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 2 — CURRENT 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.
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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.
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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.
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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 | ) | $ | — | ||||||
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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 | ) | $ | — | ||||||
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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 $1.1 million of pooled trust preferred securities measured on a recurring basis out of Level 3 into Level 2 due to increased market liquidity and price observability.
Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans that were impaired, OREO and loans held-for-sale. These fair value adjustments result from impairments recognized during the period on certain non-PCI impaired loans, application of fair value less cost to sell on OREO and application of lower of cost or market (“LOCOM”) valuation on loans held-for-sale.
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The following tables present the carrying amounts of assets included in the Consolidated Balance Sheets that had fair value changes during the year-to-date period measured on a nonrecurring basis:
Assets Measured at Fair Value on a Nonrecurring Basis as of September 30, 2016 | ||||||||||||||||
($ 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 | ) | ||||||
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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 $450.0 million of repurchase agreements was eligible for netting against resale agreements. |
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($ 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.
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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.
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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.
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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 $450.0 million as of both September 30, 2016 and December 31, 2015, respectively. The weighted average interest rates were 3.00% and 2.60% as of September 30, 2016 and December 31, 2015, respectively.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheets when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45. Collateral accepted includes securities that are not recognized on the Consolidated Balance Sheets. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheets against the related collateralized liability. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, but is usually delivered to and held by the third party trustees. The collateral amounts received/posted are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
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The following tables present resale and repurchase agreements included on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
($ 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.
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NOTE 5 — INVESTMENT 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 $49.7 million of multilateral development bank bonds as of September 30, 2016 and December 31, 2015, respectively. |
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Unrealized Losses
The following table presents the Company’s investment portfolio’s gross unrealized losses and related fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
($ 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 | |||||||||||||||||||||