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EAST WEST BANCORP INC - Quarter Report: 2017 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended September 30, 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 91101
 (Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:
(626) 768-6000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 144,542,911 shares as of October 31, 2017.

 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q (“Form 10-Q”) contain or incorporate statements that East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) believes are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. 
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such differences, some of which are beyond the Company’s control, include, but are not limited to:

the Company’s ability to compete effectively against other financial institutions in its banking markets;
changes in the commercial and consumer real estate markets;
changes in the Company’s costs of operation, compliance and expansion;
changes in the 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, the U.S. Securities and Exchange Commission, the Consumer Financial Protection Bureau and the California Department of Business Oversight — 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;
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 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;

3



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

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission on February 27, 2017 (the “Company’s 2016 Form 10-K”), under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “ITEM 1A. RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.


4



PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except shares)

 
 
 
September 30,
2017
 
December 31,
2016
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
364,328

 
$
460,559

Interest-bearing cash with banks
 
1,372,421

 
1,417,944

Cash and cash equivalents
 
1,736,749

 
1,878,503

Interest-bearing deposits with banks
 
404,946

 
323,148

Securities purchased under resale agreements (“resale agreements”)
 
1,250,000

 
2,000,000

Securities :
 
 
 
 
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $584,907 in 2017 and $767,437 in 2016)
 
2,956,776

 
3,335,795

Held-to-maturity investment security, at cost (fair value of $144,593 in 2016)
 

 
143,971

Restricted equity securities, at cost
 
73,322

 
72,775

Loans held-for-sale
 
178

 
23,076

Loans held-for-investment (net of allowance for loan losses of $285,926 in 2017 and $260,520 in 2016; includes assets pledged as collateral of $18,182,265 in 2017 and $16,441,068 in 2016)
 
28,239,431

 
25,242,619

Investments in qualified affordable housing partnerships, net
 
178,344

 
183,917

Investments in tax credit and other investments, net
 
203,758

 
173,280

Premises and equipment (net of accumulated depreciation of $109,296 in 2017 and $114,890 in 2016)
 
131,311

 
159,923

Goodwill
 
469,433

 
469,433

Other assets
 
663,718

 
782,400

TOTAL
 
$
36,307,966

 
$
34,788,840

LIABILITIES
 
 

 
 

Customer deposits:
 
 

 
 

Noninterest-bearing
 
$
10,992,674

 
$
10,183,946

Interest-bearing
 
20,318,988

 
19,707,037

Total deposits
 
31,311,662

 
29,890,983

Short-term borrowings
 
24,813

 
60,050

Federal Home Loan Bank (“FHLB”) advances
 
323,323

 
321,643

Securities sold under repurchase agreements (“repurchase agreements”)
 
50,000

 
350,000

Long-term debt
 
176,513

 
186,327

Accrued expenses and other liabilities
 
639,759

 
552,096

Total liabilities
 
32,526,070

 
31,361,099

COMMITMENTS AND CONTINGENCIES (Note 11)
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.001 par value, 200,000,000 shares authorized; 165,178,075 and 164,604,072 shares issued in 2017 and 2016, respectively
 
165

 
164

Additional paid-in capital
 
1,745,181

 
1,727,434

Retained earnings
 
2,520,817

 
2,187,676

Treasury stock at cost — 20,667,132 shares in 2017 and 20,436,621 shares in 2016
 
(452,050
)
 
(439,387
)
Accumulated other comprehensive loss, net of tax
 
(32,217
)
 
(48,146
)
Total stockholders’ equity
 
3,781,896

 
3,427,741

TOTAL
 
$
36,307,966

 
$
34,788,840

 



See accompanying Notes to Consolidated Financial Statements.

5



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 

 
 

Loans receivable, including fees
 
$
306,939

 
$
255,316

 
$
872,039

 
$
763,189

Investment securities
 
14,828

 
13,388

 
43,936

 
37,433

Resale agreements
 
7,901

 
7,834

 
25,222

 
22,479

Restricted equity securities
 
612

 
611

 
1,859

 
2,008

Interest-bearing cash and deposits with banks
 
9,630

 
3,168

 
22,298

 
10,245

Total interest and dividend income
 
339,910

 
280,317

 
965,354

 
835,354

INTEREST EXPENSE
 
 
 
 
 
 

 
 

Customer deposits
 
31,086

 
21,049

 
81,803

 
60,708

Federal funds purchased and other short-term borrowings
 
212

 
212

 
877

 
390

FHLB advances
 
1,947

 
1,361

 
5,738

 
4,153

Repurchase agreements
 
2,122

 
2,319

 
7,538

 
6,441

Long-term debt
 
1,388

 
1,228

 
4,030

 
3,726

Total interest expense
 
36,755

 
26,169

 
99,986

 
75,418

Net interest income before provision for credit losses

303,155

 
254,148

 
865,368

 
759,936

Provision for credit losses
 
12,996

 
9,525

 
30,749

 
17,018

Net interest income after provision for credit losses
 
290,159

 
244,623

 
834,619

 
742,918

NONINTEREST INCOME
 
 
 
 
 
 

 
 

Branch fees
 
10,803

 
10,408

 
31,799

 
30,983

Letters of credit fees and foreign exchange income
 
10,154

 
10,908

 
33,209

 
31,404

Ancillary loan fees and other income
 
5,987

 
6,135

 
16,876

 
13,997

Wealth management fees
 
3,615

 
4,033

 
11,682

 
9,862

Derivative fees and other income
 
6,663

 
5,791

 
12,934

 
9,778

Net gains on sales of loans
 
2,361

 
2,158

 
6,660

 
6,965

Net gains on sales of available-for-sale investment securities
 
1,539

 
1,790

 
6,733

 
8,468

Net gains on sales of fixed assets
 
1,043

 
486

 
74,092

 
2,916

Net gain on sale of business
 
3,807

 

 
3,807

 

Other fees and operating income
 
3,652

 
7,632

 
15,255

 
19,745

Total noninterest income
 
49,624

 
49,341

 
213,047

 
134,118

NONINTEREST EXPENSE
 
 
 
 
 
 

 
 

Compensation and employee benefits
 
79,583

 
75,042

 
244,930

 
220,166

Occupancy and equipment expense
 
16,635

 
15,456

 
47,829

 
45,619

Deposit insurance premiums and regulatory assessments
 
5,676

 
6,450

 
17,384

 
17,341

Legal expense
 
3,316

 
5,361

 
8,930

 
12,714

Data processing
 
3,004

 
2,729

 
9,009

 
8,712

Consulting expense
 
4,087

 
4,594

 
10,775

 
19,027

Deposit related expense
 
2,413

 
3,082

 
7,283

 
7,675

Computer software expense
 
4,393

 
3,331

 
13,823

 
9,267

Other operating expense
 
19,830

 
19,814

 
55,357

 
58,508

Amortization of tax credit and other investments
 
23,827

 
32,618

 
66,059

 
60,779

Amortization of core deposit intangibles
 
1,735

 
2,023

 
5,314

 
6,177

Total noninterest expense
 
164,499

 
170,500

 
486,693

 
465,985

INCOME BEFORE INCOME TAXES
 
175,284

 
123,464

 
560,973

 
411,051

INCOME TAX EXPENSE
 
42,624

 
13,321

 
140,247

 
90,108

NET INCOME
 
$
132,660

 
$
110,143

 
$
420,726

 
$
320,943

EARNINGS PER SHARE (“EPS”)
 
 
 
 
 
 
 
 
BASIC
 
$
0.92

 
$
0.76

 
$
2.91

 
$
2.23

DILUTED
 
$
0.91

 
$
0.76

 
$
2.88

 
$
2.21

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
 
 
 
 
BASIC
 
144,498

 
144,122

 
144,412

 
144,061

DILUTED
 
145,882

 
145,238

 
145,849

 
145,086

DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

 



See accompanying Notes to Consolidated Financial Statements.

6



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
132,660

 
$
110,143

 
$
420,726

 
$
320,943

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net change in unrealized (losses) gains on available-for-sale investment securities
 
(1,906
)
 
(4,907
)
 
7,916

 
12,993

Foreign currency translation adjustments
 
3,870

 
(555
)
 
8,013

 
(5,226
)
Other comprehensive income (loss)
 
1,964

 
(5,462
)
 
15,929

 
7,767

COMPREHENSIVE INCOME
 
$
134,624

 
$
104,681

 
$
436,655

 
$
328,710

 



See accompanying Notes to Consolidated Financial Statements.

7



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except share data)
(Unaudited)
 
 
 
Common Stock and Additional Paid-in Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other Comprehensive Loss, Net of Tax
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
 
 
 
BALANCE, JANUARY 1, 2016
 
143,909,233

 
$
1,701,459

 
$
1,872,594

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

Net income
 

 

 
320,943

 

 

 
320,943

Other comprehensive income
 

 

 

 

 
7,767

 
7,767

Stock compensation costs
 

 
13,973

 

 

 

 
13,973

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

 
2,981

 

 
(3,144
)
 

 
(163
)
Cash dividends on common stock
 

 

 
(87,416
)
 

 

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

 
$
1,718,413

 
$
2,106,121

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

BALANCE, JANUARY 1, 2017
 
144,167,451

 
$
1,727,598

 
$
2,187,676

 
$
(439,387
)
 
$
(48,146
)
 
$
3,427,741

Net income
 

 

 
420,726

 

 

 
420,726

Other comprehensive income
 

 

 

 

 
15,929

 
15,929

Stock compensation costs
 

 
15,780

 

 

 

 
15,780

Net activity of common stock pursuant to various stock compensation plans and agreements
 
343,492

 
1,968

 

 
(12,663
)
 

 
(10,695
)
Cash dividends on common stock
 

 

 
(87,585
)
 

 

 
(87,585
)
BALANCE, SEPTEMBER 30, 2017
 
144,510,943

 
$
1,745,346

 
$
2,520,817

 
$
(452,050
)
 
$
(32,217
)
 
$
3,781,896

 



See accompanying Notes to Consolidated Financial Statements.

8



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
420,726

 
$
320,943

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

 
 

Depreciation and amortization
 
123,008

 
98,561

Accretion of discount and amortization of premiums, net
 
(19,237
)
 
(37,881
)
Stock compensation costs
 
15,780

 
13,973

Deferred income tax (benefit) expense
 
(14,500
)
 
3,730

Provision for credit losses
 
30,749

 
17,018

Net gains on sales of loans
 
(6,660
)
 
(6,965
)
Net gains on sales of available-for-sale investment securities
 
(6,733
)
 
(8,468
)
Net gains on sales of premises and equipment
 
(74,092
)
 
(2,916
)
Net gain on sale of business
 
(3,807
)
 

Originations and purchases of loans held-for-sale
 
(15,069
)
 
(10,901
)
Proceeds from sales and paydowns/payoffs in loans held-for-sale
 
15,792

 
15,065

Net change in accrued interest receivable and other assets
 
105,729

 
(2,591
)
Net change in accrued expenses and other liabilities
 
95,432

 
19,217

Other net operating activities
 
(2,135
)
 
(1,181
)
Total adjustments
 
244,257

 
96,661

Net cash provided by operating activities
 
664,983

 
417,604

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Net increase in:
 
 

 
 

Loans held-for-investment
 
(2,967,873
)
 
(776,277
)
Interest-bearing deposits with banks
 
(74,254
)
 
(13,469
)
Investments in qualified affordable housing partnerships, tax credit and other investments, net
 
(121,590
)
 
(57,742
)
Purchases of:
 
 

 
 

Resale agreements
 
(550,000
)
 
(1,150,000
)
Available-for-sale investment securities
 
(501,669
)
 
(1,330,724
)
Loans held-for-investment
 
(441,141
)
 
(1,038,083
)
Premises and equipment
 
(11,598
)
 
(10,412
)
Proceeds from sale of:
 
 

 
 

Available-for-sale investment securities
 
676,776

 
1,008,256

Loans held-for-investment
 
448,679

 
545,256

Other real estate owned (“OREO”)
 
5,431

 
3,271

Premises and equipment
 
116,021

 
8,163

Business, net of cash transferred
 
3,633

 

Paydowns and maturities of resale agreements
 
1,000,000

 
1,450,000

Repayments, maturities and redemptions of available-for-sale investment securities
 
323,463

 
870,965

Other net investing activities
 
27,914

 
17,527

Net cash used in investing activities
 
(2,066,208
)
 
(473,269
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase (decrease) in:
 
 

 
 

Customer deposits
 
1,385,625

 
1,130,022

Short-term borrowings
 
(36,604
)
 
37,699

Proceeds from:
 
 
 
 
Issuance of common stock pursuant to various stock compensation plans and agreements
 
1,008

 
1,962

Payments for:
 
 

 
 

Repayment of FHLB advances
 

 
(700,000
)
Repayment of long-term debt
 
(10,000
)
 
(15,000
)
Repurchase of vested shares due to employee tax liability
 
(12,663
)
 
(3,144
)
Cash dividends on common stock
 
(87,880
)
 
(86,984
)
Other net financing activities
 

 
1,019

Net cash provided by financing activities
 
1,239,486

 
365,574

Effect of exchange rate changes on cash and cash equivalents
 
19,985

 
(3,964
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(141,754
)
 
305,945

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
1,878,503

 
1,360,887

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
1,736,749

 
$
1,666,832

 

See accompanying Notes to Consolidated Financial Statements.

9



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 

 
 

Interest paid
 
$
98,409

 
$
76,750

Income taxes paid
 
$
11,800

 
$
20,652

Noncash investing and financing activities:
 
 

 
 

Loans transferred from held-for-investment to held-for-sale
 
$
418,489

 
$
720,670

Investment security transferred from held-to-maturity to available-for-sale
 
$
115,615

 
$

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

 
$
160,135

Loans transferred to OREO
 
$
456

 
$
6,086

 
 
 
 
 



See accompanying Notes to Consolidated Financial Statements.

10



EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 Basis of Presentation
 
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank and East West’s various subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of September 30, 2017, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with FASB Accounting Standards Codification (“ASC”) Topic 810, the Trusts are not included on the Consolidated Financial Statements.

The unaudited interim Consolidated Financial Statements presented in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking industry, reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim period Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.

The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s 2016 Form 10-K.


Note 2Current Accounting Developments
    
New Accounting Pronouncements Adopted

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship provided that all other hedge accounting criteria in ASC 815 continue to be met. This clarification applies to both cash flow and fair value hedging relationships. The Company adopted this guidance prospectively in the first quarter of 2017. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which requires an entity to use a four-step decision model when assessing contingent call (put) options that can accelerate the payment of principal on debt instruments to determine whether they are clearly and closely related to their debt hosts. The Company adopted this guidance on a modified retrospective basis in the first quarter of 2017. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, to eliminate the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The amendments in ASU 2016-07 also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (loss) (“AOCI”) at the date the investment becomes qualified for use of the equity method. The Company adopted this guidance prospectively in the first quarter of 2017. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.


11



In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the statements of cash flows. The Company adopted this guidance in the first quarter of 2017. The changes that impacted the Company included a requirement that excess tax benefits and deficiencies be recognized as a component of Income tax expense on the Consolidated Statements of Income rather than Additional paid-in capital on the Consolidated Statements of Changes in Stockholders’ Equity as required in the previous guidance. The adoption of this guidance results in increased volatility to the Company’s income tax expense, but does not have a material impact on the Consolidated Balance Sheets or the Consolidated Statements of Changes in Stockholders’ Equity. The income tax expense volatility is dependent on the Company’s stock price on the dates the restricted stock units (“RSUs”) vest, which occur primarily in the first quarter of each year. Net excess tax benefits for RSUs of $4.6 million have been recognized by the Company as a component of Income tax expense on the Consolidated Statements of Income during the nine months ended September 30, 2017. The guidance also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted EPS. In addition, ASU 2016-09 no longer requires a presentation of excess tax benefits and deficiencies as both an operating outflow and a financing inflow on the Consolidated Statements of Cash Flows. Instead, excess tax benefits and deficiencies are recorded along with other income tax cash flows as an operating activity. These changes to the guidance were applied on a prospective basis. The Company has also elected to retain its existing accounting policy election to estimate award forfeitures.

Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue for contracts to provide goods or services to customers and will replace most existing revenue recognition guidance in the U.S. GAAP when it becomes effective. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 is effective on January 1, 2018. The guidance should be applied on either a modified retrospective or full retrospective basis. The Company’s revenue is mainly comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income, as well as other revenues from financial instruments such as loans, leases, securities and derivatives. The Company has completed a comprehensive scoping exercise to determine the revenue streams that are in the scope of the guidance and the review of its contracts to ascertain whether certain noninterest income revenue items are within the scope of the new guidance. Based on the completed contract reviews thus far, the adoption of this guidance is not expected to have a material impact on its Consolidated Balance Sheets or Consolidated Statements of Income. The next phase of the Company’s implementation work will be to evaluate any changes that may be required to its applicable disclosures.
 
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income, thus eliminating eligibility for the current available-for-sale category. If there is no readily determinable fair value, the guidance allows entities to measure equity investments at cost less impairment, whereby impairment is based on a qualitative assessment. Furthermore, investments in Federal Reserve Bank and FHLB stock are not subject to this guidance and will continue to be presented at cost. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the Consolidated Balance Sheets or in the footnotes. If an entity has elected the fair value option to measure liabilities, the guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in Other comprehensive income. ASU 2016-01 is effective on January 1, 2018. Early adoption is not permitted except for certain specific changes under the fair value option guidance. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the adoption date. The Company does not have a significant amount of equity securities classified as available-for-sale. Additionally, the Company does not have any financial liabilities accounted for under the fair value option. For the guidance that is applicable to us, the accounting will be implemented on a modified retrospective basis through a cumulative-effect adjustment to the Consolidated Balance Sheets as of January 1, 2018, except for the guidance related to equity securities without readily determinable fair values, which should be applied on a prospective basis. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Balance Sheets or Consolidated Statements of Income.

12




In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. The guidance requires lessees to recognize right-of-use assets and related lease liabilities for all leases with lease terms of more than 12 months on the Consolidated Balance Sheets, and provide quantitative and qualitative disclosures regarding key information about the leasing arrangements. For short-term leases with a term of 12 months or less, lessees can make a policy election not to recognize lease assets and lease liabilities. Lessor accounting is largely unchanged. ASU 2016-02 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method through a cumulative-effect adjustment. The Company is currently evaluating the potential impact on its Consolidated Financial Statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The Company expects the adoption of ASU 2016-02 to result in additional assets and liabilities, as the Company will be required to recognize operating leases on its Consolidated Balance Sheets. The Company does not expect a material impact to its recognition of operating lease expense on its Consolidated Statements of Income. Upon completion of the contract reviews and consideration of system requirements, the Company will evaluate the impacts of adopting the new accounting guidance on its disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to introduce a new approach based on expected losses to estimate credit losses on certain types of financial instruments, which modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new “expected credit loss” impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loan receivables, available-for-sale and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. For available-for-sale debt securities with unrealized losses, ASU 2016-13 does not change the measurement method of credit losses, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. While the Company is still evaluating the impact on its Consolidated Financial Statements, the Company expects that ASU 2016-13 may result in an increase in the allowance for credit losses due to the following factors: 1) the allowance for credit losses provides for expected credit losses over the remaining expected life of the loan portfolio, and will consider expected future changes in macroeconomic conditions; 2) the nonaccretable difference on the purchased credit impaired (“PCI”) loans will be recognized as an allowance, offset by an increase in the carrying value of the PCI loans; and 3) an allowance may be established for estimated credit losses on available-for-sale and held-to-maturity debt securities. The amount of the increase will be impacted by the portfolio composition and quality, as well as the economic conditions and forecasts as of the adoption date. The Company has begun its implementation efforts by identifying key interpretive issues, assessing its processes and identifying the system requirements against the new guidance to determine what modifications may be required.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on eight specific issues related to classification on the Consolidated Statements of Cash Flows in order to reduce diversity in practice. The specific issues cover cash payments for debt prepayment or debt extinguishment costs; cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments that are not made soon after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests received in securitization transactions; and clarification regarding when no specific U.S. GAAP guidance exists and the sources of the cash flows are not separately identifiable, the classification should be based on the activity that is likely to be the predominant source or use of the cash flows. ASU 2016-15 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied using a retrospective transition method. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires the Company to include those amounts that are deemed to be restricted cash and restricted cash equivalents in its cash and cash equivalent balances on the Consolidated Statements of Cash Flows. In addition, the Company is required to explain the changes in the combined total of restricted and unrestricted balances on the Consolidated Statements of Cash Flows. ASU 2016-18 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied using a retrospective transition method to each period presented. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.


13



In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the accounting for goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The guidance also eliminates the requirements for any reporting units with a zero or negative carrying amount to perform a qualitative assessment. ASU 2017-04 is effective on January 1, 2020 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The guidance does not require any accounting changes for debt securities held at a discount; the discount continues to be amortized as an adjustment of yield over the contractual life (to maturity) of the instrument. ASU 2017-08 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method, with the cumulative-effect adjustment recognized to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact on its Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied prospectively to awards modified on or after the adoption date. The Company plans to adopt this guidance in the first quarter of 2018 prospectively.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns the Company’s risk management activities and financial reporting for hedging relationships through changes to both the description and measurement guidance for qualifying hedging relationships and the presentation of hedge results, expands and refines hedge accounting for both nonfinancial and financial risk components, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item on the Consolidated Financial Statements. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. Upon adoption, the guidance should be applied using a retrospective transition method to any existing cash flows or net investment hedges through a cumulative-effect adjustment to AOCI to eliminate the separate measurement of ineffectiveness. The amended presentation and disclosure guidance is applied prospectively. The Company is currently evaluating the impact on its Consolidated Financial Statements.


Note 3Dispositions

In the first quarter of 2017, the Company completed the sale and leaseback of a commercial property in San Francisco, California for cash consideration of $120.6 million and entered into a leaseback with the buyer for part of the property, consisting of a retail branch and office facilities. The property had a net book value of $31.6 million at the time of sale, resulting in a pre-tax gain of $85.4 million after considering $3.6 million in selling costs. As the leaseback is an operating lease, $71.7 million of the gain was recognized on the closing date, and $13.7 million was deferred and will be recognized over the term of the lease agreement. The first quarter 2017 diluted EPS impact from the sale of the commercial property was $0.28 per share, net of tax.

In the third quarter of 2017, the Company sold its insurance brokerage business, East West Insurance Services, Inc., for $4.3 million, and recorded a pre-tax gain of $3.8 million. The third quarter 2017 diluted EPS impact from the sale of the Company’s insurance brokerage business was $0.02 per share, net of tax.


14



Note 4 Fair Value Measurement and Fair Value of Financial Instruments
 
In determining the fair value of financial instruments, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
Level 1
Valuation is based on quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
Level 3
Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

In determining the appropriate hierarchy levels, the Company performs an analysis of the assets and liabilities that are subject to fair value disclosure. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.


15



The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of September 30, 2017
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
U.S. Treasury securities
 
$
526,332

 
$
526,332

 
$

 
$

 
U.S. government agency and U.S. government sponsored enterprise debt securities
 
189,185

 

 
189,185

 

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

 
 

 
 

 
 

 
Commercial mortgage-backed securities
 
315,172

 

 
315,172

 

 
Residential mortgage-backed securities
 
1,150,934

 

 
1,150,934

 

 
Municipal securities
 
117,242

 

 
117,242

 

 
Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
Investment grade
 
9,694

 

 
9,694

 

 
Corporate debt securities:
 
 

 
 

 
 

 
 

 
Investment grade
 
2,327

 

 
2,327

 

 
Non-investment grade
 
9,615

 

 
9,615

 

 
Foreign bonds:
 
 
 
 
 
 
 
 
 
Investment grade
 
489,140

 

 
489,140

 

 
Other securities
 
147,135

 
31,418

 
102

 
115,615

(1) 
Total available-for-sale investment securities
 
$
2,956,776

 
$
557,750

 
$
2,283,411

 
$
115,615

 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
64,822

 
$

 
$
64,822

 
$

 
Foreign exchange contracts
 
14,187

 

 
14,187

 

 
Credit risk participation agreements (“RPAs”)
 
2

 

 
2

 

 
Warrants
 
1,455

 

 
856

 
599

 
Total derivative assets
 
$
80,466

 
$

 
$
79,867

 
$
599

 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(6,648
)
 
$

 
$
(6,648
)
 
$

 
Interest rate swaps and options
 
(64,212
)
 

 
(64,212
)
 

 
Foreign exchange contracts
 
(20,054
)
 

 
(20,054
)
 

 
RPAs
 
(1
)
 

 
(1
)
 

 
Total derivative liabilities
 
$
(90,915
)
 
$

 
$
(90,915
)
 
$

 
 
 
 
 
 
 
 
 
 
 
(1)
During the third quarter of 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held- to-maturity to available-for-sale.


16



 
 
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 31, 2016
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
720,479

 
$
720,479

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
274,866

 

 
274,866

 

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
266,799

 

 
266,799

 

Residential mortgage-backed securities
 
1,258,747

 

 
1,258,747

 

Municipal securities
 
147,654

 

 
147,654

 

Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

Investment grade
 
11,477

 

 
11,477

 

Corporate debt securities:
 
 

 
 

 
 

 
 

Investment grade
 
222,377

 

 
222,377

 

Non-investment grade
 
9,173

 

 
9,173

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
383,894

 

 
383,894

 

Other securities
 
40,329

 
30,991

 
9,338

 

Total available-for-sale investment securities
 
$
3,335,795

 
$
751,470

 
$
2,584,325

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
4,325

 
$

 
$
4,325

 
$

Interest rate swaps and options
 
67,578

 

 
67,578

 

Foreign exchange contracts
 
11,874

 

 
11,874

 

RPAs
 
3

 

 
3

 

Total derivative assets
 
$
83,780

 
$

 
$
83,780

 
$

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps on certificates of deposit
 
$
(5,976
)
 
$

 
$
(5,976
)
 
$

Interest rate swaps and options
 
(65,131
)
 

 
(65,131
)
 

Foreign exchange contracts
 
(11,213
)
 

 
(11,213
)
 

RPAs
 
(3
)
 

 
(3
)
 

Total derivative liabilities
 
$
(82,323
)
 
$

 
$
(82,323
)
 
$

 
 
 
 
 
 
 
 
 


17



At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. There were no assets or liabilities measured using significant unobservable inputs (Level 3) on a recurring basis as of December 31, 2016, and during the three and nine months ended September 30, 2016. The following table presents a reconciliation of the beginning and ending balances for other securities and warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017:
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
($ in thousands)
 
Other securities
 
Warrants
 
Other securities
 
Warrants
Beginning balance
 
$

 
$

 
$

 
$

Issuances
 

 
599

 

 
599

Transfer from held-to-maturity investment security to available-for-sale investment security
 
115,615

 

 
115,615

 

Ending balance
 
$
115,615


$
599


$
115,615


$
599

 
 
 
 
 
 
 
 
 

Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities become unobservable or observable in the current marketplace. The Company’s policy, with respect to transfers between levels of the fair value hierarchy, is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers of assets and liabilities measured on a recurring basis into and out of Level 1, Level 2 and Level 3 during the three and nine months ended September 30, 2017 and 2016. During the three and nine months ended September 30, 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale to reflect the Company’s intent to sell the security under active liquidity management.

The following table presents quantitative information about significant unobservable inputs used in the valuation of assets measured on a recurring basis classified as Level 3 as of September 30, 2017. Significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets or liabilities. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets or liabilities would be impacted by a predetermined percentage change.
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique
 
Unobservable
Input(s)
 
Weighted
 Average
Available-for-sale investment securities:

 
 
 
 
 
 
 
 
Other securities
 
$
115,615

 
Discounted cash flows
 
Discount margin
 
191 Basis points
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Warrants
 
$
599

 
Black-Scholes option pricing model
 
Volatility
 
44%
 
 
 
 
 
 
Liquidity discount
 
47%
 
 
 
 
 
 
 
 
 

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


18



The following tables present the carrying amounts of assets included on the Consolidated Balance Sheets that had fair value changes measured on a nonrecurring basis as of September 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of September 30, 2017
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Non-PCI impaired loans:
 
 

 
 

 
 

 
 

Commercial real estate (“CRE”)
 
$
9,172

 
$

 
$

 
$
9,172

Commercial and industrial (“C&I”)
 
32,053

 

 

 
32,053

Residential
 
6,079

 

 

 
6,079

Consumer
 
633

 

 

 
633

Total non-PCI impaired loans
 
$
47,937

 
$

 
$

 
$
47,937

OREO
 
$
1,789

 
$

 
$

 
$
1,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2016
($ in thousands)
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Non-PCI impaired loans:
 
 

 
 

 
 

 
 

CRE
 
$
14,908

 
$

 
$

 
$
14,908

C&I
 
52,172

 

 

 
52,172

Residential
 
2,464

 

 

 
2,464

Consumer
 
610

 

 

 
610

Total non-PCI impaired loans
 
$
70,154

 
$

 
$

 
$
70,154

OREO
 
$
345

 
$

 
$

 
$
345

Loans held-for-sale
 
$
22,703

 
$

 
$
22,703

 
$

 
 
 
 
 
 
 
 
 

The following table presents the fair value adjustments of assets measured on a nonrecurring basis recognized during the three and nine months ended and which were included on the Consolidated Balance Sheets as of September 30, 2017 and 2016:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands)
 
2017
 
2016
 
2017
 
2016
Non-PCI impaired loans:
 
 
 
 
 
 

 
 

CRE
 
$
6

 
$
(282
)
 
$
(66
)
 
$
1,741

C&I
 
(16,954
)
 
77

 
(17,648
)
 
(5,497
)
Residential
 
(3
)
 
(14
)
 
49

 
(14
)
Consumer
 

 

 
25

 
17

Total non-PCI impaired loans
 
$
(16,951
)
 
$
(219
)
 
$
(17,640
)
 
$
(3,753
)
OREO
 
$
(285
)
 
$
(41
)
 
$
(286
)
 
$
(994
)
Loans held-for-sale
 
$

 
$

 
$

 
$
(2,351
)
 
 
 
 
 
 
 
 
 


19



The following table presents the quantitative information about the significant unobservable inputs used in the valuation of assets measured on a nonrecurring basis classified as Level 3 as of September 30, 2017 and December 31, 2016:
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range of 
Input(s)
 
Weighted 
Average
September 30, 2017
 
 

 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
30,563

 
Discounted cash flows
 
Discount
 
0%  82%
 
19%
 
 
$
17,374

 
Market comparables
 
Discount (1)
 
0%  100%
 
40%
OREO
 
$
1,789

 
Appraisal
 
Selling cost
 
8%
 
8%
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
31,835

 
Discounted cash flows
 
Discount
 
0%  62%
 
7%
 
 
$
38,319

 
Market comparables
 
Discount (1)
 
0%  100%
 
18%
OREO
 
$
345

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

The following tables present the carrying and fair values per the fair value hierarchy of certain financial instruments, excluding those measured at fair value on a recurring basis, as of September 30, 2017 and December 31, 2016:
 
($ in thousands)
 
September 30, 2017
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,736,749

 
$
1,736,749

 
$

 
$

 
$
1,736,749

Interest-bearing deposits with banks
 
$
404,946

 
$

 
$
404,946

 
$

 
$
404,946

Resale agreements (1)
 
$
1,250,000

 
$

 
$
1,236,413

 
$

 
$
1,236,413

Restricted equity securities
 
$
73,322

 
$

 
$
73,322

 
$

 
$
73,322

Loans held-for-sale
 
$
178

 
$

 
$
178

 
$

 
$
178

Loans held-for-investment, net
 
$
28,239,431

 
$

 
$

 
$
27,635,961

 
$
27,635,961

Accrued interest receivable
 
$
111,710

 
$

 
$
111,710

 
$

 
$
111,710

Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposits:
 
 

 
 

 
 

 
 

 
 

Demand, checking, savings and money market deposits
 
$
25,517,121

 
$

 
$
25,517,121

 
$

 
$
25,517,121

Time deposits
 
$
5,794,541

 
$

 
$
5,787,188

 
$

 
$
5,787,188

Short-term borrowings
 
$
24,813

 
$

 
$
24,813

 
$

 
$
24,813

FHLB advances
 
$
323,323

 
$

 
$
336,741

 
$

 
$
336,741

Repurchase agreements (1)
 
$
50,000

 
$

 
$
105,269

 
$

 
$
105,269

Long-term debt
 
$
176,513

 
$

 
$
139,649

 
$

 
$
139,649

Accrued interest payable
 
$
11,017

 
$

 
$
11,017

 
$

 
$
11,017

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of September 30, 2017, $400.0 million out of $450.0 million of repurchase agreements were eligible for netting against resale agreements.


20



 
($ in thousands)
 
December 31, 2016
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,878,503

 
$
1,878,503

 
$

 
$

 
$
1,878,503

Interest-bearing deposits with banks
 
$
323,148

 
$

 
$
323,148

 
$

 
$
323,148

Resale agreements (1)
 
$
2,000,000

 
$

 
$
1,980,457

 
$

 
$
1,980,457

Held-to-maturity investment security
 
$
143,971

 
$

 
$

 
$
144,593

 
$
144,593

Restricted equity securities
 
$
72,775

 
$

 
$
72,775

 
$

 
$
72,775

Loans held-for-sale
 
$
23,076

 
$

 
$
23,076

 
$

 
$
23,076

Loans held-for-investment, net
 
$
25,242,619

 
$

 
$

 
$
24,915,143

 
$
24,915,143

Accrued interest receivable
 
$
100,524

 
$

 
$
100,524

 
$

 
$
100,524

Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Customer deposits:
 
 

 
 

 
 

 
 

 
 

Demand, checking, savings and money market deposits
 
$
24,275,714

 
$

 
$
24,275,714

 
$

 
$
24,275,714

Time deposits
 
$
5,615,269

 
$

 
$
5,611,746

 
$

 
$
5,611,746

Short-term borrowings
 
$
60,050

 
$

 
$
60,050

 
$

 
$
60,050

FHLB advances
 
$
321,643

 
$

 
$
334,859

 
$

 
$
334,859

Repurchase agreements (1)
 
$
350,000

 
$

 
$
411,368

 
$

 
$
411,368

Long-term debt
 
$
186,327

 
$

 
$
186,670

 
$

 
$
186,670

Accrued interest payable
 
$
9,440

 
$

 
$
9,440

 
$

 
$
9,440

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of December 31, 2016, $100.0 million out of $450.0 million of repurchase agreements were eligible for netting against resale agreements.

The following is a description of the valuation methodologies and significant assumptions used to measure financial assets and liabilities at fair value, and to estimate fair value for certain financial instruments not recorded at fair value. The description also includes the level of the fair value hierarchy in which the assets or liabilities are classified.
 
Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. As such, the estimated fair value is classified as Level 1.
 
Interest-bearing Deposits with Banks — The fair value of interest-bearing deposits with banks generally approximates their book value due to their short maturities.  In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
 
Resale Agreements — The fair value of resale agreements is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates.  In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Held-to-Maturity Investment Security — The held-to-maturity investment security as of December 31, 2016 was comprised of a floating rate non-agency commercial mortgage-backed security that was subsequently transferred from held-to-maturity to available-for-sale during the three months ended September 30, 2017. This security was categorized under Available-for-sale investment securities — other securities as of September 30, 2017. The fair value of this security is estimated by discounting the future expected cash flows utilizing the underlying index and a discount margin. Other unobservable inputs include conditional prepayment rate, constant default rate and loss severity. Due to the significant unobservable inputs used in estimating the fair value, this security is classified as Level 3.
 
Available-for-Sale Investment Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investment securities, which are classified as Level 1.  Level 1 available-for-sale investment securities are primarily comprised of U.S. Treasury securities.  Other than the non-agency commercial mortgage-backed security, the fair value of which is described above, the fair value of other available-for-sale investment securities are generally determined by independent external pricing service providers who have experience in valuing these securities or by the average quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company reviewed the methodologies used to develop the resulting fair values.  The available-for-sale investment securities valued using such methods are classified as Level 2.
 

21



Loans Held-for-Sale — The Company’s loans held-for-sale are carried at the lower of cost or fair value. Loans held-for-sale were comprised of single-family residential loans as of September 30, 2017, and were primarily comprised of consumer loans as of December 31, 2016. The fair value of loans held-for-sale is derived from current market prices and comparative current sales. The Company records any fair value adjustments on a nonrecurring basis. Loans held-for-sale are classified as Level 2.
 
Non-PCI Impaired Loans — The fair value of non-PCI impaired loans is measured using the market comparables or discounted cash flow techniques. For CRE and C&I loans, the fair value is based on each loan’s observable market price or the fair value of the collateral less cost to sell, if the loan is collateral dependent. The fair value of collateral is generally based on third party appraisals (or internal evaluation if third party appraisal is not required by regulations) which utilize one or more valuation techniques (income, market and/or cost approaches). All third party appraisals and evaluations are reviewed and validated by independent appraisers or the Company’s appraisal department staffed by licensed appraisers and/or experienced real estate reviewers. The third party appraisals are ordered through the appraisal department (except for one-to-four unit residential appraisals which are typically ordered through an approved appraisal management company or an approved residential appraiser) at the inception, renewal or, for all real estate related loans, upon the occurrence of any events causing a downgrade to an adverse grade (i.e., “substandard” or “doubtful”). Updated appraisals and evaluations are generally obtained within the last 12 months. The Company increases the frequency of obtaining updated appraisals for adversely graded credits when declining market conditions exist. All appraisals include an “as is” market value without conditions as of the effective date of the appraisal. For certain impaired loans, the Company utilizes the discounted cash flow approach and applies a discount derived from historical data. The significant unobservable inputs used in the fair value measurement of non-PCI impaired loans are discounts applied based on the liquidation cost of collateral and selling cost. On a quarterly basis, all nonperforming assets are reviewed to assess whether the current carrying value is supported by the collateral or cash flow and to ensure that the current carrying value is appropriate. Non-PCI impaired loans are classified as Level 3.
 
Loans Held-for-Investment, net — The fair value of loans held-for-investment other than non-PCI impaired loans is determined based on a discounted cash flow approach considered for an exit price value. The discount rate is derived from the associated yield curve plus spreads that reflect the rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within any of the loan portfolios. It is management’s opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair value adjustment of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 3.
 
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment, which are recorded at estimated fair value less cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less the cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals or accepted written offers. Refer to the Non-PCI Impaired Loans section above for a detailed discussion on the Company’s policies and procedures related to appraisals and evaluations. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. The significant unobservable input used is the selling cost. OREO properties are classified as Level 3.

Restricted Equity Securities — Restricted equity securities are comprised of Federal Reserve Bank stock and FHLB stock. Ownership of these securities is restricted to member banks and these securities do not have a readily determinable fair value.  Purchases and sales of these securities are at par value. The carrying amounts of the Company’s restricted equity securities approximate fair value. The valuation of these investments is classified as Level 2.
 
Accrued Interest Receivable — The carrying amount approximates fair value due to the short-term nature of these instruments. Considering the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.


22



Interest Rate Swaps and Options — The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option products offered to bank customers. These products allow borrowers to lock in attractive intermediate and long-term interest rates by entering into an interest rate swap or option contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments).  The variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves.  The fair value of the interest rate options, consisting of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps).  The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. In addition, to comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, model-derived credit spreads. As of September 30, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative instruments as Level 2 of the fair value hierarchy due to the observable nature of the significant inputs utilized.
 
Foreign Exchange Contracts — The Company enters into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future.  These contracts economically hedge against foreign exchange rate fluctuations. The Company also enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company assumes minimal foreign exchange rate risk because the contracts with the customer and the institutional party mirror each other. The fair value is determined at each reporting period based on changes in the foreign exchange rate. These are over-the-counter contracts where quoted market prices are not readily available.  Valuation is measured using conventional valuation methodologies with observable market data.  Valuation depends on the type of derivative, and the nature of the underlying rate and contractual terms including period of maturity, price and index upon which the derivative’s value is based. Key inputs include foreign exchange rates (spot and/or forward rates), volatility of currencies and the correlation of such inputs. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts is classified as Level 2. As of September 30, 2017, foreign exchange forward contracts used to economically hedge the Company’s net investment in East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China, are included in this caption. See Foreign Currency Forward Contracts in the section below for details on valuation methodologies and significant assumptions.
 
Customer Deposits — The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking, savings and money market deposits, approximates the carrying amount as these deposits are payable on demand at the measurement date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. For time deposits, the fair value is based on the discounted value of contractual cash flows using current market rates for instruments with similar maturities. Due to the observable nature of the inputs used in deriving the estimated fair value, time deposits are classified as Level 2.

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

Repurchase Agreements — The fair value of the repurchase agreements is calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
 
Accrued Interest Payable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
 

23



Long-Term Debt — The fair value of long-term debt is estimated by discounting the cash flows through maturity based on current market rates the Company would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value, long-term debt is classified as Level 2.
 
Foreign Currency Forward Contracts — During the three months ended December 31, 2015, the Company began entering into foreign currency forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited. Previously, the foreign currency forward contracts were eligible for hedge accounting. During the nine months ended September 30, 2017, the foreign currency forward contracts were dedesignated when the hedge relationship ceased to be highly effective. The Company continues to economically hedge its foreign currency exposure resulting from East West Bank (China) Limited and the foreign currency forward contracts are included as part of the “Foreign Exchange Contracts” caption as of September 30, 2017. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Inputs include spot rates, forward rates and the interest rate curves of the domestic and foreign currency. Interest rate forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

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

Warrants — The Company obtained warrants to purchase preferred and common stock of technology and life sciences companies as part of the loan origination process. As of September 30, 2017, the warrants included on the Consolidated Financial Statements were from public and private companies. The Company valued these warrants based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The option volatility assumption was based on public market indices that include members that operate in similar industries as the companies in our private company portfolio. The model values were further adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. There is a direct correlation between changes in the volatility assumption and the fair value measurement of warrants from private companies, while there is an inverse correlation between changes in the liquidity discount assumption and the fair value measurement of warrants from private companies. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a sensitivity analysis on the option volatility and liquidity discount assumptions is performed.

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


Note 5 Securities Purchased under Resale Agreements and Sold under Repurchase Agreements

Resale Agreements

Resale agreements are recorded at the balances at which the securities were acquired. The market values of the underlying securities collateralizing the related receivable of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterparty when deemed appropriate. Gross resale agreements were $1.65 billion and $2.10 billion as of September 30, 2017 and December 31, 2016, respectively. The weighted average interest rates were 2.30% and 1.84% as of September 30, 2017 and December 31, 2016, respectively.
 

24



Repurchase Agreements

Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded at the balances at which the securities were sold. The collateral for the repurchase agreements is primarily comprised of U.S. Treasury securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, and U.S. government agency and U.S. government sponsored enterprise debt securities. The Company may have to provide additional collateral for the repurchase agreements, as necessary. Gross repurchase agreements were $450.0 million as of each of September 30, 2017 and December 31, 2016. The weighted average interest rates were 3.56% and 3.15% as of September 30, 2017 and December 31, 2016, respectively.

Balance Sheet Offsetting
 
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheets when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45. Collateral accepted includes securities that are not recognized on the Consolidated Balance Sheets. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheets against the related collateralized liability. Collateral accepted or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, but is usually delivered to and held by the third party trustees. The collateral amounts received/posted are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.


25



The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016:
 
($ in thousands)
 
As of September 30, 2017
 
 
Gross
Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Pledged
 
Net Amount
Resale agreements
 
$
1,650,000

 
$
(400,000
)
 
$
1,250,000

 
$

 
$
(1,240,568
)
(2) 
$
9,432

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

 
$
(400,000
)
 
$
50,000

 
$

 
$
(50,000
)
(3) 
$

 
 
($ in thousands)
 
As of December 31, 2016
 
 
Gross
Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheets
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset on the
Consolidated Balance Sheets
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Pledged
 
Net Amount
Resale agreements
 
$
2,100,000

 
$
(100,000
)
 
$
2,000,000

 
$
(150,000
)
(1) 
$
(1,839,120
)
(2) 
$
10,880

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

 
$
(100,000
)
 
$
350,000

 
$
(150,000
)
(1) 
$
(200,000
)
(3) 
$

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

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives, refer to Note 7 Derivatives to the Consolidated Financial Statements for additional information.



26



Note 6Securities

The following tables present the amortized cost, gross unrealized gains and losses and fair value by major categories of available-for-sale investment securities, which are carried at fair value, and the held-to-maturity investment security, which is carried at amortized cost, as of September 30, 2017 and December 31, 2016:
 
 
 
As of September 30, 2017
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
533,035

 
$

 
$
(6,703
)
 
$
526,332

U.S. government agency and U.S. government sponsored enterprise debt securities
 
191,727

 
81

 
(2,623
)
 
189,185

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
321,943

 
326

 
(7,097
)
 
315,172

Residential mortgage-backed securities
 
1,154,026

 
4,790

 
(7,882
)
 
1,150,934

Municipal securities
 
116,798

 
900

 
(456
)
 
117,242

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
9,680

 
21

 
(7
)
 
9,694

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
2,464

 

 
(137
)
 
2,327

Non-investment grade (1)
 
10,191

 

 
(576
)
 
9,615

Foreign bonds:
 
 
 
 
 
 
 


Investment grade (1) (2)
 
505,395

 
229

 
(16,484
)
 
489,140

Other securities  (3)
 
147,504

 
3

 
(372
)
 
147,135

Total available-for-sale investment securities
 
$
2,992,763

 
$
6,350

 
$
(42,337
)
 
$
2,956,776

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

 
$

 
$

 
$

Total investment securities
 
$
2,992,763

 
$
6,350

 
$
(42,337
)
 
$
2,956,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
730,287

 
$
21

 
$
(9,829
)
 
$
720,479

U.S. government agency and U.S. government sponsored enterprise debt securities
 
277,891

 
224

 
(3,249
)
 
274,866

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

 
 

 
 

 
 

Commercial mortgage-backed securities
 
272,672

 
345

 
(6,218
)
 
266,799

Residential mortgage-backed securities
 
1,266,372

 
3,924

 
(11,549
)
 
1,258,747

Municipal securities
 
148,302

 
1,252

 
(1,900
)
 
147,654

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
11,592

 

 
(115
)
 
11,477

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
222,190

 
562

 
(375
)
 
222,377

Non-investment grade (1)
 
10,191

 

 
(1,018
)
 
9,173

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade (1) (2)
 
405,443

 
30

 
(21,579
)
 
383,894

Other securities
 
40,501

 
337

 
(509
)
 
40,329

Total available-for-sale investment securities
 
$
3,385,441

 
$
6,695

 
$
(56,341
)
 
$
3,335,795

Held-to-maturity investment security:
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed security (3)
 
$
143,971

 
$
622

 
$

 
$
144,593

Total investment securities
 
$
3,529,412

 
$
7,317

 
$
(56,341
)
 
$
3,480,388

 
 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities rated BBB- or higher by Standard &Poor’s (“S&P”) or Baa3 or higher by Moody’s are considered investment grade.  Conversely, available-for-sale investment securities rated lower than BBB- by S&P or lower than Baa3 by Moody’s are considered non-investment grade. Classifications are based on the lower of the credit ratings by S&P or Moody’s.
(2)
Fair values of foreign bonds include $458.9 million and $353.6 million of multilateral development bank bonds as of September 30, 2017 and December 31, 2016, respectively.
(3)
During the third quarter of 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale.


27



Unrealized Losses

The following tables present the gross unrealized losses and related fair values of the Company’s investment portfolio, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2017 and December 31, 2016:
 
 
 
As of September 30, 2017
($ in thousands)
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Available-for-sale investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury securities
 
$
415,507

 
$
(4,615
)
 
$
110,825

 
$
(2,088
)
 
$
526,332

 
$
(6,703
)
U.S. government agency and U.S. government sponsored enterprise debt securities
 
96,681

 
(367
)
 
54,512

 
(2,256
)
 
151,193

 
(2,623
)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial mortgage-backed securities
 
120,070

 
(1,721
)
 
155,128

 
(5,376
)
 
275,198

 
(7,097
)
Residential mortgage-backed securities
 
365,038

 
(2,344
)
 
288,768

 
(5,538
)
 
653,806

 
(7,882
)
Municipal securities
 
22,010

 
(222
)
 
11,256

 
(234
)
 
33,266

 
(456
)
Non-agency residential mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Investment grade
 
4,715

 
(7
)
 

 

 
4,715

 
(7
)
Corporate debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Investment grade
 

 

 
2,327

 
(137
)
 
2,327

 
(137
)
Non-investment grade
 

 

 
9,615

 
(576
)
 
9,615

 
(576
)
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
73,619

 
(873
)
 
344,298

 
(15,611
)
 
417,917

 
(16,484
)
Other securities
 
31,223

 
(372
)
 

 

 
31,223

 
(372
)
Total available-for-sale investment securities
 
$
1,128,863

 
$
(10,521
)
 
$
976,729

 
$
(31,816
)
 
$
2,105,592

 
$
(42,337
)
Held-to-maturity investment security:
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed security
 
$

 
$

 
$

 
$

 
$

 
$

Total investment securities
 
$
1,128,863

 
$
(10,521