EAST WEST BANCORP INC - Annual Report: 2017 (Form 10-K)

Title of each class

Name of each exchange on which registered

Common Stock, $0.001 Par Value

NASDAQ “Global Select Market”

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ¨

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 definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Non-accelerated filer	¨
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

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $8,393,797,096 (based on the June 30, 2017 closing price of Common Stock of $58.58 per share).

As of January 31, 2018, 144,544,022 shares of East West Bancorp, Inc. Common Stock were outstanding.

DOCUMENT INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III.

EAST WEST BANCORP, INC.

2017 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



			Page
PART I			3

	Item 1.	Business	5

	Item 1A.	Risk Factors	13

	Item 1B.	Unresolved Staff Comments	23

	Item 2.	Properties	23

	Item 3.	Legal Proceedings	23

	Item 4.	Mine Safety Disclosures	23

PART II			24

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24

	Item 6.	Selected Financial Data	26

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	67

	Item 8.	Financial Statements and Supplementary Data	68

	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	142

	Item 9A.	Controls and Procedures	142

	Item 9B.	Other Information	144

PART III			144

	Item 10.	Directors, Executive Officers and Corporate Governance	144

	Item 11.	Executive Compensation	144

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	145

	Item 13.	Certain Relationships and Related Transactions and Director Independence	145

	Item 14.	Principal Accountant Fees and Services	145

PART IV			146

	Item 15.	Exhibits and Financial Statement Schedules	146

	Item 16.	Form 10-K Summary	146

GLOSSARY OF ACRONYMS			147

SIGNATURES			148

EXHIBIT INDEX			149

PART I

Forward-Looking Statements

Certain matters discussed in this Annual Report 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”, “we”, 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 (the “Exchange Act”), and Rule 3b-6 promulgated thereunder. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such 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 United States (“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 (“DBO”) — Division of Financial Institutions;


•	heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;


•	changes in the economy of and monetary policy in the People’s Republic of China;


•	changes in income tax laws and regulations and the impact of the Tax Cuts and Jobs Act;


•	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 in 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 changes 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 or other events that may directly or indirectly result in a negative impact on the Company’s financial performance;


•	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 (the “Dodd-Frank 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;


•	adequacy of the Company’s risk management framework, disclosure controls and procedures, and internal control over financial reporting;


•	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;

•

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;


•	the Company’s ability to retain key officers and employees may change; and


•	any future strategic acquisitions or divestitures.

For a more detailed discussion of some of the factors that might cause such differences, see Item 1A. Risk Factors presented elsewhere in this report. 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.

ITEM 1. BUSINESS

Organization

East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of East West Bank (the “Bank”), which became its principal asset. In addition to the Bank, East West has six subsidiaries as of December 31, 2017 that were established as statutory business trusts for the purpose of issuing junior subordinated debt to third party investors. East West also owns East West Insurance Services, Inc. (“EWIS”). In the third quarter of 2017, the Company sold the insurance brokerage business of EWIS for $4.3 million, and recorded a pre-tax gain of $3.8 million. EWIS remains a subsidiary of East West and continues to maintain its insurance broker license.

East West’s principal business is to serve as a holding company for the Bank and other banking or banking-related subsidiaries that East West may establish or acquire. As a legal entity separate and distinct from its subsidiaries, East West’s principal source of funds is, and will continue to be, dividends that may be paid by its subsidiaries. East West’s other sources of funds include proceeds from the issuance of its common stock in connection with stock option and employee stock purchase plans. As of December 31, 2017, the Company had $37.15 billion in total assets, $28.69 billion in total loans (net of allowance), $32.22 billion (including deposits held-for-sale) in total deposits and $3.84 billion in stockholders’ equity.

As of December 31, 2017, the Bank has three wholly owned subsidiaries. The first subsidiary, E-W Services, Inc., is a California corporation organized by the Bank in 1977 to hold properties used by the Bank in its operations. The second subsidiary, East-West Investment, Inc., primarily acts as a trustee in connection with real estate secured loans. The remaining subsidiary is East West Bank (China) Limited.

In the fourth quarter of 2017, the Bank entered into a Purchase and Assumption Agreement to sell all eight of its Desert Community Bank (“DCB”) branches and related assets and liabilities to Flagstar Bank, a wholly owned subsidiary of Flagstar Bancorp, Inc. As of December 31, 2017, DCB branch assets held-for-sale were $91.3 million, which primarily comprised $78.1 million in loans held-for-sale. DCB deposits held-for-sale were $605.1 million. All regulatory approvals necessary for this transaction have been received, and the sale is expected to be completed in the first quarter of 2018.

The Bank continues to develop its international banking presence with its network of branches and representative offices. The Bank’s international presence includes five full-service branches in Greater China, located in Hong Kong, Shanghai, Shantou and Shenzhen. Shanghai has two branches, including one in the Shanghai Pilot Free Trade Zone. The Bank also has five representative offices in Greater China located in Beijing, Chongqing, Guangzhou, Taipei and Xiamen. In addition to facilitating traditional letters of credit and trade finance to businesses, these representative offices allow the Bank to assist existing clients and to develop new business relationships. Through these branches and offices, the Bank is focused on growing its cross-border client base between the U.S. and Greater China, helping U.S. based businesses expand in Greater China and China based companies pursue business opportunities in the U.S. The assets, revenues and earnings attributable to activities in the foreign locations were not material for the years ended December 31, 2017, 2016 and 2015.

The Bank continues to explore opportunities to establish other foreign offices, subsidiaries, strategic investments and partnerships to expand its international banking capabilities and to capitalize on cross-border businesses between the U.S. and Greater China.

Banking Services

As of December 31, 2017, the Bank was the fourth largest independent commercial bank headquartered in California based on total assets. The Bank is the largest bank in the U.S. that focuses on the financial service needs of individuals and businesses that operate both in the U.S. and Greater China, and has a strong focus on the Chinese American community. Through its network of banking locations in the U.S. and Greater China, the Bank provides a wide range of personal and commercial banking services to businesses, business executives, professionals, and other individuals. The Bank provides multilingual services to its customers in English, Cantonese, Mandarin, Vietnamese, Tagalog, Taiwanese and Spanish. The Bank also offers a variety of deposit products which includes the traditional range of personal and business checking and savings accounts, time deposits, individual retirement accounts, travelers checks, safe deposit boxes, and MasterCard^® and Visa^® merchant deposit services. The Bank’s lending activities include commercial and residential real estate, construction, trade finance and commercial business, including accounts receivable, Small Business Administration, inventory and working capital loans. In addition, the Bank is focused on providing financing to clients in need of a financial bridge to facilitate their business transactions between the U.S. and Greater China.

Operating Segments

The Bank’s three operating segments: Retail Banking, Commercial Banking and Other are based on the Bank’s core strategy. The Retail Banking segment focuses primarily on retail operations including consumers, and small and medium-sized enterprises through the Bank’s branch network. The Commercial Banking segment primarily generates commercial and industrial loans and commercial real estate (“CRE”) loans through domestic commercial lending offices located in California, New York, Texas, Washington, Massachusetts, Nevada and Georgia, and through foreign commercial lending offices located in China and Hong Kong. Furthermore, the Commercial Banking segment also offers a wide variety of international finance, and trade services and products, and generates commercial deposits. The remaining centralized functions, including the Company’s treasury operations and intersegment amount eliminations are aggregated and included in the Other segment. For complete discussion and disclosure, see the information in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Operating Segment Results and Note 19 — Business Segments to the Consolidated Financial Statements for additional information.

Market Area and Competition

The Bank operates in a highly competitive environment. The Company faces competition from domestic and foreign lending institutions and numerous other providers of financial services. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, reputation, interest rates on loans and deposits, lending limits and customer convenience. Competition also varies based on the types of customers and locations served. The Company maintains a strong presence within select markets through providing cross-border expertise to customers across a number of industry specializations between the U.S and Greater China. While the Company believes it is well positioned within a highly competitive industry, the industry could become even more competitive as a result of legislative, regulatory, economic, and technological changes, as well as continued consolidation.

The Bank concentrates on marketing its services in the greater Los Angeles metropolitan area and the greater San Francisco Bay area as California continues to grow as a top trading partner with Greater China and other Pacific Rim countries, as well as building relationships in other markets across the U.S. This provides the Bank with an important competitive advantage to its customers participating in the Asia Pacific marketplace. The Bank believes that its customers benefit from the Bank’s understanding of the Asian markets through its physical presence in Greater China, the Bank’s corporate and organizational ties throughout Asia, as well as the Bank’s international banking products and services. The Bank believes that this approach, combined with the Bank’s management and Board of Directors’ extensive ties to growing Asian business opportunities and the Chinese-American communities, provides the Bank with a competitive advantage. The Bank also has its presence in Greater China to identify and build corporate relationships, which the Bank may leverage to create business opportunities in California and other U.S. markets.

Supervision and Regulation

General

East West and the Bank are extensively regulated under U.S. federal and state laws, as well as the applicable laws of certain jurisdictions outside the U.S. in which we conduct business. Regulation and supervision by the federal and state banking agencies are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) administered by the FDIC, consumers and the banking system as a whole, and not for the protection of our investors. As a bank holding company, East West is subject to primary inspection, supervision, regulation, and examination by the Board of Governors of the Federal Reserve under the BHCA. In addition, the Company is also subject to regulation by certain foreign regulatory agencies in international jurisdictions where we conduct, or may in the future wish to conduct business, including Greater China and Hong Kong.

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Exchange Act as administered by the SEC. Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “EWBC” and is subject to NASDAQ rules for listed companies. The Company is also subject to the accounting oversight and corporate governance of the Sarbanes-Oxley Act of 2002.

Described below are material elements of selected laws and regulations applicable to East West and the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. A change in applicable statutes, regulations or regulatory policy may have a material effect on the Company’s business.

East West

East West is subject to regulation and examination by the Federal Reserve under the BHCA and its authority to, among other things:


•	require periodic reports and such additional information as the Federal Reserve may require in its discretion;


•	require the Company to maintain certain levels of capital and, under the Dodd-Frank Act, limit the ability of bank holding companies to pay dividends or bonuses unless their capital levels exceed the capital conservation buffer (see Item 1. Business — Supervision and Regulation — Capital Requirements);

•

require bank holding companies to serve as a source of financial and managerial strength to subsidiary banks and commit resources, as necessary, to support each subsidiary bank. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of Federal Reserve regulations or both;


•	restrict the receipt and the payment of dividends;


•	terminate an activity or terminate control of or liquidate or divest certain nonbank subsidiaries, affiliates or investments if the Federal Reserve believes that the activity or the control of the nonbank subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of the bank holding company;


•	regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem the Company’s securities in certain situations;


•	require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control agreements, or new employment agreements with such payment terms, which are contingent upon termination, under certain circumstances; and


•	require the approval of acquisitions and mergers with banks and large financial companies, and consider certain competitive, management, financial, financial stability and other factors in granting these approvals. DBO approvals may also be required for certain acquisitions and mergers.

As a bank holding company within the meaning of the California Financial Code, East West is subject to examination by, and may be required to file reports with, the DBO.

The Bank and its Subsidiaries

East West Bank is a California state-chartered bank, a member and stockholder of the Federal Reserve and a member of the FDIC. The Bank is subject to primary inspection, periodic examination, and supervision by the Consumer Financial Protection Bureau (the “CFPB”), the DBO, and the Federal Reserve (the Bank’s primary federal regulator). The FDIC, which insures the Bank’s deposits, also has examination authority over the Bank. The Bank’s foreign operations are regulated and supervised by the Federal Reserve and the DBO, as well as by regulatory authorities in the host countries in which the Bank’s overseas offices reside. Specific federal and state laws and regulations that are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of collateral for certain loans. The regulatory structure also gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies. California law permits state chartered commercial banks to engage in any activity permissible for national banks, unless such activity is expressly prohibited by state law. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, and further, pursuant to the Gramm Leach Bliley Act, the Bank may conduct certain “financial” activities in a subsidiary to the same extent permitted for a national bank, provided the Bank is and remains “well capitalized,” “well managed” and in “satisfactory” compliance with the Community Reinvestment Act (“CRA”).

Regulation of Subsidiaries/Branches

The Bank’s foreign-based subsidiary, East West Bank (China) Limited, is subject to applicable foreign laws and regulations, such as those implemented by the China Banking Regulatory Commission. Nonbank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. The East West Bank Hong Kong branch is subject to applicable foreign laws and regulations, such as those implemented by the Hong Kong Monetary Authority.

Capital Requirements

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items. In 2013, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implemented the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards and implemented certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components). The Basel III Capital Rules, among other things, (i) introduced a new capital measure called Common Equity Tier 1 (“CET1”) and a related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which were treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements; (iii) mandated that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; (iv) expanded the scope of the deductions from and adjustments to capital, as compared to existing regulations; (v) required banking organizations with $15 billion or more in assets (including the Company) to phase-out trust preferred securities from Tier 1 regulatory capital; and (vi) provided non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank, the option to make a one-time permanent election to exclude the effects of certain accumulated other comprehensive income or loss items. The Basel III Capital Rules also provided for a number of deductions from and adjustments to CET1. These include, for example, the requirement that (i) mortgage servicing rights; (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks; and (iii) significant investments in nonconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and is being phased-in over several years in order to give banking organizations time to adjust and adapt to the new requirements. The Basel III Capital Rules also prescribe a new standardized approach for risk weighting assets and expand the risk weighting categories to a larger and more risk-sensitive number of categories.

Under the Basel III Capital Rules, to be considered adequately capitalized, the Company and the Bank are required to maintain minimum capital ratios of 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital to risk-weighted assets, 8.0% total capital to risk-weighted assets, and a minimum Tier 1 leverage ratio of 4.0%. The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and is being phased-in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The following table lists the minimum Basel III regulatory capital ratios considering the capital conservation buffer that the Company and the Bank must satisfy during the applicable transition periods in order to avoid certain restrictions on capital distributions and discretionary bonus payments:




Regulatory Capital Ratios	January 1,
Regulatory Capital Ratios	2016	2017	2018	2019
CET1 risk-based capital ratio	5.13%	5.75%	6.38%	7.00%
Tier 1 risk-based capital ratio	6.63%	7.25%	7.88%	8.50%
Total risk-based capital ratio	8.63%	9.25%	9.88%	10.50%

As of December 31, 2017, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis. For additional discussion and disclosure see Item 7. MD&A — Regulatory Capital and Ratios and Note 18 — Regulatory Requirements and Matters to the Consolidated Financial Statements.

With respect to the Bank, the Basel III Capital Rules also revised the Prompt Corrective Action (“PCA”) regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under the Prompt Corrective Action section below.

Prompt Corrective Action

The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take PCA with respect to depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules, revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:




PCA Category	Total Risk-Based Capital Ratio	Tier 1 Risk-Based Capital Ratio	CET1 Risk-Based Ratio	Tier 1 Leverage Ratio
Well capitalized	10%	8%	6.5%	5%
Adequately capitalized	8%	6%	4.5%	4%
Undercapitalized	< 8%	< 6%	< 4.5%	< 4%
Significantly undercapitalized	< 6%	< 4%	< 3.0%	< 3%
Critically undercapitalized	Tangible Equity/Total Assets ≤ 2%

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of any dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and/or cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

Stress Testing for Banks with Assets of $10 Billion to $50 Billion

The Dodd-Frank Act requires stress testing of bank holding companies and banks that have more than $10 billion but less than $50 billion of total consolidated assets (“$10 - $50 billion companies”). Additional stress testing is required for banking organizations with total consolidated assets of $50 billion or more. $10 - $50 billion companies, including the Company and the Bank, are required to conduct annual company-run stress tests under rules issued by the Federal Reserve Bank. This stress test assesses the potential impact of different scenarios on the consolidated earnings, balance sheet and capital of a bank holding company or bank over a designated planning horizon of nine quarters, taking into account the organization’s current condition, risks, exposures, strategies and activities. Each banking organization’s Board of Directors and senior management are required to review and approve the policies and procedures of their stress testing processes as frequently as economic conditions or the condition of the organization may warrant, and at least annually. They are also required to consider the results of the stress test in the normal course of business, including the banking organization’s capital planning, assessment of capital adequacy and maintenance of capital consistent with its risks, and risk management practices. The results of the stress tests are provided to the applicable Federal Reserve banking agency. The final rule requires public disclosure of a summary of the severely adverse stress testing results for the $10 - $50 billion companies. The Bank has developed a process to comply with the stress testing requirements, which involves senior management and the Board of Directors. The Bank is required to submit the results of the annual company-run stress tests to the Federal Reserve Bank by the close of business July 31 of each calendar year, using data as of December 31 of the preceding year and publish a summary of the results of the company-run stress tests between October 15 and October 31. The Company reported the results of its 2017 annual stress tests to the Federal Reserve Bank on July 27, 2017 and published a summary of the results on its website on October 23, 2017.

Consumer Financial Protection Bureau Supervision

The Dodd-Frank Act centralized responsibility for consumer financial protection by giving the CFPB the authority for implementing, examining and enforcing compliance with federal consumer financial laws. Depository institutions with assets exceeding $10 billion (such as the Bank), their affiliates, and certain non-banks in the markets for consumer financial services (as determined by the CFPB) are subject to direct supervision by the CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. The CFPB is focused on:


•	risks to consumers and compliance with federal consumer financial laws, when it evaluates the policies and practices of a financial institution;


•	unfair, deceptive, or abusive practices, which the Dodd-Frank Act empowers CFPB to prevent through rulemaking, enforcement and examination;


•	rulemaking to implement various federal consumer statutes such as the Home Mortgage Disclosure Act, Truth in Lending Act, Real Estate Settlement Procedures Act and Electronic Fund Transfer Act;


•	the markets in which firms operate and risks to consumers posed by activities in those markets; and


•	holding lenders accountable for discriminatory dealer markups with respect to the indirect auto business.

The statutes and regulations that the CFPB enforces mandate certain disclosure and other requirements, and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. In addition, the Department of Justice enforces the Servicemembers Civil Relief Act, which provides certain protections for military service members and their families, who have utilized a financial product or service, including a limitation on the ability to retake collateral in the event of default and a statutory interest rate cap for certain debts. Failure to comply with these laws can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines or criminal penalties, punitive damages or restitution to consumers, and the loss of certain contractual rights. The Bank and the Company are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.

Federal Home Loan Bank and the Federal Reserve’s Reserve Requirements

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. As a FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. The Bank may also access the FHLB for both short-term and long-term secured borrowing sources. The Bank is also a member bank and stockholder of the Federal Reserve. The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts either in the form of vault cash, an interest-bearing account at the Federal Reserve Bank, or a pass-through account as defined by the Federal Reserve. As of December 31, 2017, the Bank was in compliance with these requirements.

Dividends and Other Transfers of Funds

Dividends from the Bank constitute the principal source of income to East West. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. In addition, the banking agencies have the authority to prohibit or limit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Furthermore, under the federal PCA regulations, the Federal Reserve or FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” For more information, see Item 1. Business — Supervision and Regulation — Capital Requirements.

It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only if the organization’s net income available to common stockholders over the past year has been sufficient to fully fund the dividends, and if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine the company’s ability to be a financial source of strength to its banking subsidiaries. The Federal Reserve requires bank holding companies to continuously review their dividend policy in light of their organizations’ financial condition and compliance with regulatory capital requirements, and has discouraged payment ratios that are at maximum allowable levels, unless both asset quality and capital are very strong.

Transactions with Affiliates and Insiders

Pursuant to Section 23A and 23B of the Federal Reserve Act, as implemented by the Federal Reserve’s Regulation W, the Bank is subject to restrictions that strictly limit the ability of banks to engage in transactions with their affiliates, including their parent bank holding companies. Regulations promulgated by the Federal Reserve limit the types and amounts of these transactions that may take place and generally require those transactions to be on an arm's-length basis. In general, these regulations require that “covered transactions” between a subsidiary bank and any one affiliate (e.g., its parent company or the non-bank subsidiaries of the bank holding company) are limited to 10% of the bank subsidiary's capital and surplus and, with respect to such bank subsidiary and all such affiliates, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, these restrictions, contained in the Federal Reserve’s Regulation W, prevent East West and other affiliates from borrowing from, or entering into other credit transactions with, the Bank or its operating subsidiaries, unless the loans or other credit transactions are secured by specified amounts of collateral. Federal law also limits a bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. The terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. The Dodd-Frank Act treats derivative transactions resulting in credit exposure to an affiliate as covered transactions. It expands the transactions for which collateral is required to be maintained, and for all such transactions, it requires collateral to be maintained at all times. In addition, the Volcker Rule under the Dodd-Frank Act establishes certain prohibitions, restrictions and requirements (known as “Super 23A” and “Super 23B”) on transactions between a covered fund and a banking entity that serves as an investment manager, investment adviser, organizer and offeror, or sponsor with respect to that covered fund, regardless of whether the banking entity has an ownership interest in the fund.

Community Reinvestment Act

Under the terms of the CRA as implemented by FDIC regulations, an institution has a continuing and affirmative obligation to help serve the credit needs of its communities, including the extension of credit to low to moderate-income neighborhoods. Should the Bank fail to serve the community adequately, potential penalties may include regulatory denials of applications to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.

FDIC Deposit Insurance Assessments

The FDIC insures the Bank’s customer deposits through the DIF of the FDIC up to $250,000 for each depositor. The DIF is funded mainly through quarterly assessments on member banks. The Dodd-Frank Act revised the FDIC's fund management authority by setting requirements for the Designated Reserve Ratio (“DRR”) and redefining the assessment base, which is used to calculate banks' quarterly assessments. The FDIA requires the FDIC's Board to set a target or DRR for the DIF annually. The FDIC views the 2.0 percent DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises. The Bank’s DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank. The initial base assessment rate is based on an institution’s capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk (“CAMELS”) ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and a measure of loss severity that estimates the relative magnitude of potential losses to the FDIC in the event of the Bank’s failure. The FDIC’s DIF restoration plan is designed to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020. Insured institutions with total assets of $10 billion or more, such as the Bank, are responsible for funding the increase. With the increase of the DIF reserve ratio to 1.17% on June 30, 2016, the range of initial assessment rates has declined for all banks from five to 35 basis points on an annualized basis to three to 30 basis points on an annualized basis. In order to reach a DIF reserve ratio of 1.35%, insured depository institutions with $10 billion or more in total assets, such as the Bank, are required to pay a quarterly surcharge equal to an annual rate of 4.5 basis points applied to the Bank’s assessment base (with certain adjustments), in addition to regular assessments. In the event that the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall on large banks in the first quarter of 2019. For additional information regarding deposit insurance, see Item 1A. Risk Factors. The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank’s charter by the DBO.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act (“BSA”) and its implementing regulations and parallel requirements of the federal banking regulators require the Bank to maintain a risk-based Anti-Money Laundering (“AML”) program reasonably designed to prevent and detect money laundering and terrorist financing and to comply with the recordkeeping and reporting requirements of the BSA, including the requirement to report suspicious activities. There is an expectation by the Bank’s regulators that there will be an effective governance structure for the program which includes effective oversight by our Board of Directors and management. The program must include, at a minimum, a designated compliance officer, written policies, procedures and internal controls, training of appropriate personnel, and independent testing of the program and risk-based customer due diligence procedures. The United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the federal banking agencies continue to issue regulations and guidance with respect to the application and requirements of the BSA and their expectations for effective AML programs. Banking regulators also examine banks for compliance with regulations administered by the Office of Foreign Assets Control (“OFAC”) for economic sanctions against targeted foreign countries, nationals and others. Failure of a financial institution to maintain and implement adequate BSA/AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Future Legislation and Regulation

Legislators, presidential administrations and regulators may enact rules, laws, and policies to regulate the financial services industry and public companies from time to time. Further legislative changes and additional regulations may change the Company’s operating environment in substantial and unpredictable ways. Such legislation and regulations could increase the cost of conducting business, impede the efficiency of the internal business processes, and restrict or expand the activities in which the Company may engage. The Company cannot predict whether future legislative proposals will be enacted and, if enacted, the effect they would have on the business strategy, results of operations or financial condition of the Company. The same uncertainty exists with respect to regulations authorized or required under the Dodd-Frank Act that have not yet been proposed or finalized. Members of the current U.S. federal government administration have indicated that the Dodd-Frank Act will be evaluated and that some of the provisions of the Dodd-Frank Act and rules promulgated thereunder, including those provisions establishing the CFPB and the rules and regulations proposed and enacted by the CFPB, may be revised, repealed, or amended. It is unclear if this evaluation of the rules and regulations will result in material changes to the current laws and rules, or those that are in process, applicable to financial institutions like us and financial services or products like ours. It also is not clear what the impact from any such changes, whether positive or negative, would be on our business or the markets and industries in which we compete and any such changes could have a material adverse impact on our business and prospects. There can be no assurance that these or future reforms will not significantly impact our businesses, results of operations and financial condition.

Employees

As of December 31, 2017, the Company had approximately 3,000 employees. None of the Company’s employees are subject to any collective bargaining agreements.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and other filings with the SEC are available free of charge at http://investor.eastwestbank.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. These reports are also available for free on the SEC’s website at http://www.sec.gov. Also, these reports can be found and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330.

ITEM 1A. RISK FACTORS

In the course of conducting the Company’s businesses, the Company is exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to the Company’s businesses. The following discussion sets forth what management currently believes could be the most significant factors, of which we are currently aware, that could affect our businesses, results of operations and financial condition. Additional factors that could affect our businesses, results of operations and financial condition are discussed in the Forward-Looking Statements. Other factors not discussed below or elsewhere in this Annual Report on Form 10-K could also adversely affect the Company’s businesses, results of operations and financial condition. Therefore, the risk factors below should not be considered a complete discussion of all of the risks and uncertainties the Company may face.

Regulatory, Compliance and Legal Risks

Changes in law, regulation or oversight may adversely affect the Company’s operations. EWBC is subject to extensive regulation under federal and state laws, as well as supervision and examination by the DBO, FDIC, Federal Reserve, FHLB, SEC, CFPB, U.S. and State Attorneys General, and other government bodies. Congress and federal agencies have significantly increased their focus on the regulation of the financial services industry. Among other things, the Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes, many parts of which are now in effect. The Federal Reserve has adopted regulations implementing the Basel III framework on bank capital adequacy, stress testing, and market liquidity risk in the U.S. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. In addition, our overseas operations in China, Hong Kong and Taiwan are subject to extensive regulation under the laws of those jurisdictions as well as supervision and examination by financial regulators for those jurisdictions, which have also increased their focus on the regulation of the financial services industry. Moreover, regulation of the financial services industry continues to undergo major changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies could affect EWBC in substantial and unpredictable ways. In addition, such changes could also subject us to additional costs and may limit the types of financial services and products we offer. Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by state, federal and non-U.S. agencies, the loss of FDIC insurance, the revocation of our banking charter, civil or criminal monetary penalties and/or reputational damage, which could have a material adverse impact on the Company’s businesses, results of operations and financial condition. The effects of any such legislative changes and regulatory actions on EWBC cannot be reliably determined at this time. See Item 1. Business — Supervision and Regulation for more information about the regulations to which we are subject.

Good standing with our regulators is of fundamental importance to the continuation and growth of our businesses given that banks operate in an extensively regulated environment under state and federal law. The Bank is subject to supervision and regulation by regulators, including the Federal Reserve, the DBO and financial regulators in China, Hong Kong and Taiwan. Federal, state and non-U.S. regulators, in the performance of their supervisory and enforcement duties, have significant discretion and power to initiate enforcement actions for violations of laws and regulations, and unsafe and unsound practices. The enforcement powers available to banking regulators include, among others, the ability to assess civil monetary penalties, to issue cease and desist or removal orders, to require written agreements, and to initiate injunctive actions. Further, regulators and bank supervisors continue to exercise qualitative supervision and regulation of our industry and specific business operations and related matters. Any failure to satisfy regulators' substantive and qualitative expectations may adversely affect our business and operations. Violations of laws and regulations or deemed deficiencies in risk management or other qualitative practices also may be incorporated into the Company’s bank supervisory ratings. A downgrade in these ratings, or other regulatory actions and settlements could limit the Company’s ability to pursue acquisitions or conduct other expansionary activities and require new or additional regulatory approvals before engaging in certain other business activities.

The CFPB is in the process of reshaping the consumer financial laws through rulemaking and enforcement of such laws against unfair, deceptive and abusive acts or practices. Compliance with any such change may impact the business operations of depository institutions offering consumer financial products or services, including the Bank. The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. What constitutes unfair, deceptive and abusive acts or practices may be clarified by CFPB enforcement actions and opinions from courts and administrative proceedings. Moreover, the Bank will be examined by the CFPB for compliance with the CFPB’s rules and regulations. The CFPB issued a series of final rules, which went into effect in January 2014, to implement provisions in the Dodd-Frank Act related to mortgage origination and servicing. We maintain additional compliance personnel and have taken other steps to satisfy the associated regulatory compliance burden. While it remains difficult to quantify any additional required increase in our regulatory compliance burden, additional costs associated with regulatory compliance may be incurred.

We face risk of noncompliance and enforcement actions under the BSA and other AML statutes and regulations. The BSA requires banks and other financial institutions to, among other things, develop and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. FinCEN has delegated examination authority for compliance by banks with the BSA to the federal banking regulators, including to the Board of Governors of the Federal Reserve for state licensed member banks. Under parallel authority of the bank regulators, the federal bank regulators and certain state regulators have authority to bring enforcement actions related to BSA compliance which may include compliance undertakings, written agreements, cease and desist orders, and/or civil monetary penalties. FinCEN may also impose civil monetary penalties based on BSA violations that are deemed willful. In addition, willful violations of the BSA also could result in criminal fines, penalties or forfeitures. The banking regulators also examine for compliance with the rules enforced by the OFAC. Banks are under enhanced scrutiny for both BSA and OFAC compliance. Consequently, if our policies, procedures and internal controls are deemed deficient, we could face monetary penalties as well as serious reputational consequences that could materially and adversely affect our businesses, results of operations and financial condition.

The Bank is subject to supervision pursuant to a written agreement with the Federal Reserve Bank of San Francisco (“FRB”) and a memorandum of understanding (“MOU”) with the DBO regarding BSA and AML compliance, which agreements and the conditions which led to such agreements could result in additional actions being taken against the Bank, increase the Bank’s operating costs and could adversely affect the Bank’s results of operations. The Bank entered into a Written Agreement, dated November 9, 2015 with the FRB (the “Written Agreement”), and a related MOU with the DBO, relating to certain deficiencies identified in the Bank’s BSA/AML compliance program, as described in further detail in Item 7. MD&A — Regulatory Matters. If additional compliance issues are identified or if the regulators conclude that the Bank has not satisfactorily complied with the Written Agreement or MOU, the FRB or DBO could take further action with respect to the Bank, and if any such further actions were taken, such action could have a material adverse effect on our businesses, results of operations and financial condition. The operating and other conditions of the Written Agreement could lead to an increased risk of being subject to additional regulatory actions by the FRB and DBO or other government agencies, as well as additional actions resulting from future regular annual soundness and compliance examinations by federal and state regulators. To date, the Company has added significant resources to comply with the Written Agreement and MOU, and to address any additional findings or recommendations by our regulators.

We are subject to financial and reputational risk arising from lawsuits and other legal proceedings. We face significant risk from litigation and claims brought by consumers, borrowers and counterparties. This includes claims for monetary damages, penalties and fines, as well as demands for injunctive relief. The results of these lawsuits and other legal proceedings could lead to significant financial obligations for the Company, as well as restrictions or changes to how we conduct our businesses. The costs of litigation and defense may adversely impact our businesses, results of operations and financial condition. In addition, we may suffer reputational harm as a result of lawsuits and claims. Moreover, it may be difficult to predict the outcome of a lawsuit or legal proceeding, which may present additional uncertainty to our business prospects. Also, what constitutes unfair, deceptive and abusive acts or practices may be shaped by opinions from courts, administrative proceedings and agency guidance.

Capital and Liquidity Risks

As a regulated entity, we are subject to capital requirements, and a failure to meet these standards could affect our financial condition. The Company and the Bank are subject to certain capital guidelines, qualitative judgments by regulators about components, risk weightings and other factors. New regulatory capital and liquidity requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases, and may require us to increase our regulatory capital, or increase regulatory capital ratios or liquidity. Significant parts of the capital requirements applicable to the Company and the Bank under the Basel III Capital Rules adopted by the Federal Reserve are effective, although certain provisions of the rules are phased-in over a period of years, with the rules generally fully phased-in as of January 1, 2019. As such, we are required to adopt more stringent capital adequacy standards than we have in the past. In addition, we may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, as a result of stress testing and capital planning based on the hypothetical future adverse economic scenarios. We expect to meet the requirements of the Basel III Capital Rules, including the capital conservation buffer fully phased-in as of January 1, 2019. Compliance with these capital requirements, including leverage ratios, may limit operations that require intensive use of capital. This could adversely affect our ability to expand or maintain present business levels, which may adversely affect our businesses, results of operations and financial condition. Additional information on the regulatory capital requirements applicable to the Company and the Bank is set forth in Item 1. Business — Supervision and Regulation — Capital Requirements.

The Company’s dependence on dividends from the Bank could affect the Company’s liquidity and ability to pay dividends. East West is dependent on the Bank for dividends, distributions and other payments. Our principal source of cash flows, including cash flows to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividend income from the Bank. The ability of the Bank to pay dividends to East West is limited by federal and California law. Subject to the Bank meeting or exceeding regulatory capital requirements, regulatory approval is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two years. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with the Federal Reserve in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for the period.

The Company is subject to liquidity risk, which could negatively affect the Company’s funding levels. Market conditions or other events could negatively affect the level of or cost of funding, which in turn could affect the Company’s ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences. Although the Company has implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on the Company’s businesses, results of operations and financial condition. If the cost effectiveness or the availability of supply in the credit markets is reduced for a prolonged period of time, the Company’s funding needs may require the Company to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, and further managing loan growth and investment opportunities. These alternative means of funding may not be available under stressed conditions or realized timely.

Market Risks

General economic, political or industry conditions may be less favorable than expected. Our businesses and results of operations are affected by the financial markets and general economic conditions in the U.S. and China, including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the global financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, and the sustainability of economic growth in the U.S. and China. The deterioration of any of these conditions could adversely affect our consumer and commercial businesses, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations. Because the Company’s operations and the collateral securing its loan portfolio are concentrated in Northern and Southern California, the Company may be particularly susceptible to the adverse economic conditions in the state of California. Any unfavorable changes in the economic and market conditions could lead to the following risks:

•

the process the Company uses to estimate losses inherent in the Company’s credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of the borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of the Company’s estimates which may, in turn, impact the reliability of the process;


•	the Company’s commercial and residential borrowers may not be able to make timely repayments of their loans, or the decrease in value of real estate collateral securing the payment of such loans could result in credit losses, delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on the Company’s operating results;


•	a decrease in the demand for loans and other products and services;


•	a decrease in deposit balances due to overall reductions in customers’ accounts;


•	future disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;


•	the value of the available-for-sale investment securities portfolio that the Company holds may be adversely affected by defaults by debtors; and


•	a loss of confidence in the financial services industry, our market sector and the equity markets by investors, placing pressure on the Company’s stock price.

A portion of the Company’s loan portfolio is secured by real estate and thus the Company has a higher degree of risk from a downturn in real estate markets. As discussed in the General economic, political or industry conditions may be less favorable than expected section above, a decline in real estate markets could impact the Company’s businesses because many of the Company’s loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature and national disasters, such as earthquakes which are particular to California. A significant portion of the Company’s real estate collateral is located in California. If real estate values decline, the value of real estate collateral securing the Company’s loans could be significantly reduced. The Company’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and the Company would be more likely to suffer losses on defaulted loans. Furthermore, CRE and multifamily loans typically involve large balances to single borrowers or groups of related borrowers. Since payments on these loans are often dependent on the successful operation or management of the properties, as well as the business and financial condition of the borrower, repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions, or changes in applicable government regulations. Borrowers’ inability to repay such loans may have an adverse effect on the Company’s businesses, results of operations and financial condition.

The Company’s businesses are subject to interest rate risk and variations in interest rates may negatively affect the Company’s financial performance. Our financial results depend substantially on net interest income, which is the difference between the interest income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Interest-earning assets primarily include loans extended, securities held in our investment portfolio and excess cash held to manage short-term liquidity. We fund our assets using deposits and borrowings. While we offer interest-bearing deposit products, a portion of our deposit balances are from noninterest-bearing products. Overall, the interest rates we receive on our interest-earning assets and pay on our interest-bearing liabilities could be affected by a variety of factors, including market interest rate changes, competition, regulatory requirements and a change in our product mix. Changes in key variable market interest rates such as the Federal Funds, National Prime, the London Interbank Offered Rate or Treasury rates generally impact our interest rate spread. Because of the differences in the maturities and repricing characteristics of the Company’s interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Over the past several quarters, the Federal Reserve has been raising interest rates. Increases in interest rates may result in a change in the mix of non-interest and interest-bearing deposit accounts. When interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract. Higher interest rates may also result in lower mortgage production income and increased charge-offs in certain segments of the loan portfolio, such as CRE and home equity.

The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings. The Federal Reserve Board regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin. They can also materially decrease the value of financial assets we hold. Federal Reserve policies may also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans, or could adversely create asset bubbles which result from prolonged periods of accommodative policy. This, in turn, may result in volatile markets and rapidly declining collateral values. Changes in Federal Reserve policies are beyond our control and difficult to predict. Consequently, the impact of these changes on our activities and results of operations is difficult to predict.

We face risks associated with international operations. A substantial number of our customers have economic and cultural ties to Asia. The Bank’s international presence includes five full-service branches in Greater China, located in Hong Kong, Shanghai, Shantou and Shenzhen. Shanghai has two branches, including one in the Shanghai Pilot Free Trade Zone. The Bank also has five representative offices in Greater China located in Beijing, Chongqing, Guangzhou, Taipei and Xiamen. Our efforts to expand our businesses in Asia carry certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations, risks associated with leveraging and conducting business on an international basis, including among others, legal, regulatory and tax requirements and restrictions, uncertainties regarding liability, trade barriers, difficulties in staffing and managing foreign operations, political and economic risks, and financial risks including currency and payment risks. Further, volatility in the Shanghai and Hong Kong stock exchanges and/or a potential fall in real estate prices in China, among other things, may negatively impact asset values and the profitability and liquidity of the Company’s customers who operate in this region. These risks could adversely affect the success of our international operations and could have a material adverse effect on our overall businesses, results of operations and financial condition. In addition, we face risks that our employees and affiliates may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act, anti-corruption laws, and other foreign laws and regulations. Failure to comply with such laws and regulations could, among other things, result in enforcement actions and fines against us, as well as limitations on our conduct, any of which could have a material adverse effect on our businesses, results of operations and financial condition.

The Company is subject to fluctuations in foreign currency exchange rates. The Company’s foreign currency translation exposure relates primarily to its China subsidiary that has its functional currency denominated in Chinese Renminbi. In addition, as the Company continues to expand its businesses in China and Hong Kong, certain transactions are conducted in currencies other than the U.S. Dollar (“USD”). Although the Company has entered into derivative instruments to offset the impact of the foreign exchange fluctuations, given the volatility of exchange rates, there is no assurance that the Company will be able to effectively manage foreign currency translation risk. Fluctuations in foreign currency exchange rates could have a material adverse effect on the Company’s businesses, results of operations and financial condition.

Credit Risks

The Company’s allowance for credit losses level may not be adequate to cover actual losses. In accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), we maintain an allowance for loan losses to provide for loan defaults and non-performance, and an allowance for unfunded credit reserves which, when combined, are referred to as the allowance for credit losses. Our allowance for loan losses is based on our evaluation of risks associated with our loans held-for-investment portfolio, including historical loss experience, expected loss calculations, delinquencies, performing status, the size and composition of the loan portfolio, economic conditions, and concentrations within the portfolio. The allowance estimation process requires subjective and complex judgments, including analysis of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. Current economic conditions in the U.S. and in the international markets could deteriorate, which could result in, among other things, greater than expected deterioration in credit quality of our loan portfolio or in the value of collateral securing these loans. Our allowance for loan losses may not be adequate to cover probable loan losses, and future provisions for loan losses could materially and adversely affect our results of operations and financial condition. Additionally, in order to maximize the collection of loan balances, we sometimes modify loan terms when there is a reasonable chance that an appropriate modification would allow the borrower to continue servicing the debt. If such modifications ultimately are less effective at mitigating loan losses than we expect, we may incur losses in excess of the specific amount of allowance for loan losses associated with a modified loan, and this would result in additional provision for loan losses. In addition, we establish a reserve for losses associated with our unfunded credit reserves. The level of the allowance for unfunded credit reserves is determined by following a methodology similar to that used to establish our allowance for loan losses in our loans held-for-investment portfolio. There can be no assurance that our allowance for unfunded credit reserves will be adequate to provide for the actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit reserves in any period may result in a charge to earnings.

We may be subject to increased credit risk and higher credit losses to the extent that our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Our credit risk and credit losses can increase if our loans are concentrated in borrowers engaged in the same or similar economic conditions in the markets in which we operate or elsewhere, which could result in materially higher credit losses. Deterioration in economic conditions, housing conditions, or real estate values in those markets could result in materially higher credit losses. The Bank has a concentration of real estate loans in California. Potential deterioration in the real estate market could result in additional loan charge-offs and provision for loan losses, which could have a material adverse effect on the Company’s businesses, results of operations and financial condition.

Operational Risks

A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, financial condition, cash flows, and liquidity, as well as cause reputational harm. The potential for operational risk exposure exists throughout our organization and from our interactions with third parties. Our operational and security systems, infrastructure, including our computer systems, network infrastructure, data management and internal processes, as well as those of third parties, are integral to our performance. In addition, we rely on our employees and third parties in our ongoing operations, who may, as a result of human error or malfeasance or failure or breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to the third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or may become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control which could adversely affect our ability to process these transactions or provide certain services. There could be electrical, telecommunications or other major physical infrastructure outages, natural disasters such as earthquakes, tornadoes, hurricanes and floods, disease pandemics, and events arising from local or larger scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth, and this entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, financial condition, cash flows, and liquidity, and may result in loss of confidence, significant litigation exposure and harm to our reputation.

A cyber-attack, information or security breach, or a technology failure of ours or of a third party could adversely affect our ability to conduct our businesses, manage our exposure to risk or expand our businesses, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, financial condition, cash flows and liquidity, as well as cause reputational harm. The Company offers various internet-based services to its clients, including online banking services. The secure transmission of confidential information over the internet is essential to maintain our clients’ confidence in the Company’s online services. In addition, our businesses are highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems, software and networks. Although the Company has developed systems and processes that are designed to prevent security breaches and periodically test the Company’s security, failure to mitigate breaches of security could adversely affect the Company’s ability to offer and grow the online services, result in violations of applicable privacy and other laws, costly litigation and loss of customer relationships and could have an adverse effect on the Company’s businesses, results of operations and financial condition.

Failure to keep pace with technological change could adversely affect the Company’s businesses. The Company may face risks associated with the ability to utilize information technology systems to support our operations effectively. The financial services industry is continuously undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s businesses and, in turn, the Company’s results of operations and financial condition. In addition, if we do not implement systems effectively or if our outsourcing business partners do not perform their functions properly, there could be an adverse effect on us. There can be no assurance that we will be able to effectively maintain or improve our systems and processes, or utilize outsourced talent, to meet our business needs efficiently. Any such failure could adversely affect our businesses, results of operations, financial condition, and reputation.

Natural disasters and geopolitical events beyond the Company’s control could adversely affect the Company. Natural disasters such as earthquakes, wildfires, extreme weather conditions, hurricanes, floods, and other acts of nature and geopolitical events involving terrorism or military conflict could adversely affect the Company’s business operations and those of the Company’s customers and cause substantial damage and loss to real and personal property. These natural disasters and geopolitical events could impair the borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of nonperforming assets, net charge-offs, and provision for loan losses, which could adversely affect the Company’s businesses, results of operations and financial condition.

The actions and soundness of other financial institutions could affect the Company. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company executes transactions with various counterparties in the financial industry, including brokers and dealers, commercial banks and investment banks. Defaults by financial services institutions and uncertainty in the financial services industry in general could lead to the unavailability of liquidity throughout the market and may expose the Company to credit risk in the event of default of its counterparty or client. Further, the Company’s credit risk may increase when the underlying collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any such losses could materially and adversely affect the Company’s businesses, results of operations and financial condition.

The Company’s controls and procedures could fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of the Company’s controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect the Company’s businesses, results of operations and financial condition.

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company’s prospects. Competition for qualified employees and personnel in the banking industry is intense and there is a limited number of qualified persons with knowledge of, and experience in, the regional banking industry, especially in the West Coast market. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. The Company’s success depends, to a significant degree, upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel, as well as upon the continued contributions of its management and personnel. In particular, the Company’s success has been and continues to be highly dependent upon the abilities of certain key executives.

We face strong competition in the financial services industry and we could lose business or suffer margin declines as a result. The Company’s financial performance and profitability also depend on the Company’s ability to compete with financial services companies and other companies that offer banking services. The Company conducts the majority of its operations in California. The banking and financial services businesses in California are highly competitive, and increased competition in the Company’s primary market area may adversely impact the level of loans and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. These competitors include national banks, other regional banks and community banks. The Company also faces competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, the Company’s competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services. If the Company is unable to attract and retain banking customers, the Company may be unable to continue its loan growth and level of deposits.

The Company has engaged in and may continue to engage in further expansion through acquisitions, which could negatively affect the Company’s businesses and earnings. There are risks associated with expansion through acquisitions. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, and being unable to profitably deploy assets acquired in the transaction. Additional country/region-specific risks are associated with transactions outside the U.S., including in China. To the extent the Company issues capital stock in connection with additional transactions, these transactions and related stock issuances may have a dilutive effect on earnings per share and share ownership.

Accounting and Tax Risks

Changes in accounting standards or changes in how the accounting standards are interpreted or applied could materially impact the Company’s financial statements. From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. In addition, the FASB, SEC, banking regulators and the Company’s independent registered public accounting firm may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report the Company’s financial statements. In some cases, the Company could be required to apply a new or revised standard retroactively, potentially resulting in the Company restating prior period’s financial statements.

The Company’s consolidated financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in the future. Pursuant to U.S. GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. Several of our accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. For a description of these policies, refer to Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements.

There may be substantial changes to fiscal and tax policies that may adversely affect our business. From time to time, the U.S. government may make substantial changes to a variety of federal policies and regulations, including fiscal and tax policies that may affect our business. In addition, new tax laws or the expiration of or changes in the existing tax laws, or the interpretation of those laws, could have a material impact on the Company’s businesses, results of operations and financial condition. The Company’s positions or its actions taken prior to such changes, may be compromised by such changes. In addition, the Company’s actions taken in response to, or reliance upon, such changes in the tax laws may impact our tax position in a manner that may result in adverse financial conditions. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted. The Tax Act resulted in additional income tax expense being recorded in the fourth quarter of 2017. The Tax Act made numerous changes to the federal corporate tax law that, among other things, reducing the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, expensing 100% of the cost of acquired qualified property after September 27, 2017, transitioning from a worldwide tax system to a territorial system, imposing a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminating any carrybacks of tax credits and net operating losses (“NOLs”) incurred after December 31, 2017. In addition, NOLs incurred after December 31, 2017 are now limited to 80% of taxable income for any given year and may be carried forward indefinitely. The changes enacted by the Tax Act will be partially effective in the current 2018 tax year and fully effective in the 2019 tax year. The Company is analyzing the Tax Act with its professional advisors. While we currently anticipate that the changes enacted by the Tax Act will have a favorable effect on our financial condition, profitability and/or cash flows, until such analysis is complete, the full impact of the Tax Act on the Company in future periods is uncertain and no assurances can be made by the Company on any potential impacts. In the absence of guidance on various uncertainties and ambiguities in the application of certain provisions of the Tax Act, we will use what we believe are reasonable interpretations and assumptions in applying the Tax Act, but it is possible that the IRS could issue subsequent guidance or take positions upon audit that differ from our prior interpretations and assumptions, which could have a material adverse effect on our cash tax liabilities, results of operations and financial condition.

The Company’s investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on the Company’s results of operations. The Company invests in certain tax-advantaged projects that support affordable housing, community development and renewable energy resources. The Company’s investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. The Company is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible inability to realize these tax credits and other tax benefits could have a negative impact on the Company’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside the Company’s control, including changes in the applicable tax code and the ability of the projects to be completed.

Other Risks

Anti-takeover provisions could negatively impact the Company’s stockholders. Provisions of Delaware law and of the Company’s certificate of incorporation, as amended, and bylaws could make it more difficult for a third party to acquire control of the Company or could have the effect of discouraging a third party from attempting to acquire control of the Company, even if an acquisition might be in the best interest of the stockholders. For example, the Company’s certificate of incorporation requires the approval of the holders of at least two-thirds of the outstanding shares of voting stock to approve certain business combinations. The Company is also subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire the Company without the approval of the Board of Directors. Additionally, the Company’s certificate of incorporation, as amended, authorizes the Board of Directors to issue preferred stock and preferred stock could be issued as a defensive measure in response to a takeover proposal. These and other provisions could make it more difficult for a third party to acquire the Company, even if an acquisition might be in the best interest of the stockholders.

Managing reputational risk is important to attracting and maintaining customers, investors and employees. Threats to the Company’s reputation can come from many sources, including unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company’s customers. The Company has policies and procedures in place to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Company’s businesses, employees or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues, and increased governmental regulation.

The price of the Company’s common stock may be volatile or may decline. The trading price of the Company’s common stock may fluctuate as a result of a number of factors, many of which are outside the Company’s control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of the Company’s common stock. Among the factors that could affect the Company’s stock price are:


•	actual or anticipated quarterly fluctuations in the Company’s results of operations and financial condition;


•	changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;


•	failure to meet analysts’ revenue or earnings estimates;


•	speculation in the press or investment community;


•	strategic actions by the Company or its competitors, such as acquisitions or restructurings;


•	actions by institutional stockholders;


•	fluctuations in the stock price and operating results of the Company’s competitors;


•	general market conditions and, in particular, developments related to market conditions for the financial services industry;


•	proposed or adopted regulatory changes or developments;


•	anticipated or pending investigations, proceedings or litigation that involve or affect the Company; and


•	domestic and international economic factors unrelated to the Company’s performance.

The market price of the Company’s common stock may be volatile. In addition, the trading volume in the Company’s common stock may fluctuate and cause significant price variations to occur. The trading price of the shares of the Company’s common stock and the value of other securities will depend on many factors, which may change from time to time, including, without limitation, the financial condition, performance, creditworthiness and prospects, future sales of the equity or equity-related securities, government legislation, regulatory action and cyclical fluctuations. A significant decline in the Company’s stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

If the Company’s goodwill were determined to be impaired, it would result in a charge against earnings and thus a reduction in stockholders’ equity. The Company tests goodwill for impairment on an annual basis, or more frequently, if necessary. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measuring impairment, when available. Other acceptable valuation methods include present value measurements based on multiples of earnings or revenues, or similar performance measures. If the Company were to determine that the carrying amount of the goodwill exceeded its implied fair value, the Company would be required to write down the value of the goodwill on the balance sheet, adversely affecting earnings as well as capital.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

East West’s corporate headquarters is located at 135 North Los Robles Avenue, Pasadena, California, in an eight-story office building. The Company operates over 130 locations worldwide including its headquarters, main administrative offices, branches and representative offices. In the U.S., the Bank’s corporate headquarters and main administrative offices are located in California, and branches are located in California, Texas, New York, Washington, Georgia, Massachusetts and Nevada. In Greater China, East West’s presence includes full service branches in Hong Kong, Shanghai, Shantou and Shenzhen, and representative offices in Beijing, Chongqing, Guangzhou, Taipei and Xiamen.

As of December 31, 2017, the Bank owns the properties at 32 of its U.S. locations. All international and other domestic branch and office locations are leased, with lease expiration dates ranging from 2018 to 2032, exclusive of renewal options. All properties occupied by the Bank are used across all business segments and for corporate purposes. See Note 19 — Business Segments to the Consolidated Financial Statements for details on each segment. The Bank also owns leasehold improvements, equipment, furniture, and fixtures at its offices, all of which are used in its business activities.

East West uses the premises, equipment, and furniture of the Bank and does not currently own or lease any real or personal property. The Company believes that its existing facilities are in good condition and suitable for the conduct of its business and operations. On an ongoing basis, the Company evaluates its current and planned projected space requirements and, from time to time, it may determine that certain premises or facilities are no longer necessary for its operations. The Company believes that, if necessary, it could secure alternative facilities on similar terms without adversely affecting its operations.

ITEM 3. LEGAL PROCEEDINGS

See Note 13 — Commitments, Contingencies and Related Party Transactions — Litigation to the Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders of Common Stock and Dividends

The Company’s common stock is traded on the NASDAQ under the symbol “EWBC.” The following tables set forth the high and low closing sales prices per share of the Company’s common stock as reported on the NASDAQ, as well as the quarterly dividends the Company declared, for the periods indicated:




	2017
	High	Low	Cash Dividends
First quarter	$56.53	$49.11	$0.20
Second quarter	$59.31	$49.43	$0.20
Third quarter	$60.06	$53.03	$0.20
Fourth quarter	$62.18	$56.66	$0.20




	2016
	High	Low	Cash Dividends
First quarter	$41.07	$27.25	$0.20
Second quarter	$40.00	$31.34	$0.20
Third quarter	$37.59	$31.34	$0.20
Fourth quarter	$51.73	$36.31	$0.20

As of January 31, 2018, 144,544,022 shares of the Company’s common stock were held by 751 stockholders of record and by approximately 61,500 additional stockholders whose common stock was held for them in street name or nominee accounts.

For information on the statutory and regulatory restrictions that limit the Company’s ability to pay dividends to its stockholders and the Bank’s ability to pay dividends to East West, see Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds, Item 7. MD&A — Asset Liability and Market Risk Management and Note 20 — Parent Company Condensed Financial Statements to the Consolidated Financial Statements.

Securities Authorized for Issuance under Equity Compensation Plans

For information regarding securities authorized for issuance under the Company’s equity compensation plans, see Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of Part III presented elsewhere in this report, which are incorporated herein by reference.

Five-Year Stock Performance

The following graph and table compare the Company’s cumulative total return on its common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 500 Index and the Keefe, Bruyette and Woods (“KBW”) NASDAQ Regional Banking Index (“KRX”) over the five-year period through December 31, 2017. The S&P 500 Index is utilized as a benchmark against performance and is a commonly referenced U.S. equity benchmark consisting of leading companies from different economic sectors. The KRX is used to align EWBC with those companies of a relatively similar size. This index seeks to reflect the performance of publicly traded U.S. companies that do business as regional banks or thrifts, and is composed of 50 companies. The graph and table below assume that on December 31, 2012, $100 was invested in EWBC’s common stock, the S&P 500 Index and the KRX, and that all dividends were reinvested. Historical stock price performance shown on the graph is not necessarily indicative of future price performance. The information set forth under the heading “Five-Year Stock Performance” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.




	December 31,
Index	2012	2013	2014	2015	2016	2017
East West Bancorp, Inc.	$100.00	$166.05	$187.52	$205.26	$256.46	$311.21
KRX	$100.00	$146.85	$150.41	$159.31	$221.46	$225.34
S&P 500 Index	$100.00	$132.39	$150.51	$152.59	$170.84	$208.14

Source: KBW

Repurchases of Equity Securities by the Issuer and Affiliated Purchasers

On July 17, 2013, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $100.0 million of the Company’s common stock. The Company did not repurchase any shares under this program thereafter, including during 2017 and 2016. Although this program has no stated expiration date, the Company does not intend to repurchase any stock pursuant to this program absent further action of the Company’s Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

For selected financial data information, see Item 7. MD&A — Overview — Five-Year Summary of Selected Financial Data, which is incorporated herein by reference.

ITEM 7. 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 various subsidiaries, including its subsidiary bank, East West Bank and its subsidiaries (referred to herein as “East West Bank” or the “Bank”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report.

Overview

East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended. The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered in California that has a strong focus on the financial service needs of the Chinese American community. The Bank operates both in the United States (“U.S.”) and Greater China. As of December 31, 2017, East West had $37.2 billion in assets and approximately 3,000 full-time equivalent employees.

The Company’s vision is to serve as the financial bridge between the U.S. 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 U.S. and Greater China, and by offering a full range of cross-border products and services, the Company continues to seek attractive opportunities for growth in pursuing its cross-border business banking strategy. This focus guides our decision-making across every aspect of our operations: the products we develop, the expertise we cultivate and the infrastructure we build to help our customers conduct business. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services.

We remain committed to enhancing long-term shareholder value by continuing to execute on the fundamentals of growing loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and meeting their financial needs through our offering of diverse products and services. The Company’s approach is concentrated on organically growing and deepening client relationships that meet our risk/return measures. We expect our relationship business model to continue to generate organic growth and to expand targeted customer bases. We continue to focus on expense management by investing in technology on critical business infrastructure and streamlining core processes. In addition, our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.

Financial Highlights

For the year ended December 31, 2017 the Company has successfully completed its eighth consecutive year of record earnings, reflecting strong revenue growth, in excess of expense growth. The Company’s focus on creating sustainable, expandable and profitable customer relationships has provided consistent financial results and delivered strong returns to its stockholders. In addition, the Company is committed to investing in technology and human capital to drive business growth, continuously strengthening infrastructure to ensure prudent risk management and enhance operational excellence.

Noteworthy items about the Company’s performance included:


•	Net income totaled $505.6 million for the year ended December 31, 2017, which reflected an increase of $73.9 million or 17%, compared to the same period in 2016. Diluted earnings per share (“EPS”) was $3.47 for the year ended December 31, 2017, which reflected an increase of $0.50 or 17%, compared to the same period in 2016.

•

Net income and diluted EPS for the year ended December 31, 2017, included a $41.5 million after-tax net gain recognized from the sale of a commercial property in San Francisco, California and a $2.2 million after-tax net gain recognized from the sale of East West Insurance Services, Inc.’s (“EWIS”) business, partially offset by a $41.7 million increase in income tax expense related to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).


•	Return on average assets increased 11 basis points to 1.41% for the year ended December 31, 2017, compared to 1.30% in 2016. Return on average equity increased 65 basis points to 13.71% for the year ended December 31, 2017, compared to 13.06% in 2016.


•	Revenue, the sum of net interest income before provision for credit losses and noninterest income, increased $227.9 million or 19% to $1.44 billion for the year ended December 31, 2017, compared to the same period in 2016.


•	Full year 2017 net interest income of $1.19 billion increased $152.4 million or 15% year-over-year, primarily reflecting loan growth and the positive impact of higher interest rates on the Company’s interest-sensitive balance sheet.


•	Full year 2017 net interest margin of 3.48% expanded 18 basis points compared to 3.30% in 2016. The average loan yield of 4.40% in 2017 increased 13 basis points from 4.27% in 2016, and the cost of deposits of 0.38% in 2017 increased eight basis points from 0.30% in 2016.


•	Noninterest income increased $75.5 million or 41% in 2017 to $258.4 million, primarily reflecting the impact of the gain on sale of the aforementioned commercial property.


•	Noninterest expense increased $46.2 million or 8% to $662.1 million for the year ended December 31, 2017, compared to the same period in 2016.

•

The allowance for loan losses was $287.1 million, or 0.99% of loans held-for-investment as of December 31, 2017, compared to $260.5 million, or 1.02% of loans held-for-investment as of December 31, 2016. For the full year 2017, net charge-offs of $22.5 million were 0.08% of average loans held-for-investment, compared to $36.2 million or 0.15% of average loans held-for-investment for the full year 2016. Non-purchased credit impaired (“non-PCI”) nonperforming assets of $115.1 million as of December 31, 2017 decreased by 11% year-over-year from $129.6 million as of December 31, 2016.


•	The Company’s effective tax rate for the year ended December 31, 2017 was 31.2%, compared to 24.6% for the same period in 2016. The increase in the effective tax rate was primarily attributable to the recognition of the effects of the Tax Act in the period of the enactment.

Balance Sheet and Liquidity

The Company experienced growth of total assets of $2.36 billion or 7% to $37.15 billion as of December 31, 2017, compared to $34.79 billion as of December 31, 2016. This increase predominantly reflected loan growth, followed by higher cash and cash equivalents, partially offset by decreases in resale agreements, investment securities and other assets.

Gross loans held-for-investment increased $3.47 billion or 14% to $28.98 billion as of December 31, 2017, compared to $25.50 billion as of December 31, 2016, driven by increases across almost all of the Company’s major commercial and consumer loan categories. The allowance for loan losses was $287.1 million, or 0.99% of loans held-for-investment as of December 31, 2017, compared to $260.5 million, or 1.02% of loans held-for-investment as of December 31, 2016.

Deposits net of held-for-sale, increased $1.72 billion or 6% to $31.62 billion as of December 31, 2017, compared to $29.89 billion as of December 31, 2016, primarily due to a $1.70 billion or 7% increase in core deposits. The Company’s deposit mix has been stable. Core deposits accounted for 82% and 81% of total deposits as of December 31, 2017 and 2016, respectively. Noninterest-bearing demand deposits accounted for 34% of total deposits as of both December 31, 2017 and 2016.

Capital

The Company’s financial performance in 2017 resulted in strong capital generation, which increased total stockholders’ equity by $414.2 million or 12% to $3.84 billion as of December 31, 2017, compared to December 31, 2016. The Company returned $116.8 million and $115.8 million in cash dividends to our stockholders for the years ended December 31, 2017 and December 31, 2016, respectively. Book value per common share increased 12% to $26.58 as of December 31, 2017, compared to $23.78 as of December 31, 2016.

From a capital management perspective, the Company continued to maintain a strong capital position with its Common Equity Tier 1 (“CET1”) capital ratio at 11.4% as of December 31, 2017, compared to 10.9% as of December 31, 2016. The total risk-based capital ratio was 12.9% and 12.4% as of December 31, 2017 and December 31, 2016, respectively. The Tier 1 leverage capital ratio was 9.2% as of December 31, 2017, compared to 8.7% as of December 31, 2016.

Five-Year Summary of Selected Financial Data




($ and shares in thousands, except per share data)	2017			2016			2015			2014			2013
Summary of operations:
Interest and dividend income	$	1,325,119		$	1,137,481		$	1,053,815		$	1,153,698		$	1,068,685
Interest expense	140,050			104,843			103,376			112,820			112,492
Net interest income before provision for credit losses	1,185,069			1,032,638			950,439			1,040,878			956,193
Provision for credit losses	46,266			27,479			14,217			49,158			22,364
Net interest income after provision for credit losses	1,138,803			1,005,159			936,222			991,720			933,829
Noninterest income (loss) ⁽¹⁾	258,406			182,918			183,383			(11,714		)	(92,468		)
Noninterest expense	662,109			615,889			540,884			532,983			394,215
Income before income taxes	735,100			572,188			578,721			447,023			447,146
Income tax expense ⁽²⁾	229,476			140,511			194,044			101,145			153,822
Net income	505,624			431,677			384,677			345,878			293,324
Preferred stock dividends	—			—			—			—			3,428
Net income available to common stockholders	$	505,624		$	431,677		$	384,677		$	345,878		$	289,896

Per common share:
Basic earnings	$	3.50		$	3.00		$	2.67		$	2.42		$	2.10
Diluted earnings	$	3.47		$	2.97		$	2.66		$	2.41		$	2.09
Dividends declared	$	0.80		$	0.80		$	0.80		$	0.72		$	0.60
Book value	$	26.58		$	23.78		$	21.70		$	19.89		$	17.19

Weighted-average number of shares outstanding:
Basic	144,444			144,087			143,818			142,952			137,342
Diluted	145,913			145,172			144,512			143,563			139,574
Common shares outstanding at period-end	144,543			144,167			143,909			143,582			137,631

At year end:
Total assets	$	37,150,249		$	34,788,840		$	32,350,922		$	28,743,592		$	24,732,216
Loans held-for-investment, net	$	28,688,590		$	25,242,619		$	23,378,789		$	21,468,270		$	17,600,613
Available-for-sale investment securities	$	3,016,752		$	3,335,795		$	3,773,226		$	2,626,617		$	2,733,797
Total deposits, excluding held-for-sale deposits	$	31,615,063		$	29,890,983		$	27,475,981		$	24,008,774		$	20,412,918
Long-term debt	$	171,577		$	186,327		$	206,084		$	225,848		$	226,868
Federal Home Loan Bank (“FHLB”) advances	$	323,891		$	321,643		$	1,019,424		$	317,241		$	315,092
Stockholders’ equity	$	3,841,951		$	3,427,741		$	3,122,950		$	2,856,111		$	2,366,373

Financial ratios:
Return on average assets	1.41		%	1.30		%	1.27		%	1.25		%	1.24		%
Return on average equity	13.71		%	13.06		%	12.74		%	12.72		%	12.50		%
Total average equity to total average assets	10.30		%	9.97		%	9.95		%	9.83		%	9.95		%
Common dividend payout ratio	23.14		%	27.01		%	30.21		%	30.07		%	28.74		%
Net interest margin	3.48		%	3.30		%	3.35		%	4.03		%	4.38		%
Loans-to-deposits ratio, excluding held-for-sale	90.74		%	84.45		%	85.09		%	89.42		%	86.22		%

Capital ratios of EWBC⁽³⁾:
CET1 capital	11.4		%	10.9		%	10.5		%	N/A			N/A
Tier 1 capital	11.4		%	10.9		%	10.7		%	11.0		%	11.9		%
Tier 1 leverage capital	9.2		%	8.7		%	8.5		%	8.4		%	8.6		%
Total capital	12.9		%	12.4		%	12.2		%	12.6		%	13.5		%

(1)

Includes $71.7 million and $3.8 million of pretax gains recognized from the sale of a commercial property in California and EWIS’s insurance brokerage business, respectively, for the year ended December 31, 2017. Includes changes in FDIC indemnification asset and receivable/payable charges of $38.0 million, $201.4 million and $228.6 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company terminated the United Commercial Bank (“UCB”) and Washington First International Bank (“WFIB”) shared-loss agreements during the year ended December 31, 2015. There were no FDIC indemnification asset and receivable/payable balances during each of the years ended December 31, 2017 and 2016.


(2)	Includes an additional $41.7 million in income tax expense recognized during the year ended December 31, 2017 due to the enactment of the Tax Act.


(3)	Capital ratios are calculated under the Basel III Capital Rules which became effective on January 1, 2015. Prior to this date, the ratios were calculated under the Basel I Capital Rules. The CET1 capital ratio was introduced under the Basel III Capital Rules.

N/A — Not applicable.

Results of Operations

Components of Net Income




($ in thousands, except per share data)	Year Ended December 31,
($ in thousands, except per share data)	2017		2016		2015		2017 vs. 2016 % Change		2016 vs. 2015 % Change
Interest and dividend income	$	1,325,119	$	1,137,481	$	1,053,815	16	%	8	%
Interest expense	140,050		104,843		103,376		34	%	1	%
Net interest income before provision for credit losses	1,185,069		1,032,638		950,439		15	%	9	%
Noninterest income	258,406		182,918		183,383		41	%	0	%
Revenue	1,443,475		1,215,556		1,133,822		19	%	7	%
Provision for credit losses	46,266		27,479		14,217		68	%	93	%
Noninterest expense	662,109		615,889		540,884		8	%	14	%
Income tax expense	229,476		140,511		194,044		63	%	(28	)%
Net income	$	505,624	$	431,677	$	384,677	17	%	12	%
Diluted EPS	$	3.47	$	2.97	$	2.66	17	%	12	%

Net income increased $73.9 million to $505.6 million, or $3.47 per diluted share for the year ended December 31, 2017, compared to the same period in 2016. The higher results for 2017 compared to 2016 were primarily driven by higher net interest income and noninterest income, partially offset by an increase in noninterest expense and a higher effective tax rate in 2017. Net income increased $47.0 million to $431.7 million, or $2.97 per diluted share for the year ended December 31, 2016 compared to the same period in 2015. The higher results for 2016 compared to 2015 were driven by an increase in net interest income and a lower effective tax rate, partially offset by an increase in noninterest expense.

Revenue, or the sum of net interest income before provision for credit losses and noninterest income, increased $227.9 million to $1.44 billion during the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue for 2017 compared with 2016 was predominately due to an increase in net interest income, reflecting growth in the loan portfolio and the positive impact of short-term interest rate increases in 2017, and an increase in noninterest income, primarily due to gains recognized from the sale of the commercial property. Revenue for the year ended December 31, 2016 was $1.22 billion, an increase of $81.7 million from $1.13 billion for the same period in 2015. The increase was mainly due to higher interest income from a strong loan growth.

See below within this section for discussions of net interest income, noninterest income, noninterest expense and income taxes.

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 deposits, securities sold under repurchase agreements (“repurchase agreements”), borrowings and other interest-bearing liabilities. Net interest margin is calculated by dividing 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 year ended December 31, 2017 was $1.19 billion, an increase of $152.4 million or 15%, compared to the same period in 2016. The notable increase in net interest income in 2017 was primarily due to strong loan growth and higher yields from interest-earning assets, partially offset by a higher cost of funds. The higher cost of funds was primarily due to a 14 basis point increase in the cost of interest-bearing deposits from 0.44% for the year ended December 31, 2016 to 0.58% for the year ended December 31, 2017. Net interest income for the year ended December 31, 2016 was $1.03 billion, an increase of $82.2 million or 9% compared to $950.4 million for the same period in 2015. The increase in net interest income was primarily due to strong loan growth during 2016.

For the year ended December 31, 2017, net interest margin increased 18 basis points to 3.48%, compared to 3.30% for the same period in 2016. The increase in net interest margin in 2017 was due to higher yields from interest-earning assets (primarily due to a 13 basis points increase in loan yield of 4.27% for the year ended December 31, 2016 to 4.40% for the year ended December 31, 2017), as a result of the short-term interest rate increases. The higher loan yield for the year ended December 31, 2017 was partially offset by lower accretion income from the purchased credit impaired (“PCI”) loans accounted for under Accounting Standard Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For the year ended December 31, 2017, total accretion income from loans accounted for under ASC 310-30 decreased by $24.4 million to $21.1 million, compared to the same period in 2016. For the year ended December 31, 2016, net interest margin was 3.30%, a decrease of five basis points from 3.35% in 2015, primarily due to a reduction in loan yield from 4.35% for the year ended December 31, 2015 to 4.27% for the year ended December 31, 2016. The reduction in loan yield was mainly attributable to the decrease in PCI loan accretion income to $45.4 million for the year ended December 31, 2016, compared to $61.3 million for the same period in 2015.

For the year ended December 31, 2017, average interest-earning assets increased $2.74 billion or 9% to $34.03 billion from $31.30 billion for the same period in 2016. This increase was primarily due to increases of $2.99 billion or 12% in average loans and $349.2 million or 18% in average interest-bearing cash and deposits with banks, partially offset by decreases of $328.4 million or 10% decrease in average investment securities and $269.7 million or 16% decrease in average resale agreements. For the year ended December 31, 2016, average interest-earning assets increased $2.91 billion or 10% to $31.30 billion from $28.39 billion for the same period in 2015. The increase was primarily due to a $1.99 billion or 9% increase in average loans to $24.26 billion for the year ended December 31, 2016, compared to $22.28 billion for the same period in 2015.

Deposits are an important source of funding and affect both net interest income and net interest margin. Deposits are comprised of noninterest-bearing demand, interest-bearing checking, money market, savings and time deposits. Average deposits increased $2.31 billion or 8% to $30.81 billion for the year ended December 31, 2017, compared to $28.50 billion for the same period in 2016. In comparison, average deposits increased $2.74 billion or 11% to $28.50 billion for the year ended December 31, 2016, compared to $25.76 billion for the same period in 2015. The average noninterest-bearing demand deposits to total average deposits ratio increased to 34% for the year ended December 31, 2017, from 33% and 31% for the same periods in 2016 and 2015, respectively. Cost of deposits was 0.38%, 0.30% and 0.29% for the years ended December 31, 2017, 2016 and 2015, respectively. Cost of interest-bearing deposits was 0.58%, 0.44% and 0.41% for the years ended December 31, 2017, 2016 and 2015, respectively. The average loans to average deposits ratio increased to 88% for the year ended December 31, 2017 from 85% and 86% for the same periods in 2016 and 2015, respectively.

Other than deposits, other sources of funding primarily include FHLB advances, long-term debt and repurchase agreements. Cost of funds was 0.44% for the year ended December 31, 2017, compared to 0.36% and 0.39% for the same periods in 2016 and 2015, respectively.

The Company utilizes various tools to manage interest rate risk. Refer to the “Interest Rate Risk Management” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Asset Liability and Market Risk Management for details.

The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the years ended December 31, 2017, 2016 and 2015:




($ in thousands)	Year Ended December 31,
	2017							2016							2015
	Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate
ASSETS
Interest-earning assets:
Interest-bearing cash and deposits with banks	$	2,242,256		$	33,390	1.49	%	$	1,893,064		$	14,731	0.78	%	$	1,851,604		$	17,939	0.97	%
Resale agreements ⁽¹⁾	1,438,767			32,095		2.23	%	1,708,470			30,547		1.79	%	1,337,274			19,799		1.48	%
Investment securities ⁽²⁾⁽³⁾	3,026,693			58,670		1.94	%	3,355,086			53,399		1.59	%	2,847,655			41,375		1.45	%
Loans ⁽⁴⁾⁽⁵⁾	27,252,756			1,198,440		4.40	%	24,264,895			1,035,377		4.27	%	22,276,589			968,625		4.35	%
Restricted equity securities	73,593			2,524		3.43	%	75,260			3,427		4.55	%	77,460			6,077		7.85	%
Total interest-earning assets	$	34,034,065		$	1,325,119	3.89	%	$	31,296,775		$	1,137,481	3.63	%	$	28,390,582		$	1,053,815	3.71	%
Noninterest-earning assets:
Cash and due from banks	395,092							365,104							342,606
Allowance for loan losses	(272,765		)					(262,804		)					(263,143		)
Other assets	1,631,221							1,770,298							1,858,412
Total assets	$	35,787,613						$	33,169,373						$	30,328,457
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking deposits ⁽⁶⁾	$	3,951,930		$	18,305	0.46	%	$	3,495,094		$	12,640	0.36	%	$	2,795,379		$	8,453	0.30	%
Money market deposits ⁽⁶⁾	8,026,347			44,181		0.55	%	7,679,695			27,094		0.35	%	6,763,979			18,988		0.28	%
Saving deposits ⁽⁶⁾	2,369,398			6,431		0.27	%	2,104,060			4,719		0.22	%	1,785,085			3,468		0.19	%
Time deposits ⁽⁶⁾	5,838,382			47,474		0.81	%	5,852,042			39,771		0.68	%	6,482,697			42,596		0.66	%
Federal funds purchased and other short-term borrowings	34,546			1,003		2.90	%	25,591			713		2.79	%	4,797			58		1.21	%
FHLB advances	391,480			7,751		1.98	%	380,868			5,585		1.47	%	327,080			4,270		1.31	%
Repurchase agreements ⁽¹⁾	140,000			9,476		6.77	%	211,475			9,304		4.40	%	404,096			20,907		5.17	%
Long-term debt	178,882			5,429		3.03	%	198,589			5,017		2.53	%	218,353			4,636		2.12	%
Total interest-bearing liabilities	$	20,930,965		$	140,050	0.67	%	$	19,947,414		$	104,843	0.53	%	$	18,781,466		$	103,376	0.55	%
Noninterest-bearing liabilities and stockholders’ equity:
Demand deposits ⁽⁶⁾	10,627,718							9,371,481							7,928,460
Accrued expenses and other liabilities	541,717							544,549							599,436
Stockholders’ equity	3,687,213							3,305,929							3,019,095
Total liabilities and stockholders’ equity	$	35,787,613						$	33,169,373						$	30,328,457

Interest rate spread						3.22	%						3.10	%						3.16	%

Net interest income and net interest margin				$	1,185,069	3.48	%				$	1,032,638	3.30	%				$	950,439	3.35	%


(1)	Average balances of resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements.


(2)	Yields on tax-exempt securities are not presented on a tax-equivalent basis.


(3)	Interest income on investment securities includes the amortization of net premiums on investment securities of $21.2 million, $26.2 million and $18.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.


(4)	Average balance includes nonperforming loans and loans held-for-sale.


(5)	Interest income on loans includes net deferred loan fees, accretion of ASC 310-30 discounts and amortization of premiums, which totaled $30.8 million, $53.5 million and $66.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.


(6)	Includes deposits held-for-sale as of December 31, 2017.

The following table summarizes 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. Nonaccrual loans are included in average loans used to compute the table below:




($ in thousands)	Year Ended December 31,
	2017 vs. 2016									2016 vs. 2015
	Total Change			Changes Due to						Total Change			Changes Due to
	Total Change			Volume			Yield/Rate			Total Change			Volume			Yield/Rate
Interest-earning assets:
Interest-bearing cash and deposits with banks	$	18,659		$	3,134		$	15,525		$	(3,208	)	$	394		$	(3,602	)
Resale agreements	1,548			(5,287		)	6,835			10,748			6,149			4,599
Investment securities	5,271			(5,580		)	10,851			12,024			7,831			4,193
Loans	163,063			130,282			32,781			66,752			85,120			(18,368		)
Restricted equity securities	(903		)	(74		)	(829		)	(2,650		)	(168		)	(2,482		)
Total interest and dividend income	$	187,638		$	122,475		$	65,163		$	83,666		$	99,326		$	(15,660	)
Interest-bearing liabilities:
Checking deposits	$	5,665		$	1,800		$	3,865		$	4,187		$	2,348		$	1,839
Money market deposits	17,087			1,274			15,813			8,106			2,798			5,308
Saving deposits	1,712			642			1,070			1,251			671			580
Time deposits	7,703			(93		)	7,796			(2,825		)	(4,249		)	1,424
Federal funds purchased and other short-term borrowings	290			259			31			655			503			152
FHLB advances	2,166			160			2,006			1,315			752			563
Repurchase agreements	172			(3,796		)	3,968			(11,603		)	(8,831		)	(2,772		)
Long-term debt	412			(531		)	943			381			(445		)	826
Total interest expense	$	35,207		$	(285	)	$	35,492		$	1,467		$	(6,453	)	$	7,920
Change in net interest income	$	152,431		$	122,760		$	29,671		$	82,199		$	105,779		$	(23,580	)

Noninterest Income

Noninterest income increased $75.5 million or 41% to $258.4 million for the year ended December 31, 2017, compared to the same period in 2016. This increase was primarily due to a gain on the sale of a commercial property in California. Noninterest income decreased slightly to $182.9 million for the year ended December 31, 2016, compared to $183.4 million for the same period in 2015. The decrease was primarily due to the 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 FDIC indemnification asset and receivable/payable. Noninterest income represented 18%, 15% and 16% of revenue for the years ended December 31, 2017, 2016 and 2015, respectively.

The following table presents the components of noninterest income for the periods indicated:




($ in thousands)	Year Ended December 31,
($ in thousands)	2017		2016		2015			2017 vs. 2016 % Change		2016 vs. 2015 % Change
Branch fees	$	42,490	$	41,178	$	39,495		3	%	4	%
Letters of credit fees and foreign exchange income	42,779		45,760		38,985			(7	)%	17	%
Ancillary loan fees and other income	23,333		19,352		15,029			21	%	29	%
Wealth management fees	14,632		13,240		18,268			11	%	(28	)%
Derivative fees and other income	17,671		16,781		16,493			5	%	2	%
Net gains on sales of loans	8,870		6,085		24,873			46	%	(76	)%
Net gains on sales of available-for-sale investment securities	8,037		10,362		40,367			(22	)%	(74	)%
Net gains on sales of fixed assets	77,388		3,178		3,567			2,335	%	(11	)%
Net gains on sale of business	3,807		—		—			100	%	—	%
Changes in FDIC indemnification asset and receivable/payable	—		—		(37,980		)	—	%	NM
Other fees and operating income	19,399		26,982		24,286			(28	)%	11	%
Total noninterest income	$	258,406	$	182,918	$	183,383		41	%	0	%

NM — Not Meaningful.

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 fixed assets increased $74.2 million or 2,335% to $77.4 million for the year ended December 31, 2017, compared to $3.2 million for the same period in 2016. This increase was primarily due to the $71.7 million of pre-tax gain recognized from the sale of a commercial property in California during the first quarter of 2017. In the first quarter of 2017, East West Bank completed the sale and leaseback of a commercial property in California for cash consideration of $120.6 million and entered into a lease agreement for part of the property, consisting of a retail branch and office facilities. The total pre-tax profit from the sale was $85.4 million, of which $71.7 million was recognized in the first quarter of 2017, and $13.7 million was deferred and recognized over the term of the lease agreement.

In the third quarter of 2017, the Company sold the insurance brokerage business of its subsidiary, EWIS, for $4.3 million and recognized a pre-tax gain of $3.8 million. EWIS remains a subsidiary of East West and continues to maintain its insurance broker license.

Net gains on sales of available-for-sale investment securities for the year ended December 31, 2017 totaled $8.0 million, compared to $10.4 million and $40.4 million for the same periods in 2016 and 2015, respectively. Net gains on the sales of available-for-sale investment securities for the year ended December 31, 2016 decreased by $30.0 million or 74%, compared to the same period in 2015. The larger net gains on sale of available-for-sale investment securities recognized during the year ended December 31, 2015, compared to the years ended December 31, 2017 and 2016 was primarily due to $21.7 million of gains realized from the sale of non-investment grade corporate debt securities.

Net gains on sales of loans for the year ended December 31, 2017 totaled $8.9 million, compared to $6.1 million and $24.9 million for the same periods in 2016 and 2015, respectively. The net gains included valuation adjustments of $61 thousand, $5.6 million and $3.0 million to carry loans held-for-sale at lower of cost or fair value for the years ended December 31, 2017, 2016 and 2015, respectively. See Item 7. MD&A — Balance Sheet Analysis — Total Loan Portfolio for details.

During the year ended December 31, 2015, the Company reached an agreement with the FDIC to early terminate the UCB and WFIB shared-loss agreements. There were no remaining shared-loss agreements with the FDIC as of December 31, 2015. As a result, there was no expense related to the changes in FDIC indemnification asset and receivable/payable for the years ended December 31, 2017 and 2016, compared to $38.0 million of expenses for the same period in 2015.

Noninterest Expense

Noninterest expense totaled $662.1 million for the year ended December 31, 2017, an increase of $46.2 million or 8%, compared to the same period in 2016. The increase was primarily due to increases in compensation and employee benefits, and legal expense, partially offset by a decrease in consulting expense. Noninterest expense totaled $615.9 million for the year ended December 31, 2016, an increase of $75.0 million or 14%, compared to $540.9 million for the same period in 2015. The increase was primarily due to increases in amortization of tax credit and other investments, and compensation and employee benefits, partially offset by the fact that there were no repurchase agreements’ extinguishment costs incurred for the year ended December 31, 2016 and a decrease in legal expense.

The following table presents the various components of noninterest expense for the periods indicated:




	Year Ended December 31,
($ in thousands)	2017		2016		2015		2017 vs. 2016 % Change		2016 vs. 2015 % Change
Compensation and employee benefits	$	335,291	$	300,115	$	262,193	12	%	14	%
Occupancy and equipment expense	64,921		61,453		61,292		6	%	0	%
Deposit insurance premiums and regulatory assessments	23,735		23,279		18,772		2	%	24	%
Legal expense	11,444		2,841		16,373		303	%	(83	)%
Data processing	12,093		11,683		10,185		4	%	15	%
Consulting expense	14,922		22,742		17,234		(34	)%	32	%
Deposit related expense	9,938		10,394		10,379		(4	)%	0	%
Computer software expense	18,183		12,914		8,660		41	%	49	%
Other operating expense	76,697		78,936		68,624		(3	)%	15	%
Amortization of tax credit and other investments	87,950		83,446		36,120		5	%	131	%
Amortization of core deposit intangibles	6,935		8,086		9,234		(14	)%	(12	)%
Repurchase agreements’ extinguishment costs	—		—		21,818		—	%	NM
Total noninterest expense	$	662,109	$	615,889	$	540,884	8	%	14	%

NM — Not Meaningful.

Compensation and employee benefits increased $35.2 million or 12% during the year ended December 31, 2017, and $37.9 million or 14% during the year ended December 31, 2016. The increases for the years ended December 31, 2017 and 2016 were primarily attributable to an increase in headcount to support the Company’s growing business, and risk management and compliance requirements.

Legal expense increased $8.6 million or 303% during the year ended December 31, 2017, and decreased $13.5 million or 83% during the year ended December 31, 2016. This fluctuation in legal expense was mainly due to a $13.4 million reversal in legal accrual following the settlement of a lawsuit titled “F&F, LLC and 618 Investments, Inc. v. East West Bank” during the year ended December 31, 2016.

Consulting expense increased $5.5 million or 32% during the year ended December 31, 2016, primarily attributable to Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) related consulting expense incurred as part of the Company’s ongoing efforts in executing the compliance plans and programs required by the Written Agreement and Memorandum of Understanding (“MOU”). Consulting expense subsequently decreased $7.8 million or 34% during the year ended December 31, 2017 primarily due to the progress made by the Company in strengthening the BSA and AML compliance programs.

Computer software expense increased $5.3 million or 41% to $18.2 million for the year ended December 31, 2017, compared to the same period in 2016. For the year ended December 31, 2016, computer software expense increased by $4.3 million or 49% to $12.9 million, compared to $8.7 million for the same period in 2015. The increased expenses in both 2017 and 2016 were due to new system implementations and software upgrades incurred to support the Company’s growing business.

Amortization of tax credit and other investments increased $4.5 million or 5% to $88.0 million for the year ended December 31, 2017, compared to the same period in 2016, and $47.3 million or 131% to $83.4 million for the year ended December 31, 2016, compared to the same period in 2015. The increases in amortization of tax credit and other investments in both 2017 and 2016 were primarily due to additional renewable energy and historic rehabilitation tax credit investments that were placed into service during the same periods.

There were no extinguishment costs related to repurchase agreements for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, the Company recorded $21.8 million related to the extinguishment of higher-cost repurchase agreements of $545.0 million.

Income Taxes




	Year Ended December 31,
($ in thousands)	2017			2016			2015			2017 vs. 2016 % Change		2016 vs. 2015 % Change
Income before income taxes	$	735,100		$	572,188		$	578,721		28	%	(1	)%
Income tax expense	$	229,476		$	140,511		$	194,044		63	%	(28	)%
Effective tax rate	31.2		%	24.6		%	33.5		%	27	%	(27	)%

See Note 12 — Income Taxes to the Consolidated Financial Statements for a reconciliation of the effective tax rates to the U.S federal statutory income tax rate. The higher effective tax rate of 31.2% for the year ended December 31, 2017, compared to the same period in 2016, was mainly due to the enactment of the Tax Act, which resulted in an additional $41.7 million tax expense recognized that contributed to a 5.7% increase in the effective tax rate in 2017. The lower effective tax rate of 24.6% for the year ended December 31, 2016, compared to the same period in 2015, was mainly due to more tax credits that were recognized in 2016 from investments in qualified housing partnerships and other tax credit investments.

On December 22, 2017, the Tax Act was enacted. It significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, expensing 100% of the cost of acquired qualified property after September 27, 2017, transitioning from a worldwide tax system to a territorial system, imposing a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminating any carrybacks of tax credits and net operating losses (“NOLs”) incurred after December 31, 2017. In addition, NOLs incurred after December 31, 2017 are now limited to 80% of taxable income for any given year and may be carried forward indefinitely. ASC 740, Income Taxes, requires companies to recognize the effect of the Tax Act in the period of enactment. Hence, such effects must be recognized in the Company’s 2017 Consolidated Financial Statements, even though the effective date of the law for most provisions is January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of generally accepted accounting principles in the United States (“U.S. GAAP”) in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company recorded $41.7 million of income tax expense in the fourth quarter of 2017 related to the impact of the Tax Act, the period in which the legislation was enacted. This amount was primarily related to the remeasurements of certain deferred tax assets and liabilities of $33.1 million, as well as tax credits and other tax benefits related to qualified affordable housing partnerships of $7.9 million.

The Company anticipates a significant reduction in its effective tax rate as a result of the income tax rate reduction, and such changes will be included in the Company’s financial statements effective January 1, 2018. The Company will also likely have more taxable income in post-2017 tax years as a result of the Tax Act’s changes to the Section 162(m) limitation on executive compensation over $1 million and the limitation related to deductibility of FDIC assessment fees.

Management regularly reviews the Company’s tax positions and deferred tax balances. Factors considered in this analysis include the Company’s ability to generate future taxable income, implement tax-planning strategies and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. 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 tax rates expected to be in effect when such amounts are realized and settled. Net deferred tax assets decreased by $32.3 million or 25% to $97.4 million as of December 31, 2017, compared to $129.7 million as of December 31, 2016, largely as the result of the remeasurement of net deferred tax assets pursuant to the Tax Act as discussed above. For additional details on the components of net deferred tax assets, see Note 12 — Income Taxes to the Consolidated Financial Statements.

A valuation allowance is established for deferred tax assets if, based on the weight of all positive evidence against all negative 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 NOLs 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 ASC 740-10, Income Taxes.

Operating Segment Results

The Company defines its operating segments based on its core strategy, and has identified three reportable operating segments: (1) Retail Banking; (2) Commercial Banking; and (3) Other.

The Retail Banking segment focuses primarily on deposit operations through the Bank’s branch network. The Commercial Banking segment primarily generates commercial loans and deposits through domestic commercial lending offices in the U.S. and foreign offices in China and Hong Kong. Furthermore, the Commercial Banking segment offers a wide variety of international finance, trade finance, and cash management services and products. The remaining centralized functions, including the treasury activities of the Company 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.

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

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

Note 19 — Business Segments to the Consolidated Financial Statements describes the Company’s segment reporting methodology and the business activities of each business segment, and presents financial results of these business segments for the years ended December 31, 2017, 2016 and 2015.

The following tables present the selected segment information for the years ended December 31, 2017, 2016 and 2015:




($ in thousands)	Year Ended December 31, 2017
($ in thousands)	Retail Banking		Commercial Banking		Other			Total
Net interest income (loss)	$	590,821	$	553,817	$	40,431		$	1,185,069
Noninterest income	$	55,093	$	110,104	$	93,209		$	258,406
Noninterest expense	$	320,287	$	193,176	$	148,646		$	662,109
Segment income (loss) before income taxes	$	323,815	$	426,291	$	(15,006	)	$	735,100
Segment income after income taxes	$	190,404	$	251,834	$	63,386		$	505,624




($ in thousands)	Year Ended December 31, 2016
($ in thousands)	Retail Banking		Commercial Banking		Other			Total
Net interest income	$	459,442	$	530,908	$	42,288		$	1,032,638
Noninterest income	$	51,435	$	96,010	$	35,473		$	182,918
Noninterest expense ⁽¹⁾	$	306,570	$	172,259	$	137,060		$	615,889
Segment income (loss) before income taxes ⁽¹⁾	$	208,663	$	422,824	$	(59,299	)	$	572,188
Segment income after income taxes ⁽¹⁾	$	122,256	$	248,474	$	60,947		$	431,677




($ in thousands)	Year Ended December 31, 2015
($ in thousands)	Retail Banking		Commercial Banking		Other			Total
Net interest income	$	453,015	$	509,591	$	(12,167	)	$	950,439
Noninterest income	$	46,265	$	71,867	$	65,251		$	183,383
Noninterest expense ⁽¹⁾	$	276,144	$	159,987	$	104,753		$	540,884
Segment income (loss) before income taxes ⁽¹⁾	$	228,971	$	401,419	$	(51,669	)	$	578,721
Segment income after income taxes ⁽¹⁾	$	134,383	$	236,459	$	13,835		$	384,677


(1)	Noninterest expense for the years ended December 31, 2016 and 2015 was reclassified to include inter-segment allocations and the change in amortization on tax credit and other investments allocation methodology. As a result, the segment income (loss) before income taxes and segment income after income taxes were reclassified accordingly.

Retail Banking

The Retail Banking segment reported segment income before income taxes of $323.8 million for the year ended December 31, 2017, compared to $208.7 million for the same period in 2016. The increase of $115.1 million or 55% in Retail Banking segment income before income taxes for the year ended December 31, 2017 was primarily driven by an increase in net interest income, partially offset by an increase in noninterest expense.

Net interest income for this segment increased $131.4 million or 29% to $590.8 million for the year ended December 31, 2017, compared to $459.4 million for the same period in 2016. The increase in net interest income was primarily due to the growth in core deposits for the segment, and the higher interest income credits received by this segment under the Bank’s internal funds transfer pricing system due to interest rate increases.

Noninterest income for this segment increased $3.7 million or 7% to $55.1 million for the year ended December 31, 2017, compared to $51.4 million for the same period in 2016. The increase in noninterest income was primarily attributable to increases in wealth management fees and derivative fees as a result of higher customer transaction volumes. This was partially offset by a decrease in ancillary loan fees.

Noninterest expense for this segment increased $13.7 million or 4% to $320.3 million for the year ended December 31, 2017, compared to $306.6 million for the same period in 2016. The increase was primarily due to increases in compensation and employee benefits expense.

The Retail Banking segment reported segment income before income taxes of $208.7 million for the year ended December 31, 2016, compared to $229.0 million for the same period in 2015. The $20.3 million or 9% decrease in segment income before income taxes for this segment was primarily driven by an increase in noninterest expense, partially offset by increases in net interest income and noninterest income. The $30.5 million or 11% increase in noninterest expense to $306.6 million for the year ended December 31, 2016, compared to $276.1 million for the same period in 2015 was primarily due to higher consulting expense and compensation and employee benefits expense. The increase in net interest income was primarily due to growth in core deposits for the segment. The increase in noninterest income for the year ended December 31, 2016 compared to the same period in 2015 was mainly attributable to a decrease in the reduction of changes in FDIC indemnification asset and receivable/payable, as all shared-loss agreements with the FDIC were early terminated in 2015, and an increase in derivative fees and other income. The increase in noninterest income was partially offset by decreases in net gains on sales of loans and wealth management fees.

Commercial Banking

The Commercial Banking segment reported segment income before income taxes of $426.3 million for the year ended December 31, 2017, compared to $422.8 million for the same period in 2016. The increase of $3.5 million or 1% in segment income before income taxes for this segment was attributable to increases in net interest income and noninterest income, partially offset by increases in noninterest expense.

Net interest income for this segment increased $22.9 million or 4% to $553.8 million for the year ended December 31, 2017, compared to $530.9 million for the same period in 2016. The increase in net interest income for the year ended December 31, 2017 was due to growth in commercial loans and commercial core deposits, from which the segment receives interest income credit under the Bank’s internal funds transfer pricing system.

Noninterest income for this segment increased $14.1 million or 15% to $110.1 million for the year ended December 31, 2017, compared to $96.0 million for the same period in 2016. The increase was attributable to increases in ancillary loan fees and letters of credit fees, and a net gain on sale of the insurance brokerage business of the Company’s subsidiary — EWIS.

Noninterest expense for this segment increased $20.9 million or 12% to $193.2 million for the year ended December 31, 2017, compared to $172.3 million for the same period in 2016. The increase in noninterest expense was primarily due to increases in legal expense and compensation and employee benefits expense.

Comparing the years ended December 31, 2016 and 2015, the Commercial Banking segment reported segment income before income taxes of $422.8 million for the year ended December 31, 2016, compared to $401.4 million for the same period in 2015. The increase of $21.4 million or 5% in segment income before income taxes for this segment was attributable to increases in net interest income and noninterest income, partially offset by increases in noninterest expense and provision for credit losses. Net interest income for this segment increased $21.3 million or 4%, to $530.9 million for the year ended December 31, 2016, compared to $509.6 million for the same period in 2015 primarily due to the loan growth. Noninterest income for this segment increased $24.1 million or 34%, to $96.0 million for the year ended December 31, 2016, compared to $71.9 million 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, and increases in ancillary loan fees, letters of credit fees and foreign exchange income, partially offset by decreases in net gains on sales of loans and derivative fees and other income. Noninterest expense for this segment increased $12.3 million or 8%, to $172.3 million for the year ended December 31, 2016, compared to $160.0 million for the same period in 2015. The increase in noninterest expense was primarily due to increases in compensation and employee benefits expense.

Other

The Other segment reported segment loss before income taxes of $15.0 million for the year ended December 31, 2017, compared to $59.3 million for the same period in 2016. The $44.3 million or 75% reduction in segment loss before income taxes for this segment for the year ended December 31, 2017 was driven by an increase in noninterest income which was primarily attributable to the net gain on sale of a commercial property in California, partially offset by an increase in noninterest expense.

Net interest income for this segment decreased $1.9 million or 4% to $40.4 million for the year ended December 31, 2017, compared to $42.3 million for the same period in 2016. 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 internal funds transfer pricing credits and charges, which are included in net interest income. The decrease in net interest income for the year ended December 31, 2017 was primarily due to an increase in net interest expense from deposits due to higher interest rates.

Noninterest income for this segment increased $57.7 million or 163% to $93.2 million for the year ended December 31, 2017, compared to $35.5 million recorded for the same period in 2016. The increase in noninterest income for the year ended December 31, 2017 was primarily due to the $71.7 million net gain on sale of a commercial property in California, as discussed in Item 7. MD&A — Results of Operations — Noninterest income.

Noninterest expense for this segment increased $11.5 million or 8% to $148.6 million for the year ended December 31, 2017, compared to $137.1 million for the same period in 2016. This increase was primarily attributable to increases in compensation and employee benefits expense and amortization of tax credit and other investments.

Comparing the years ended December 31, 2016 and 2015, the Other segment reported segment loss before taxes of $59.3 million for the year ended December 31, 2016, compared to $51.7 million for the same period in 2015. The increase in segment loss before taxes for this segment for the year ended December 31, 2016 was driven by a decrease in noninterest income and an increase in noninterest expense, partially offset by an increase in net interest income. Net interest income for this segment increased $54.5 million, to $42.3 million for the year ended December 31, 2016, compared to a net interest loss of $12.2 million for the same period in 2015. The increase in net interest income was primarily due to an increase in interest income from investment securities and resale agreements, a decrease in interest expense on repurchase agreements, and a reduction in net transfer pricing paid. Noninterest income for this segment decreased $29.8 million or 46%, to $35.5 million for the year ended December 31, 2016, compared to $65.3 million for the same period in 2015. The decrease was primarily due to lower net gains on sales of available-for-sale investment securities. Noninterest expense for this segment increased $32.3 million or 31% to $137.1 million for the year ended December 31, 2016, compared to $104.8 million for the same period in 2015. The increase was primarily attributable to higher amortization of tax credit and other investments.

Balance Sheet Analysis

The following is a discussion of the significant changes between December 31, 2017 and December 31, 2016:

Selected Consolidated Balance Sheet Data




($ in thousands)	December 31,				Change
($ in thousands)	2017		2016		$			%

ASSETS
Cash and cash equivalents	$	2,174,592	$	1,878,503	$	296,089		16	%
Interest-bearing deposits with banks	398,422		323,148		75,274			23	%
Resale agreements	1,050,000		2,000,000		(950,000		)	(48	)%
Available-for-sale investment securities, at fair value	3,016,752		3,335,795		(319,043		)	(10	)%
Held-to-maturity investment security, at cost	—		143,971		(143,971		)	(100	)%
Restricted equity securities, at cost	73,521		72,775		746			1	%
Loans held-for-sale	85		23,076		(22,991		)	(100	)%
Loans held-for-investment (net of allowance for loan losses of $287,128 in 2017 and $260,520 in 2016)	28,688,590		25,242,619		3,445,971			14	%
Investments in qualified affordable housing partnerships, net	162,824		183,917		(21,093		)	(11	)%
Investments in tax credit and other investments, net	224,551		173,280		51,271			30	%
Premises and equipment	121,209		159,923		(38,714		)	(24	)%
Goodwill	469,433		469,433		—			—	%
Branch assets held-for-sale	91,318		—		91,318			100	%
Other assets	678,952		782,400		(103,448		)	(13	)%
TOTAL	$	37,150,249	$	34,788,840	$	2,361,409		7	%
LIABILITIES
Deposits	$	31,615,063	$	29,890,983	$	1,724,080		6	%
Branch liability held-for-sale	605,111		—		605,111			100	%
Short-term borrowings	—		60,050		(60,050		)	(100	)%
FHLB advances	323,891		321,643		2,248			1	%
Repurchase agreements	50,000		350,000		(300,000		)	(86	)%
Long-term debt	171,577		186,327		(14,750		)	(8	)%
Accrued expenses and other liabilities	542,656		552,096		(9,440		)	(2	)%
Total liabilities	33,308,298		31,361,099		1,947,199			6	%
STOCKHOLDERS’ EQUITY	3,841,951		3,427,741		414,210			12	%
TOTAL	$	37,150,249	$	34,788,840	$	2,361,409		7	%

As of December 31, 2017, total assets were $37.15 billion, an increase of $2.36 billion or 7% from December 31, 2016. The predominant area of asset growth was in loans, which was driven by strong increases across a majority of the Company’s commercial and consumer loan categories, as well as higher cash and cash equivalents resulting from deposit growth and active liquidity management. These increases were partially offset by decreases in resale agreements, investment securities and other assets.

As of December 31, 2017, total liabilities were $33.31 billion, an increase of $1.95 billion or 6% from December 31, 2016, primarily due to increases in deposits, reflecting the continued strong growth from existing and new customers. This increase was partially offset by a decrease in repurchase agreements primarily due to an increase in resale agreements that were eligible for netting against repurchase agreements under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements.

As of December 31, 2017, total stockholders’ equity was $3.84 billion, an increase of $414.2 million or 12% from December 31, 2016. This increase was primarily due to $505.6 million in net income, partially offset by $117.0 million of cash dividends on common stock.

On November 11, 2017, the Bank entered into a Purchase and Assumption Agreement to sell all of its eight Desert Community Bank (“DCB”) branches located in the High Desert area of California, and related assets and liabilities to Flagstar Bank, a wholly-owned subsidiary of Flagstar Bancorp, Inc. All regulatory approvals necessary for this transaction have been received, and the sale is expected to be completed in the first quarter of 2018. DCB is reported under the “Retail Banking” operating segment. The Company determined that this transaction met the criteria for held-for-sale as of December 31, 2017. The branch assets classified as held-for-sale as of December 31, 2017 related to the DCB Purchase and Assumption Agreement were mainly comprised of $78.1 million in loans held-for-sale and $8.0 million in premises and equipment held-for-sale, net. The branch liability classified as held-for-sale was comprised of $605.1 million in deposits held-for-sale as of December 31, 2017.

Investment Securities

The Company aims to maintain an investment portfolio that consists of high quality and liquid securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s available-for-sale investment securities provide:


•	Interest income for earnings and yield enhancement;


•	Availability for funding needs arising during the normal course of business;


•	The ability to execute interest rate risk management strategies due to changes in economic or market conditions which influence loan origination, prepayment speeds, or deposit balances and mix; and


•	Collateral to support pledging agreements as required and/or to enhance the Company’s borrowing capacity.

Held-to-Maturity Investment Security

During the first quarter of 2016, the Company securitized $201.7 million of multifamily residential loans and retained $160.1 million of the senior tranche of the resulting securities from the securitization as held-to-maturity, which is carried at amortized cost. The held-to-maturity investment security is a non-agency commercial mortgage-backed security maturing on April 25, 2046. During the third quarter of 2017, the Company transferred this non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale. The transfer reflected the Company’s intent to sell the security as part of its active liquidity management. This investment security was sold in the fourth quarter of 2017.

Available-for-Sale Investment Securities

As of December 31, 2017 and 2016, the Company’s available-for-sale investment securities portfolio was primarily comprised of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities and foreign bonds. Investment securities classified as available-for-sale are carried at their fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive loss, net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheet.

The following table presents the amortized cost and fair value of available-for-sale investment securities by major categories as of the dates indicated:




($ in thousands)	December 31,
	2017				2016				2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale investment securities:
U.S. Treasury securities	$	651,395	$	640,280	$	730,287	$	720,479	$	1,002,874	$	998,515
U.S. government agency and U.S. government sponsored enterprise debt securities	206,815		203,392		277,891		274,866		771,288		768,849
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities	1,528,217		1,509,228		1,539,044		1,525,546		1,350,673		1,349,058
Municipal securities	99,636		99,982		148,302		147,654		173,785		175,649
Non-agency residential mortgage-backed securities	9,136		9,117		11,592		11,477		62,133		62,393
Corporate debt securities	37,585		37,003		232,381		231,550		292,341		289,074
Foreign bonds ⁽¹⁾	505,396		486,408		405,443		383,894		90,586		89,795
Other securities	31,887		31,342		40,501		40,329		40,149		39,893
Total available-for-sale investment securities	$	3,070,067	$	3,016,752	$	3,385,441	$	3,335,795	$	3,783,829	$	3,773,226


(1)	The Company held bonds from International Bank for Reconstruction and Development that exceeded 10% of stockholders’ equity, with an unamortized cost of $474.9 million and a fair value of $456.1 million as of December 31, 2017 and an unamortized cost of $374.9 million and a fair value of $353.6 million as of December 31, 2016.

The fair value of available-for-sale investment securities totaled $3.02 billion as of December 31, 2017, compared to $3.34 billion as of December 31, 2016. The decrease of $319.0 million or 10% was primarily attributable to the sales, repayments, maturities and redemptions of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities and corporate debt securities, partially offset by purchases of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities and foreign bonds.

The Company’s available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. As of December 31, 2017, the Company’s net unrealized losses on available-for-sale investment securities were $53.3 million, compared to $49.6 million as of December 31, 2016. The increase in net unrealized losses was primarily attributed to an increase in interest rate. Gross unrealized losses on available-for-sale investment securities totaled $58.3 million as of December 31, 2017, compared to $56.3 million as of December 31, 2016. As of December 31, 2017, the Company had no intention to sell securities with unrealized losses and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost. No other-than-temporary impairment loss was recognized for the years ended December 31, 2017 and 2016. For complete discussion and disclosure, see Note 1 — Summary of Significant Accounting Policies, Note 3 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 5 — Securities to the Consolidated Financial Statements.

As of December 31, 2017 and 2016, available-for-sale investment securities with fair value of $534.3 million and $767.4 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.

The following table presents the weighted-average yields and contractual maturity distribution, excluding periodic principal payments, of the Company’s investment securities as of the periods indicated. Actual maturities of mortgage-backed securities can differ from contractual maturities as the borrowers have the right to prepay the obligations. In addition, such factors as prepayments and interest rate changes may affect the yields on the carrying value of mortgage-backed securities.




	December 31,
($ in thousands)	2017						2016
($ in thousands)	Amortized Cost		Fair Value		Yield⁽¹⁾		Amortized Cost		Fair Value		Yield⁽¹⁾
Available-for-sale investment securities:
U.S. Treasury securities:
Maturing in one year or less	$	120,233	$	119,844	1.01	%	$	100,707	$	100,653	0.65	%
Maturing after one year through five years	531,162		520,436		1.55	%	376,580		371,917		1.27	%
Maturing after five years through ten years	—		—		—	%	253,000		247,909		1.59	%
Total	651,395		640,280		1.45	%	730,287		720,479		1.29	%
U.S. government agency and U.S. government sponsored enterprise debt securities:
Maturing in one year or less	24,999		24,882		1.02	%	118,966		118,982		0.94	%
Maturing after one year through five years	9,720		9,743		2.36	%	52,622		52,630		1.38	%
Maturing after five years through ten years	119,645		116,570		2.05	%	81,829		78,977		2.07	%
Maturing after ten years	52,451		52,197		2.58	%	24,474		24,277		2.50	%
Total	206,815		203,392		2.07	%	277,891		274,866		1.49	%
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Maturing after one year through five years	48,363		47,811		2.34	%	47,278		46,950		1.74	%
Maturing after five years through ten years	71,562		70,507		2.48	%	79,379		78,903		3.11	%
Maturing after ten years	1,408,292		1,390,910		2.31	%	1,412,387		1,399,693		2.34	%
Total	1,528,217		1,509,228		2.32	%	1,539,044		1,525,546		2.36	%
Municipal securities ⁽²⁾:
Maturing in one year or less	7,395		7,424		2.69	%	6,404		6,317		2.56	%
Maturing after one year through five years	83,104		83,301		2.31	%	127,178		127,080		2.31	%
Maturing after five years through ten years	4,156		4,215		2.92	%	9,785		9,515		2.50	%
Maturing after ten years	4,981		5,042		4.40	%	4,935