repurchase agreements are comprised of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities, and U.S. government agency and U.S. government sponsored enterprise debt securities. The Company may have to provide additional collateral for the repurchase agreements, as necessary. Gross repurchase agreements were $450.0 million as of both September 30, 2016 and December 31, 2015, respectively. The weighted average interest rates were 3.00% and 2.60% as of September 30, 2016 and December 31, 2015, respectively.

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 includes securities that are not recognized on the Consolidated Balance Sheets. Collateral pledged consists 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 collateral amounts received/posted are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.


22



The following tables present resale and repurchase agreements included on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
As of September 30, 2016
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
1,750,000

 
$
(250,000
)
 
$
1,500,000

 
$

 
$
(1,499,719
)
(1) 
$
281

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

 
$
(250,000
)
 
$
200,000

 
$

 
$
(200,000
)
(2) 
$

 
 
($ in thousands)
 
As of December 31, 2015
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
2,050,000

 
$
(450,000
)
 
$
1,600,000

 
$

 
$
(1,593,503
)
(1) 
$
6,497

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

 
$
(450,000
)
 
$

 
$

 
$

(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.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives, refer to Note 6 Derivatives to the Consolidated Financial Statements for additional information.



23



NOTE 5INVESTMENT SECURITIES

The following table presents the amortized cost, gross unrealized gains and losses and fair value by major categories of available-for-sale investment securities, which are carried at fair value, and a held-to-maturity investment security, which is carried at amortized cost:
 
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
As of September 30, 2016
 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
455,019

 
$
1,440

 
$
(11
)
 
$
456,448

U.S. government agency and U.S. government sponsored enterprise debt securities
 
381,986

 
1,386

 
(41
)
 
383,331

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
325,486

 
2,791

 
(1,459
)
 
326,818

Residential mortgage-backed securities
 
1,188,753

 
8,538

 
(2,453
)
 
1,194,838

Municipal securities
 
149,008

 
3,423

 
(138
)
 
152,293

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
51,396

 
1,578

 
(17
)
 
52,957

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
282,106

 
533

 
(652
)
 
281,987

Non-investment grade (1)
 
10,191

 

 
(1,413
)
 
8,778

Foreign bonds:
 
 
 
 
 
 
 


Investment grade (1) (2)
 
340,474

 
419

 
(3,459
)
 
337,434

Other securities
 
40,388

 
1,355

 
(3
)
 
41,740

Total available-for-sale investment securities
 
3,224,807

 
21,463

 
(9,646
)
 
3,236,624

Held-to-maturity investment security:
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed security
 
154,461

 

 
(165
)
 
154,296

Total investment securities
 
$
3,379,268

 
$
21,463

 
$
(9,811
)
 
$
3,390,920

 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
1,002,874

 
$
33

 
$
(4,392
)
 
$
998,515

U.S. government agency and U.S. government sponsored enterprise debt securities
 
771,288

 
555

 
(2,994
)
 
768,849

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
354,418

 
268

 
(3,024
)
 
351,662

Residential mortgage-backed securities
 
996,255

 
7,542

 
(6,401
)
 
997,396

Municipal securities
 
173,785

 
2,657

 
(793
)
 
175,649

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
62,133

 
433

 
(173
)
 
62,393

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
280,850

 
129

 
(1,547
)
 
279,432

Non-investment grade (1)
 
11,491

 

 
(1,849
)
 
9,642

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade (1) (2)
 
90,586

 
3

 
(794
)
 
89,795

Other securities
 
40,149

 
124

 
(380
)
 
39,893

Total available-for-sale investment securities
 
$
3,783,829

 
$
11,744

 
$
(22,347
)
 
$
3,773,226

 
 
 
 
 
 
 
 
 
(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. Classifications are based on the lower of the credit ratings by S&P or Moody’s.
(2)
Fair values of foreign bonds include $296.8 million and $49.7 million of multilateral development bank bonds as of September 30, 2016 and December 31, 2015, respectively.

24



Unrealized Losses

The following table presents 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:
 
($ in thousands)
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
As of September 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
30,375

 
$
(11
)
 
$

 
$

 
$
30,375

 
$
(11
)
U.S. government agency and U.S. government sponsored enterprise debt securities
 
35,019

 
(41
)
 

 

 
35,019

 
(41
)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial mortgage-backed securities
 
61,708

 
(716
)
 
59,680

 
(743
)
 
121,388

 
(1,459
)
Residential mortgage-backed securities
 
304,826

 
(1,658
)
 
70,557

 
(795
)
 
375,383

 
(2,453
)
Municipal securities
 
5,334

 
(111
)
 
2,870

 
(27
)
 
8,204

 
(138
)
Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Investment grade
 
7,027

 
(17
)
 

 

 
7,027

 
(17
)
Corporate debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Investment grade
 
49,377

 
(178
)
 
81,935

 
(474
)
 
131,312

 
(652
)
Non-investment grade
 

 

 
8,778

 
(1,413
)
 
8,778

 
(1,413
)
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
276,313

 
(3,109
)
 
9,650

 
(350
)
 
285,963

 
(3,459
)
Other securities
 
2,690

 
(3
)
 

 

 
2,690

 
(3
)
Total available-for-sale investment securities
 
772,669

 
(5,844
)
 
233,470

 
(3,802
)
 
1,006,139

 
(9,646
)
Held-to-maturity investment security:
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed security
 
154,296

 
(165
)
 

 

 
154,296

 
(165
)
Total investment securities
 
$
926,965

 
$
(6,009
)
 
$
233,470

 
$
(3,802
)
 
$
1,160,435

 
$
(9,811
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
907,400

 
$
(4,250
)
 
$
20,282

 
$
(142
)
 
$
927,682

 
$
(4,392
)
U.S. government agency and U.S. government sponsored enterprise debt securities
 
541,385

 
(2,994
)
 

 

 
541,385

 
(2,994
)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 

 
 

Commercial mortgage-backed securities
 
252,340

 
(2,562
)
 
20,793

 
(462
)
 
273,133

 
(3,024
)
Residential mortgage-backed securities
 
535,842

 
(4,530
)
 
58,315

 
(1,871
)
 
594,157

 
(6,401
)
Municipal securities
 
48,495

 
(437
)
 
14,739

 
(356
)
 
63,234

 
(793
)
Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 

 
 

Investment grade
 
5,123

 
(1
)
 
6,242

 
(172
)
 
11,365

 
(173
)
Corporate debt securities:
 
 
 
 
 
 
 
 
 
 

 
 

Investment grade
 
149,358

 
(683
)
 
80,276

 
(864
)
 
229,634

 
(1,547
)
Non-investment grade
 

 

 
9,642

 
(1,849
)
 
9,642

 
(1,849
)
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
74,101

 
(506
)
 
9,713

 
(288
)
 
83,814

 
(794
)
Other securities
 
13,475

 
(112
)
 
8,731

 
(268
)
 
22,206

 
(380
)
Total available-for-sale investment securities
 
$
2,527,519

 
$
(16,075
)
 
$
228,733

 
$
(6,272
)
 
$
2,756,252

 
$
(22,347
)
 
  

25



For each reporting period, the Company examines all individual securities that are in an unrealized loss position for OTTI.  For discussion of the factors and criteria the Company uses in analyzing securities for OTTI, please see Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.

The unrealized losses were primarily attributed to the yield curve movement, in addition to 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.

The Company believes the gross unrealized losses detailed in the previous tables are temporary and are not due to reasons of credit quality. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, no impairment loss has been recorded in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015.

During the first quarter of 2016, the Company obtained a non-agency mortgage-backed investment security, through the securitization of multifamily real estate loans, which was classified as held-to-maturity and is measured at amortized cost. The Company has the intent and ability to hold the security to maturity. For detailed discussion, please see to Note 7 Loans Receivable And Allowance For Credit Losses to the Consolidated Financial Statements.

OTTI

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, 2016 and 2015:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$

 
$
106,688

 
$

 
$
112,338

Addition of OTTI previously not recognized
 

 

 

 

Additional increase 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

 
$

 
$
31,923

 

For the three months ended September 30, 2015, the Company realized a gain of $10.9 million from the sale of non-investment grade corporate debt securities with previously recognized OTTI credit losses of $74.8 million. For the nine months ended September 30, 2015, the Company realized a gain of $11.9 million from the sale of non-investment grade corporate debt securities with previously recognized OTTI credit losses of $80.4 million.

Realized Gains and Losses

The following table presents the proceeds, gross realized gains and losses related to the sales of available-for-sale investment securities for the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
 
$
143,513

 
$
855,425

 
$
1,008,256

 
$
1,328,487

Gross realized gains
 
$
1,790

 
$
17,036

 
$
8,593

 
$
26,994

Gross realized losses
 
$

 
$

 
$
125

 
$

Related tax expense
 
$
752

 
$
7,155

 
$
3,560

 
$
11,337

 


26



Scheduled Maturities of Investment Securities
 
The following table presents the scheduled maturities of available-for-sale investment securities as of September 30, 2016:
 
($ in thousands)
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
664,482

 
$
661,989

Due after one year through five years
 
587,483

 
592,032

Due after five years through ten years
 
362,297

 
363,709

Due after ten years
 
1,610,545

 
1,618,894

Total available-for-sale investment securities
 
$
3,224,807

 
$
3,236,624

 

The following table presents the scheduled maturity of the held-to-maturity investment security as of September 30, 2016:
 
($ in thousands)
 
Amortized
Cost
 
Estimated
Fair Value
Due after ten years
 
$
154,461

 
$
154,296

 

Actual maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to prepay obligations. In addition, such factors as prepayments and interest rates may affect the yields on the carrying values of mortgage-backed securities.

Available-for-sale investment securities with fair values of $955.7 million and $873.0 million as of September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, repurchase agreements, the Federal Reserve Bank’s discount window, and for other purposes required or permitted by law.


NOTE 6DERIVATIVES
     
The Company uses derivatives to manage exposure to market risk, including interest rate risk and foreign currency risk and to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates are not significant to earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Company’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, please see Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.


27



The following table presents the total notional and fair values of the Company’s derivatives as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
Derivative
Assets (1)
 
Derivative
   Liabilities (1)
 
 
Derivative
Assets (1)
 
Derivative
   Liabilities (1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
48,365

 
$

 
$
2,137

 
$
112,913

 
$

 
$
5,213

Foreign currency forward contracts
 
83,026

 

 
78

 
86,590

 
2,365

 

Total derivatives designated as hedging instruments
 
$
131,391

 
$

 
$
2,215

 
$
199,503

 
$
2,365

 
$
5,213

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
7,450,492

 
$
144,293

 
$
146,623

 
$
6,494,900

 
$
67,215

 
$
67,325

Foreign exchange contracts
 
605,439

 
6,065

 
3,334

 
652,993

 
10,254

 
9,350

RPAs
 
66,845

 

 
8

 
43,033

 

 
4

Total derivatives not designated as hedging instruments
 
$
8,122,776

 
$
150,358

 
$
149,965

 
$
7,190,926

 
$
77,469

 
$
76,679

 
(1)
Derivative assets are included in Other assets on the Consolidated Balance Sheets. Derivative liabilities are included in Accrued expenses and other liabilities and Interest-bearing deposits on the Consolidated Balance Sheets.

Derivatives Designated as Hedging Instruments

Interest Rate Swaps on Certificates of Deposit — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, London Interbank Offered Rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.

The total notional amounts of the interest rate swaps on certificates of deposit were $48.4 million and $112.9 million, as of September 30, 2016 and December 31, 2015, respectively. The fair value liabilities of the interest rate swaps were $2.1 million and $5.2 million as of September 30, 2016 and December 31, 2015, respectively. This decrease was primarily due to $63.7 million notional amounts of interest rate swaps on certificates of deposit that were called during the nine months ended September 30, 2016.

The following table presents the net gains (losses) recognized on the Consolidated Statements of Income related to the derivatives designated as fair value hedges for the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
(Losses) gains recorded in interest expense:
 
 
 
 
 
 
 
 
  Recognized on interest rate swaps
 
$
(1,327
)
 
$
4,616

 
$
3,044

 
$
5,336

  Recognized on certificates of deposit
 
674

 
(4,247
)
 
(2,688
)
 
(4,647
)
Net amount recognized on fair value hedges (ineffective portion)
 
$
(653
)
 
$
369

 
$
356

 
$
689

 


28



Net Investment Hedges — Consistent with ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions, ASC 815 allows hedging of the foreign currency risk of a net investment in a foreign operation. During the fourth quarter of 2015, the Company entered into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’s net investment in China, against the risk of adverse changes in the foreign currency exchange rate. During the three months ended September 30, 2016, the Company designated new foreign currency forward contracts as new hedge relationships. The Company expects that the hedging instrument will be highly effective in offsetting the changes in the value of the hedged net investment attributable to the hedged risk. The Company recorded the changes in the carrying amount of its China subsidiary in the Foreign currency translation adjustment account within AOCI. Simultaneously, the effective portion of the hedge of this exposure was also recorded in the Foreign Currency Translation Adjustment account and the ineffective portion, if any, was recorded in current earnings.

As of September 30, 2016, the notional amounts and fair values of the foreign currency forward contracts were $83.0 million and a $78 thousand liability, respectively. The following table presents the gains recorded in the Foreign currency translation adjustment account within AOCI related to the effective portion of the net investment hedges and the ineffectiveness recorded on the Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Gains recognized in AOCI on net investment hedges (effective portion)
 
$
69

 
$

 
$
296

 
$

Losses recognized in Foreign exchange income (ineffective portion)
 
$
(236
)
 
$

 
$
(667
)
 
$

 

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps and Options — The Company enters into interest rate derivatives including interest rate swaps and options with its customers to allow them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored interest rate contracts with institutional counterparties.  As of September 30, 2016, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers totaled $3.73 billion for derivatives that were in an asset valuation position and $3.73 billion for derivatives that were in a liability valuation position. As of December 31, 2015, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers totaled $3.25 billion for derivatives that were in an asset valuation position and $3.25 billion for derivatives that were in a liability valuation position. The fair values of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $144.3 million asset and a $146.6 million liability as of September 30, 2016. The fair values of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $67.2 million asset and a $67.3 million liability as of December 31, 2015.
 
Foreign Exchange Contracts — The Company enters into foreign exchange contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. A majority of these contracts have original maturities of one year or less. As of September 30, 2016 and December 31, 2015, the notional amounts of the short-term foreign exchange contracts were $605.4 million and $653.0 million, respectively.  The fair values of the short-term foreign exchange contracts recorded were a $6.1 million asset and a $3.3 million liability as of September 30, 2016. The fair values of the short-term foreign exchange contracts recorded were a $10.3 million asset and a $9.4 million liability as of December 31, 2015.


29



RPAs — The Company has entered into RPAs under which the Company assumed its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The Company may or may not be a party to the interest rate derivative contract and enters into such RPAs in instances where the Company is a party to the related loan participation agreement with the borrower. The Company will make/receive payments under the RPAs if the borrower defaults on its obligation to perform under the interest rate derivative contract. The Company manages its credit risk on the RPAs by monitoring the credit worthiness of the borrowers, which is based on the normal credit review process. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. As of September 30, 2016, the notional amount and the fair values of RPAs purchased were approximately a $43.0 million and an $8 thousand liability, respectively. As of September 30, 2016, the notional amount of the RPAs sold was approximately $23.9 million and the fair value of the derivative asset was insignificant. As of December 31, 2015, the notional amount and the fair values of RPAs purchased were approximately $33.7 million and a $4 thousand liability, respectively. As of December 31, 2015, the notional amount of the RPA sold was approximately $9.3 million and the fair value of the derivative asset was insignificant. Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of September 30, 2016 and December 31, 2015, the exposures from the RPAs purchased would be $278 thousand and $257 thousand, respectively.  As of September 30, 2016 and December 31, 2015, the weighted average remaining maturities of the outstanding RPAs were 3.7 years and 3.2 years, respectively.

Foreign Exchange Options — 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 deposit available to its customers. These certificates of deposit had a term of five years and paid interest based on the performance of the Chinese Renminbi 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). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are recorded at fair value. These instruments expired in the second quarter of 2015.

The following table presents the net gains (losses) recognized on the Company’s Consolidated Statements of Income related to derivatives not designated as hedging instruments for the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Location in
Consolidated
Statements of Income
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
Other fees and operating income
 
$
411

 
$
(864
)
 
$
(2,219
)
 
$
(243
)
Foreign exchange contracts
 
Foreign exchange income
 
3,787

 
(3,764
)
 
10,982

 
(1,548
)
RPAs
 
Other fees and operating income
 
4

 

 
(8
)
 

Foreign exchange options
 
Foreign exchange income
 

 

 

 
236

Embedded derivative liabilities
 
Other operating expense
 

 

 

 
(136
)
Net gains (losses)
 
 
 
$
4,202

 
$
(4,628
)
 
$
8,755

 
$
(1,691
)
 

Credit-Risk-Related Contingent Features Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit-risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. In the event that East West Bank’s credit rating is downgraded to below investment grade, no additional collateral would be required to be posted as of September 30, 2016 and December 31, 2015, since the liabilities related to such contracts were already fully collateralized.


30



Offsetting of Derivatives

The Company has entered into agreements with counterparty financial institutions, which include master netting agreements.  However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present gross derivatives on the Consolidated Balance Sheets and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities and/or cash. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown:
 
($ in thousands)
 
As of September 30, 2016
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
 
Assets
 
 
 
 
Financial
Instruments
 
 
Collateral
Received
 
 
Net Amount
Derivatives
 
$
3,811

 
$

 
$
3,811

 
$
(2,560
)
(1) 
 
$
(1,155
)
(2) 
 
$
96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts
of Recognized
Liabilities
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Liabilities
Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
 
Liabilities
 
 
 
 
Financial
Instruments
 
 
Collateral 
Posted
 
 
Net Amount
Derivatives
 
$
151,442

 
$

 
$
151,442

 
$
(2,560
)
(1) 
 
$
(148,102
)
(3) 
 
$
780

 
 
($ in thousands)
 
As of December 31, 2015
 
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
 
Assets
 
 
 
 
Financial
Instruments
 
 
Collateral
Received
 
 
Net Amount
Derivatives
 
$
8,733

 
$

 
$
8,733

 
$
(5,293
)
(1) 
 
$
(3,068
)
(2) 
 
$
372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts
of Recognized
Liabilities
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Liabilities
Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
 
Liabilities
 
 
 
 
Financial
Instruments
 
 
Collateral 
Posted
 
 
Net Amount
Derivatives
 
$
78,779

 
$

 
$
78,779

 
$
(5,293
)
(1) 
 
$
(73,109
)
(3) 
 
$
377

 
(1)
Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable master netting arrangements if the Company has elected to net.
(2)
Represents $1.2 million and $3.1 million of cash collateral received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements as of September 30, 2016 and December 31, 2015, respectively.
(3)
Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $51.1 million and $21.1 million of cash collateral posted as of September 30, 2016 and December 31, 2015, respectively.

In addition to the amounts included in the table above, the Company also has balance sheet netting related to resale and repurchase agreements, please refer to Note 4Securities Purchased Under Resale Agreements And Sold Under Repurchase Agreements to the Consolidated Financial Statements. Please refer to Note 3 Fair Value Measurement And Fair Value Of Financial Instruments to the Consolidated Financial Statements for fair value measurement disclosures on derivatives.



31



NOTE 7LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES


The Company’s held-for-investment loan portfolio includes originated and purchased loans. Originated and purchased loans with no evidence of credit deterioration at their acquisition date are referred to collectively as non-PCI loans. Purchased credit impaired (“PCI”) loans are loans acquired with evidence of credit deterioration since their origination and it is probable at the acquisition date that the Company would be unable to collect all contractually required payments. PCI loans are accounted for under ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company has elected to account for PCI loans on a pool level basis in accordance with ASC 310-30 at the time of acquisition.

The following table presents the composition of the Company’s non-PCI and PCI loans as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
Non-PCI
Loans
 
PCI
    Loans (1)
 
Total (1)
 
Non-PCI
Loans
 
PCI
    Loans (1)
 
Total (1)
CRE:
 
 
 
 
 
 
 
 
 
 
 
 
Income producing
 
$
7,387,777

 
$
392,998

 
$
7,780,775

 
$
6,937,199

 
$
541,275

 
$
7,478,474

Construction
 
600,803

 

 
600,803

 
436,776

 
1,895

 
438,671

Land
 
130,989

 
2,512

 
133,501

 
187,409

 
6,195

 
193,604

     Total CRE
 
8,119,569

 
395,510

 
8,515,079

 
7,561,384

 
549,365

 
8,110,749

C&I:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
8,640,569

 
42,873

 
8,683,442

 
8,155,991

 
57,906

 
8,213,897

Trade finance
 
674,591

 
12

 
674,603

 
787,800

 
1,310

 
789,110

     Total C&I
 
9,315,160

 
42,885

 
9,358,045

 
8,943,791

 
59,216

 
9,003,007

Residential:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
3,201,245

 
150,622

 
3,351,867

 
2,877,286

 
189,633

 
3,066,919

Multifamily
 
1,311,858

 
108,268

 
1,420,126

 
1,374,718

 
148,277

 
1,522,995

     Total residential
 
4,513,103

 
258,890

 
4,771,993

 
4,252,004

 
337,910

 
4,589,914

Consumer
 
2,059,178

 
20,296

 
2,079,474

 
1,931,828

 
24,263

 
1,956,091

     Total loans
 
$
24,007,010

 
$
717,581

 
$
24,724,591

 
$
22,689,007

 
$
970,754

 
$
23,659,761

Unearned fees, premiums, and discounts, net
 
7,371

 

 
7,371

 
(16,013
)
 

 
(16,013
)
Allowance for loan losses
 
(255,656
)
 
(156
)
 
(255,812
)
 
(264,600
)
 
(359
)
 
(264,959
)
     Loans, net
 
$
23,758,725

 
$
717,425

 
$
24,476,150

 
$
22,408,394

 
$
970,395

 
$
23,378,789

 
(1)
Loans net of ASC 310-30 discount.

The Company’s CRE segment provides financing for income producing properties, construction properties and land. Commercial business and trade finance in the C&I segment provide financing to small and middle market businesses in a wide spectrum of industries. This includes loans for working capital, accounts receivable and inventory lines of credit, Small Business Administration loans, lease financing and financing to international trade companies with trade financial services and products, including letters of credit, revolving lines of credit, import loans, bankers’ acceptances, working capital lines of credit, domestic purchase financing and pre-export financing.

The Company’s adjustable rate mortgage (“ARM”) single-family residential loans are primarily comprised of first mortgage loans secured by one-to-four unit residential properties. The Company’s ARM single-family residential loan programs generally have a one- to five-year initial fixed period. The Company’s multifamily residential loan programs include variable rate loans that have a six-month floating ARM, or a three- to seven-year initial fixed period. As of September 30, 2016 and December 31, 2015, consumer loans were comprised primarily of home equity lines of credit.


32



All loans originated are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks which may come from these products. The Company conducts a variety of quality control procedures and periodic audits, including review of criteria for lending and legal requirements, to ensure it is in compliance with its origination standards.

As of September 30, 2016 and December 31, 2015, loans totaling $15.62 billion and $15.91 billion, respectively, were pledged to secure borrowings and to provide additional borrowing capacity from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

All loans are subject to the Company’s internal and external credit review and monitoring. Loans are risk rated based on an analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes a review of all repayment sources, the borrower’s current payment performance/delinquency, current financial and liquidity status and all other relevant information.  For single-family residential loans, payment performance/delinquency is the driving indicator for the risk ratings.  Risk ratings are the overall credit quality indicator for the Company and the credit quality indicator utilized for estimating the appropriate allowance for loan losses. The Company utilizes a risk rating system, which can be classified within the following categories: Pass, Watch, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the repayment sources.

Pass and Watch loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. These borrowers may have some credit risks that require monitoring, but full repayments are expected. Special Mention loans are considered to have potential weaknesses that warrant closer attention by management. Special Mention is considered a transitory grade. If potential weaknesses are resolved, the loan is upgraded to a Pass or Watch grade. If negative trends in the borrower’s financial status or other information indicates that the repayment sources may become inadequate, the loan is downgraded to a Substandard grade. Substandard loans are considered to have well-defined weaknesses that jeopardize the full and timely repayment of the loan. Substandard loans have a distinct possibility of loss, if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as Substandard. Doubtful loans have insufficient sources of repayment and a high probability of loss. Loss loans are considered to be uncollectible and of such little value that they are no longer considered bankable assets. These internal risk ratings are reviewed routinely and adjusted based on changes in the borrowers’ financial status and collectability.


33



The following tables present the credit risk rating for non-PCI loans by portfolio segment as of September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
($ in thousands)
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Non-PCI
Loans
CRE:
 
 

 
 

 
 

 
 

 
 

Income producing
 
$
7,175,508

 
$
28,052

 
$
184,217

 
$

 
$
7,387,777

Construction
 
595,106

 
5,697

 

 

 
600,803

Land
 
117,194

 

 
13,785

 
10

 
130,989

C&I:
 
 
 
 
 
 
 
 

 
 

Commercial business
 
8,263,325

 
132,512

 
228,368

 
16,364

 
8,640,569

Trade finance
 
640,016

 
18,524

 
14,115

 
1,936

 
674,591

Residential:
 
 
 
 
 
 
 
 

 
 

Single-family
 
3,176,832

 
7,161

 
17,252

 

 
3,201,245

Multifamily
 
1,264,586

 

 
47,272

 

 
1,311,858

Consumer
 
2,048,988

 
3,879

 
6,311

 

 
2,059,178

Total
 
$
23,281,555

 
$
195,825

 
$
511,320

 
$
18,310

 
$
24,007,010

 
 
 
 
December 31, 2015
($ in thousands)
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Non-PCI
Loans
CRE:
 
 

 
 

 
 

 
 

 
 

Income producing
 
$
6,672,951

 
$
59,309

 
$
204,939

 
$

 
$
6,937,199

Construction
 
435,112

 
1,194

 
470

 

 
436,776

Land
 
172,189

 

 
15,220

 

 
187,409

C&I:
 
 

 
 

 
 

 
 

 
 

Commercial business
 
7,794,735

 
201,280

 
135,449

 
24,527

 
8,155,991

Trade finance
 
750,144

 
13,812

 
23,844

 

 
787,800

Residential:
 
 

 
 

 
 

 
 

 
 

Single-family
 
2,841,722

 
8,134

 
27,430

 

 
2,877,286

Multifamily
 
1,317,550

 
2,918

 
54,250

 

 
1,374,718

Consumer
 
1,926,418

 
883

 
4,527

 

 
1,931,828

Total
 
$
21,910,821

 
$
287,530

 
$
466,129

 
$
24,527

 
$
22,689,007

 


34



The following tables present the credit risk rating for PCI loans by portfolio segment as of September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
($ in thousands)
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Total
PCI Loans
CRE:
 
 

 
 

 
 

 
 

Income producing
 
$
333,342

 
$
3,474

 
$
56,182

 
$
392,998

Construction
 

 

 

 

Land
 
2,134

 

 
378

 
2,512

C&I:
 
 
 
 
 
 
 
 
Commercial business
 
34,023

 
4,590

 
4,260

 
42,873

Trade finance
 
12

 

 

 
12

Residential:
 
 
 
 
 
 
 
 

Single-family
 
147,768

 
1,216

 
1,638

 
150,622

Multifamily
 
93,379

 

 
14,889

 
108,268

Consumer
 
18,795

 
317

 
1,184

 
20,296

Total (1)
 
$
629,453

 
$
9,597

 
$
78,531

 
$
717,581

 
 
 
 
December 31, 2015
($ in thousands)
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Total
PCI Loans
CRE:
 
 

 
 

 
 

 
 

Income producing
 
$
440,100

 
$
4,987

 
$
96,188

 
$
541,275

Construction
 

 

 
1,895

 
1,895

Land
 
4,285

 

 
1,910

 
6,195

C&I:
 
 

 
 

 
 

 
 

Commercial business
 
52,212

 
819

 
4,875

 
57,906

Trade finance
 
1,310

 

 

 
1,310

Residential:
 
 

 
 

 
 

 
 

Single-family
 
184,092

 
1,293

 
4,248

 
189,633

Multifamily
 
130,770

 

 
17,507

 
148,277

Consumer
 
23,121

 
452

 
690

 
24,263

Total (1)
 
$
835,890

 
$
7,551

 
$
127,313

 
$
970,754

 
(1)
Loans net of ASC 310-30 discount.


35



Nonaccrual and Past Due Loans

Non-PCI loans that are 90 or more days past due are generally placed on nonaccrual status. Additionally, non-PCI loans that are not 90 or more days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following tables present the aging analysis on non-PCI loans as of September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
($ in thousands)
 
Accruing
Loans
30-59 Days
Past Due
 
Accruing
Loans
60-89 Days
Past Due
 
Total
Accruing
Past Due
Loans
 
Nonaccrual
Loans Less
Than 90 
Days
Past Due
 
Nonaccrual
Loans
90 or More
Days 
Past Due
 
Total
Nonaccrual
Loans
 
Current
Accruing
Loans
 
Total
Non-PCI
Loans
CRE:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Income producing
 
$
99

 
$
930

 
$
1,029

 
$
16,164

 
$
12,920

 
$
29,084

 
$
7,357,664

 
$
7,387,777

Construction
 

 

 

 

 

 

 
600,803

 
600,803

Land
 

 

 

 
5,706

 
10

 
5,716

 
125,273

 
130,989

C&I:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial business
 
12,667

 
3,871

 
16,538

 
44,514

 
17,783

 
62,297

 
8,561,734

 
8,640,569

Trade finance
 

 

 

 

 
1,936

 
1,936

 
672,655

 
674,591

Residential:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Single-family
 
7,116

 
1,557

 
8,673

 
2,302

 
3,483

 
5,785

 
3,186,787

 
3,201,245

Multifamily
 
4,642

 
382

 
5,024

 
6,743

 
6,804

 
13,547

 
1,293,287

 
1,311,858

Consumer
 
1,408

 
1,086

 
2,494

 
121

 
3,390

 
3,511

 
2,053,173

 
2,059,178

Total
 
$
25,932

 
$
7,826

 
$
33,758

 
$
75,550

 
$
46,326

 
$
121,876

 
$
23,851,376

 
$
24,007,010

 
 
 
 
December 31, 2015
($ in thousands)
 
Accruing
Loans
30-59 Days
Past Due
 
Accruing
Loans
60-89 Days
Past Due
 
Total
Accruing
Past Due
Loans
 
Nonaccrual
Loans Less
Than 90 
Days
Past Due
 
Nonaccrual
Loans
90 or More
Days 
Past Due
 
Total
Nonaccrual
Loans
 
Current
Accruing
Loans
 
Total
Non-PCI
Loans
CRE:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Income producing
 
$
3,465

 
$
25,256

 
$
28,721

 
$
11,359

 
$
17,870

 
$
29,229

 
$
6,879,249

 
$
6,937,199

Construction
 

 

 

 
14

 

 
14

 
436,762

 
436,776

Land
 
1,124

 

 
1,124

 
277

 
406

 
683

 
185,602

 
187,409

C&I:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial business
 
1,992

 
1,185

 
3,177

 
50,726

 
14,009

 
64,735

 
8,088,079

 
8,155,991

Trade finance
 

 

 

 

 

 

 
787,800

 
787,800

Residential:
 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Single-family
 
7,657

 
2,927

 
10,584

 
92

 
8,634

 
8,726

 
2,857,976

 
2,877,286

Multifamily
 
6,320

 
981

 
7,301

 
6,486

 
9,758

 
16,244

 
1,351,173

 
1,374,718

Consumer
 
2,078

 
209

 
2,287

 
233

 
1,505

 
1,738

 
1,927,803

 
1,931,828

Total
 
$
22,636

 
$
30,558

 
$
53,194

 
$
69,187

 
$
52,182

 
$
121,369

 
$
22,514,444

 
$
22,689,007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

For information on the policy for recording payments received and resuming accrual of interest on non-PCI loans that are placed on nonaccrual status, please see Note 1Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.

PCI loans are excluded from the above aging analysis tables as the Company has elected to account for these loans on a pool level basis in accordance with ASC 310-30 at the time of acquisition. Please refer to the discussion on PCI loans within this note for additional details on interest income recognition. As of September 30, 2016 and December 31, 2015, PCI loans on nonaccrual status totaled $17.6 million and $37.7 million, respectively.


36



Loans in Process of Foreclosure

As of September 30, 2016 and December 31, 2015, the Company had $8.8 million and $18.0 million, respectively, of recorded investment in consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions, which were not included in OREO. Foreclosed residential real estate properties with a carrying amount of $1.7 million were included in total net OREO of $8.6 million as of September 30, 2016. In comparison, foreclosed residential real estate properties with a carrying amount of $912 thousand were included in total net OREO of $7.0 million as of December 31, 2015.

Troubled Debt Restructurings (“TDRs”)

Potential TDRs are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty in order to maximize the Company’s recovery. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower, it would not otherwise consider.

The following tables present the additions to non-PCI TDRs for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
Loans Modified as TDRs During the Three Months Ended September 30,
($ in thousands)
 
2016
 
2015
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
CRE:
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Income producing
 
 
$

 
$

 
$

 
1
 
$
451

 
$
403

 
$

Land
 
 
$

 
$

 
$

 
1
 
$
2,056

 
$
788

 
$

C&I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
3
 
$
493

 
$
459

 
$
93

 
3
 
$
4,596

 
$
4,423

 
$
1,229

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans Modified as TDRs During the Nine Months Ended September 30,
($ in thousands)
 
2016
 
2015
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
CRE:
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Income producing
 
3
 
$
15,899

 
$
15,722

 
$
43

 
2
 
$
1,279

 
$
1,209

 
$

Land
 
1
 
$
5,522

 
$
5,226

 
$

 
2
 
$
2,227

 
$
881

 
$
102

C&I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
8
 
$
22,182

 
$
9,088

 
$
2,711

 
16
 
$
42,686

 
$
35,365

 
$
6,726

Trade finance
 
2
 
$
7,901

 
$
3,025

 
$

 
 
$

 
$

 
$

Residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
2
 
$
1,071

 
$
1,058

 
$

 
1
 
$
281

 
$
279

 
$
2

Consumer:
 
1
 
$
344

 
$
335

 
$
1

 
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Includes subsequent payments after modification and reflects the balance as of September 30, 2016 and 2015.
(2)
The financial impact includes charge-offs and specific reserves recorded at the modification date.


37



The following tables present the non-PCI TDR modifications for the three and nine months ended September 30, 2016 and 2015 by modification type:
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Modification Type
 
2016
 
2015
 
Principal (1)
 
Interest
Rate
Reduction
 
Interest
Deferments
 
Other
 
Total
 
Principal (1)
 
Principal
and
Interest (2)
 
Interest
Deferments
 
Other
 
Total
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE
 
$

 
$

 
$

 
$

 
$

 
$

 
$
788

 
$

 
$
403

 
$
1,191

C&I
 
427

 

 
32

 

 
459

 
4,423

 

 

 

 
4,423

Total
 
$
427

 
$

 
$
32

 
$

 
$
459

 
$
4,423

 
$
788

 
$

 
$
403

 
$
5,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Modification Type
 
2016
 
2015
 
Principal (1)
 
Interest
Rate
Reduction
 
Interest
Deferments
 
Other
 
Total
 
Principal (1)
 
Principal
and
Interest (2)
 
Interest
Deferments
 
Other
 
Total
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE
 
$
19,800

 
$

 
$

 
$
1,148

 
$
20,948

 
$

 
$
1,593

 
$

 
$
497

 
$
2,090

C&I
 
10,193

 
1,288

 
32

 
600

 
12,113

 
17,241

 
18,124

 

 

 
35,365

Residential
 
267

 
791

 

 

 
1,058

 
279

 

 

 

 
279

Consumer
 
335

 

 

 

 
335

 

 

 

 

 

Total
 
$
30,595

 
$
2,079

 
$
32

 
$
1,748

 
$
34,454

 
$
17,520

 
$
19,717

 
$

 
$
497

 
$
37,734

 
 
 
 
 
 
 
 
 
 
 
(1)
Principal modification includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
(2)
Principal and interest modification includes principal and interest deferments or reductions.

Subsequent to restructuring, a TDR that becomes delinquent, generally beyond 90 days, is considered to have defaulted. The following table presents information for loans modified as TDRs within the previous 12 months that have subsequently defaulted during the three and nine months ended September 30, 2016 and 2015, and are still in default at period end:

 
 
 
 
 
 
 
 
 
 
 
Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended September 30,
 
 
2016
 
2015
($ in thousands)
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
CRE:
 
 

 
 

 
 

 
 

Income producing
 
1

 
$
995

 
1

 
$
2,088

 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Loans Modified as TDRs that Subsequently Defaulted During the Nine Months Ended September 30,
 
 
2016
 
2015
($ in thousands)
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
CRE:
 
 

 
 

 
 

 
 

Income producing
 
1

 
$
995

 
1

 
$
2,088

C&I:
 
 

 
 

 
 

 
 

Commercial business
 
2

 
$
113

 

 
$

 
 
 
 
 
 
 
 
 


38



The amount of additional funds committed to lend to borrowers whose terms have been modified was $2.9 million as of September 30, 2016. In comparison, the amount of additional funds committed to lend to borrowers whose terms have been modified was immaterial as of December 31, 2015.

Impaired Loans

The Company’s loans are grouped into heterogeneous and homogeneous (mostly consumer loans) categories. Classified loans in the heterogeneous category are identified and evaluated for impairment on an individual basis. A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all scheduled payments of principal or interest due in accordance with the original contractual terms. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent, less costs to sell. When the value of an impaired loan is less than the recorded investment and the loan is classified as nonperforming and uncollectible, the deficiency is charged-off against the allowance for loan losses. Impaired loans exclude the homogeneous consumer loan portfolio, which is evaluated collectively for impairment. The Company’s impaired loans include predominantly non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified in a TDR, which may be on accrual or nonaccrual status.

The following tables present information on impaired non-PCI loans as of September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
($ in thousands)
 
Unpaid
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
CRE:
 
 

 
 

 
 

 
 

 
 

Income producing
 
$
59,227

 
$
31,493

 
$
19,703

 
$
51,196

 
$
507

Construction
 

 

 

 

 

Land
 
6,886

 
5,226

 
1,081

 
6,307

 
72

C&I:
 
 

 
 

 
 

 
 

 
 

Commercial business
 
109,416

 
28,316

 
53,453

 
81,769

 
3,798

Trade finance
 
6,080

 
4,361

 
655

 
5,016

 
3

Residential:
 
 

 
 

 
 

 
 

 
 

Single-family
 
14,825

 
1,842

 
11,439

 
13,281

 
310

Multifamily
 
22,894

 
15,649

 
5,208

 
20,857

 
217

Consumer
 
1,556

 

 
1,556

 
1,556

 
43

Total
 
$
220,884

 
$
86,887

 
$
93,095

 
$
179,982

 
$
4,950

 
 
 
 
December 31, 2015
($ in thousands)
 
Unpaid
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
CRE:
 
 

 
 

 
 

 
 

 
 

Income producing
 
$
47,043

 
$
24,347

 
$
15,720

 
$
40,067

 
$
3,148

Construction
 
66

 

 
14

 
14

 
1

Land
 
1,537

 
632

 
683

 
1,315

 
118

C&I:
 
 

 
 

 
 

 
 
 
 

Commercial business
 
81,720

 
31,045

 
40,111

 
71,156

 
15,993

Trade finance
 
10,675

 

 
10,675

 
10,675

 
95

Residential:
 
 

 
 

 
 

 
 
 
 

Single-family
 
16,486

 
4,401

 
10,611

 
15,012

 
584

Multifamily
 
25,634

 
16,944

 
6,783

 
23,727

 
339

Consumer
 
1,240

 

 
1,240

 
1,240

 
60

Total
 
$
184,401

 
$
77,369

 
$
85,837

 
$
163,206

 
$
20,338

 


39



The following table presents the average recorded investment and interest income recognized on non-PCI impaired loans during the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Average
Recorded
Investment
 
Recognized
Interest
Income 
(1)
 
Average
Recorded
Investment
 
Recognized
Interest
Income 
(1)
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
CRE:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income producing
 
$
52,020

 
$
464

 
$
43,227

 
$
130

 
$
52,130

 
$
1,368

 
$
45,154

 
$
393

Construction
 

 

 
759

 

 

 

 
695

 

Land
 
6,562

 
9

 
3,957

 
10

 
6,721

 
26

 
4,796

 
30

C&I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business
 
91,015

 
258

 
75,655

 
161

 
92,531

 
648

 
75,951

 
489

Trade finance
 
9,004

 
33

 
11,285

 
50

 
10,028

 
166

 
11,584

 
185

Residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
13,410

 
72

 
18,192

 
68

 
13,489

 
220

 
18,338

 
205

Multifamily
 
20,594

 
77

 
24,338

 
178

 
20,654

 
231

 
24,546

 
530

Consumer
 
1,567

 
16

 
1,248

 
12

 
1,572

 
48

 
1,253

 
35

Total impaired non-PCI loans
 
$
194,172

 
$
929

 
$
178,661

 
$
609

 
$
197,125

 
$
2,707

 
$
182,317

 
$
1,867

 
(1)
Includes interest recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal and not as interest income.


40



Allowance for Credit Losses

The following tables present a summary of activities in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015:
 
 
 
Three Months Ended September 30, 2016
($ in thousands)
 
Non-PCI Loans
 
PCI Loans
 
Total
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
 
 
Beginning balance
 
$
78,102

 
$
148,427

 
$
31,561

 
$
8,421

 
$
266,511

 
$
257

 
$
266,768

(Reversal of) provision for loan losses
 
(6,598
)
 
18,548

 
309

 
(644
)
 
11,615

 
(101
)
 
11,514

Charge-offs
 
(309
)
 
(23,696
)
 
(29
)
 
(13
)
 
(24,047
)
 

 
(24,047
)
Recoveries
 
634

 
165

 
654

 
124

 
1,577

 

 
1,577

Net recoveries (charge-offs)
 
325

 
(23,531
)
 
625

 
111

 
(22,470
)
 

 
(22,470
)
Ending balance
 
$
71,829

 
$
143,444

 
$
32,495

 
$
7,888

 
$
255,656

 
$
156

 
$
255,812

 
 
 
 
Three Months Ended September 30, 2015
($ in thousands)
 
Non-PCI Loans
 
PCI Loans
 
Total
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
 
 
Beginning balance
 
$
75,496

 
$
133,962

 
$
40,668

 
$
10,491

 
$
260,617

 
$
612

 
$
261,229

Provision for (reversal of) loan losses
 
2,333

 
11,221

 
(4,979
)
 
(70
)
 
8,505

 
(71
)
 
8,434

Charge-offs
 
(135
)
 
(7,187
)
 
(35
)
 
(123
)
 
(7,480
)
 

 
(7,480
)
Recoveries
 
83

 
933

 
1,158

 
73

 
2,247

 

 
2,247

Net (charge-offs) recoveries
 
(52
)
 
(6,254
)
 
1,123

 
(50
)
 
(5,233
)
 

 
(5,233
)
Ending balance
 
$
77,777

 
$
138,929

 
$
36,812

 
$
10,371

 
$
263,889

 
$
541

 
$
264,430

 
 
 
 
Nine Months Ended September 30, 2016
($ in thousands)
 
Non-PCI Loans
 
PCI Loans
 
 
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
 
 
Total
Beginning balance
 
$
81,191

 
$
134,597

 
$
39,292

 
$
9,520

 
$
264,600

 
$
359

 
$
264,959

(Reversal of) provision for loan losses
 
(9,731
)
 
38,549

 
(7,679
)
 
(1,887
)
 
19,252

 
(203
)
 
19,049

Charge-offs
 
(504
)
 
(31,770
)
 
(166
)
 
(17
)
 
(32,457
)
 

 
(32,457
)
Recoveries
 
873

 
2,068

 
1,048

 
272

 
4,261

 

 
4,261

Net recoveries (charge-offs)
 
369

 
(29,702
)
 
882

 
255

 
(28,196
)
 

 
(28,196
)
Ending balance
 
$
71,829

 
$
143,444

 
$
32,495

 
$
7,888

 
$
255,656

 
$
156

 
$
255,812

 
 
 
 
Nine Months Ended September 30, 2015
($ in thousands)
 
Non-PCI Loans
 
PCI Loans
 
Total
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
 
 
Beginning balance
 
$
72,263

 
$
134,598

 
$
43,856

 
$
10,248

 
$
260,965

 
$
714

 
$
261,679

Provision for (reversal of) loan losses
 
5,739

 
13,883

 
(9,868
)
 
305

 
10,059

 
(173
)
 
9,886

Charge-offs
 
(1,486
)
 
(16,619
)
 
(782
)
 
(586
)
 
(19,473
)
 

 
(19,473
)
Recoveries
 
1,261

 
7,067

 
3,606

 
404

 
12,338

 

 
12,338

Net (charge-offs) recoveries
 
(225
)
 
(9,552
)
 
2,824

 
(182
)
 
(7,135
)
 

 
(7,135
)
Ending balance
 
$
77,777

 
$
138,929

 
$
36,812

 
$
10,371

 
$
263,889

 
$
541

 
$
264,430

 

For further information on accounting policies and the methodology used to estimate the allowance for credit losses and loan charge-offs, please see Note 1Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.


41



The following table presents a summary of activities in the allowance for unfunded credit reserves during the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$
20,318

 
$
19,741

 
$
20,360

 
$
12,712

(Reversal of) provision for unfunded credit reserves
 
(1,989
)
 
(698
)
 
(2,031
)
 
6,331

Ending balance
 
$
18,329

 
$
19,043

 
$
18,329

 
$
19,043

 
 
 
 
 
 
 
 
 

The allowance for unfunded credit reserves is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities. The allowance for unfunded credit reserves is included in Accrued expense and other liabilities on the Consolidated Balance Sheets. Please refer to Note 10Commitments And Contingencies to the Consolidated Financial Statements for additional information related to unfunded credit reserves.

The following tables present the Company’s allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of September 30, 2016 and December 31, 2015:
 
 
 
September 30, 2016
($ in thousands)
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
579

 
$
3,801

 
$
527

 
$
43

 
$
4,950

Collectively evaluated for impairment
 
71,250

 
139,643

 
31,968

 
7,845

 
250,706

Acquired with deteriorated credit quality 
 
148

 
3

 
5

 

 
156

Ending balance
 
$
71,977

 
$
143,447

 
$
32,500

 
$
7,888

 
$
255,812

 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
57,503

 
$
86,785

 
$
34,138

 
$
1,556

 
$
179,982

Collectively evaluated for impairment
 
8,062,066

 
9,228,375

 
4,478,965

 
2,057,622

 
23,827,028

Acquired with deteriorated credit quality (1)
 
395,510

 
42,885

 
258,890

 
20,296

 
717,581

Ending balance (1)
 
$
8,515,079

 
$
9,358,045

 
$
4,771,993

 
$
2,079,474

 
$
24,724,591

 
 
 
 
December 31, 2015
($ in thousands)
 
CRE
 
C&I
 
Residential
 
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
3,267

 
$
16,088

 
$
923

 
$
60

 
$
20,338

Collectively evaluated for impairment
 
77,924

 
118,509

 
38,369

 
9,460

 
244,262

Acquired with deteriorated credit quality
 
347

 
9

 
3

 

 
359

Ending balance
 
$
81,538

 
$
134,606

 
$
39,295

 
$
9,520

 
$
264,959

 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
41,396

 
$
81,831

 
$
38,739

 
$
1,240

 
$
163,206

Collectively evaluated for impairment
 
7,519,988

 
8,861,960

 
4,213,265

 
1,930,588

 
22,525,801

Acquired with deteriorated credit quality (1)
 
549,365

 
59,216

 
337,910

 
24,263

 
970,754

Ending balance (1)
 
$
8,110,749

 
$
9,003,007

 
$
4,589,914

 
$
1,956,091

 
$
23,659,761

 
(1)
Loans net of ASC 310-30 discount.


42



PCI Loans

At the date of acquisition, PCI loans are pooled and accounted for at fair value, which represents the discounted value of the expected cash flows of the loan portfolio. The amount of expected cash flows over the initial investment in the loan represents the “accretable yield,” which is recognized as interest income on a level yield basis over the life of the loan. The excess of total contractual cash flows over the cash flows expected to be received at origination is deemed as the “nonaccretable difference.”

The following table presents the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$
166,777

 
$
271,862

 
$
214,907

 
$
311,688

Accretion
 
(14,827
)
 
(30,608
)
 
(53,510
)
 
(84,537
)
Changes in expected cash flows
 
311

 
1,518

 
(9,136
)
 
15,621

Ending balance
 
$
152,261

 
$
242,772

 
$
152,261

 
$
242,772

 
 
 
 
 
 
 
 
 


Loans Held-for-Sale

Loans held-for-sale are carried at the LOCOM. When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic review under the Company’s management evaluation processes, including asset/liability management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from the loans held-for-investment portfolio to the loans held-for-sale portfolio at LOCOM.

Loans held-for-sale amounted to $47.7 million as of September 30, 2016, and were comprised primarily of consumer and multifamily residential loans. In comparison, loans held-for-sale, which were comprised of consumer loans, amounted to $32.0 million as of December 31, 2015. Transfers of loans held-for-investment to loans held-for-sale were $144.9 million and $720.7 million, respectively, for the three and nine months ended September 30, 2016. These loan transfers were comprised primarily of C&I, multifamily residential and CRE loans. In comparison, loans held-for-investment transferred to loans held-for-sale of $400.3 million and $1.56 billion, respectively, for the three and nine months ended September 30, 2015, were comprised primarily of single-family residential and C&I loans. For the three months ended September 30, 2016, no write-downs to the allowance for loan losses were recorded that related to loans transferred from loans held-for-investment to loans held-for-sale. For the nine months ended September 30, 2016, the Company recorded $1.9 million in write-downs to the allowance for loan losses related to loans transferred from loans held-for-investment to loans held-for-sale. In comparison, the Company recorded $968 thousand and $3.1 million in write-downs to the allowance for loan losses related to loans transferred from loans held-for-investment to loans held-for-sale for the three and nine months ended September 30, 2015, respectively.
  
During the three months ended September 30, 2016 and 2015, the Company sold $107.3 million and $181.9 million, respectively, in originated loans resulting in net gains of $2.2 million and $5.1 million, respectively. During the nine months ended September 30, 2016, the Company sold or securitized $529.5 million in originated loans, resulting in net gains of $9.3 million. During the nine months ended September 30, 2016, the Company recorded $1.1 million in net gains and $641 thousand in mortgage servicing rights, and retained $160.1 million of the senior tranche of the resulting securities from the securitization of $201.7 million of multifamily residential loans. Originated loans sold or securitized during the nine months ended September 30, 2016 were primarily comprised of multifamily residential, C&I and CRE loans. In comparison, during the nine months ended September 30, 2015, the Company sold $741.0 million in originated loans, which were comprised primarily of single-family residential and C&I loans, resulting in net gains of $19.4 million.

43



From time to time, the Company purchases loans (including participation loans) and sells loans in the secondary market. During the three and nine months ended September 30, 2016, the Company purchased approximately $456.9 million and $1.50 billion of loans, respectively, compared to $207.0 million and $572.5 million, respectively, for the same periods last year. The Company sold $45.8 million and $179.4 million of loans in the secondary market, respectively, during the three and nine months ended September 30, 2016. Such purchased loans were transferred from loans held-for-investment to loans held-for-sale and a write-down to allowance was recorded, as appropriate. No gains or losses on loans sold in the secondary market were recorded for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the Company recorded $69 thousand in gains on loans sold in the secondary market. In comparison, the Company sold $64.0 million and $510.1 million of loans in the secondary market, respectively, during the three and nine months ended September 30, 2015. No gains or losses on loans sold in the secondary market were recorded for the three months ended September 30, 2015. For the nine months ended September 30, 2015, the Company recorded net gains of $1.0 million on loans sold in the secondary market.

No LOCOM adjustments related to the loans held-for-sale portfolio were recorded for the three months ended September 30, 2016, compared to $211 thousand recorded for the three months ended September 30, 2015. For the nine months ended September 30, 2016 and 2015, the Company recorded $2.4 million and $728 thousand, respectively, in LOCOM adjustments related to the loans held-for-sale portfolio. LOCOM adjustments are recorded in Net gains on sales of loans on the Consolidated Statements of Income.

NOTE 8
INVESTMENTS IN QUALIFIED AFFORDABLE HOUSING PARTNERSHIPS, TAX CREDIT AND OTHER INVESTMENTS, NET

The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate income.  The Company invests in certain affordable housing limited partnerships that qualify for CRA credits. Such limited partnerships are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the United States. Each of the partnerships must meet the regulatory requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits.  In addition to affordable housing limited partnerships, the Company invests in new market tax credit projects that qualify for CRA credits and eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, while the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.

Investments in Qualified Affordable Housing Partnerships, Net

The Company records its investments in qualified affordable housing partnerships, net using the proportional amortization method. 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 on the Consolidated Statements of Income as a component of income tax expense. The following table presents the balances of the Company’s investments in qualified affordable housing partnerships, net and related unfunded commitments as of the periods indicated:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
Investments in qualified affordable housing partnerships, net
 
$
173,045

 
$
193,978

Accrued expenses and other liabilities — Unfunded commitments
 
$
41,267

 
$
61,525

 

The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net for the periods indicated:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Tax credits and other tax benefits recognized
 
$
8,591

 
$
9,237

 
$
26,561

 
$
26,617

Amortization expense included in income tax expense
 
$
6,612

 
$
6,348

 
$
20,923

 
$
18,744

 
 
 
 
 
 
 
 
 


44



Investments in Tax Credit and Other Investments, Net

Investments in tax credit and other investments, net were $169.9 million and $187.2 million as of September 30, 2016 and December 31, 2015, respectively, and were included in Other assets on the Consolidated Balance Sheets. The Company is not the primary beneficiary in these partnerships and, therefore, is not required to consolidate its investments in tax credit and other investments on the Consolidated Financial Statements. Depending on the ownership percentage and the influence the Company has on the limited partnership, the Company applies either the equity method or cost method of accounting.

Total unfunded commitments for these investments were $119.2 million and $113.2 million as of September 30, 2016 and December 31, 2015, respectively, and were included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Amortization of tax credit and other investments were $32.6 million and $12.3 million for the three months ended September 30, 2016 and 2015, respectively. Amortization of tax credit and other investments were $60.8 million and $21.6 million for the nine months ended September 30, 2016 and 2015, respectively.


NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS    

Goodwill

Total goodwill of $469.4 million remained unchanged as of September 30, 2016 compared to December 31, 2015. Goodwill is tested for impairment on an annual basis as of December 31st, or more frequently as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s three operating segments, Retail Banking, Commercial Banking, and Other, are equivalent to the Company’s reporting units. For complete discussion and disclosure, please refer to Note 14 Business Segments to the Consolidated Financial Statements.

Impairment Analysis

The Company performed its annual impairment analysis as of December 31, 2015 and concluded that there was no goodwill impairment as the fair values of all reporting units exceeded the carrying amounts of goodwill. There were no triggering events during the nine months ended September 30, 2016 and therefore, no additional goodwill impairment analysis was performed. No assurance can be given that goodwill will not be written down in future periods. Please refer to Note 10 - Goodwill and Other Intangible Assets to the Consolidated Financial Statements of the Company’s 2015 Form 10-K for additional details related to the Company’s annual goodwill impairment analysis.
    
Premiums on Acquired Deposits

Premiums on acquired deposits represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions. These intangibles are tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. There were no impairment write-downs on deposit premiums for the nine months ended September 30, 2016 and 2015.

The following table presents the gross carrying value of intangible assets and accumulated amortization as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
Gross balance
 
$
108,814

 
$
108,814

Accumulated amortization
 
78,916

 
72,739

Net carrying balance
 
$
29,898

 
$
36,075

 

Amortization Expense

The Company amortizes premiums on acquired deposits based on the projected useful lives of the related deposits. The amortization expense related to the intangible assets was $2.0 million and $2.3 million for the three months ended September 30, 2016 and 2015, respectively, and $6.2 million and $7.0 million for the nine months ended September 30, 2016 and 2015, respectively.


45



The following table presents the estimated future amortization expense of premiums on acquired deposits:
 
Year Ended December 31,
 
Amount
($ in thousands)
 
 
Remainder of 2016
 
$
1,909

2017
 
6,935

2018
 
5,883

2019
 
4,864

2020
 
3,846

Thereafter
 
6,461

Total
 
$
29,898

 


NOTE 10 COMMITMENTS AND CONTINGENCIES
 
Credit Extensions — In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying Consolidated Financial Statements. While the Company does not anticipate losses as a result of these transactions, commitments to extend credit are included in determining the appropriate level of the allowance for unfunded commitments and unissued commercial letters of credit and standby letters of credit (“SBLCs”). For further information about these commitments, including their terms, see Note 14 — Commitments, Contingencies and Related Party Transactions Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K. The following table presents the Company’s credit-related commitments as of the periods indicated:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
Loan commitments
 
$
4,688,223

 
$
3,370,271

Commercial letters of credit and SBLCs
 
$
1,527,366

 
$
1,293,547

 

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements.

Commercial letters of credit are issued to facilitate domestic and foreign trade transactions while SBLCs generally are contingent upon the failure of the customers to perform according to the terms of the underlying contract with the third party. As a result, the total contractual amounts do not necessarily represent future funding requirements. The Company’s historical experience is that SBLCs typically expire without being funded. Additionally, in many cases, the Company holds collateral in various forms against these SBLCs. As a part of its risk management activities, the Company monitors the creditworthiness of customers in conjunction with its SBLC exposure. Customers are obligated to reimburse the Company for any payment made on the customers’ behalf. If customers fail to pay, the Company would, as applicable, liquidate the collateral and/or offset accounts. Total letters of credit of $1.53 billion consisted of commercial letters of credit of $45.1 million and SBLCs of $1.48 billion as of September 30, 2016.

The Company uses the same credit underwriting criteria in extending loans, commitments, and conditional obligations to customers. Each customer’s creditworthiness is evaluated on a case-by-case basis. Collateral may be obtained based on management’s assessment of the customer’s credit. Collateral may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial property.
 
Estimated exposure to loss from these commitments is included in the allowance for unfunded credit reserves and amounted to $17.9 million as of September 30, 2016 and $19.8 million as of December 31, 2015. These amounts are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.
 

46



Guarantees — The Company has sold or securitized loans with recourse in the ordinary course of business. The recourse component in the loans sold or securitized with recourse is considered a guarantee. As the guarantor, the Company is obligated to make payments when the loans default. As of September 30, 2016 and December 31, 2015, the unpaid principal balance of total loans sold or securitized with recourse amounted to $159.5 million and $191.3 million, respectively. The maximum potential future payments of loans subject to full recourse, which generally represents the unpaid principal balance of total loans sold or securitized with recourse, were $25.5 million and $29.8 million as of September 30, 2016 and December 31, 2015, respectively. The maximum potential future payments of loans subject to limited recourse were $4.9 million and $5.9 million as of September 30, 2016 and December 31, 2015, respectively. The recourse provision on multifamily loans varies by loan sale and is limited to 4% of the top loss on the underlying loans. The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit reserves and totaled $466 thousand and $630 thousand as of September 30, 2016 and December 31, 2015, respectively. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.

Litigation — The Company is a party to various legal actions arising in the normal course of business. In accordance with ASC 450, Contingencies, the Company accrues reserves for currently outstanding lawsuits, claims, and proceedings when a loss contingency is probable and can be reasonably estimated. The outcome of such legal actions is inherently difficult to predict and it is possible that one or more of the currently pending, threatened legal or regulatory matters could have a material adverse effect on the Company’s liquidity, consolidated financial position, and/or results of operations. Based on the information currently available, advice of counsel and established reserves, the Company believes that the eventual outcome of pending legal matters will not individually or in the aggregate have a material adverse effect on the Company’s consolidated financial statements. On September 8, 2014, a jury in the case titled “F&F, LLC and 618 Investment, Inc. v. East West Bank,” Superior Court of the State of California for the County of Los Angeles, Case No. BC462714, delivered a verdict in favor of plaintiff F&F, LLC. The case is being appealed.  The litigation accrual was $38.1 million and $35.4 million as of September 30, 2016 and December 31, 2015, respectively.

Other Commitments — The Company has commitments to invest in qualified affordable housing partnerships and other tax credit investments qualifying for historic rehabilitation tax credits or other types of tax credits. These commitments are payable on demand. As of September 30, 2016 and December 31, 2015, these commitments were $160.5 million and $174.7 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.


NOTE 11 STOCK COMPENSATION PLANS

Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to employees. The Company did not issue any stock options or RSAs during the nine months ended September 30, 2016 and 2015. All RSAs have vested during 2015.

RSUs are granted under the Company’s long-term incentive plan at no cost to the recipient. RSUs vest ratably over three years or cliff vest after three or five years of continued employment from the date of the grant. RSUs entitle the recipient to receive cash dividends equivalent to any dividends paid on the underlying common stock. The RSU dividends are accrued during the vesting period and are paid at the time of vesting. While a portion of the RSUs are time-vesting awards, others vest subject to the attainment of specified performance goals. All RSUs are subject to forfeiture until vested.

The following table presents the total stock compensation expense and the related net tax benefit associated with the Company’s various employee share-based compensation plans for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Stock compensation costs
 
$
4,763

 
$
4,050

 
$
13,973

 
$
11,702

Net tax benefit recognized in equity for stock compensation plans
 
$
14

 
$
31

 
$
1,019

 
$
3,227

 
 
 
 
 
 
 
 
 


47



The following table presents a summary of the activity for the Company’s time-based and performance-based RSUs for the nine months ended September 30, 2016 based on the target amount of awards:
 
 
 
Nine Months Ended September 30, 2016
 
Time-Based RSUs
 
Performance-Based RSUs
 
Shares
 
Weighted
Average
Grant-Date Fair Value
 
Shares
 
Weighted
Average
Grant-Date Fair Value
Outstanding at beginning of period
 
933,312

 
$
36.83

 
389,358

 
$
34.21

Granted
 
496,580

 
31.47

 
159,407

 
29.18

Vested
 
(119,867
)
 
25.34

 
(138,019
)
 
25.25

Forfeited
 
(96,320
)
 
35.65

 

 

Outstanding at end of period
 
1,213,705

 
$
35.86

 
410,746

 
$
35.27

 
 
Compensation cost for the time-based awards is based on the quoted market price of the Company’s stock at the grant date. Performance-based awards granted that include discretionary performance-based vesting conditions are subject to variable accounting. As of September 30, 2016, total unrecognized compensation cost related to time-based and performance-based RSUs amounted to $27.1 million and $9.5 million, respectively. This cost is expected to be recognized over a weighted average period of 1.82 years and 1.68 years, respectively.


NOTE 12STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

Warrant —The Company acquired MetroCorp Bancshares, Inc., (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp had an outstanding warrant to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holder were converted into the right to acquire 230,282 shares of East West’s common stock until January 16, 2019. The warrant has not been exercised as of September 30, 2016.

EPS — Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, plus common share equivalents calculated for stock options, warrants and RSUs outstanding using the treasury stock method. The Company has issued RSAs, which are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents. These RSAs are considered participating securities. Accordingly, the Company applied the two-class method in the computation of basic and diluted EPS in periods where RSAs are outstanding. RSUs do not contain nonforfeitable rights to dividends when granted. As of September 30, 2016, there were no RSAs outstanding.


48



The following table presents EPS calculations for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in thousands, except per share data, shares in thousands)
 
2016
 
2015
 
2016
 
2015
Basic
 
 
 
 
 
 
 
 
Net income
 
$
110,143

 
$
94,097

 
$
320,943

 
$
292,872

Less: Earnings allocated to participating securities
 

 

 

 
3

Net income allocated to common stockholders
 
$
110,143

 
$
94,097

 
$
320,943

 
$
292,869

 
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
144,122

 
143,861

 
144,061

 
143,788

Basic EPS
 
$
0.76

 
$
0.65

 
$
2.23

 
$
2.04

 
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
 
Net income allocated to diluted common stockholders
 
$
110,143

 
$
94,097

 
$
320,943

 
$
292,869

 
 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
 
144,122

 
143,861

 
144,061

 
143,788

Diluted potential common shares (1)
 
1,116

 
729

 
1,025

 
680

Diluted weighted average number of shares outstanding
 
145,238

 
144,590

 
145,086

 
144,468

Diluted EPS
 
$
0.76

 
$
0.65

 
$
2.21

 
$
2.03

 
 
 
 
 
 
 
 
 
(1)
Includes dilutive shares from RSUs and warrants for the three and nine months ended September 30, 2016 and 2015. Also includes dilutive shares from stock options for the three and nine months ended September 30, 2015.

For the three months ended September 30, 2016 and 2015, approximately 2 thousand and 23 thousand weighted average anti-dilutive shares from RSUs, respectively, were excluded from the diluted EPS computation. For the nine months ended September 30, 2016 and 2015, approximately 7 thousand and 13 thousand weighted average anti-dilutive shares from RSUs, respectively, were excluded from the diluted EPS computation.



49



NOTE 13ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables present the changes in the components of AOCI balances for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended September 30,
 
2016
 
2015
 
Available-
for-Sale
Investment
Securities
 
Foreign
Currency
Translation
Adjustments (1)
 
Total
 
Available-
for-Sale
Investment
Securities
 
Foreign
Currency
Translation
Adjustments
(1)
 
Total
Beginning balance
 
$
11,756

 
$
(13,468
)
 
$
(1,712
)
 
$
5,430

 
$

 
$
5,430

Net unrealized (losses) gains arising during the period
 
(3,869
)
 
(555
)
 
(4,424
)
 
13,127

 
(6,846
)
 
6,281

Amounts reclassified from AOCI
 
(1,038
)
 

 
(1,038
)
 
(9,881
)
 

 
(9,881
)
Changes, net of taxes
 
(4,907
)
 
(555
)
 
(5,462
)
 
3,246

 
(6,846
)
 
(3,600
)
Ending balance
 
$
6,849

 
$
(14,023
)
 
$
(7,174
)
 
$
8,676

 
$
(6,846
)
 
$
1,830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
 
Available-
for-Sale
Investment
Securities
 
Foreign
Currency
Translation
Adjustments
(1)
 
Total
 
Available-
for-Sale
Investment
Securities
 
Foreign
Currency
Translation
Adjustments
(1)
 
Total
Beginning balance
 
$
(6,144
)
 
$
(8,797
)
 
$
(14,941
)
 
$
4,237

 
$

 
$
4,237

Net unrealized gains (losses) arising during the period
 
17,901

 
(5,226
)
 
12,675

 
20,096

 
(6,846
)
 
13,250

Amounts reclassified from AOCI
 
(4,908
)
 

 
(4,908
)
 
(15,657
)
 

 
(15,657
)
Changes, net of taxes
 
12,993

 
(5,226
)
 
7,767

 
4,439

 
(6,846
)
 
(2,407
)
Ending balance
 
$
6,849

 
$
(14,023
)
 
$
(7,174
)
 
$
8,676

 
$
(6,846
)
 
$
1,830

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. In the third quarter of 2015, there was a change in functional currency from USD to the local currency of the Company’s foreign subsidiary.


50



The following tables present the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the three and nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended September 30,
 
2016
 
2015
 
Before-Tax
 
Tax
Effect
 
Net-of-Tax
 
Before-Tax
 
Tax
Effect
 
Net-of-Tax
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Net unrealized (losses) gains arising during the period
 
$
(6,677
)
 
$
2,808

 
$
(3,869
)
 
$
22,634

 
$
(9,507
)
 
$
13,127

Net realized gains reclassified into net income (1)
 
(1,790
)
 
752

 
(1,038
)
 
(17,036
)
 
7,155

 
(9,881
)
Net change
 
(8,467
)
 
3,560

 
(4,907
)
 
5,598

 
(2,352
)
 
3,246

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized losses arising during period
 
(555
)
 

 
(555
)
 
(6,846
)
 

 
(6,846
)
Net change
 
(555
)
 

 
(555
)
 
(6,846
)
 

 
(6,846
)
Other comprehensive loss
 
$
(9,022
)
 
$
3,560

 
$
(5,462
)
 
$
(1,248
)
 
$
(2,352
)
 
$
(3,600
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
 
Before-Tax
 
Tax
Effect
 
Net-of-Tax
 
Before-Tax
 
Tax
Effect
 
Net-of-Tax
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gains arising during the period
 
$
30,888

 
$
(12,987
)
 
$
17,901

 
$
34,648

 
$
(14,552
)
 
$
20,096

Net realized gains reclassified into net income (1)
 
(8,468
)
 
3,560

 
(4,908
)
 
(26,994
)
 
11,337

 
(15,657
)
Net change
 
22,420

 
(9,427
)
 
12,993

 
7,654

 
(3,215
)
 
4,439

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized losses arising during period
 
(5,226
)
 

 
(5,226
)
 
(6,846
)
 

 
(6,846
)
Net change
 
(5,226
)
 

 
(5,226
)
 
(6,846
)
 

 
(6,846
)
Other comprehensive income (loss)
 
$
17,194

 
$
(9,427
)
 
$
7,767

 
$
808

 
$
(3,215
)
 
$
(2,407
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
For the three and nine months ended September 30, 2016 and 2015, the pretax amount was reported in Net gains on sales of available-for-sale investment securities on the Consolidated Statements of Income.


NOTE 14 BUSINESS SEGMENTS
 
The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company. The Company has identified three operating segments for purposes of management reporting: (1) Retail Banking; (2) Commercial Banking; and (3) Other. These three business divisions meet the criteria of an operating segment: the segment engages in business activities from which it earns revenues and incurs expenses; its operating results are regularly reviewed by the Company’s chief operating decision-maker to render decisions about resources to be allocated to the segment and assess its performance; and discrete financial information is available.
 
The Retail Banking segment focuses primarily on retail operations through the Bank’s branch network. The Commercial Banking segment, which includes CRE, primarily generates commercial loans through the commercial lending offices located in the Bank’s production offices. Furthermore, the Company’s Commercial Banking segment offers a wide variety of international finance and trade services and products. The remaining centralized functions, including treasury activities and eliminations of inter-segment amounts, have been aggregated and included in the “Other” segment, which provides broad administrative support to the two core segments.
 

51



The Company’s funds transfer pricing assumptions are intended to promote core deposit growth and to reflect the current risk profiles of various loan categories within the credit portfolio. Transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the Company’s process is reflective of current market conditions. The transfer pricing process is formulated with the goal of incenting loan and deposit growth that is consistent with the Company’s overall growth objectives, as well as to provide a reasonable and consistent basis for the measurement of the Company’s business segments and product net interest margins.

The accounting policies of the segments are the same as those described in Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain operating and administrative costs and the provision for credit losses. Net interest income is based on the Company’s internal funds transfer pricing system which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business segment. Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. The provision for credit losses is allocated based on actual charge-offs for the period as well as average loan balances for each segment during the period. The Company evaluates overall performance based on profit or loss from operations before income taxes excluding nonrecurring gains and losses.
 
Changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods are generally restated for comparability for changes in management structure or reporting methodologies unless it is not deemed practicable to do so.
 
The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended September 30, 2016
 
Retail
Banking
 
Commercial
Banking
 
Other
 
Total
Interest income
 
$
77,186

 
$
180,095

 
$
23,036

 
$
280,317

Charge for funds used
 
(24,320
)
 
(53,262
)
 
(3,858
)
 
(81,440
)
Interest spread on funds used
 
52,866

 
126,833

 
19,178

 
198,877

Interest expense
 
(14,855
)
 
(3,699
)
 
(7,615
)
 
(26,169
)
Credit on funds provided
 
68,622

 
8,206

 
4,612

 
81,440

Interest spread on funds provided
 
53,767

 
4,507

 
(3,003
)
 
55,271

Net interest income
 
$
106,633

 
$
131,340

 
$
16,175

 
$
254,148

(Reversal of) provision for credit losses
 
$
(3,709
)
 
$
13,234

 
$

 
$
9,525

Depreciation, amortization and (accretion), net
 
$
782

 
$
(5,875
)
 
$
40,541

 
$
35,448

Segment pretax profit
 
$
32,304

 
$
80,393

 
$
10,767

 
$
123,464

As of September 30, 2016:
 
 
 
 
 
 
 
 
Goodwill
 
$
357,207

 
$
112,226

 
$

 
$
469,433

Segment assets
 
$
7,606,611

 
$
18,549,562

 
$
7,099,102

 
$
33,255,275

 


52



 
($ in thousands)
 
Three Months Ended September 30, 2015
 
Retail
Banking
 
Commercial
Banking
 
Other
 
Total
Interest income
 
$
81,911

 
$
166,693

 
$
16,028

 
$
264,632

Charge for funds used
 
(20,795
)
 
(41,447
)
 
(20,485
)
 
(82,727
)
Interest spread on funds used
 
61,116

 
125,246

 
(4,457
)
 
181,905

Interest expense
 
(13,727
)
 
(4,765
)
 
(5,851
)
 
(24,343
)
Credit on funds provided
 
68,783

 
8,849

 
5,095

 
82,727

Interest spread on funds provided
 
55,056

 
4,084

 
(756
)
 
58,384

Net interest income (loss)
 
$
116,172

 
$
129,330

 
$
(5,213
)
 
$
240,289

Provision for credit losses
 
$
1,455

 
$
6,281

 
$

 
$
7,736

Depreciation, amortization and (accretion), net (1)
 
$
1,827

 
$
(13,496
)
 
$
18,765

 
$
7,096

Segment pretax profit (loss)
 
$
52,325

 
$
96,605

 
$
(9,941
)
 
$
138,989

As of September 30, 2015:
 
 
 
 
 
 
 
 
Goodwill
 
$
357,207

 
$
112,226

 
$

 
$
469,433

Segment assets
 
$
7,274,494

 
$
17,125,065

 
$
6,720,117

 
$
31,119,676

 
 
($ in thousands)
 
Nine Months Ended September 30, 2016
 
Retail
Banking
 
Commercial
Banking
 
Other
 
Total
Interest income
 
$
233,192

 
$
534,603

 
$
67,559

 
$
835,354

Charge for funds used
 
(70,770
)
 
(159,734
)
 
(22,465
)
 
(252,969
)
Interest spread on funds used
 
162,422

 
374,869

 
45,094

 
582,385

Interest expense
 
(44,133
)
 
(11,965
)
 
(19,320
)
 
(75,418
)
Credit on funds provided
 
210,831

 
26,655

 
15,483

 
252,969

Interest spread on funds provided
 
166,698

 
14,690

 
(3,837
)
 
177,551

Net interest income
 
$
329,120

 
$
389,559

 
$
41,257

 
$
759,936

(Reversal of) provision for credit losses
 
$
(2,846
)
 
$
19,864

 
$

 
$
17,018

Depreciation, amortization and (accretion), net
 
$
279

 
$
(25,915
)
 
$
86,316

 
$
60,680

Segment pretax profit
 
$
114,513

 
$
268,401

 
$
28,137

 
$
411,051

As of September 30, 2016:
 
 
 
 
 
 
 
 
Goodwill
 
$
357,207

 
$
112,226

 
$

 
$
469,433

Segment assets
 
$
7,606,611

 
$
18,549,562

 
$
7,099,102

 
$
33,255,275

 

53



 
($ in thousands)
 
Nine Months Ended September 30, 2015
 
Retail
Banking
 
Commercial
Banking
 
Other
 
Total
Interest income
 
$
252,085

 
$
482,816

 
$
48,437

 
$
783,338

Charge for funds used
 
(65,452
)
 
(117,125
)
 
(43,653
)
 
(226,230
)
Interest spread on funds used
 
186,633

 
365,691

 
4,784

 
557,108

Interest expense
 
(38,946
)
 
(13,738
)
 
(27,156
)
 
(79,840
)
Credit on funds provided
 
187,401

 
24,859

 
13,970

 
226,230

Interest spread on funds provided
 
148,455

 
11,121

 
(13,186
)
 
146,390

Net interest income (loss)
 
$
335,088

 
$
376,812

 
$
(8,402
)
 
$
703,498

(Reversal of) provision for credit losses
 
$
(1,268
)
 
$
17,485

 
$

 
$
16,217

Depreciation, amortization and (accretion), net (1)
 
$
6,743

 
$
(30,027
)
 
$
40,625

 
$
17,341

Segment pretax profit (loss)
 
$
160,609

 
$
287,049

 
$
(17,422
)
 
$
430,236

As of September 30, 2015:
 
 
 
 
 
 
 
 
Goodwill
 
$
357,207

 
$
112,226

 
$

 
$
469,433

Segment assets
 
$
7,274,494

 
$
17,125,065

 
$
6,720,117

 
$
31,119,676

 
(1)
Includes amortization and accretion related to the FDIC indemnification asset/net payable to the FDIC.


NOTE 15SUBSEQUENT EVENTS
 
On October 19, 2016, the Company’s Board of Directors declared fourth quarter 2016 cash dividends of $0.20 per share for the Company’s common stock which is payable on November 15, 2016 to stockholders of record as of November 1, 2016.



54



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources 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. This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s financial condition and the results of operations. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report and the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the U.S. Securities and Exchange Commission on February 26, 2016 (the “Company’s 2015 Form 10-K”).
 
Overview
 
The Company’s vision is to serve as the financial bridge between the United States and Greater China. The Company’s primary strategy to achieve this vision is to expand the Company’s global network of contacts and resources to better meet its customers’ diverse financial needs in and between the world’s two largest markets. With over 130 locations in the United States and Greater China and a full range of cross-border products and services, the Company is well equipped to fulfill its customers’ business needs.

Financial Highlights

The Company successfully completed another quarter with strong earnings and financial results for the three and nine months ended September 30, 2016, achieving healthy growth and an increase in revenues. It is the Company’s priority to focus on strengthening its risk management infrastructure, compliance, and the Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) programs in order to meet increasing regulatory expectations. The Company continues making efforts to address BSA concerns and making the necessary investments for internal programs to ensure the Company is in compliance with BSA rules and regulations, while still providing strong return to stockholders.

Noteworthy items on the Company’s performance included:

Net income totaled $110.1 million and $320.9 million for the three and nine months ended September 30, 2016, which reflected increases of 17% and 10%, respectively, compared to the same periods in the prior year.
Diluted earnings per share were $0.76 and $2.21 for the three and nine months ended September 30, 2016, which reflected increases of 17% and 9%, respectively, compared to the prior year periods.
Revenue, the sum of net interest income before provision for credit losses and noninterest income increased $9.0 million or 3% to $303.5 million for the three months ended September 30, 2016, compared to the prior year period, and $51.7 million or 6% to $894.1 million for the nine months ended September 30, 2016, compared to the prior year period.
Noninterest expense increased $22.8 million or 15% to $170.5 million for the three months ended September 30, 2016 compared to the prior year period. For the nine months ended September 30, 2016, noninterest expense increased $70.0 million or 18% to $466.0 million compared to the prior year period.
The Company’s effective tax rate for the three and nine months ended September 30, 2016 was 10.8% and 21.9%, respectively, compared to 32.3% and 31.9% for the same periods in the prior year. The decreases in the effective tax rate were mainly attributable to a larger benefit from tax credit investments in 2016, compared to 2015.
Cost of funds remained at 0.36% for each of the three months ended September 30, 2016 and 2015. Cost of funds improved six basis points to 0.35% for the nine months ended September 30, 2016, compared to the prior year period.

Additionally, the Company experienced a $904.4 million or 3% growth in total assets as of September 30, 2016 compared to December 31, 2015. This was largely attributable to increases in net loans held-for-investment, cash and cash equivalents and a held-to-maturity investment security, partially offset by decreases in available-for-sale investment securities and securities purchased under resale agreements (“resale agreements”).


55



Gross loans held-for-investment increased $1.06 billion or 5% to $24.72 billion as of September 30, 2016, compared to $23.66 billion as of December 31, 2015, while the allowance for loan losses to loans held-for-investment ratio improved by nine basis points to 1.03% compared to 1.12% as of December 31, 2015. The overall balance sheet growth was primarily fueled by a solid deposit growth during the nine months ended September 30, 2016. Deposits increased $1.12 billion or 4% to $28.59 billion as of September 30, 2016 compared to $27.48 billion as of December 31, 2015, primarily due to a $2.13 billion or 10% increase in core deposits, partially offset by $1.02 billion or 15% decrease in time deposits to $5.60 billion as of September 30, 2016. Core deposits comprised 80% and 76% of total deposits as of September 30, 2016 and December 31, 2015, respectively.
    
From a capital management perspective, the Company continued to maintain a strong capital position with its Common Equity Tier 1 (“CET1”) capital ratio at 10.9% as of September 30, 2016, compared to 10.5% as of December 31, 2015. The total risk-based capital ratio was 12.5% and 12.2% as of September 30, 2016 and December 31, 2015, respectively. The Tier 1 leverage capital ratio was 8.9% as of September 30, 2016, compared to 8.5% as of June 30, 2016. Book value per common share increased $1.74 or 8% from $21.70 as of December 31, 2015 to $23.44 as of September 30, 2016.

The strong balance sheet growth and increased revenues placed the Company in a better position to focus on its bridge banking strategy and target future growth opportunities. As the Company remains focused on its continued growth, the Company continues to meet its customers’ financial needs. In October 2016, the Company’s Board of Directors (the “Board”) declared fourth quarter cash dividends for the Company’s common stock. The cash dividend of $0.20 per share is payable on November 15, 2016 to stockholders of record as of November 1, 2016.

Results of Operations
 
Net income increased $16.0 million or 17% to $110.1 million and $28.1 million or 10% to $320.9 million for the three and nine months ended September 30, 2016, respectively, from $94.1 million and $292.9 million for the same periods in 2015. The earnings performance during 2016 reflects the Company’s continued focus on prudent growth and its effort in maintaining operating expense discipline and in executing its business strategy.

Revenue, the sum of net interest income before provision for credit losses and noninterest income, was $303.5 million for the three months ended September 30, 2016, a $9.0 million or 3% increase from $294.5 million for the same period in 2015. The $9.0 million increase in revenue was primarily due to a $13.8 million increase in net interest income, partially offset a $4.8 million decrease in noninterest income. The $13.8 million increase in net interest income for the three months ended September 30, 2016 was primarily due to higher interest revenue generated from loan growth, partially offset by an increase in interest expense from an increase in customer deposits.

For the nine months ended September 30, 2016, revenue was $894.1 million, an increase of $51.7 million or 6% from $842.4 million for the same period in 2015. This increase was primarily due to a $56.4 million increase in net interest income, partially offset by a $4.8 million decrease in noninterest income. The $56.4 million increase in net interest income comparing the nine months ended September 30, 2016 to the same period in 2015 was primarily due to higher interest revenue generated from loan growth and a decrease in interest expense from securities sold under repurchase agreements (“repurchase agreements”) primarily due to a decrease in repurchase agreement average balances, partially offset by an increase in interest expense on customer deposits.

Noninterest expense increased $22.8 million or 15% to $170.5 million for the three months ended September 30, 2016, and $70.0 million or 18% to $466.0 million for the nine months ended September 30, 2016, compared to the same periods in 2015. The increase for the three months ended September 30, 2016 was primarily due to an increase in amortization of tax credit and other investments, compensation and employee benefits and legal expense, partially offset by a decrease in repurchase agreements’ extinguishment costs. The increase for the nine months ended September 30, 2016 was primarily due to an increase in amortization of tax credit and other investments, compensation and employee benefits, consulting expense and other real estate owned (“OREO”) expense, partially offset by a decrease in repurchase agreements’ extinguishment costs.

The return on average assets increased 11 basis points to 1.33% for the three months ended September 30, 2016, compared to 1.22% for the same period in 2015. For the nine months ended September 30, 2016, the return on average assets of 1.31% remained unchanged compared to the same period in 2015. The return on average equity increased 85 basis points to 13.08% for the three months ended September 30, 2016, compared to 12.23% for the same period in 2015. For the nine months ended September 30, 2016 and 2015, the return on average equity of 13.12% remained unchanged.


56



Components of Net Income
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Net interest income
 
$
254.1

 
$
240.3

 
$
759.9

 
$
703.5

Provision for credit losses
 
(9.5
)
 
(7.7
)
 
(17.0
)
 
(16.2
)
Noninterest income
 
49.3

 
54.2

 
134.1

 
138.9

Noninterest expense
 
(170.5
)
 
(147.7
)
 
(466.0
)
 
(395.9
)
Income tax expense
 
(13.3
)
 
(44.9
)
 
(90.1
)
 
(137.4
)
Net income
 
$
110.1

 
$
94.1

 
$
320.9

 
$
292.9

Annualized return on average assets
 
1.33
%
 
1.22
%
 
1.31
%
 
1.31
%
Annualized return on average equity
 
13.08
%
 
12.23
%
 
13.12
%
 
13.12
%
 

Net Interest Income
 
The Company’s primary source of revenue is net interest income, which is the difference between interest earned on loans, investment securities, resale agreements and other interest-earning assets less interest expense on customer deposits, repurchase agreements, long-term debt and other interest-bearing liabilities. Net interest margin is calculated by dividing the annualized net interest income by average interest-earning assets. Net interest income and net interest margin are affected by several factors, including changes in average balances and composition of interest-earning assets and funding sources, market interest rate fluctuations and slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, volume of noninterest-bearing sources of funds and asset quality.

Net interest income for the three months ended September 30, 2016 was $254.1 million, an increase of $13.8 million or 6% compared to $240.3 million for the same period in 2015. Net interest income for the nine months ended September 30, 2016 was $759.9 million, an increase of $56.4 million or 8% compared to $703.5 million for the same period in 2015. The increase in net interest income for the nine months ended September 30, 2016 was primarily due to greater interest income resulting from the growth of the loan portfolio, resale agreements, and investment portfolio.

Net interest margin was 3.26% for the three months ended September 30, 2016, a six basis point decrease from 3.32% for the three months ended September 30, 2015. Net interest margin was 3.29% for the nine months ended September 30, 2016, a nine basis point decrease from 3.38% for the nine months ended September 30, 2015. The decrease in net interest margin for both the three and nine months ended September 30, 2016, compared to the same periods in 2015, was primarily due to the reduction in loan yields. The lower loan yields for the three and nine months ended September 30, 2016 were primarily due to the prolonged low interest rate environment and lower accretion income from the loans accounted for under Accounting Standard Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). During the three and nine months ended September 30, 2016, total accretion income from loans accounted for under ASC 310-30 was $7.1 million and $33.8 million, respectively, compared to $18.0 million and $46.4 million for the same periods in 2015, respectively.

For the three months ended September 30, 2016, average interest-earning assets increased $2.33 billion or 8% to $31.06 billion from $28.73 billion for the same period in 2015. The increase was primarily due to a $1.95 billion or 9% increase in average loan balances to $24.31 billion for the three months ended September 30, 2016, compared to $22.36 billion for the same period in 2015. For the nine months ended September 30, 2016, average interest-earning assets increased $2.97 billion or 11% to $30.81 billion from $27.84 billion for the same period in 2015. The increase was primarily due to a $2.02 billion or 9% increase in average loan balances to $24.01 billion for the nine months ended September 30, 2016, compared to $21.99 billion for the same period in 2015.


57



Customer deposits are an important source of low-cost funding and affect both net interest income and net interest margin. Average deposits, which consist of noninterest-bearing demand, interest-bearing checking, money market, savings and time deposits, increased by $2.05 billion or 8% to $28.28 billion for the three months ended September 30, 2016, compared to $26.23 billion for the same period in 2015. The ratio of average noninterest-bearing demand deposits to total deposits increased from 30% for the three months ended September 30, 2015 to 33% for the three months ended September 30, 2016. Average loans were 116% funded by average deposits for the three months ended September 30, 2016, slightly lower than the funding of 117% for the same period in 2015. Cost of deposits increased to 0.30% for the three months ended September 30, 2016 from 0.28% for the three months ended September 30, 2015. For the nine months ended September 30, 2016, average deposits increased by $2.91 billion or 12% to $28.06 billion, compared to $25.15 billion for the same period in 2015. The ratio of average noninterest-bearing demand deposits to total deposits increased to 32% for the nine months ended September 30, 2016 from 30% for the nine months ended September 30, 2015. Average loans were 117% funded by average deposits for the nine months ended September 30, 2016, higher than the funding of 114% for the same period in 2015. Cost of deposits remained stable at 0.29% during each of the nine months ended September 30, 2016 and 2015.

58



The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rates by asset and liability components for the three months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended September 30,
 
2016
 
2015
 
Average
Balance
 
Interest
 
Average
Yield/
Rate(1)
 
Average
Balance
 
Interest
 
Average
Yield/
Rate(1)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Due from banks and short-term investments
 
$
1,593,577

 
$
3,168

 
0.79
%
 
$
2,215,472

 
$
4,190

 
0.75
%
Resale agreements (2)
 
1,805,978

 
7,834

 
1.73
%
 
1,243,478

 
4,411

 
1.41
%
Investment securities (3)(4)
 
3,273,861

 
13,388

 
1.63
%
 
2,830,941

 
10,279

 
1.44
%
Loans (5)(6)
 
24,309,313

 
255,316

 
4.18
%
 
22,364,976

 
244,372

 
4.33
%
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stock
 
72,625

 
611

 
3.35
%
 
72,868

 
1,380

 
7.51
%
Total interest-earning assets
 
31,055,354

 
280,317

 
3.59
%
 
28,727,735

 
264,632

 
3.65
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
354,053

 
 
 
 
 
333,193

 
 
 
 
Allowance for loan losses
 
(266,763
)
 
 
 
 
 
(261,479
)
 
 
 
 
Other assets
 
1,763,889

 
 
 
 
 
1,863,481

 
 
 
 
Total assets
 
$
32,906,533

 
 
 
 
 
$
30,662,930

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
Checking deposits
 
$
3,553,477

 
$
3,253

 
0.36
%
 
$
2,838,728

 
$
2,155

 
0.30
%
Money market deposits
 
7,548,835

 
6,663

 
0.35
%
 
6,938,009

 
4,992

 
0.29
%
Savings deposits
 
2,133,036

 
1,160

 
0.22
%
 
1,823,036

 
918

 
0.20
%
Time deposits
 
5,627,084

 
9,973

 
0.71
%
 
6,659,322

 
10,454

 
0.62
%
Federal funds purchased and other short-term borrowings
 
32,137

 
212

 
2.62
%
 
9,651

 
35

 
1.44
%
FHLB advances
 
320,743

 
1,361

 
1.69
%
 
318,523

 
1,074

 
1.34
%
Repurchase agreements (2)
 
200,000

 
2,319

 
4.61
%
 
238,641

 
3,555

 
5.91
%
Long-term debt
 
196,170

 
1,228

 
2.49
%
 
215,930

 
1,160

 
2.13
%
Total interest-bearing liabilities
 
19,611,482

 
26,169

 
0.53
%
 
19,041,840

 
24,343

 
0.51
%
Noninterest-bearing liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
9,413,031

 
 
 
 
 
7,970,181

 
 
 
 
Accrued expenses and other liabilities
 
532,779

 
 
 
 
 
599,633

 
 
 
 
Stockholders’ equity
 
3,349,241

 
 
 
 
 
3,051,276

 
 
 
 
Total liabilities and stockholders’ equity
 
$
32,906,533

 
 
 
 
 
$
30,662,930

 
 
 
 
Interest rate spread
 
 

 
 
 
3.06
%
 
 
 
 
 
3.14
%
Net interest income and net interest margin
 
 

 
$
254,148

 
3.26
%
 
 
 
$
240,289

 
3.32
%
 
(1)
Annualized.
(2)
Average balances of resale and repurchase agreements are reported net, pursuant to ASC 210-20-45, Balance Sheet Offsetting.
(3)
Yields on tax exempt securities are not presented on a tax-equivalent basis.
(4)
Includes the amortization of net premiums on investment securities of $5.4 million and $4.2 million for the three months ended September 30, 2016 and 2015, respectively.
(5)
Average balances include nonperforming loans.
(6)
Includes the accretion of discount and amortization of net deferred loan costs which totaled $8.5 million and $19.0 million and for the three months ended September 30, 2016 and 2015, respectively.



59



The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rates by asset and liability components for the nine months ended September 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
 
Average
Balance
 
Interest
 
Average
Yield/
Rate(1)
 
Average
Balance
 
Interest
 
Average
Yield/
Rate(1)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Due from banks and short-term investments
 
$
1,768,252

 
$
10,245

 
0.77
%
 
$
1,772,734

 
$
14,542

 
1.10
%
Resale agreements (2)
 
1,672,993

 
22,479

 
1.79
%
 
1,289,212

 
13,940

 
1.45
%
Investment securities (3)(4)
 
3,289,014

 
37,433

 
1.52
%
 
2,710,052

 
29,947

 
1.48
%
Loans (5)(6)
 
24,006,926

 
763,189

 
4.25
%
 
21,990,416

 
719,987

 
4.38
%
FHLB and Federal Reserve Bank stock
 
76,122

 
2,008

 
3.52
%
 
78,924

 
4,922

 
8.34
%
Total interest-earning assets
 
30,813,307

 
835,354

 
3.62
%
 
27,841,338

 
783,338

 
3.76
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
349,721

 
 
 
 
 
331,171

 
 
 
 
Allowance for loan losses
 
(264,088
)
 
 
 
 
 
(261,213
)
 
 
 
 
Other assets
 
1,763,505

 
 
 
 
 
1,872,695

 
 
 
 
Total assets
 
$
32,662,445

 
 
 
 
 
$
29,783,991

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
Checking deposits
 
$
3,445,996

 
$
9,058

 
0.35
%
 
$
2,666,141

 
$
5,849

 
0.29
%
Money market deposits
 
7,519,261

 
19,295

 
0.34
%
 
6,657,620

 
13,833

 
0.28
%
Savings deposits
 
2,043,547

 
3,207

 
0.21
%
 
1,743,044

 
2,516

 
0.19
%
Time deposits
 
5,941,760

 
29,148

 
0.66
%
 
6,448,955

 
31,479

 
0.65
%
Federal funds purchased and other short-term borrowings
 
19,384

 
390

 
2.69
%
 
5,866

 
53

 
1.21
%
FHLB advances
 
400,850

 
4,153

 
1.38
%
 
325,015

 
3,156

 
1.30
%
Repurchase agreements (2)
 
182,482

 
6,441

 
4.71
%
 
522,693

 
19,494

 
4.99
%
Long-term debt
 
201,060

 
3,726

 
2.48
%
 
220,835

 
3,460

 
2.09
%
Total interest-bearing liabilities
 
19,754,340

 
75,418

 
0.51
%
 
18,590,169

 
79,840

 
0.57
%
Noninterest-bearing liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
9,107,051

 
 
 
 
 
7,631,711

 
 
 
 
Accrued expenses and other liabilities
 
534,569

 
 
 
 
 
577,469

 
 
 
 
Stockholders’ equity
 
3,266,485

 
 
 
 
 
2,984,642

 
 
 
 
Total liabilities and stockholders’ equity
 
$
32,662,445

 
 
 
 
 
$
29,783,991

 
 
 
 
Interest rate spread
 
 
 
 
 
3.11
%
 
 
 
 
 
3.19
%
Net interest income and net interest margin
 
 
 
$
759,936

 
3.29
%
 
 
 
$
703,498

 
3.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Annualized.
(2)
Average balances of resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting.
(3)
Yields on tax exempt securities are not presented on a tax-equivalent basis.
(4)
Includes the amortization of net premiums on investment securities of $18.2 million and $12.2 million for the nine months ended September 30, 2016 and 2015, respectively.
(5)
Average balances include nonperforming loans.
(6)
Includes the accretion of discount and amortization of net deferred loan costs which totaled $39.7 million and $49.7 million for the nine months ended September 30, 2016 and 2015, respectively.


60



The following table presents the extent to which changes in interest rates and changes in average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into the change attributable to variations in volume and the change attributable to variations in interest rates. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Nonperforming loans are included in average loans used to compute the table below:
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016 vs. 2015
 
2016 vs. 2015
 
Total
Change
 
Changes Due to
 
Total
Change
 
Changes Due to
 
 
Volume 
 
Yield/Rate 
 
 
Volume 
 
Yield/Rate 
Interest-earning assets:
 
 
 
 
 
 
 
 

 
 

 
 

Due from banks and short-term investments
 
$
(1,022
)
 
$
(1,227
)
 
$
205

 
$
(4,297
)
 
$
(37
)
 
$
(4,260
)
Resale agreements
 
3,423

 
2,293

 
1,130

 
8,539

 
4,704

 
3,835

Investment securities
 
3,109

 
1,721

 
1,388

 
7,486

 
6,566

 
920

Loans
 
10,944

 
20,675

 
(9,731
)
 
43,202

 
64,567

 
(21,365
)
FHLB and Federal Reserve Bank stock
 
(769
)
 
(5
)
 
(764
)
 
(2,914
)
 
(169
)
 
(2,745
)
Total interest and dividend income
 
$
15,685

 
$
23,457

 
$
(7,772
)
 
$
52,016

 
$
75,631

 
$
(23,615
)
Interest-bearing liabilities:
 
 

 
 
 
 
 
 

 
 

 
 

Checking deposits
 
$
1,098

 
$
604

 
$
494

 
$
3,209

 
$
1,913

 
$
1,296

Money market deposits
 
1,671

 
467

 
1,204

 
5,462

 
1,940

 
3,522

Savings deposits
 
242

 
165

 
77

 
691

 
459

 
232

Time deposits
 
(481
)
 
(1,735
)
 
1,254

 
(2,331
)
 
(2,487
)
 
156

Federal funds purchased and other short-term borrowings
 
177

 
131

 
46

 
337

 
220

 
117

FHLB advances
 
287

 
8

 
279

 
997

 
775

 
222

Repurchase agreements
 
(1,236
)
 
(522
)
 
(714
)
 
(13,053
)
 
(12,060
)
 
(993
)
Long-term debt
 
68

 
(112
)
 
180

 
266

 
(328
)
 
594

Total interest expense
 
$
1,826

 
$
(994
)
 
$
2,820

 
$
(4,422
)
 
$
(9,568
)
 
$
5,146

Change in net interest income
 
$
13,859

 
$
24,451

 
$
(10,592
)
 
$
56,438

 
$
85,199

 
$
(28,761
)
 

Noninterest Income

Noninterest income decreased by $4.9 million or 9% to $49.3 million for the three months ended September 30, 2016 compared to $54.2 million for the same period in 2015 and decreased $4.8 million or 3% to $134.1 million for the nine months ended September 30, 2016 compared to $138.9 million for the same period in 2015. The decreases were mainly attributable to decreases in net gains on sales of available-for-sale investment securities and loans, partially offset by a reduction in expenses related to changes in Federal Deposit Insurance Corporation (“FDIC”) indemnification asset and receivable/payable, as well as increases in letters of credit fees and foreign exchange income, and other fees and operating income.


61



The following table presents the components of noninterest income for the periods indicated:
 
($ in millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Branch fees
 
$
10.4

 
$
10.0

 
$
31.0

 
$
29.2

Letters of credit fees and foreign exchange income
 
10.9

 
7.5

 
31.4

 
25.0

Ancillary loan fees
 
6.1

 
4.8

 
14.0

 
10.3

Wealth management fees
 
4.0

 
4.4

 
9.9

 
14.3

Derivative commission income
 
5.4

 
4.3

 
12.0

 
12.0

Net gains on sales of loans
 
2.2

 
4.9

 
7.0

 
19.7

Net gains on sales of available-for-sale investment securities
 
1.8

 
17.0

 
8.5

 
27.0

Changes in FDIC indemnification asset and receivable/payable
 

 
(3.9
)
 

 
(19.0
)
Other fees and operating income
 
8.5

 
5.2

 
20.3

 
20.4

Total noninterest income
 
$
49.3

 
$
54.2

 
$
134.1

 
$
138.9

 

The following discussion provides the composition of the major changes in noninterest income and the factors contributing to the changes.

Net gains on sales of available-for-sale investment securities decreased by $15.2 million or 89% to $1.8 million for the three months ended September 30, 2016 from $17.0 million for the three months ended September 30, 2015, and decreased by $18.5 million or 69% to $8.5 million for the nine months ended September 30, 2016 from $27.0 million for the nine months ended September 30, 2015. Proceeds from sales of available-for-sale investment securities for the three months ended September 30, 2016 and 2015 amounted to $143.5 million and $855.4 million, respectively. Proceeds from sales of available-for-sale investment securities for the nine months ended September 30, 2016 and 2015 were $1.01 billion and $1.33 billion, respectively. The available-for-sale investment securities sold for the three and nine months ended September 30, 2016 and 2015 were primarily comprised of U.S. Treasury, and U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities.

Net gains on sales of loans for the three months ended September 30, 2016 amounted to $2.2 million, compared to $4.9 million for the three months ended September 30, 2015, which included lower of cost or market (“LOCOM”) valuation adjustments. Net gains on sales of loans for the nine months ended September 30, 2016, which included LOCOM valuation adjustments, amounted to $7.0 million, compared to $19.7 million for the nine months ended September 30, 2015. The decrease in net gains on sales of loans for the three and nine months ended September 30, 2016, compared to the same periods in 2015, was primarily related to a decrease in loans sold. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Total Loan Portfolio for details.

For the three and nine months ended September 30, 2016, there was no expense related to the changes in FDIC indemnification asset and receivable/payable, compared to $3.9 million and $19.0 million of expense for the same periods in 2015, respectively. In 2015, the Company reached an agreement with the FDIC to early terminate the Washington First International Bank and United Commercial Bank shared-loss agreements. There were no remaining shared-loss agreements with the FDIC as of December 31, 2015.

Letters of credit fees and foreign exchange income increased by $3.4 million or 45% to $10.9 million for the three months ended September 30, 2016 from $7.5 million for the three months ended September 30, 2015. Letters of credit fees and foreign exchange income increased by $6.4 million or 26% to $31.4 million for the nine months ended September 30, 2016 from $25.0 million for the nine months ended September 30, 2015. The growth in both periods was mainly attributable to increases in credit enhancement fee income and foreign exchange trade volume.


62



Noninterest Expense

Noninterest expense totaled $170.5 million for the three months ended September 30, 2016, an increase of $22.8 million or 15%, compared to $147.7 million for the same period in 2015. The increase for the three months ended September 30, 2016 compared to the same period in 2015 was primarily due to higher amortization of tax credit and other investments, and compensation and employee benefits. This increase was partially offset by the fact that there were no repurchase agreements’ extinguishment costs incurred in the three months ended September 30, 2016. Noninterest expense totaled $466.0 million for the nine months ended September 30, 2016, an increase of $70.1 million or 18%, compared to $395.9 million for the same period in 2015. The increase for the nine months ended September 30, 2016, compared to the same period in 2015 was primarily due to higher amortization of tax credit and other investments, compensation and employee benefits, higher consulting expenses and OREO expense. This increase was partially offset by the fact that there were no repurchase agreements’ extinguishment costs incurred in the nine months ended September 30, 2016.
    
The following table presents the components of noninterest expense for the periods indicated: 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Compensation and employee benefits
 
$
75.0

 
$
66.2

 
$
220.2

 
$
193.3

Occupancy and equipment expense
 
15.5

 
15.4

 
45.6

 
46.0

Amortization of tax credit and other investments
 
32.6

 
12.3

 
60.8

 
21.6

Amortization of premiums on deposits acquired
 
2.0

 
2.3

 
6.2

 
7.0

Deposit insurance premiums and regulatory assessments
 
6.5

 
4.7

 
17.3

 
13.7

OREO (income) expense
 
(0.1
)
 
(1.4
)
 
1.5

 
(7.5
)
Legal expense
 
5.4

 
2.1

 
12.7

 
13.1

Data processing
 
2.7

 
2.6

 
8.7

 
7.6

Consulting expense
 
4.6

 
5.0

 
19.0

 
9.6

Deposit related expenses
 
3.1

 
2.5

 
7.7

 
7.4

Computer software expense
 
3.3

 
2.4

 
9.3

 
6.4

Repurchase agreements’ extinguishment costs
 

 
15.2

 

 
21.8

Other operating expense
 
19.9

 
18.4

 
57.0

 
55.9

Total noninterest expense
 
$
170.5

 
$
147.7

 
$
466.0

 
$
395.9

 
 
 
 
 
 
 
 
 

The following provides a discussion of the major changes in noninterest expense and the factors contributing to the changes.

Amortization of tax credit and other investments increased by $20.3 million to $32.6 million for the three months ended September 30, 2016, compared to $12.3 million for the same period in 2015, and increased by $39.2 million to $60.8 million for the nine months ended September 30, 2016, compared to $21.6 million for the same period in 2015. The increases were primarily due to additional tax credit investments placed in service for the three and nine months ended September 30, 2016.

Compensation and employee benefits increased by $8.8 million or 13% to $75.0 million for the three months ended September 30, 2016, compared to $66.2 million for the same period in 2015, and increased by $26.9 million or 14% to $220.2 million for the nine months ended September 30, 2016, compared to $193.3 million for the same period in 2015. The increases were primarily attributable to the increased headcount to support the Company’s growing business and regulatory compliance requirements.

Consulting expense slightly decreased $389 thousand or 8% to $4.6 million for the three months ended September 30, 2016, compared to $5.0 million for the same period in 2015. However, consulting expense increased $9.4 million or 98% to $19.0 million for the nine months ended September 30, 2016, compared to $9.6 million for the same period in 2015. The increase for the nine months ended September 30, 2016 was primarily due to BSA and AML consulting expenses incurred to implement a more robust BSA/AML compliance program in order to address the requirements of the written agreement, dated November 9, 2015, with the Federal Reserve Bank of San Francisco (“Written Agreement“) and Memorandum of Understanding (“MOU”) with the California Department of Business Oversight (“DBO”). Refer to MD&A — Regulatory Matters for details.


63



OREO income was $67 thousand and $1.4 million for the three months ended September 30, 2016 and 2015, respectively. OREO expense was $1.5 million for the nine months ended September 30, 2016, compared to an income of $7.5 million for the same period in 2015. The increases were mainly attributable to lower net gains on OREO sales for the three and nine months ended September 30, 2016.

During the three and nine months ended September 30, 2015, the Company recorded $15.2 million and $21.8 million, respectively, in extinguishment costs related to $445.0 million and $545.0 million, respectively, of repurchase agreements. There was no debt extinguishment during the three and nine months ended September 30, 2016.

Income Taxes
 
Provision for income taxes was $13.3 million and $90.1 million for the three and nine months ended September 30, 2016, respectively, compared to $44.9 million and $137.4 million for the same periods in 2015. The effective tax rate was 10.8% and 21.9% for the three and nine months ended September 30, 2016, respectively, compared to 32.3% and 31.9% for the same periods in 2015. The lower effective tax rate for the three and nine months ended September 30, 2016, compared to the same periods in 2015 was mainly attributable to additional tax credit investments entered during 2016. Included in the income tax expense recognized for the three and nine months ended September 30, 2016 was $42.5 million and $94.5 million, respectively, compared to $19.4 million and $58.1 million for the same periods in 2015, of tax credits generated mainly from investments in qualified affordable housing partnerships and other tax credit investments. During the three months ended September 30, 2016, the Company closed its audits for the years 2003 through 2008 with the California Franchise Tax Board and received a settlement of $4.7 million related to various refund claims under review. This settlement contributed to a $3.0 million income tax benefit during the three and nine months ended September 30, 2016.

Management regularly reviews the Company’s tax positions and deferred tax assets. Factors considered in this analysis include future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, and tax planning strategies. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when such amounts are realized and settled. As of September 30, 2016 and December 31, 2015, the Company had net deferred tax assets of $127.5 million and $135.9 million, respectively.

A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more likely than not to be realized. Management has concluded that it is more likely than not that all of the benefits of the deferred tax assets will be realized, with the exception of the deferred tax assets related to net operating losses in certain states. Accordingly, a valuation allowance has been recorded for these amounts. The Company believes that adequate provisions have been made for all income tax uncertainties consistent with the standards of ASC 740-10, Income Taxes.

Operating Segment Results
 
The Company’s operations are strategically aligned into three major business segments: Retail Banking, Commercial Banking and Other. These business segments are differentiated primarily based upon the products and services provided.
 
The Retail Banking segment focuses primarily on retail operations through the Bank’s branch network. The Commercial Banking segment, which includes commercial and industrial (“C&I”) and commercial real estate (“CRE”), primarily generates commercial loans through the domestic commercial lending offices located in California, New York, Texas, Washington, Massachusetts, Nevada and Georgia, and the foreign commercial lending offices located in China and Hong Kong. Furthermore, the Commercial Banking segment offers a wide variety of international finance and trade services and products. The remaining centralized functions, including the treasury operations of the Company and eliminations of intersegment amounts have been aggregated and included in the “Other” segment.

Changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods are generally restated for comparability when there are changes in management structure or reporting methodologies, unless it is not deemed practicable to do so.
 

64



The Company’s transfer pricing process is formulated to incentivize loan and deposit growth that is consistent with the Company’s overall growth objectives, as well as to provide a reasonable and consistent basis for measurement of the Company’s business segments and product net interest margins. The Company’s transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. 

Note 14Business Segments to the Consolidated Financial Statements describes the Company’s segment reporting methodology as well as the business activities of each business segment and presents financial results of these business segments for the three and nine months ended September 30, 2016 and 2015.
 
The following table presents the selected segment information for the periods indicated:
 
($ in millions)
 
Three Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
Retail Banking
 
Commercial Banking
 
Other
Net interest income (loss)
 
$
106.6

 
$
116.2

 
$
131.3

 
$
129.3

 
$
16.2

 
$
(5.2
)
Noninterest income
 
$
14.7

 
$
13.1

 
$
26.2

 
$
20.1

 
$
8.4

 
$
21.0

Noninterest expense
 
$
55.9

 
$
47.0

 
$
45.3

 
$
37.4

 
$
69.3

 
$
63.3

Pretax income (loss)
 
$
32.3

 
$
52.3

 
$
80.4

 
$
96.6

 
$
10.8

 
$
(9.9
)
 
 
($ in millions)
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
Retail Banking
 
Commercial Banking
 
Other
Net interest income (loss)
 
$
329.1

 
$
335.1

 
$
389.6

 
$
376.8

 
$
41.2

 
$
(8.4
)
Noninterest income
 
$
37.8

 
$
36.5

 
$
70.4

 
$
60.4

 
$
25.9

 
$
42.0

Noninterest expense
 
$
173.3

 
$
148.2

 
$
145.7

 
$
121.3

 
$
147.0

 
$
126.4

Pretax income (loss)
 
$
114.5

 
$
160.6

 
$
268.4

 
$
287.0

 
$
28.2

 
$
(17.4
)
 

Retail Banking
The Retail Banking segment reported pretax income of $32.3 million and $114.5 million for the three and nine months ended September 30, 2016, respectively, compared to $52.3 million and $160.6 million for the same periods in 2015. The decrease in pretax income for this segment for the three and nine months ended September 30, 2016 was driven by a decrease in net interest income and an increase in noninterest expense, partially offset by an increase in noninterest income and a decrease in provision for credit losses.
Net interest income for this segment decreased $9.5 million or 8% to $106.6 million for the three months ended September 30, 2016, compared to $116.2 million for the same period in 2015. Net interest income for this segment decreased $6.0 million or 2% to $329.1 million for the nine months ended September 30, 2016, compared to $335.1 million for the same period in 2015. The decrease in net interest income was due to lower discount accretion to interest income from the PCI loan portfolio and single-family residential loans purchased in 2016 at a lower yield compared to loans in the portfolio for the same periods in 2015. The decrease in net interest income for the nine months ended September 30, 2016 was partially offset by the growth in core deposits for this segment.
Noninterest income for this segment increased $1.6 million or 13% to $14.7 million for the three months ended September 30, 2016, compared to $13.1 million for the same period in 2015. Noninterest income for this segment increased $1.3 million or 4% to $37.8 million for the nine months ended September 30, 2016, compared to $36.5 million recorded for the same period in 2015. The increase in noninterest income for the three and nine months ended September 30, 2016 was attributable to a decrease in the reduction of changes in FDIC indemnification asset and receivable/(payable) as all remaining shared-loss agreements with the FDIC were early terminated as of December 31, 2015, and an increase in derivative commission income, partially offset by decreases in wealth management fees and net gains on sales of loans.

65



Noninterest expense for this segment increased $9.0 million or 19% to $55.9 million for the three months ended September 30, 2016, compared to $47.0 million for the same period in 2015. The increase was primarily due to higher compensation and employee benefits, consulting expense, deposit insurance premiums and regulatory assessments and loan-related expenses. Noninterest expense for this segment increased $25.1 million or 17% to $173.3 million during the nine months ended September 30, 2016, compared to $148.2 million for the same period in 2015. This increase was mainly a result of higher consulting expense, compensation and employee benefits, deposit insurance premiums and regulatory assessments, data processing and computer software expenses.
Commercial Banking
The Commercial Banking segment reported pretax income of $80.4 million and $268.4 million for the three and nine months ended September 30, 2016, respectively, compared to $96.6 million and $287.0 million for the same periods in 2015. The decrease in pretax income for this segment for the three and nine months ended September 30, 2016 was attributable to increases in noninterest expense and provision for credit losses, partially offset by increases in net interest income and noninterest income.
Net interest income for this segment increased $2.0 million or 2% to $131.3 million for the three months ended September 30, 2016, compared to $129.3 million for the same period in 2015. For the nine months ended September 30, 2016, net interest income for this segment increased $12.8 million or 3% to $389.6 million, compared to $376.8 million for the same period in 2015. The increase in net interest income for the three and nine months ended September 30, 2016 was due to the growth of commercial loans, partially offset by the lower discount accretion to interest income from the PCI loan portfolio.
Noninterest income for this segment increased $6.1 million or 31% to $26.2 million for the three months ended September 30, 2016, compared to $20.1 million for the same period in 2015. The increase in noninterest income was primarily due to increases in derivative commission income, letters of credit fees and ancillary loan fees. For the nine months ended September 30, 2016, noninterest income for this segment increased $10.0 million or 17% to $70.4 million, compared to $60.4 million recorded for the same period in 2015. The increase was attributable to a decrease in the reduction of changes in FDIC indemnification asset and receivable/(payable), as previously discussed in the Retail Banking segment, and increases in ancillary loan fees, foreign exchange income and letters of credit fees, partially offset by decreases in derivative commission income and net gains on sales of loans.
Noninterest expense for this segment increased $7.9 million or 21% to $45.3 million for the three months ended September 30, 2016, compared to $37.4 million for the same period in 2015. The increase in noninterest expense was due to increases in compensation and employee benefits, OREO expense and consulting expense. Noninterest expense for this segment increased $24.4 million or 20% to $145.7 million during the nine months ended September 30, 2016, compared to $121.3 million for the same period in 2015. The increase in noninterest expense was primarily due to increases in compensation and employee benefits, OREO expense, consulting expense, legal expense and deposit insurance premiums and regulatory assessments, partially offset by a decrease in loan-related expenses.
Other
The Other segment reported pretax income of $10.8 million and $28.2 million for the three and nine months ended September 30, 2016, respectively, compared to pretax losses of $9.9 million and $17.4 million for the same periods in 2015.
Net interest income for this segment increased $21.4 million to $16.2 million for the three months ended September 30, 2016, compared to a net interest loss of $5.2 million for the same period in 2015. Net interest income for this segment increased $49.7 million to $41.2 million for the nine months ended September 30, 2016, compared to a net interest loss of $8.4 million for the same period in 2015. The increase in net interest income for the three and nine months ended September 30, 2016 was primarily due to an increase in interest income from investment securities and a decrease in interest expense on repurchase agreements. The Other segment includes the activities of the treasury function, which is responsible for the liquidity and interest rate risk management of the Company, and supports the Retail Banking and Commercial Banking segments through fund transfer pricing which is included in net interest income. In addition, it bears the cost of adverse movement in interest rates which affect the net interest margin.

66



Noninterest income for this segment decreased $12.6 million or 60% to $8.4 million for the three months ended September 30, 2016, compared to $21.0 million recorded for the same period in 2015. Noninterest income for this segment decreased $16.1 million or 38% to $25.9 million for the nine months ended September 30, 2016, compared to $42.0 million recorded for the same period in 2015. The decrease in noninterest income for the three and nine months ended September 30, 2016 was primarily due to the lower net gains on the sales of available-for-sale investment securities, partially offset by an increase in rental income.
Noninterest expense for this segment increased $5.9 million or 9% to $69.3 million for the three months ended September 30, 2016, compared to $63.3 million for the same period in 2015. This increase was primarily due to higher amortization of tax credit and other investments, and legal expense, partially offset by repurchase agreements’ extinguishment costs incurred in 2015 and lower consulting expense. Noninterest expense for this segment increased $20.6 million or 16% to $147.0 million for the nine months ended September 30, 2016, compared to $126.4 million for the same period in 2015. This increase was primarily due to higher amortization of tax credit and other investments, and compensation and employee benefits, partially offset by repurchase agreements’ extinguishment costs incurred in 2015 and lower consulting expense.
Balance Sheet Analysis
 
Total assets increased $904.4 million or 3%, to $33.26 billion as of September 30, 2016, compared to $32.35 billion as of December 31, 2015. The net increase in total assets was primary due to increases of $1.10 billion or 5% in net loans held-for-investment, $305.9 million or 22% in cash and cash equivalents and $154.5 million or 100% in held-to-maturity investment security. These increases were partially offset by decreases of $536.6 million or 14% in available-for-sale investment securities and $100.0 million or 6% in resale agreements.

The $1.10 billion increase in net loans held-for-investment was primarily driven by growth in the loan portfolio, mainly from increases in CRE loans of $404.3 million, C&I loans of $355.0 million, residential loans of $182.1 million and consumer loans of $123.4 million.
The $305.9 million increase in cash and cash equivalents was largely due to the timing of cash inflows versus outflows from fundings, payments, and cash requirements related to normal operating activities. The $154.5 million increase in the held-to-maturity investment security was the result of a securitization of multifamily real estate loans entered into by the Company during the first quarter of 2016.
The $536.6 million decrease in available-for-sale investment securities was largely due to decreases of $542.1 million in U.S. Treasury securities and $385.5 million in U.S. government agency and U.S. government sponsored enterprise debt securities, partially offset by increases of $247.6 million in foreign bonds and $172.6 million in U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities.
The $100.0 million decrease in resale agreements from $1.60 billion as of December 31, 2015 to $1.50 billion as of September 30, 2016 was mainly due to $1.45 billion of paydowns and maturities of resale agreements, partially offset by $1.15 billion of purchases of resale agreements during the nine months ended September 30, 2016. This $300.0 million net decrease in gross resale agreements was, however, partially offset by a $200.0 million decrease in resale and repurchase agreements that were eligible for netting as of September 30, 2016 compared to December 31, 2015.
Total liabilities increased $649.2 million or 2%, to $29.88 billion as of September 30, 2016, compared to $29.23 billion as of December 31, 2015. The increase in total liabilities funded the asset growth. This net increase was primarily due to increases of $1.12 billion or 4% in customer deposits growth and $200.0 million or 100% in repurchase agreements, partially offset by a decrease of $698.3 million or 69% in FHLB advances. Total customer deposits grew to $28.59 billion as of September 30, 2016, largely due to increases in noninterest-bearing demand deposits of $867.2 million, money market deposits of $751.1 million, and savings and interest-bearing checking accounts of $516.6 million. Such increases in customer deposits were partially offset by a decrease in time deposits of $1.02 billion as a result of reductions in public deposits. The $200.0 million increase in repurchase agreements was due to a $200.0 million decrease in resale and repurchase agreements that were eligible for netting as of September 30, 2016 compared to December 31, 2015 as discussed in the preceding paragraph. The $698.3 million decrease in FHLB advances was primarily due to the repayment of $700.0 million of short-term FHLB advances which matured in the first quarter of 2016.

67



Investment Securities
 
Income from investment securities provides a significant portion of the Company’s total income, primarily from available-for-sale investment securities. The Company aims to maintain an investment portfolio with an appropriate mix of fixed-rate and adjustable-rate securities with relatively short durations to minimize overall interest rate and liquidity risk. The Company’s available-for-sale investment securities are liquid in nature and provide:

Interest income for earnings and yield enhancement;
Availability for funding needs arising during the normal course of business;
The ability to execute interest risk management strategies due to changes in economic or market conditions which influence loan origination demand, prepayment speeds, or deposit balances and mix; and
Collateral to support pledging agreements which enhance the Company’s borrowing capacity.

The Company’s available-for-sale investment securities portfolio consists primarily of U.S. Treasury securities, U.S. government agency and U.S. government sponsored enterprise debt securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, municipal securities, corporate debt securities and foreign bonds. Investments classified as available-for-sale are carried at their estimated fair values with the corresponding changes in fair values recorded in Accumulated other comprehensive income or loss, as a component of Stockholders’ equity on the Consolidated Balance Sheets.

During the nine months ended September 30, 2016, the Company securitized $201.7 million of multifamily residential loans and retained a $160.1 million senior tranche of the securities. The resulting security is classified as a held-to-maturity investment, which is carried at amortized cost. The held-to-maturity security is a non-agency commercial mortgage-backed security maturing on April 25, 2046. Management intends to and the Company has the ability to hold the security to maturity.

Total available-for-sale investment securities decreased $536.6 million or 14% to $3.24 billion as of September 30, 2016, compared with $3.77 billion as of December 31, 2015. The primary drivers of this decrease during the nine months ended September 30, 2016 were:

$542.1 million decrease in U.S Treasury securities primarily due to the sales of $710.7 million resulting in $4.8 million of realized gains and $90.0 million in maturities, partially offset by $255.5 million of purchases.
$385.5 million decrease in U.S. government agency and U.S. government sponsored enterprise debt securities primarily due to calls of $533.9 million, partially offset by $159.1 million of purchases.
$247.6 million increase in foreign bonds primarily due to the purchase of $299.9 million of multilateral development bank bonds. These purchases were partially offset by calls of $50.0 million.
$172.6 million increase in U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities primarily due to $616.3 million of purchases, partially offset by $266.2 million in sales resulting in realized gains of $3.2 million and paydowns of approximately $180.0 million.

As of September 30, 2016, the available-for-sale investment portfolio had net unrealized gains of $11.8 million compared to net unrealized losses of $10.6 million as of December 31, 2015. The change in the net unrealized amount was primarily attributed to a decline in interest rates. Securities in an unrealized loss position are analyzed periodically for other-than-temporary impairment (“OTTI”). No OTTI was recognized for the three and nine months ended September 30, 2016 and 2015.

As of September 30, 2016 and December 31, 2015, available-for-sale investment securities with fair values of $955.7 million and $873.0 million, respectively, were pledged to secure public deposits, repurchase agreements, the Federal Reserve Bank’s discount window, and for other purposes required or permitted by law. For complete discussion and disclosure, please see Note 5 Investment Securities to the Consolidated Financial Statements.


68



The following table presents the weighted average yields and contractual maturity distribution, excluding periodic principal payments, of the Company’s investment securities as of September 30, 2016:
 
($ in thousands)
 
Within
One Year
 
After One
But Within
Five Years
 
After Five
But Within
Ten Years
 
After
Ten Years
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
120,982

 
0.61
%
 
$
283,367

 
1.01
%
 
$
52,099

 
1.26
%
 
$

 
%
 
$
456,448

 
0.93
%
U.S. government agency and U.S. government sponsored enterprise debt securities
 
254,839

 
0.89
%
 
52,985

 
1.01
%
 
75,507

 
2.10
%
 

 
%
 
383,331

 
1.14
%
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 

 
%
 
18,105

 
2.95
%
 
47,683

 
2.86
%
 
261,030

 
2.45
%
 
326,818

 
2.54
%
Residential mortgage-backed securities
 

 
%
 
117

 
4.53
%
 
74,173

 
2.10
%
 
1,120,548

 
1.95
%
 
1,194,838

 
1.96
%
Municipal securities (1)
 
6,463

 
2.70
%
 
127,031

 
2.31
%
 
13,964

 
2.50
%
 
4,835

 
3.95
%
 
152,293

 
2.40
%
Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 

 
%
 

 
%
 

 
%
 
52,957

 
3.23
%
 
52,957

 
3.35
%
Corporate debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
2,180

 
2.79
%
 

 
%
 
100,283

 
2.10
%
 
179,524

 
2.14
%
 
281,987

 
2.13
%
Non-investment grade
 
8,778

 
1.34
%
 

 
%
 

 
%
 

 
%
 
8,778

 
1.34
%
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
227,007

 
1.63
%
 
110,427

 
2.09
%
 
 
 
 
 
 
 
 
 
337,434

 
2.02
%
Other securities
 
41,740

 
2.58
%
 

 
%
 

 
%
 

 
%
 
41,740

 
2.58
%
Total available-for-sale investment securities
 
$
661,989

 
 
 
$
592,032

 
 
 
$
363,709

 
 
 
$
1,618,894

 
 
 
$
3,236,624

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity investment security:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed security
 
$

 
%
 
$

 
%
 
$

 
%
 
$
154,296

 
3.23
%
 
$
154,296

 
3.23
%
 
(1)
Yields on tax exempt securities are not presented on a tax-equivalent basis.

Total Loan Portfolio
 
The Company offers a broad range of financial products designed to meet the credit needs of its borrowers. The Company’s loan portfolio segments include CRE, C&I, residential and consumer.

CRE Loans. CRE loans include income producing real estate, construction and land loans. Interest rates on CRE loans may be fixed, variable, or hybrid. Although real estate loans are collateralized by real property, these transactions are subject to similar credit evaluation, underwriting and monitoring standards as those for commercial business loans. Approximately 74% of CRE loans are secured by real estate in California. Consequently, changes in the California economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses.

C&I Loans. C&I loans include commercial business and trade finance loans. Included in C&I loans are working capital, accounts receivable and inventory lines of credit, small business administration loans, lease financing and financing to international trade companies with trade financial services and products, including letters of credit, revolving lines of credit, import loans, bankers’ acceptances, working capital lines of credit, domestic purchase financing and pre-export financing.


69



Most trade finance activities are related to trade with Asian countries. However, a majority of the Company’s loans are made to companies domiciled in the U.S. A substantial portion of these are companies based in California that engage in import and export businesses. Additionally, the Company offers export-import financing to various customers. The Company’s trade finance portfolio consists primarily of loans made to borrowers that import goods into the U.S. and export goods to China. Certain C&I loans may be guaranteed by the Export-Import Bank of the U.S. or direct obligations of the Export-Import Bank of China.
Residential Loans. Adjustable rate mortgage (“ARM”) residential loans consist of both single-family and multifamily loans. The Company offers first mortgage loans secured by one-to-four unit residential properties located in its primary lending areas. The Company’s ARM single-family residential loan programs generally have a one- to five-year initial fixed period. The Company’s multifamily residential loan programs include variable rate loans that have a six-month floating ARM, or a three- to seven-year initial fixed period.

Consumer Loans. Consumer loans include home equity lines of credit (“HELOCs”), auto loans, and insurance premium financing loans. The Company’s ARM loans and HELOCs are secured by one-to-four unit residential properties located in its primary lending areas. The program is a low documentation program that requires low loan to value ratios, typically 50% or less. These loans have historically experienced low delinquency and default rates.

The following table presents the composition of the Company’s total loan portfolio by segment as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
Amount
 
Percent
 
Amount
 
Percent
CRE:
 
 
 
 
 
 
 
 
Income producing
 
$
7,780,775

 
31
%
 
$
7,478,474

 
32
%
Construction
 
600,803

 
2
%
 
438,671

 
2
%
Land
 
133,501

 
1
%
 
193,604

 
1
%
Total CRE
 
8,515,079

 
34
%
 
8,110,749

 
35
%
C&I:
 
 
 
 
 
 
 
 
Commercial business
 
8,683,442

 
35
%
 
8,213,897

 
35
%
Trade finance
 
674,603

 
3
%
 
789,110

 
3
%
Total C&I
 
9,358,045

 
38
%
 
9,003,007

 
38
%
Residential:
 
 
 
 
 
 
 
 
Single-family
 
3,351,867

 
14
%
 
3,066,919

 
13
%
Multifamily
 
1,420,126

 
6
%
 
1,522,995

 
6
%
Total residential
 
4,771,993

 
20
%
 
4,589,914

 
19
%
Consumer
 
2,079,474

 
8
%
 
1,956,091

 
8
%
Total loans held-for-investment (1)
 
$
24,724,591

 
100
%
 
$
23,659,761

 
100
%
Unearned fees, premiums, and discounts, net
 
7,371

 
 
 
(16,013
)
 
 
Allowance for loan losses
 
(255,812
)
 
 
 
(264,959
)
 
 
Loans held-for-sale
 
47,719

 
 
 
31,958

 
 
Total loans, net
 
$
24,523,869

 
 
 
$
23,410,747

 
 
 
(1)
Loans net of ASC 310-30 discount.


70



The Company’s total loan portfolio includes originated and purchased loans. Originated and purchased loans, for which there was no evidence of credit deterioration at their acquisition date, are referred to collectively as non-purchased credit impaired (“non-PCI”) loans. Acquired loans for which there was, at the acquisition date, evidence of credit deterioration are referred to as purchased credit impaired (“PCI”) loans. PCI loans are recorded net of ASC 310-30 discount and totaled $717.6 million and $970.8 million, respectively, as of September 30, 2016 and December 31, 2015. For additional details regarding PCI loans, please see Note 7Loans Receivable And Allowance For Credit Losses to the Consolidated Financial Statements.

The Company’s overseas offices include the branch in Hong Kong and the subsidiary bank in China. As of September 30, 2016 and December 31, 2015, loans held in the Hong Kong branch totaled $657.0 million and $694.6 million, respectively. As of September 30, 2016 and December 31, 2015, loans held in the subsidiary bank in China totaled $410.4 million and $356.5 million, respectively. In total, these loans represent approximately 3% of total consolidated assets as of both September 30, 2016 and December 31, 2015. These loans are included in the total loan portfolio table.

Net loans, including loans held-for-sale, increased $1.11 billion or 5% to $24.52 billion as of September 30, 2016 from $23.41 billion as of December 31, 2015. The increase was largely attributable to increases of $404.3 million or 5% in CRE loans, $355.0 million or 4% in C&I loans, $182.1 million or 4% in residential loans and $123.4 million or 6% in consumer loans.

When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic review under the Company’s management evaluation processes, including asset/liability management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from the loans held-for-investment portfolio to the loans held-for-sale portfolio at LOCOM. Transfers of loans held-for-investment to loans held-for-sale were $144.9 million and $720.7 million, respectively, for the three and nine months ended September 30, 2016. These loan transfers were comprised primarily of C&I, multifamily residential and CRE loans. In comparison, loans held-for-investment transferred to loans held-for-sale of $400.3 million and $1.56 billion, respectively, for the three and nine months ended September 30, 2015, were comprised primarily of single-family residential and C&I loans. For the three months ended September 30, 2016, no write-downs to the allowance for loan losses were recorded that related to loans transferred from loans held-for-investment to loans held-for-sale. For the nine months ended September 30, 2016, the Company recorded $1.9 million in write-downs to the allowance for loan losses related to loans transferred from loans held-for-investment to loans held-for-sale. In comparison, the Company recorded $968 thousand and $3.1 million in write-downs to the allowance for loan losses related to loans transferred from loans held-for-investment to loans held-for-sale for the three and nine months ended September 30, 2015, respectively.

71



During the three months ended September 30, 2016 and 2015, the Company sold $107.3 million and $181.9 million, respectively, in originated loans resulting in net gains of $2.2 million and $5.1 million, respectively. During the nine months ended September 30, 2016 the Company sold or securitized $529.5 million in originated loans, resulting in net gains of $9.3 million. The Company recorded $1.1 million in net gains and $641 thousand in mortgage servicing rights, and retained $160.1 million of the senior tranche of the resulting securities from the securitization of $201.7 million of multifamily residential loans during the nine months ended September 30, 2016. Originated loans sold or securitized during the nine months ended September 30, 2016, were comprised primarily of $247.5 million of multifamily residential loans, $156.3 million of C&I loans and $115.2 million of CRE loans. In comparison, during the nine months ended September 30, 2015, the Company sold $741.0 million in originated loans resulting in net gains of $19.4 million. Originated loans sold during the nine months ended September 30, 2015 were primarily comprised of $640.0 million of single-family residential loans and $95.8 million of C&I loans. Excluding the impact of the $529.5 million in originated loans sold and securitized, organic loan growth during the nine months ended September 30, 2016 was $1.59 billion or 9% annualized.

From time to time, the Company purchases loans (including participation loans) and sells loans in the secondary market. During the three and nine months ended September 30, 2016, the Company purchased approximately $456.9 million and $1.50 billion of loans, respectively, compared to $207.0 million and $572.5 million, respectively, for the same periods last year. The Company sold $45.8 million and $179.4 million of loans in the secondary market, respectively, during the three and nine months ended September 30, 2016. Such purchased loans were transferred from loans held-for-investment to loans held-for-sale and a write-down to allowance was recorded, as appropriate. No gains or losses on loans sold in the secondary market were recorded for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the Company recorded $69 thousand in gains on loans sold in the secondary market. In comparison, the Company sold $64.0 million and $510.1 million of loans in the secondary market, respectively, during the three and nine months ended September 30, 2015. No gains or losses on loans sold in the secondary market were recorded for the three months ended September 30, 2015. For the nine months ended September 30, 2015, the Company recorded net gains of $1.0 million on loans sold in the secondary market.

No LOCOM adjustments related to the loans held-for-sale portfolio were recorded for the three months ended September 30, 2016, compared to the $211 thousand recorded for the three months ended September 30, 2015. For the nine months ended September 30, 2016 and 2015, the Company recorded $2.4 million and $728 thousand, respectively, in LOCOM adjustments related to the loans held-for-sale portfolio. LOCOM adjustments are recorded in Net gains on sales of loans on the Consolidated Statements of Income.

Non-PCI Nonperforming Assets
 
Non-PCI nonperforming assets are comprised of nonaccrual loans and OREO, net. Loans are placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. The following table presents information regarding non-PCI nonperforming assets and performing troubled debt restructurings (“TDRs”) as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
Nonaccrual loans
 
$
121,876

 
$
121,369

OREO, net
 
8,622

 
7,034

Total nonperforming assets
 
$
130,498

 
$
128,403

Performing TDRs
 
$
61,617

 
$
43,575

Non-PCI nonperforming assets to total assets
 
0.39
%
 
0.40
%
Non-PCI nonaccrual loans to loans held-for-investment
 
0.49
%
 
0.51
%
Allowance for loan losses to non-PCI nonaccrual loans
 
209.90
%
 
218.31
%
 

Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status in accordance with the Company’s accounting policy, offset by reductions for loans that are paid down, charged off, sold, foreclosed, or no longer classified as nonaccrual as a result of continued performance and improvement in the borrower’s financial condition and loan repayment capabilities. Nonaccrual loans increased slightly to $121.9 million as of September 30, 2016 from $121.4 million as of December 31, 2015.


72



As of September 30, 2016, $75.6 million or 62% of the $121.9 million non-PCI nonaccrual loans consisted of loans which were less than 90 days past due. In comparison, approximately $69.2 million or 57% of the $121.4 million non-PCI nonaccrual loans consisted of loans which were less than 90 days past due as of December 31, 2015. For additional details regarding the Company’s non-PCI nonaccrual loans policy, please see Note 1Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.

TDRs may be designated as performing or nonperforming. A TDR may be designated as performing, if the loan has demonstrated sustained performance under the modified terms. The period of sustained performance may include the periods prior to modification if prior performance has met or exceeded the modified terms. A loan will remain on nonaccrual status until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments.

The following table presents the accruing and nonaccruing TDRs by loan segments as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
 
Performing
TDRs
 
Nonperforming
TDRs
 
Performing
TDRs
 
Nonperforming
TDRs
CRE
 
$
22,703

 
$
9,766

 
$
11,470

 
$
8,310

C&I
 
22,552

 
18,886

 
17,095

 
34,285

Residential
 
14,806

 
9,676

 
13,770

 
10,508

Consumer
 
1,556

 

 
1,240

 

Total
 
$
61,617

 
$
38,328

 
$
43,575

 
$
53,103

 

Performing TDR loans increased $18.0 million or 41% to $61.6 million as of September 30, 2016, primarily due to one CRE loan and one C&I loan becoming TDRs during the nine months ended September 30, 2016. Nonperforming TDR loans decreased $14.8 million or 28% to $38.3 million as of September 30, 2016 primarily due to the charge-offs of two C&I loans and the sale of one C&I loan during the nine months ended September 30, 2016.
    
Impaired loans exclude the homogeneous consumer loan portfolio which is evaluated collectively for impairment. The Company’s impaired loans predominantly include non-PCI loans held-for-investment on nonaccrual status and non-PCI loans modified as a TDR, on both accrual and nonaccrual status. Please see Note 1Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K for additional information regarding the Company’s TDR and impaired loan policies. As of September 30, 2016, the allowance for loan losses included $5.0 million for impaired loans with a total recorded balance of $93.1 million. As of December 31, 2015, the allowance for loan losses included $20.3 million for impaired loans with a total recorded balance of $85.8 million.


73



The following table presents the recorded investment balances for non-PCI impaired loans as of September 30, 2016 and December 31, 2015:
 
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
Amount
 
Percent
 
Amount
 
Percent
CRE:
 
 
 
 
 
 
 
 
Income producing
 
$
51,196

 
28
%
 
$
40,067

 
24
%
Construction
 

 
%
 
14

 
%
Land
 
6,307

 
4
%
 
1,315

 
1
%
Total CRE impaired loans
 
57,503

 
32
%
 
41,396

 
25
%
C&I:
 
 
 
 
 
 
 
 
Commercial business
 
81,769

 
45
%
 
71,156

 
43
%
Trade finance
 
5,016

 
3
%
 
10,675

 
7
%
Total C&I impaired loans
 
86,785

 
48
%
 
81,831

 
50
%
Residential:
 
 
 
 
 
 
 
 
Single-family
 
13,281

 
7
%
 
15,012

 
9
%
Multifamily
 
20,857

 
12
%
 
23,727

 
15
%
Total residential impaired loans
 
34,138

 
19
%
 
38,739

 
24
%
Consumer
 
1,556

 
1
%
 
1,240

 
1
%
Total impaired loans
 
$
179,982

 
100
%
 
$
163,206

 
100
%
 
 
Allowance for Credit Losses
 
Allowance for credit losses consists of allowance for loan losses and allowance for unfunded credit reserves. Unfunded credit reserves include reserves provided for unfunded lending commitments, unissued commercial letters of credit and standby letters of credit (“SBLCs”) and recourse obligations for loans sold. The allowance for credit losses is increased by the provision for credit losses which is charged against current period operating results, and is increased or decreased by the amount of net recoveries or charge-offs, respectively, during the period. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Net adjustments to the allowance for unfunded credit reserves are included in the provision for credit losses.

The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent loss in the loan portfolio, including unfunded credit reserves. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs an ongoing assessment of the risks inherent in the loan portfolio. While the Company believes that the allowance for loan losses is appropriate as of September 30, 2016, future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions. For additional details on the Company’s allowance for credit losses, including the methodologies used, please see Note 7Loans Receivable And Allowance For Credit Losses to the Consolidated Financial Statements and Note 1Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K.


74



The following table presents a summary of activities in the allowance for credit losses during the three and nine months ended September 30, 2016 and 2015:
 
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Allowance for loan losses, beginning of period
 
$
266,768

 
$
261,229

 
$
264,959

 
$
261,679

Provision for loan losses
 
11,514

 
8,434

 
19,049

 
9,886

Gross charge-offs:
 
 
 
 
 
 
 
 
CRE
 
(309
)
 
(135
)
 
(504
)
 
(1,486
)
C&I
 
(23,696
)
 
(7,187
)
 
(31,770
)
 
(16,619
)
Residential
 
(29
)
 
(35
)
 
(166
)
 
(782
)
Consumer
 
(13
)
 
(123
)
 
(17
)
 
(586
)
Total gross charge-offs
 
(24,047
)
 
(7,480
)
 
(32,457
)
 
(19,473
)
Gross recoveries:
 
 
 
 
 
 
 
 
CRE
 
634

 
83

 
873

 
1,261

C&I
 
165

 
933

 
2,068

 
7,067

Residential
 
654

 
1,158

 
1,048

 
3,606

Consumer
 
124

 
73

 
272

 
404

Total gross recoveries
 
1,577

 
2,247

 
4,261

 
12,338

Net charge-offs
 
(22,470
)
 
(5,233
)
 
(28,196
)
 
(7,135
)
Allowance for loan losses, end of period
 
255,812

 
264,430

 
255,812

 
264,430

 
 
 
 
 
 
 
 
 
Allowance for unfunded credit reserves, beginning of period
 
20,318

 
19,741

 
20,360

 
12,712

(Reversal of) provision for unfunded credit reserves
 
(1,989
)
 
(698
)
 
(2,031
)
 
6,331

Allowance for unfunded credit reserves, end of period
 
18,329

 
19,043

 
18,329

 
$
19,043

Allowance for credit losses
 
$
274,141

 
$
283,473

 
$
274,141

 
$
283,473

 
 
 
 
 
 
 
 
 
Average loans held-for-investment
 
$
24,259,848

 
$
22,280,349

 
$
23,970,129

 
$
21,886,673

Loans held-for-investment
 
$
24,724,591

 
$
22,658,908

 
$
24,724,591

 
$
22,658,908

Annualized net charge-offs to average loans held-for-investment
 
0.37
%
 
0.09
%
 
0.16
%
 
0.04
%
Allowance for loan losses to loans held-for-investment
 
1.03
%
 
1.17
%
 
1.03
%
 
1.17
%
 

As of September 30, 2016, the allowance for loan losses amounted to $255.8 million or 1.03% of total loans held-for-investment, compared to $265.0 million or 1.12% and $264.4 million or 1.17% of total loans held-for-investment as of December 31, 2015 and September 30, 2015, respectively. Provision for credit losses includes provision for loan losses and unfunded credit reserves. Provision for credit losses is charged to income to bring the allowance for credit losses to a level deemed appropriate by the Company based on the factors described above. The fluctuation in the provision for credit losses is dependent on the historical loss rates trend along with the net charge-offs experienced during the period. Provision for loan losses was $11.5 million and $19.0 million for the three and nine months ended September 30, 2016, respectively, compared to provision for loan losses of $8.4 million and $9.9 million for the same periods in 2015. The increases in provision for loan losses comparing the three and nine months ended September 30, 2016 and 2015 were reflective of the higher charge-offs in the three and nine months ended September 30, 2016, compared to the same prior year periods, and the overall loan portfolio growth. Net charge-offs were $22.5 million and $28.2 million for the three and nine months ended September 30, 2016, compared to net charge-offs of $5.2 million and $7.1 million for the three and nine months ended September 30, 2015, respectively. The increases in net charge-offs comparing the three and nine months ended September 30, 2016 and 2015 were primarily attributable to three larger C&I loans totaling $21.0 million in unrelated industries that had been placed on nonaccrual status a year ago. Of the loans charged off in the current quarter, approximately 75% of the charge-off amounts had been previously provided for as of June 30, 2016 as a component of the allowance for loan losses, while an additional $5.8 million was included in the provision for credit losses for the three months ended September 30, 2016.
  

75



The following table presents the Company’s allocation of the allowance for loan losses by segment and the ratio of each loan segment to total loans as of September 30, 2016 and December 31, 2015:
($ in thousands)
 
September 30, 2016
 
December 31, 2015
 
Allowance
Allocation
 
% of
Total Loans
 
Allowance
Allocation
 
% of
Total Loans
CRE
 
$
71,977

 
34
%
 
$
81,538

 
35
%
C&I
 
143,447

 
38
%
 
134,606

 
38
%
Residential
 
32,500

 
20
%
 
39,295

 
19
%
Consumer
 
7,888

 
8
%
 
9,520

 
8
%
Total
 
$
255,812

 
100
%
 
$
264,959

 
100
%
 

The Company maintains an allowance on non-PCI and PCI loans. Based on the Company’s estimates of cash flows expected to be collected, an allowance for the PCI loans is established, with a charge to income through the provision for loan losses.  PCI loan losses are estimated collectively for groups of loans with similar characteristics. As of September 30, 2016, the Company established an allowance of $156 thousand on $717.6 million of PCI loans. As of December 31, 2015, an allowance of $359 thousand was established on $970.8 million of PCI loans. The allowance balances for both periods were attributed mainly to the PCI CRE loans.

Deposits
 
The Company offers a wide variety of deposit products to both consumer and commercial customers. The following table presents the balances for customer deposits as of the dates indicated:
 
 
 
 
 
 
 
 
 
 
 
Change
($ in thousands)
 
September 30, 2016

 
December 31, 2015

 
Amount
 
Percent
Core deposits:
 
 
 
 
 
 
 
 
Noninterest-bearing demand
 
$
9,524,021

 
$
8,656,805

 
$
867,216

 
10
 %
Interest-bearing checking
 
3,550,101

 
3,336,293

 
213,808

 
6
 %
Money market
 
7,684,085

 
6,932,962

 
751,123

 
11
 %
Savings
 
2,235,847

 
1,933,026

 
302,821

 
16
 %
Total core deposits
 
22,994,054

 
20,859,086

 
2,134,968

 
10
 %
Time deposits
 
5,598,387

 
6,616,895

 
(1,018,508
)
 
(15
)%
Total deposits
 
$
28,592,441

 
$
27,475,981

 
$
1,116,460

 
4
 %
 
 
 
 
 

As of September 30, 2016, total deposits totaled $28.59 billion, an increase of $1.12 billion or 4% from $27.48 billion as of December 31, 2015. Core deposits totaled $22.99 billion as of September 30, 2016, an increase of $2.13 billion or 10% from $20.86 billion as of December 31, 2015. Core deposits grew largely due to increases of $867.2 million or 10% in noninterest-bearing demand deposits and $751.1 million or 11% in money market deposits accounts.

The increase in core deposits was partially offset by a decrease in time deposits of $1.02 billion or 15% to $5.60 billion as of September 30, 2016 from $6.62 billion as of December 31, 2015, largely due to reductions in public deposits.

Borrowings

The Company utilizes short-term and long-term borrowings to manage its liquidity position. Borrowings include short-term borrowings, long-term FHLB advances and repurchase agreements.

During the nine months ended September 30, 2016, the Company’s subsidiary, East West Bank (China) Limited, entered into several short-term borrowings totaling $37.0 million with interest rates ranging from 2.57% to 2.87%. Of the total short-term borrowings, $7.5 million matured on October 8, 2016; $10.0 million will mature on February 27, 2017; $9.7 million will mature on March 13, 2017; and $9.7 million will mature on April 27, 2017.


76



FHLB advances decreased by $698.3 million or 69% to $321.1 million as of September 30, 2016 from $1.02 billion as of December 31, 2015. The decrease was primarily due to the repayment of short-term FHLB advances of $700.0 million which matured in February 2016. As of September 30, 2016, FHLB advances had floating interest rates ranging from 0.77% to 1.18% with remaining maturities between 2.4 and 6.1 years.
 
Gross repurchase agreements totaled $450.0 million as of both September 30, 2016 and December 31, 2015. Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. Repurchase agreements totaled $200.0 million as of September 30, 2016. In comparison, there were no repurchase agreements reported as of December 31, 2015. As of September 30, 2016, $250.0 million of repurchase agreements were eligible for netting against resale agreements, resulting in $200.0 million of net repurchase agreements. In comparison, all $450.0 million of gross repurchase agreements were eligible for netting against resale agreements, resulting in no repurchase agreements reported as of December 31, 2015. As of September 30, 2016, gross repurchase agreements outstanding amounted to $450.0 million with interest rates ranging from 2.98% to 3.06% and original terms between 10.0 and 16.5 years. The remaining maturity terms of the repurchase agreements range between 6.1 and 6.9 years. Repurchase agreements are accounted for as collateralized financing transactions and recorded at the balances at which the securities were sold. The collateral for the repurchase agreements are comprised of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities, and U.S. government agency and U.S. government sponsored enterprise debt securities. Refer to Note 4 Securities Purchased Under Resale Agreements And Sold Under Repurchase Agreements to the Consolidated Financial Statements for additional details.

Long-Term Debt
 
Long-term debt, consisting of junior subordinated debt and a term loan, decreased $14.8 million or 7% from $206.1 million as of December 31, 2015 to $191.3 million as of September 30, 2016.  The decrease was primarily due to the quarterly repayment on the term loan, totaling $15.0 million for the nine months ended September 30, 2016.

The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings. Junior subordinated debt is recorded as a component of long-term debt and includes the value of the common stock issued by six wholly-owned subsidiaries in conjunction with these transactions. The junior subordinated debt totaled $146.3 million and $146.1 million as September 30, 2016 and December 31, 2015, respectively. The junior subordinated debt had a weighted average interest rate of 2.22% and 1.86% for the nine months ended September 30, 2016 and 2015, respectively, and remaining maturity terms of 18.2 to 21.0 years as of September 30, 2016. Beginning in 2016, trust preferred securities no longer qualify as Tier I capital and are limited to Tier II capital for regulatory purposes, based on Basel III Capital Rules. For further discussion, please see Item 1. Business — Supervision and Regulation — Capital Requirements of the Company’s 2015 Form 10-K.

In 2013, the Company entered into a $100.0 million three-year term loan agreement. The terms of the agreement were modified in 2015 to extend the term loan maturity from July 1, 2016 to December 31, 2018, where principal repayments of $5.0 million are due quarterly. The term loan bears interest at the rate of the three-month London Interbank Offered Rate plus 150 basis points and the weighted average interest rate was 2.19% and 1.82% for the nine months ended September 30, 2016 and 2015, respectively. The outstanding balance of the term loan was $45.0 million and $60.0 million as of September 30, 2016 and December 31, 2015, respectively.
 
Capital
 
The Company maintains an adequate capital base to support its anticipated asset growth, operating needs and credit risks and to ensure that East West and the Bank are in compliance with all regulatory capital guidelines. The Company engages in regular capital planning processes to optimize the use of available capital and to appropriately plan for future capital needs. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. In addition, the Company conducts capital stress tests as part of its annual capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.

The Company’s stockholders’ equity increased $255.1 million or 8% to $3.38 billion as of September 30, 2016 from $3.12 billion as of December 31, 2015. The Company’s primary source of capital is the retention of its operating earnings. Retained earnings increased $233.5 million or 12% to $2.11 billion as of September 30, 2016, compared to $1.87 billion as of December 31, 2015. This increase was primarily due to net income of $320.9 million, reduced by $87.4 million of common stock dividends. In addition, common stock and additional paid-in capital increased $17.0 million or 1% primarily due to the activity in employee’s stock compensation plans. For other factors that contributed to the change in stockholders’ equity, refer to the Consolidated Statements of Changes in Stockholders’ Equity (Unaudited).
    

77



Book value per common share was $23.44 based on 144.1 million common shares outstanding at September 30, 2016, compared to $21.70 per common share based on 143.9 million common shares outstanding at December 31, 2015. The Company made a quarterly dividend payment of $0.20 per common share during the nine months ended September 30, 2016.

Regulatory Capital and Ratios
    
The federal banking agencies have risk-based capital adequacy guidelines that are designed to reflect the degree of risk associated with a banking organization’s operations and transactions. The guidelines cover transactions that are reported on the balance sheet as well as those recorded as off-balance sheet items. In 2013, the Federal Reserve Board, FDIC, and Office of the Comptroller of the Currency issued the final Basel III Capital Rules establishing a new comprehensive capital framework for strengthening international capital standards as well as implementing certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Please see Item 1. Business — Supervision and Regulation — Capital Requirements of the Company’s 2015 Form 10-K for additional information. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain of their components).

The Basel III Capital Rules require that banking organizations maintain a minimum CET1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. Beginning in 2016, the rules require banking organizations to maintain a capital conservation buffer of 2.5% above the capital minimums, phased-in over four years. When fully phased-in in 2019, the banking organizations will be required to maintain a CET1 capital ratio of at least 7.0%, a Tier 1 capital ratio of at least 8.5%, and a total capital ratio of at least 10.5% to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments.

The Company is committed to maintaining capital at a level sufficient to assure the Company’s stockholders, customers and regulators that the Company and the Bank are financially sound. As of September 30, 2016 and December 31, 2015, both the Company and the Bank met all capital requirements under the Basel III Capital Rules on a fully phased-in basis, and were both considered “well capitalized.” The following table presents the Company’s and the Bank’s capital ratios as of September 30, 2016 and December 31, 2015 under Basel III capital rules, and those required by regulatory agencies for capital adequacy and well capitalized classification purposes:
 
 
 
Basel III Capital Rules
 
 
September 30, 2016
 
December 31, 2015
 
Minimum
Regulatory
Requirements
 
Well
Capitalized
Requirements
 
Fully
Phased-in
Minimum
Regulatory
Requirement
 
 
Company
 
East West Bank
 
Company
 
East West Bank
 
 
 
CET1 risk-based capital ratio
 
10.9
%
 
11.3
%
 
10.5
%
 
11.0
%
 
4.5
%
 
6.5
%
 
7.0
%
Tier 1 risk-based capital ratio
 
10.9
%
 
11.3
%
 
10.7
%
 
11.0
%
 
6.0
%
 
8.0
%
 
8.5
%
Total risk-based capital ratio
 
12.5
%
 
12.3
%
 
12.2
%
 
12.1
%
 
8.0
%
 
10.0
%
 
10.5
%
Tier 1 leverage capital ratio
 
8.9
%
 
9.2
%
 
8.5
%
 
8.8
%
 
4.0
%
 
5.0
%
 
4.0
%
 

The growth in the Company’s Consolidated Balance Sheets contributed to the $1.25 billion or 5% increase in risk-weighted assets from $25.23 billion as of December 31, 2015 to $26.48 billion as of September 30, 2016. As of September 30, 2016, the Company’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital ratios and Tier 1 leverage capital ratios were 10.9%, 10.9%, 12.5% and 8.9%, respectively, well above the well-capitalized requirements of 6.5%, 8.0%, 10.0% and 5.0%, respectively.

Regulatory Matters

The Bank entered into a Written Agreement to correct less than satisfactory BSA and AML programs detailed in a joint examination by the Federal Reserve Bank of San Francisco (“FRB”) and the DBO. The Bank also entered into a related MOU with the DBO. Please see Item 7. MD&A — Regulatory Matters, and Note 19 — Regulatory Requirements and Matters to the Consolidated Financial Statements of the Company’s 2015 Form 10-K for further details.


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We believe that the Bank is making progress in executing the compliance plans and programs required by the Written Agreement and MOU, although there can be no assurances that our plans and progress will be found to be satisfactory by our regulators. To date, the Bank has added significant resources to meet the monitoring and reporting obligations imposed by the Written Agreement and will continue to require significant management and third party consultant resources to comply with the Written Agreement and MOU, and to address any additional findings or recommendations by the regulators. These incremental administrative and third party costs, as well as the operational restrictions imposed by the Written Agreement, may adversely affect the Bank’s results of operations.

If additional compliance issues are identified or if the regulators determine that the Bank has not satisfactorily complied with the terms of the Written Agreement, the regulators could take further actions with respect to the Bank and, if such further actions were taken, such actions could have a material adverse effect on the Bank. The operating and other conditions of the Written Agreement could lead to an increased risk of being subject to additional regulatory actions by the DBO and FRB or other government agencies, as well as additional actions resulting from future regular annual safety and soundness and compliance examinations by the federal and state regulators that downgrade the regulatory ratings of the Bank.

Off-Balance Sheet Arrangements
 
In the course of the Company’s business, the Company may enter into or be a party to transactions that are not recorded on the balance sheet and are considered to be off-balance sheet arrangements. Off-balance sheet arrangements are any contractual arrangements whereby an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

As a financial service provider, the Company routinely enters into commitments to extend credit to customers, such as loan commitments, commercial letters of credit for foreign and domestic trade, SBLCs and financial guarantees. Many of these commitments to extend credit may expire without being drawn upon. The credit policies used in underwriting loans to customers are also used to extend these commitments. Under some of these contractual agreements, the Company may also have liabilities contingent upon the occurrence of certain events. The Company’s liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities. The following table presents the Company’s commitments, commercial letters of credit and SBLCs as of September 30, 2016:
 
($ in thousands)
 
Commitments
Outstanding
Loan commitments
 
$
4,688,223

Commercial letters of credit and SBLCs
 
$
1,527,366

 

 A discussion of significant contractual arrangements under which the Company may be held contingently liable is included in Note 10 Commitments And Contingencies to the Consolidated Financial Statements. In addition, the Company has contractual obligations for future payments on debts, borrowings and lease obligations as detailed in Item 7 — MD&A— Off-Balance Sheet Arrangements and Aggregate Contractual Obligations of the Company’s 2015 Form 10-K.

Asset Liability and Market Risk Management
 
Liquidity
 
Liquidity refers to the Company’s ability to meet its contractual and contingent financial obligations, on or off-balance sheet, as they become due. The Company’s primary liquidity management objective is to provide sufficient funding for its businesses throughout market cycles and be able to manage both expected and unexpected cash flow needs and requirements without adversely impacting the financial health of the Company. To achieve this objective, the Company analyzes its liquidity risk, maintains readily available liquid assets and accesses diverse funding sources including its stable core deposit base. The Company’s Asset/Liability Committee (“ALCO”) sets the liquidity guidelines that govern the day-to-day active management of the Company’s liquidity position. The ALCO regularly monitors the Company’s liquidity status and related management process, and provides regular reports to the Board.


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The Company maintains liquidity in the form of cash and cash equivalents, short-term investments and available-for-sale investment securities. These assets totaled $5.21 billion and $5.43 billion as of September 30, 2016 and December 31, 2015, respectively, accounting for 16% and 17% of total assets as of September 30, 2016 and December 31, 2015, respectively. Traditional forms of funding such as deposits and borrowings augment these liquid assets. Total deposits amounted to $28.59 billion as of September 30, 2016, compared to $27.48 billion as of December 31, 2015, of which core deposits comprised 80% and 76% of total deposits as of September 30, 2016 and December 31, 2015, respectively. As a means of augmenting the Company’s liquidity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and FRB of San Francisco, unsecured federal funds’ lines of credit with various correspondent banks for purchase of overnight funds, and several master repurchase agreements with major brokerage companies. The Company’s available borrowing capacity with the FHLB and FRB of San Francisco was $5.45 billion and $3.15 billion, respectively, as of September 30, 2016. The Bank’s unsecured federal funds’ lines of credit, subject to availability, were $716.0 million with correspondent banks. The Company believes that its liquidity sources are sufficient to meet all reasonable foreseeable short-term and intermediate-term needs.
 
During the nine months ended September 30, 2016 and 2015, the Company experienced net cash inflows from operating activities of $417.6 million and $421.6 million, respectively. The difference between net income of $320.9 million and net cash provided by operating activities of $417.6 million for the nine months ended September 30, 2016 was primarily due to a $19.2 million increase in cash inflows from accrued expenses and other liabilities and $75.6 million of non-cash charges during the nine months ended September 30, 2016. Though net income increased $28.1 million comparing the nine months ended September 30, 2016 and 2015, net cash inflows from operating activities decreased $4.0 million. This difference between net income and net cash inflows from operating activities was primarily due to a $31.0 million decrease in non-cash charges that contributed to the increase in net income.

Net cash used in investing activities totaled $473.3 million and $1.68 billion during the nine months ended September 30, 2016 and 2015, respectively. The $1.20 billion reduction in net cash used in investing activities during the nine months ended September 30, 2016 compared to the same period last year was primarily due to a $851.8 million increase in net cash inflows from available-for-sale investment securities and a $575.0 million increase in net cash inflows from resale agreements, partially offset by $94.1 million and $89.4 million increases in net cash outflows from loans receivable and short-term investments, respectively.

During the nine months ended September 30, 2016 and 2015, the Company experienced net cash inflows from financing activities of $365.6 million and $2.10 billion, respectively. The $1.73 billion decrease in net cash inflows from financing activities for the nine months ended September 30, 2016 compared to the same period last year was primarily due to a $1.64 billion decrease in net cash provided by deposits and a $700.0 million repayment of short-term FHLB advances, partially offset by a $566.8 million decrease in net cash outflows from the extinguishment of repurchase agreements during the nine months ended September 30, 2016.

As of September 30, 2016, the Company is not aware of any trends, events or uncertainties that had or were reasonably likely to have a material effect on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expenditures in the foreseeable future.
 
East West’s liquidity has historically been dependent on the payment of cash dividends by its subsidiary, East West Bank, subject to applicable statutes, regulations and special approval. East West Bank paid total dividends of $100.0 million to East West during the nine months ended September 30, 2016 and no dividend was paid for the nine months ended September 30, 2015. In addition, in October 2016, the Board declared a quarterly cash dividend of $0.20 per share for the Company’s common stock payable on November 15, 2016 to stockholders of record on November 1, 2016.

Interest Rate Risk Management

Interest rate risk results primarily from the Company’s traditional banking activities of gathering deposits and extending loans, and is the primary market risk for the Company. Economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest the Company earns on interest-earning assets and pays on interest-bearing liabilities, and the level of the noninterest-bearing funding sources. In addition, changes in interest rate can influence the rate of principal prepayments on loans and speed of deposit withdrawals. Due to the pricing term mismatches and embedded options inherent in certain products, changes in market interest rates not only affect expected near-term earnings, but also the economic value of these interest-earning assets and interest-bearing liabilities. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant to the Company’s interest rate risk and no separate quantitative information concerning these risks is presented herein.


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With oversight by the Company’s Board, the ALCO coordinates the overall management of the Company’s interest rate risk. The ALCO meets regularly and is responsible for reviewing the Company’s open market positions and establishing policies to monitor and limit exposure to market risk. Management of interest rate risk is carried out primarily through strategies involving the Company’s investment securities portfolio, loan portfolio, available funding channels and capital market activities. In addition, the Company’s policies permit the use of off-balance sheet derivative instruments to assist in managing interest rate risk.

The interest rate risk exposure is measured and monitored through various risk management tools which include a simulation model that performs interest rate sensitivity analysis under multiple scenarios. The model includes the Company’s loans, investment securities, resale agreements, customer deposits and borrowing portfolios, including the repurchase agreements. The financial instruments from the Company’s domestic and foreign operations, forecasted noninterest income and noninterest expense items are also incorporated in the simulation. The interest rate scenarios simulated include an instantaneous parallel shift and non-parallel shift in the yield curve. In addition, the Company also performs various simulations using alternative interest rate scenarios. The alternative interest rate scenarios include yield curve flattening, yield curve steepening and yield curve inverting. In order to apply the assumed interest rate environment, adjustments are made to reflect the shift in the U.S. Treasury and other appropriate yield curves. The Company incorporates both a static balance sheet and a forward growth balance sheet in order to perform these evaluations. Results of these various simulations are used to formulate and gauge strategies to achieve a desired risk profile within the Company’s capital and liquidity guidelines.

The simulation model is based on the actual maturity and re-pricing characteristics of the Company’s interest-rate sensitive assets, liabilities and related derivative contracts. The modeled results are highly sensitive to the deposit decay assumptions used for deposits that do not have specific maturities. The Company uses historical regression analysis of the Company’s internal deposit data as a guide to set deposit decay assumptions. In addition, the model is also highly sensitive to certain assumptions on the correlation of the change in interest rates paid on core deposits to changes in benchmark market interest rates, commonly referred to as deposit beta assumptions. Deposit beta assumptions are based on the Company’s historical experience. The model is also sensitive to the loan and investment prepayment assumption. The loan and investment assumption, which relates to anticipated prepayments under different interest rate environments, is based on an independent model, as well as the Company’s historical prepayment experiences.

Existing investment securities, loans, customer deposits and borrowings are assumed to roll into new instruments at a similar spread relative to benchmark interest rates and internal pricing guidelines. The assumptions applied in the model are documented and supported for reasonableness. Changes to key model assumptions are reviewed by the ALCO. Due to the sensitivity of the model results, the Company performs periodic testing to assess the impact of the assumptions. The Company also makes appropriate calibrations when necessary. Scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. Simulation results are highly dependent on these assumptions. To the extent actual behavior is different from the assumptions in the models, there could be a material change in interest rate sensitivity.

The following table presents the Company’s net interest income and economic value of equity (“EVE”) sensitivity at September 30, 2016 and December 31, 2015 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions. The results of the simulation are presented in the table below:
 
Change in
Interest Rates
(Basis Points)
 
Net Interest
Income
   Volatility (1)
 
EVE
    Volatility (2)
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
+200
 
21.2
 %
 
18.5
 %
 
10.7
 %
 
9.8
 %
+100
 
10.8
 %
 
9.6
 %
 
6.0
 %
 
5.3
 %
-100
 
(4.6
)%
 
(4.0
)%
 
(4.9
)%
 
(4.2
)%
-200
 
(5.1
)%
 
(4.6
)%
 
(10.1
)%
 
(6.9
)%
 
(1)
The percentage change represents net interest income over 12 months in a stable interest rate environment versus net interest income in the various rate scenarios.
(2)
The percentage change represents net portfolio value of the Company in a stable interest rate environment versus net portfolio value in the various rate scenarios.


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Twelve-Month Net Interest Income Simulation

The Company’s estimated twelve-month net interest income sensitivity increased on September 30, 2016, compared to December 31, 2015, for both upward interest rate scenarios. In a simulated downward interest rate scenario, sensitivity remained relatively unchanged overall for both downward interest rate scenarios, mainly due to rates being at or near the floor rate in the current rate environment. The increase in sensitivity between September 30, 2016 and December 31, 2015 was primarily due to the increase in core deposits. This increase of core deposits caused the portfolio to become more sensitive, since these deposits are either noninterest-bearing demand deposits or have a low deposit beta.

Under most rising interest rate environments, the Company would expect some customers to move balances in demand deposits into higher interest-bearing deposits such as money market, savings or time deposits. The models are particularly sensitive to the assumption about the rate of such migration. The following table presents the Company’s net interest income sensitivity as of September 30, 2016 for the +100 and +200 basis point interest rate scenarios assuming a $1.00 billion, $2.00 billion and $3.00 billion demand deposit migration:
 
Change in
Interest Rates
(Basis Points)
 
Net Interest Income Volatility
 
$1.00 Billion
Migration
12 Months
 
$2.00 Billion
Migration
12 Months
 
$3.00 Billion
Migration
12 Months
+200
 
18.2
%
 
15.1
%
 
12.1
%
+100
 
8.9
%
 
6.9
%
 
5.0
%
 
 
 

EVE at Risk

The Company’s EVE sensitivity increased as of September 30, 2016, compared to December 31, 2015, for both upward interest rate scenarios. In the simulated upward 100 basis point and 200 basis point interest rate scenarios, sensitivity increased 6.0% and 10.7%, respectively. The increase in sensitivity as of September 30, 2016 compared to December 31, 2015 in the upward interest rate scenario was primarily due to changes in the balance sheet portfolio mix. Sensitivity in the downward interest rate scenarios is a decrease of 4.9% and 10.1% of the base level as of September 30, 2016 in declining rate scenarios of 100 and 200 basis points, respectively.

The Company’s net interest income and EVE profile as of September 30, 2016, as presented in the net interest income and EVE tables, reflects an asset sensitive net interest income position and an asset sensitive EVE position. The Company is naturally asset sensitive due to its large portfolio of rate-sensitive loans that are funded in part by noninterest-bearing and rate-stable core deposits. As a result, if there are no significant changes in the mix of assets and liabilities, net interest income increases when interest rates increase and decreases when interest rates decrease. As of September 30, 2016, the federal funds target rate was at a range of 0.25% to 0.50% which was unchanged from the range as of December 31, 2015. Further declines in interest rates are not expected to significantly reduce earning asset yield or liability costs, nor have a meaningful impact on net interest income. Given the uncertainty of the magnitude, timing and direction of future interest rate movements and the shape of the yield curve, actual results may vary from those predicted by the Company’s model.

Derivatives

It is the Company’s policy not to speculate on the future direction of interest rates or foreign currency exchange rates. However, the Company will, from time to time, enter into derivatives transactions in order to reduce its exposure to market risks, including interest rate risk and foreign currency risk. The Company believes these transactions, when properly structured and managed, may provide a hedge against inherent risk in assets or liabilities and against risk in specific transactions. Hedging transactions may be implemented using swaps, caps, floors, financial futures, forwards and options. Prior to entering into any hedging activities, the Company analyzes the costs and benefits of the hedge in comparison to alternative strategies.


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As of September 30, 2016 and December 31, 2015, the Company had cancellable interest rate swaps with original terms of 20 years and between 20 and 25 years, respectively. The objective of these interest rate swap contracts, which were designated as fair value hedges, was to obtain low-cost floating rate funding on the Company’s brokered certificates of deposit. As of September 30, 2016 and December 31, 2015, the swap contracts called for the Company to receive a fixed interest rate and pay a variable interest rate. As of September 30, 2016 and December 31, 2015, the notional amounts of the Company’s brokered certificates of deposit interest rate swaps were $48.4 million and $112.9 million, respectively. The fair values were a $2.1 million liability and a $5.2 million liability as of September 30, 2016 and December 31, 2015, respectively. This decrease was primarily due to $63.7 million notional amounts of interest rate swaps on certificates of deposit that were called during the nine months ended September 30, 2016.

The Company also offers various interest rate derivative products to clients. When derivative transactions are executed with clients, the derivative contracts are offset by paired trades with registered swap dealers. These contracts allow borrowers to lock in attractive intermediate and long term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are not linked to specific Company assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions in a hedge relationship and, therefore, are economic hedges and hedge accounting does not apply.  The contracts are marked to market at each reporting period and recorded with changes in fair value as a part of Noninterest income on the Consolidated Statements of Income. Fair values are determined from verifiable third-party sources that have considerable experience with derivative markets. The Company provides data to the third party source for purposes of calculating the credit valuation component of the fair value measurement of client derivative contracts. As of September 30, 2016 and December 31, 2015, the Company had entered into derivative contracts with clients and offsetting derivative contracts with counterparties having a notional balance totaling $7.45 billion and $6.49 billion, respectively. Since these contracts are primarily back-to-back interest rate swaps, the Company’s net exposures to interest rate derivative contracts as of September 30, 2016 and December 31, 2015 were $2.3 million and $110 thousand liabilities, respectively.

The Company enters into foreign exchange contracts with its clients and counterparty banks primarily for the purpose of allowing its clients to hedge transactions in foreign currencies from fluctuations in foreign exchange rates and also to allow the Company to economically hedge against foreign exchange fluctuations in certain certificates of deposit and loans that it offers to its customers that are denominated in foreign currencies. These transactions are economic hedges and the Company does not apply hedge accounting. The Company’s policies also permit taking proprietary currency positions within approved limits, in compliance with the proprietary trading exemption provided under Section 619 of the Dodd-Frank Act. The Company does not speculate in the foreign exchange markets, and actively manages its foreign exchange exposures within prescribed risk limits and defined controls. As of September 30, 2016 and December 31, 2015, the Company’s outstanding foreign exchange contracts that were not designated as hedging instruments, totaled $605.4 million and $653.0 million, respectively. The fair values of the foreign exchange contracts, included in Other assets and Accrued expenses and other liabilities on the Consolidated Balance Sheets, totaled $6.1 million and $3.3 million, respectively, as of September 30, 2016 and $10.3 million and $9.4 million, respectively, as of December 31, 2015.

As of September 30, 2016 and December 31, 2015, the Company had two foreign exchange contracts, which were designated as net investment hedges to mitigate the risk of adverse changes in the U.S. Dollar (“USD”)-Chinese Renminbi (“RMB”) exchange rate to hedge a portion of the Company’s net investment in its subsidiary, East West Bank (China) Limited. As of September 30, 2016 and December 31, 2015, the Company’s currency hedge had a notional value of 560.0 million RMB, the equivalent of 83.0 million USD, and 560.0 million RMB, the equivalent of 86.6 million USD, respectively. The fair values were a $78 thousand liability and a $2.4 million asset of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the contracts have a weighted average strike price of 6.7449 RMB to USD and expire in March 2017.

Additional information on the Company’s derivatives is presented in Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2015 Form 10-K, Note 3 Fair Value Measurement And Fair Value Of Financial Instruments and Note 6 Derivatives to the Consolidated Financial Statements.


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Critical Accounting Policies and Estimates

Our significant accounting policies (see Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statements and Item 7. MD&A Critical Accounting Policies and Estimates of the Company’s 2015 Form 10-K) are fundamental to understanding our MD&A. A portion of the Company’s significant accounting polices require the use of estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results. In addition, certain accounting policies require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. There are procedures and processes in place to facilitate the application of such judgments. Changes in underlying factors, assumptions or estimates could have a material impact on the Company’s future financial condition and results of operations. The following is a list of the more judgmental and complex accounting estimates and principles:

fair value of financial instruments;
available-for-sale investment securities;
PCI loans;
allowance for credit losses;
goodwill impairment; and
income taxes.

Recently Issued Accounting Standards
For detailed discussion and disclosure on new accounting pronouncements adopted and recent accounting pronouncements issued, please see Note 2Current Accounting Developments to the Consolidated Financial Statements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
For quantitative and qualitative disclosures regarding market risk in the Company’s portfolio, please see Item 1. Consolidated Financial Statements — Note 6Derivatives and Item 2. MD&A — Asset Liability and Market Risk Management in Part I of this report. 


ITEM 4.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As of September 30, 2016, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016.

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2016, that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.



84



PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
Please see Note 10 Commitments and Contingencies - Litigation, in Part I of this report, incorporated herein by reference.

 
ITEM 1A.  RISK FACTORS

The Company’s 2015 Form 10-K contains disclosure regarding the risks and uncertainties related to the Company’s business under the heading Item 1A. Risk Factors. There has been no material change to the Company’s risk factors as presented in the Company’s 2015 Form 10-K.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
There were no unregistered sales of equity securities or repurchase activities during the three months ended September 30, 2016.


ITEM 6. EXHIBITS
 
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2, furnished with this report:
Exhibit No.
 
Exhibit Description
 
 
 
10.1
 
Employment Agreement dated July 1, 2016 by and between East West Bank and Gregory L. Guyett. Incorporated by reference to Exhibit10.1 from the Registrant’s Form 8-K, filed with the Commission on October 5, 2016.
 
 
 
31.1
 
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.



85



Glossary of Acronyms
ALCO
Asset/Liability Committee
AML
Anti-money laundering
AOCI
Accumulated other comprehensive loss
ARM
Adjustable rate mortgage
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BSA
Bank Secrecy Act
C&I
Commercial and industrial
CET1
Common equity tier 1
CRA
Community Reinvestment Act
CRE
Commercial real estate
DBO
California Department of Business Oversight
EPS
Earnings per share
EVE
Economic value of equity
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
FRB
Federal Reserve Bank of San Francisco
HELOCs
Home equity lines of credit
LOCOM
Lower of cost or market
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MOU
Memorandum of Understanding
Non-PCI
Non-purchased credit impaired
OREO
Other real estate owned
OTTI
Other-than-temporary impairment
PCI
Purchased credit impaired
RMB
Chinese Renminbi
RPAs
Credit risk participation agreements
RSAs
Restricted stock awards
RSUs
Restricted stock units
SBLCs
Standby letters of credit
SEC
U.S. Securities and Exchange Commission
TDRs
Troubled debt restructurings
U.S. GAAP
United States Generally Accepted Accounting Principles
USD
U.S. Dollar
VIEs
Variable interest entities


86



SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated:
November 4, 2016
 
 
 
 
 
 
EAST WEST BANCORP INC.
(Registrant)
 
 
 
 
 
By
/s/ IRENE H. OH
 
 
 
 
Irene H. Oh
 
 
 
Executive Vice President and
Chief Financial Officer




87