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 March 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

 

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: 144,484,091 shares as of April 30, 2017.

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TABLE OF CONTENTS

			Page
PART I — FINANCIAL INFORMATION			5
	Item 1.	Consolidated Financial Statements	5
		Consolidated Balance Sheets	5
		Consolidated Statements of Income (Unaudited)	6
		Consolidated Statements of Comprehensive Income (Unaudited)	7
		Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	8
		Consolidated Statements of Cash Flows (Unaudited)	9
		Notes to Consolidated Financial Statements (Unaudited)	11
		1 — Basis of Presentation	11
		2 — Current Accounting Developments	11
		3 — Disposition of Commercial Property	14
		4 — Fair Value Measurement and Fair Value of Financial Instruments	14
		5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements	22
		6 — Securities	24
		7 — Derivatives	27
		8 — Loans Receivable and Allowance for Credit Losses	32
		9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net	43
		10 — Goodwill and Other Intangible Assets	44
		11 — Commitments and Contingencies	45
		12 — Stock Compensation Plans	46
		13 — Stockholders’ Equity and Earnings Per Share	47
		14 — Accumulated Other Comprehensive Income (Loss)	48
		15 — Business Segments	49
		16 — Subsequent Events	50
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
		Overview	51
		Results of Operations	52
		Balance Sheet Analysis	61
		Off-Balance Sheet Arrangements	74
		Asset Liability and Market Risk Management	75
		Critical Accounting Policies and Estimates	79
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79
	Item 4.	Controls and Procedures	80
PART II — OTHER INFORMATION			81
	Item 1.	Legal Proceedings	81
	Item 1A.	Risk Factors	81
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
	Item 6.	Exhibits	81
GLOSSARY OF ACRONYMS			82
SIGNATURE			83
EXHIBT INDEX			84

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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”, “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, 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, 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 retail customers;

•	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 increases and spending cuts;

•	impact of adverse judgments or settlements in litigation;

•	impact of regulatory enforcement actions;

•	changes in the Company’s ability to receive dividends from its subsidiaries;

•	impact of political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;

•	impact of natural or man-made disasters or calamities or conflicts;

•	continuing consolidation in the financial services industry;

•	the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;

•	impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Company’s business, business practices and cost of operations;

•	impact of adverse changes to the Company’s credit ratings from the major credit rating agencies;

3

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•	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

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except shares)

		March 31, 2017				December 31, 2016
		(Unaudited)
ASSETS
Cash and due from banks		$	346,005			$	460,559
Interest-bearing cash with banks		2,088,638				1,417,944
Cash and cash equivalents		2,434,643				1,878,503
Interest-bearing deposits with banks		249,849				323,148
Securities purchased under resale agreements (“resale agreements”)		1,650,000				2,000,000
Securities :
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $640,853 in 2017 and $767,437 in 2016)		2,962,034				3,335,795
Held-to-maturity investment security, at cost (fair value of $133,656 in 2017 and $144,593 in 2016)		132,497				143,971
Restricted equity securities, at cost		73,019				72,775
Loans held-for-sale		28,931				23,076
Loans held-for-investment (net of allowance for loan losses of $263,094 in 2017 and $260,520 in 2016; includes assets pledged as collateral of $17,159,894 in 2017 and $16,441,068 in 2016)		26,198,198				25,242,619
Investments in qualified affordable housing partnerships, net		176,965				183,917
Investments in tax credit and other investments, net		177,023				173,280
Premises and equipment (net of accumulated depreciation of $103,933 in 2017 and $114,890 in 2016)		128,002				159,923
Goodwill		469,433				469,433
Other assets		661,532				782,400
TOTAL		$	35,342,126			$	34,788,840
LIABILITIES
Customer deposits:
Noninterest-bearing		$	10,658,946			$	10,183,946
Interest-bearing		19,884,029				19,707,037
Total deposits		30,542,975				29,890,983
Short-term borrowings		42,023				60,050
Federal Home Loan Bank (“FHLB”) advances		322,196				321,643
Securities sold under repurchase agreements (“repurchase agreements”)		200,000				350,000
Long-term debt		181,388				186,327
Accrued expenses and other liabilities		487,590				552,096
Total liabilities		31,776,172				31,361,099
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 165,119,710 and 164,604,072 shares issued in 2017 and 2016, respectively.		164				164
Additional paid-in capital		1,732,585				1,727,434
Retained earnings		2,328,264				2,187,676
Treasury stock at cost — 20,658,144 shares in 2017 and 20,436,621 shares in 2016.		(451,541		)		(439,387		)
Accumulated other comprehensive loss (“AOCI”), net of tax		(43,518		)		(48,146		)
Total stockholders’ equity		3,565,954				3,427,741
TOTAL		$	35,342,126			$	34,788,840

See accompanying Notes to Consolidated Financial Statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

($ and shares in thousands, except per share data)

(Unaudited)

		Three Months Ended March 31,
		2017				2016
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees		$	272,061			$	253,542
Investment securities		15,247				11,193
Resale agreements		9,468				6,677
Restricted equity securities		777				795
Interest-bearing cash and deposits with banks		5,116				3,965
Total interest and dividend income		302,669				276,172
INTEREST EXPENSE
Customer deposits		23,672				19,297
Federal funds purchased and other short-term borrowings		413				9
FHLB advances		2,030				1,500
Repurchase agreements		3,143				1,926
Long-term debt		1,289				1,236
Total interest expense		30,547				23,968
Net interest income before provision for credit losses		272,122				252,204
Provision for credit losses		7,068				1,440
Net interest income after provision for credit losses		265,054				250,764
NONINTEREST INCOME
Branch fees		10,296				10,222
Letters of credit fees and foreign exchange income		11,069				9,553
Ancillary loan fees		4,982				3,577
Wealth management fees		4,530				3,051
Derivative fees and other income		2,506				2,543
Net gains on sales of loans		2,754				1,927
Net gains on sales of available-for-sale investment securities		2,474				3,842
Net gains on sales of fixed assets		72,007				189
Other fees and operating income		5,405				5,609
Total noninterest income		116,023				40,513
NONINTEREST EXPENSE
Compensation and employee benefits		84,603				71,837
Occupancy and equipment expense		15,640				14,415
Deposit insurance premiums and regulatory assessments		5,929				5,418
Legal expense		3,062				3,007
Data processing		2,947				2,688
Consulting expense		1,919				8,452
Deposit related expenses		2,365				2,320
Computer software expense		3,968				2,741
Other operating expense		16,463				19,469
Amortization of tax credit and other investments		14,360				14,155
Amortization of core deposit intangibles		1,817				2,104
Total noninterest expense		153,073				146,606
INCOME BEFORE INCOME TAXES		228,004				144,671
INCOME TAX EXPENSE		58,268				37,155
NET INCOME		$	169,736			$	107,516
EARNINGS PER SHARE (“EPS”)
BASIC		$	1.18			$	0.75
DILUTED		$	1.16			$	0.74
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC		144,249				143,958
DILUTED		145,732				144,803
DIVIDENDS DECLARED PER COMMON SHARE		$	0.20			$	0.20

See accompanying Notes to Consolidated Financial Statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

(Unaudited)

		Three Months Ended March 31,
		2017				2016
Net income		$	169,736			$	107,516
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities		3,621				12,916
Foreign currency translation adjustments		1,007				(33		)
Other comprehensive income		4,628				12,883
COMPREHENSIVE INCOME		$	174,364			$	120,399

See accompanying Notes to Consolidated Financial Statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands, except share data)

(Unaudited)

		Common Stock and Additional Paid-in Capital							Retained Earnings				Treasury Stock				AOCI, Net of Tax				Total Stockholders’ Equity
		Shares			Amount
BALANCE, JANUARY 1, 2016		143,909,233			$	1,701,459			$	1,872,594			$	(436,162	)		$	(14,941	)		$	3,122,950
Net income		—			—				107,516				—				—				107,516
Other comprehensive income		—			—				—				—				12,883				12,883
Stock compensation costs		—			4,575				—				—				—				4,575
Net activity of common stock pursuant to various stock compensation plans and agreements, and related tax benefits		154,518			986				—				(3,054		)		—				(2,068		)
Common stock dividends		—			—				(29,075		)		—				—				(29,075		)
BALANCE, MARCH 31, 2016		144,063,751			$	1,707,020			$	1,951,035			$	(439,216	)		$	(2,058	)		$	3,216,781
BALANCE, JANUARY 1, 2017		144,167,451			$	1,727,598			$	2,187,676			$	(439,387	)		$	(48,146	)		$	3,427,741
Net income		—			—				169,736				—				—				169,736
Other comprehensive income		—			—				—				—				4,628				4,628
Stock compensation costs		—			5,151				—				—				—				5,151
Net activity of common stock pursuant to various stock compensation plans and agreements		294,115			—				—				(12,154		)		—				(12,154		)
Common stock dividends		—			—				(29,148		)		—				—				(29,148		)
BALANCE, MARCH 31, 2017		144,461,566			$	1,732,749			$	2,328,264			$	(451,541	)		$	(43,518	)		$	3,565,954

See accompanying Notes to Consolidated Financial Statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

		Three Months Ended March 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	169,736			$	107,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		33,061				28,613
Accretion of discount and amortization of premiums, net		(4,931		)		(15,855		)
Stock compensation costs		5,151				4,575
Deferred tax expenses		2,295				3,718
Provision for credit losses		7,068				1,440
Net gains on sales of loans		(2,754		)		(1,927		)
Net gains on sales of available-for-sale investment securities		(2,474		)		(3,842		)
Net gains on sales of premises and equipment		(72,007		)		(189		)
Originations and purchases of loans held-for-sale		(4,287		)		(1,403		)
Proceeds from sales and paydowns/payoffs in loans held-for-sale		4,773				2,229
Net change in accrued interest receivable and other assets		93,501				2,057
Net change in accrued expenses and other liabilities		(37,791		)		57,957
Other net operating activities		(6,064		)		(1,339		)
Total adjustments		15,541				76,034
Net cash provided by operating activities		185,277				183,550
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in:
Loans held-for-investment		(1,085,449		)		(165,726		)
Interest-bearing deposits with banks		75,140				(3,531		)
Investments in qualified affordable housing partnerships, tax credit and other investments		(38,354		)		(8,390		)
Purchases of:
Resale agreements		(200,000		)		(1,000,000		)
Available-for-sale investment securities		(50,936		)		(223,873		)
Loans held-for-investment		(147,242		)		(239,399		)
Premises and equipment		(1,191		)		(2,259		)
Proceeds from sale of:
Available-for-sale investment securities		302,656				652,753
Loans held-for-investment		276,643				151,832
OREO		3,958				384
Premises and equipment		116,021				—
Paydowns and maturities of resale agreements		400,000				1,000,000
Repayments, maturities and redemptions of available-for-sale investment securities		125,006				158,268
Other net investing activities		11,345				10,467
Net cash (used in) provided by investing activities		(212,403		)		330,526
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in:
Customer deposits		646,188				1,116,272
Short-term borrowings		(18,524		)		9,962
Payments for:
Repayment of FHLB advances		—				(700,000		)
Repayment of long-term debt		(5,000		)		(5,000		)
Repurchase of vested shares due to employee tax liability		(12,154		)		(3,054		)
Cash dividends on common stocks		(30,039		)		(29,325		)
Other net financing activities		—				986
Net cash provided by financing activities		580,471				389,841
Effect of exchange rate changes on cash and cash equivalents		2,795				493
NET INCREASE IN CASH AND CASH EQUIVALENTS		556,140				904,410
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,878,503				1,360,887
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	2,434,643			$	2,265,297

See accompanying Notes to Consolidated Financial Statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

		Three Months Ended March 31,
		2017				2016
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest		$	30,361			$	24,309
Income tax refunds, net		$	(230	)		$	(28,509	)
Noncash investing and financing activities:
Loans held-for-investment transferred to loans held-for-sale, net		$	278,024			$	308,722
Held-to-maturity investment security retained from securitization of loans		$	—			$	160,135
Dividends payable		$	891			$	250

See accompanying Notes to Consolidated Financial Statements.

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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, East West Insurance Services, Inc., and various subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of March 31, 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 financial statements. Certain items on the Consolidated Financial Statements and notes for the prior years 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 financial statements are issued for inclusion in the accompanying 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 2 — Current 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 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.

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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 statement of cash flows. The Company adopted ASU 2016-09 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. Net excess tax benefits for restricted stock units (“RSUs”) of approximately $4.4 million were recognized by the Company as a component of Income tax expense on the Consolidated Statements of Income during the first quarter of 2017. This change 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 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 on the Consolidated Statements of Cash Flows. These changes were applied on a prospective basis. The adoption of ASU 2016-09 will result in increased volatility to the Company’s income tax expense but is not expected to 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 RSUs vest, which occur primarily in the first quarter of each year. The Company has 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). The new guidance replaces existing revenue recognition guidance for contracts to provide goods or services to customers.  ASU 2014-09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company’s 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 conducted a comprehensive scoping exercise to determine the revenue streams that are in the scope of these updates. Preliminary results indicate that certain noninterest income financial statement line items may contain revenue streams that are in the scope of these updates. The Company’s next implementation efforts include identifying contracts within the scope of the new guidance and assessing the related noninterest income revenues to determine if any accounting or internal control changes will be required under the provisions of the new guidance. The Company continues to evaluate the impact of ASU 2014-09 on our noninterest income and on our presentation and 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. ASU 2016-01 requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the Consolidated Balance Sheets or in the footnotes. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in Other Comprehensive Income. The Company has not elected to measure any of its liabilities at fair value, and therefore, this aspect of the guidance is not applicable to us. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted except for certain specific changes under the fair value option guidance. To adopt the amendments, the Company is required to make a cumulative effect adjustment to the Consolidated Balance Sheets as of the beginning of the fiscal year in which the guidance is effective. However, the amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the adoption date. The Company is currently evaluating the impact on its Consolidated Financial Statements.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. ASU 2016-02 requires lessees to recognize all leases longer than 12 months on the Consolidated Balance Sheet as lease assets and lease liabilities and provide quantitative and qualitative disclosures regarding key information about 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 for interim and annual reporting periods beginning after December 15, 2018 with modified retrospective application. Early adoption is permitted. 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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to introduce a new approach based on expected losses to estimate credit losses on certain types of financial instruments, which modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new “expected credit loss” impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, 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 loans and lease losses and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Earlier adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 began its implementation efforts by identifying key interpretive issues, and 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 Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on the classification of certain cash receipts and payments on the Consolidated Statements of Cash Flows in order to reduce diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance requires application using a retrospective transition method. Early adoption is permitted. 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 in its cash and cash equivalents balances on the Statements of Cash Flows those amounts that are deemed to be restricted cash and restricted cash equivalents. In addition, the Company is required to explain the changes in the combined total of restricted and unrestricted balances on the Statements of Cash Flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, where the guidance should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the impact on its Consolidated Financial Statements.

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. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years 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 is currently evaluating the impact on its Consolidated Financial Statements.

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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. Therefore, entities will no longer recognize a loss in earnings upon the debtor’s exercise of a call on a purchased callable debt security held at a premium. The ASU does not require any accounting change 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 for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Entities must apply a modified retrospective approach, with the cumulative effect adjustment recognized to retained earnings as of the beginning of the period of adoption. Entities are also required to provide disclosures about a change in accounting principle in the period of adoption. The Company is currently evaluating the impact on its Consolidated Financial Statements.

Note 3 — Disposition of Commercial Property

In the first quarter of 2017, the Company completed the sale and leaseback of a commercial property in San Francisco, California for a sale price of $120.6 million and entered into a lease agreement for part of the property, including a retail branch and office facilities. The total pre-tax profit from the sale was $85.4 million with $71.7 million recognized in the first quarter of 2017 and $13.7 million to be deferred 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.

Note 4 — Fair Value Measurement and Fair Value of Financial Instruments

 

In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:

•	Level 1	—	Valuation is based on quoted prices for identical instruments traded in active markets.
•	Level 2	—	Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
•	Level 3	—	Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

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

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The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of March 31, 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		$	700,860			$	700,860			$	—			$	—
U.S. government agency and U.S. government sponsored enterprise debt securities		180,863				—				180,863				—
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		264,522				—				264,522				—
Residential mortgage-backed securities		1,179,755				—				1,179,755				—
Municipal securities		147,069				—				147,069				—
Non-agency residential mortgage-backed securities:
Investment grade		10,730				—				10,730				—
Corporate debt securities:
Investment grade		2,254				—				2,254				—
Non-investment grade		9,184				—				9,184				—
Foreign bonds:
Investment grade		425,868				—				425,868				—
Other securities		40,929				31,075				9,854				—
Total available-for-sale investment securities		$	2,962,034			$	731,935			$	2,230,099			$	—
Derivative assets:
Interest rate swaps and options		$	61,586			$	—			$	61,586			$	—
Foreign exchange contracts		$	8,220			$	—			$	8,220			$	—
Credit risk participation agreements (“RPAs”)		$	3			$	—			$	3			$	—
Derivative liabilities:
Interest rate swaps on certificates of deposit		$	(6,793	)		$	—			$	(6,793	)		$	—
Interest rate swaps and options		$	(60,204	)		$	—			$	(60,204	)		$	—
Foreign exchange contracts		$	(7,357	)		$	—			$	(7,357	)		$	—
RPAs		$	(2	)		$	—			$	(2	)		$	—

 

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		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			$	—
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	)		$	—

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 March 31, 2017 and December 31, 2016, and during the three months ended March 31, 2017 and 2016.

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 in and out of Level 1, Level 2 and Level 3 during the three months ended March 31, 2017 and 2016.

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.

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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:

		Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 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”)		$	10,042			$	—			$	—			$	10,042
Commercial and industrial (“C&I”)		47,829				—				—				47,829
Residential		2,522				—				—				2,522
Consumer		610				—				—				610
Total non-PCI impaired loans		$	61,003			$	—			$	—			$	61,003
OREO		$	70			$	—			$	—			$	70

		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 months ended and which were included on the Consolidated Balance Sheets as of March 31, 2017 and 2016:

		Three Months Ended March 31,
($ in thousands)		2017				2016
Non-PCI impaired loans:
CRE		$	(64	)		$	2,178
C&I		32				(1,935		)
Residential		82				(83		)
Consumer		(1		)		3
Total non-PCI impaired loans		$	49			$	163
OREO		$	(285	)		$	(461	)
Loans held-for-sale		$	—			$	(2,351	)

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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 March 31, 2017 and December 31, 2016:

($ in thousands)		Fair Value Measurements (Level 3)				Valuation Technique(s)		Unobservable Input(s)		Range of Inputs		Weighted  Average
March 31, 2017
Non-PCI impaired loans		$	31,453			Discounted cash flow		Discount		0% — 74%		11%
		$	29,550			Market comparables		Discount (1)		0% — 100%		7%
OREO		$	70			Appraisal		Selling cost		8%		8%
December 31, 2016
Non-PCI impaired loans		$	31,835			Discounted cash flow		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 March 31, 2017 and December 31, 2016:

($ in thousands)		March 31, 2017
		Carrying Amount				Level 1				Level 2				Level 3				Estimated Fair Value
Financial assets:
Cash and cash equivalents		$	2,434,643			$	2,434,643			$	—			$	—			$	2,434,643
Interest-bearing deposits with banks		$	249,849			$	—			$	249,849			$	—			$	249,849
Resale agreements (1)		$	1,650,000			$	—			$	1,628,839			$	—			$	1,628,839
Held-to-maturity investment security		$	132,497			$	—			$	—			$	133,656			$	133,656
Loans held-for-sale		$	28,931			$	—			$	28,931			$	—			$	28,931
Loans held-for-investment, net		$	26,198,198			$	—			$	—			$	25,825,039			$	25,825,039
Restricted equity securities		$	73,019			$	—			$	73,019			$	—			$	73,019
Accrued interest receivable		$	102,067			$	—			$	102,067			$	—			$	102,067
Financial liabilities:
Customer deposits:
Demand, interest checking, savings and money market deposits		$	24,700,811			$	—			$	24,700,811			$	—			$	24,700,811
Time deposits		$	5,842,164			$	—			$	5,837,924			$	—			$	5,837,924
Short-term borrowings		$	42,023			$	—			$	42,023			$	—			$	42,023
FHLB advances		$	322,196			$	—			$	336,619			$	—			$	336,619
Repurchase agreements (1)		$	200,000			$	—			$	260,545			$	—			$	260,545
Long-term debt		$	181,388			$	—			$	182,502			$	—			$	182,502
Accrued interest payable		$	9,626			$	—			$	9,626			$	—			$	9,626

(1)	Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of March 31, 2017, $250.0 million out of $450.0 million of repurchase agreements was eligible for netting against resale agreements.

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($ in thousands)		December 31, 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
Loans held-for-sale		$	23,076			$	—			$	23,076			$	—			$	23,076
Loans held-for-investment, net		$	25,242,619			$	—			$	—			$	24,915,143			$	24,915,143
Restricted equity securities		$	72,775			$	—			$	72,775			$	—			$	72,775
Accrued interest receivable		$	100,524			$	—			$	100,524			$	—			$	100,524
Financial liabilities:
Customer deposits:
Demand, interest 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 was 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 fair value of the held-to-maturity investment security is determined by the discounted cash flow approach. The discount rate is derived from conditional prepayment rate, constant default rate, loss severity and discount margin. Due to the significant unobservable inputs, the held-to-maturity investment security is classified as Level 3.

 

Available-for-Sale Investment Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investment securities, which are classified as Level 1.  Level 1 available-for-sale investment securities are comprised primarily of U.S. Treasury securities.  The fair values of other available-for-sale investment securities are generally determined by independent external pricing service providers who have experience in valuing these securities or by the average quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values.  The available-for-sale investment securities valued using such methods are classified as Level 2.

 

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Loans Held-for-Sale — The Company’s loans held-for-sale are carried at the lower of cost or fair value. These loans were mainly comprised of C&I loans as of March 31, 2017 and 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. As such, 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 loans and C&I loans, the fair value is based on each loan’s observable market price or the fair value of the collateral less cost to sell, if the loan is collateral dependent. The fair value of collateral is 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 event 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 the cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less the cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals, broker price opinions or accepted written offers. Please refer to the Non-PCI Impaired Loans section above for a detailed discussion on the Company’s policies and procedures related to appraisals and evaluations. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. The Company uses the market comparable valuation technique to measure the fair value of OREO properties. The significant unobservable input used is the selling cost. OREO properties are classified as Level 3.

Restricted Equity Securities — Restricted equity securities are comprised of FHLB stock and Federal Reserve Bank stock. The carrying amounts of the Company’s restricted equity securities approximate fair value. The valuation of these investments is classified as Level 2. Ownership of these securities is restricted to member banks and the securities do not have a readily determinable fair value.  Purchases and sales of these securities are at par value.

 

Accrued Interest Receivable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

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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 March 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts’ positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative valuations in Level 2 of the fair value hierarchy due to the observable nature of the significant inputs utilized.

 

Foreign Exchange Contracts — The Company enters into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future.  These contracts economically hedge against foreign exchange rate fluctuations. The Company also enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company assumes minimal foreign exchange rate risk because the contracts with the customer and the institutional party mirror each other. The fair value is determined at each reporting period based on changes in the foreign exchange rate. These are over-the-counter contracts where quoted market prices are not readily available.  Valuation is measured using conventional valuation methodologies with observable market data.  Valuation depends on the type of derivative and the nature of the underlying rate and contractual terms including period of maturity, price and index upon which the derivative’s value is based. Key inputs include foreign exchange rates (spot and/or forward rates), volatility of currencies, and the correlation of such inputs. The counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign contracts is classified as Level 2. As of March 31, 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 demand deposits, interest checking, savings and money market deposits, approximates the carrying amount as the amounts are payable on demand at the measurement date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. For time deposits, the fair value is based on the discounted value of contractual cash flows using current market rates for instruments with similar maturities. Due to the observable nature of the inputs used in deriving the estimated fair value, time deposits are classified as Level 2.

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.

 

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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 East West Bank (China) Limited. Previously, the foreign currency forward contracts or a proportion of the forward contracts were eligible for hedge accounting. During the three months ended March 31, 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 its China subsidiary and the foreign exchange forward contracts are included as part of the “Foreign Exchange Contracts” caption as of March 31, 2017. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market exchange rate. Inputs include spot rates, forward rates, and the interest rate curve of the domestic and foreign currency. Interest rate forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

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 fall within Level 2 of the fair value hierarchy.

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

Note 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 $1.90 billion and $2.10 billion as of March 31, 2017 and December 31, 2016, respectively. The weighted average interest rates were 2.15% and 1.84% as of March 31, 2017 and December 31, 2016, respectively.

 

Repurchase Agreements

Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded at the balances at which the securities were sold. The collateral for the repurchase agreements is comprised of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. Treasury securities, and U.S. government agency and U.S. government sponsored enterprise debt securities. The Company may have to provide additional collateral for the repurchase agreements, as necessary. Gross repurchase agreements were $450.0 million as of both March 31, 2017 and December 31, 2016, respectively. The weighted average interest rates were 3.30% and 3.15% as of March 31, 2017 and December 31, 2016, respectively.

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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.

The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016:

($ in thousands)		As of March 31, 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		$	1,900,000			$	(250,000	)		$	1,650,000			$	(150,000	)	(1)	$	(1,488,939	)	(2)	$	11,061
		Gross Amounts of Recognized Liabilities				Gross Amounts Offset on the Consolidated Balance Sheets				Net Amounts of Liabilities Presented on the Consolidated Balance Sheets				Gross Amounts Not Offset on the Consolidated Balance Sheets
Liabilities														Financial Instruments				Collateral  Posted				Net Amount
Repurchase agreements		$	450,000			$	(250,000	)		$	200,000			$	(150,000	)	(1)	$	(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.

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Note 6 — Securities

The following tables present as of March 31, 2017 and December 31, 2016 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 March 31, 2017
($ in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale investment securities:
U.S. Treasury securities		$	709,332			$	10			$	(8,482	)		$	700,860
U.S. government agency and U.S. government sponsored enterprise debt securities		183,605				134				(2,876		)		180,863
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		271,025				337				(6,840		)		264,522
Residential mortgage-backed securities		1,185,382				3,855				(9,482		)		1,179,755
Municipal securities		146,559				1,909				(1,399		)		147,069
Non-agency residential mortgage-backed securities:
Investment grade (1)		10,837				—				(107		)		10,730
Corporate debt securities:
Investment grade (1)		2,476				—				(222		)		2,254
Non-investment grade (1)		10,191				—				(1,007		)		9,184
Foreign bonds:
Investment grade (1) (2)		445,433				49				(19,614		)		425,868
Other securities		40,593				853				(517		)		40,929
Total available-for-sale investment securities		$	3,005,433			$	7,147			$	(50,546	)		$	2,962,034
Held-to-maturity investment security:
Non-agency commercial mortgage-backed security		$	132,497			$	1,159			$	—			$	133,656
Total investment securities		$	3,137,930			$	8,306			$	(50,546	)		$	3,095,690
		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		$	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 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 $395.5 million and $353.6 million of multilateral development bank bonds as of March 31, 2017 and December 31, 2016, respectively.

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Unrealized Losses

The following tables present as of March 31, 2017 and December 31, 2016 the Company’s investment portfolio’s gross unrealized losses and related fair values, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

		As of March 31, 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		$	680,801			$	(8,482	)		$	—			$	—			$	680,801			$	(8,482	)
U.S. government agency and U.S. government sponsored enterprise debt securities		154,847				(2,876		)		—				—				154,847				(2,876		)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		212,706				(5,879		)		35,193				(961		)		247,899				(6,840		)
Residential mortgage-backed securities		598,526				(8,151		)		132,328				(1,331		)		730,854				(9,482		)
Municipal securities		45,327				(1,006		)		6,925				(393		)		52,252				(1,399		)
Non-agency residential mortgage-backed securities:
Investment grade		10,729				(107		)		—				—				10,729				(107		)
Corporate debt securities:
Investment grade		—				—				2,254				(222		)		2,254				(222		)
Non-investment grade		—				—				9,184				(1,007		)		9,184				(1,007		)
Foreign bonds:
Investment grade		380,530				(19,409		)		9,795				(205		)		390,325				(19,614		)
Other securities		31,013				(517		)		—				—				31,013				(517		)
Total available-for-sale investment securities		$	2,114,479			$	(46,427	)		$	195,679			$	(4,119	)		$	2,310,158			$	(50,546	)
Held-to-maturity investment security:
Non-agency commercial mortgage-backed security		$	—			$	—			$	—			$	—			$	—			$	—
Total investment securities		$	2,114,479			$	(46,427	)		$	195,679			$	(4,119	)		$	2,310,158			$	(50,546	)
		As of December 31, 2016
($ 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		$	670,268			$	(9,829	)		$	—			$	—			$	670,268			$	(9,829	)
U.S. government agency and U.S. government sponsored enterprise debt securities		203,901				(3,249		)		—				—				203,901				(3,249		)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		202,106				(5,452		)		29,201				(766		)		231,307				(6,218		)
Residential mortgage-backed securities		629,324				(9,594		)		119,603				(1,955		)		748,927				(11,549		)
Municipal securities		57,655				(1,699		)		2,692				(201		)		60,347				(1,900		)
Non-agency residential mortgage-backed securities:
Investment grade		5,033				(101		)		6,444				(14		)		11,477				(115		)
Corporate debt securities:
Investment grade		—				—				71,667				(375		)		71,667				(375		)
Non-investment grade		—				—				9,173				(1,018		)		9,173				(1,018		)
Foreign bonds:
Investment grade		363,618				(21,327		)		14,258				(252		)		377,876				(21,579		)
Other securities		30,991				(509		)		—				—				30,991				(509		)
Total available-for-sale investment securities		$	2,162,896			$	(51,760	)		$	253,038			$	(4,581	)		$	2,415,934			$	(56,341	)
Held-to-maturity investment security:
Non-agency commercial mortgage-backed security		$	—			$	—			$	—			$	—			$	—			$	—
Total investment securities		$	2,162,896			$	(51,760	)		$	253,038			$	(4,581	)		$	2,415,934			$	(56,341	)

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For each reporting period, the Company examines all individual securities that are in an unrealized loss position for OTTI.  For discussion of the factors and criteria the Company uses in analyzing securities for OTTI, see Note 1 — Summary of Significant Accounting Policies — Available-for-Sale Investment Securities to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.

The unrealized losses were primarily attributed to the yield curve movement, in addition to widened liquidity and credit spreads. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. The Company believes that the gross unrealized losses detailed in the previous tables are temporary and not due to reasons of credit quality. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, no impairment loss has been recorded on the Company’s Consolidated Statements of Income for the three months ended March 31, 2017 and 2016. As of March 31, 2017, the Company had 163 available-for-sale investment securities in an unrealized loss position with no credit impairment, primarily comprised of 13 investment grade foreign bonds, 83 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and 27 U.S. Treasury securities. In comparison, the Company had 170 available-for-sale investment securities in an unrealized loss position with no credit impairment, primarily comprised of 13 investment grade foreign bonds, 82 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and 26 U.S. Treasury securities as of December 31, 2016.

During the first quarter of 2016, the Company obtained a non-agency mortgage-backed investment security, through the securitization of multifamily real estate loans, which was classified as held-to-maturity and recorded at amortized cost. The Company has the intent and ability to hold the security to maturity.

OTTI

No OTTI credit losses were recognized for the three months ended March 31, 2017 and 2016.

Realized Gains and Losses

The following table presents the proceeds, gross realized gains and losses, and tax expense related to the sales of available-for-sale investment securities for the three months ended March 31, 2017 and 2016:

($ in thousands)		Three Months Ended March 31,
		2017				2016
Proceeds from sales		$	302,656			$	652,753
Gross realized gains		$	2,474			$	3,967
Gross realized losses		$	—			$	125
Related tax expense		$	1,040			$	1,616

Scheduled Maturities of Investment Securities

 

The following table presents the scheduled maturities of available-for-sale investment securities as of March 31, 2017:

($ in thousands)		Amortized Cost				Estimated Fair Value
Due within one year		$	519,223			$	503,271
Due after one year through five years		878,436				867,870
Due after five years through ten years		241,665				236,183
Due after ten years		1,366,109				1,354,710
Total available-for-sale investment securities		$	3,005,433			$	2,962,034

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The following table presents the scheduled maturity of the held-to-maturity investment security as of March 31, 2017:

($ in thousands)		Amortized Cost				Estimated Fair Value
Due after ten years		$	132,497			$	133,656

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

Available-for-sale investment securities with fair values of $640.9 million and $767.4 million as of March 31, 2017 and December 31, 2016, 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.

Restricted Equity Securities

Restricted equity securities include stock of the Federal Reserve Bank and the Federal Home Loan Bank. Restricted equity securities are carried at cost as these securities do not have a readily determined fair value because ownership of these shares is restricted and they lack a market. The following table presents the restricted equity securities as of March 31, 2017 and December 31, 2016:

($ in thousands)		March 31, 2017				December 31, 2016
Federal Reserve Bank stock		$	17,250			$	17,250
FHLB stock		55,769				55,525
Total		$	73,019			$	72,775

Note 7 — Derivatives

     

The Company uses derivatives to manage exposure to market risk, including interest rate risk and foreign currency risk and to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates are not significant to earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Company’s investment in its China subsidiary, East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.

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The following table presents the total notional and fair values of the Company’s derivatives as of March 31, 2017 and December 31, 2016:

($ in thousands)		March 31, 2017												December 31, 2016
		Notional Amount				Fair Value								Notional Amount				Fair Value
						Derivative Assets (1)				Derivative    Liabilities (1)								Derivative Assets (1)				Derivative    Liabilities (1)
Derivatives designated as hedging instruments:
Interest rate swaps on certificates of deposit		$	48,365			$	—			$	6,793			$	48,365			$	—			$	5,976
Foreign currency forward contracts		—				—				—				83,026				4,325				—
Total derivatives designated as hedging instruments		$	48,365