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EAST WEST BANCORP INC - Quarter Report: 2018 June (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 June 30, 2018
 
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: 144,913,002 shares as of July 31, 2018.

 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
 
 
 
June 30,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
415,653

 
$
457,181

Interest-bearing cash with banks
 
1,881,818

 
1,717,411

Cash and cash equivalents
 
2,297,471

 
2,174,592

Interest-bearing deposits with banks
 
360,900

 
398,422

Securities purchased under resale agreements (“resale agreements”)
 
975,000

 
1,050,000

Securities:
 
 
 
 
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $436,773 in 2018 and $534,327 in 2017)
 
2,707,444

 
3,016,752

Restricted equity securities, at cost
 
73,524

 
73,521

Loans held-for-sale
 
14,658

 
85

Loans held-for-investment (net of allowance for loan losses of $301,550 in 2018 and $287,128 in 2017; includes assets pledged as collateral of $19,634,818 in 2018 and $18,880,598 in 2017)
 
29,928,829

 
28,688,590

Investments in qualified affordable housing partnerships, net
 
152,556

 
162,824

Investments in tax credit and other investments, net
 
242,595

 
224,551

Premises and equipment (net of accumulated depreciation of $112,426 in 2018 and $111,898 in 2017)
 
122,072

 
121,209

Goodwill
 
465,547

 
469,433

Branch assets held-for-sale
 

 
91,318

Other assets
 
732,358

 
678,952

TOTAL
 
$
38,072,954

 
$
37,150,249

LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
10,739,333

 
$
10,887,306

Interest-bearing
 
22,036,799

 
20,727,757

Total deposits
 
32,776,132

 
31,615,063

Branch liability held-for-sale
 

 
605,111

Short-term borrowings
 
58,523

 

Federal Home Loan Bank (“FHLB”) advances
 
325,020

 
323,891

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

 
50,000

Long-term debt
 
161,704

 
171,577

Accrued expenses and other liabilities
 
587,291

 
542,656

Total liabilities
 
33,958,670

 
33,308,298

COMMITMENTS AND CONTINGENCIES (Note 11)
 


 


STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock, $0.001 par value, 200,000,000 shares authorized; 165,576,339 and 165,214,770 shares issued in 2018 and 2017, respectively
 
166

 
165

Additional paid-in capital
 
1,754,711

 
1,755,330

Retained earnings
 
2,883,201

 
2,576,302

Treasury stock, at cost — 20,671,710 shares as of both 2018 and 2017
 
(452,327
)
 
(452,327
)
Accumulated other comprehensive loss (“AOCI”), net of tax
 
(71,467
)
 
(37,519
)
Total stockholders’ equity
 
4,114,284

 
3,841,951

TOTAL
 
$
38,072,954

 
$
37,150,249

 


See accompanying Notes to Consolidated Financial Statements.

3



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 

 
 

Loans receivable, including fees
 
$
365,555

 
$
293,039

 
$
703,459

 
$
565,100

Investment securities
 
15,059

 
13,861

 
30,515

 
29,108

Resale agreements
 
7,182

 
7,853

 
14,116

 
17,321

Restricted equity securities
 
800

 
470

 
1,434

 
1,247

Interest-bearing cash and deposits with banks
 
11,715

 
7,552

 
22,660

 
12,668

Total interest and dividend income
 
400,311

 
322,775

 
772,184

 
625,444

INTEREST EXPENSE
 
 
 
 
 
 

 
 

Deposits
 
51,265

 
27,045

 
90,401

 
50,717

Federal funds purchased and other short-term borrowings
 
124

 
252

 
131

 
665

FHLB advances
 
2,552

 
1,761

 
4,812

 
3,791

Repurchase agreements
 
3,042

 
2,273

 
5,348

 
5,416

Long-term debt
 
1,649

 
1,353

 
3,120

 
2,642

Total interest expense
 
58,632

 
32,684

 
103,812

 
63,231

Net interest income before provision for credit losses

341,679

 
290,091

 
668,372

 
562,213

Provision for credit losses
 
15,536

 
10,685

 
35,754

 
17,753

Net interest income after provision for credit losses
 
326,143

 
279,406

 
632,618

 
544,460

NONINTEREST INCOME
 
 
 
 
 
 

 
 

Branch fees
 
10,140

 
10,321

 
20,570

 
20,245

Letters of credit fees and foreign exchange income
 
15,673

 
12,365

 
25,275

 
23,806

Ancillary loan fees and other income
 
5,841

 
5,907

 
11,422

 
10,889

Wealth management fees
 
4,501

 
3,381

 
7,454

 
7,716

Derivative fees and other income
 
6,570

 
3,765

 
13,260

 
6,271

Net gains on sales of loans
 
2,354

 
1,546

 
3,936

 
4,300

Net gains on sales of available-for-sale investment securities
 
210

 
2,720

 
2,339

 
5,194

Net gains on sales of fixed assets
 
1,114

 
1,042

 
2,200

 
73,049

Net gain on sale of business
 

 

 
31,470

 

Other fees and operating income
 
1,865

 
6,197

 
4,786

 
11,602

Total noninterest income
 
48,268

 
47,244

 
122,712

 
163,072

NONINTEREST EXPENSE
 
 
 
 
 
 

 
 

Compensation and employee benefits
 
93,865

 
80,744

 
189,099

 
165,347

Occupancy and equipment expense
 
16,707

 
15,554

 
33,587

 
31,194

Deposit insurance premiums and regulatory assessments
 
5,832

 
5,779

 
12,105

 
11,708

Legal expense
 
2,837

 
2,552

 
5,092

 
5,614

Data processing
 
3,327

 
3,058

 
6,728

 
6,005

Consulting expense
 
5,120

 
4,769

 
7,472

 
6,688

Deposit related expense
 
2,922

 
2,505

 
5,601

 
4,870

Computer software expense
 
5,549

 
5,462

 
10,603

 
9,430

Other operating expense
 
20,779

 
20,670

 
38,386

 
38,755

Amortization of tax credit and other investments
 
20,481

 
27,872

 
37,881

 
42,232

Total noninterest expense
 
177,419

 
168,965

 
346,554

 
321,843

INCOME BEFORE INCOME TAXES
 
196,992

 
157,685

 
408,776

 
385,689

INCOME TAX EXPENSE
 
24,643

 
39,355

 
49,395

 
97,623

NET INCOME
 
$
172,349

 
$
118,330

 
$
359,381

 
$
288,066

EARNINGS PER SHARE (“EPS”)
 
 
 
 
 
 
 
 
BASIC
 
$
1.19

 
$
0.82

 
$
2.48

 
$
2.00

DILUTED
 
$
1.18

 
$
0.81

 
$
2.46

 
$
1.98

WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
 
 
 
 
 
 
 
 
BASIC
 
144,899

 
144,485

 
144,782

 
144,368

DILUTED
 
146,091

 
145,740

 
146,046

 
145,774

CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

 



See accompanying Notes to Consolidated Financial Statements.

4



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
172,349

 
$
118,330

 
$
359,381

 
$
288,066

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Net changes in unrealized (losses) gains on available-for-sale investment securities
 
(8,841
)
 
6,201

 
(27,653
)
 
9,822

Foreign currency translation adjustments
 
(6,822
)
 
3,136

 
(24
)
 
4,143

Other comprehensive (loss) income
 
(15,663
)
 
9,337

 
(27,677
)
 
13,965

COMPREHENSIVE INCOME
 
$
156,686

 
$
127,667

 
$
331,704

 
$
302,031

 



See accompanying Notes to Consolidated Financial Statements.

5



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)
(Unaudited)
 
 
 
Common Stock and
Additional Paid-in Capital
 
Retained
Earnings
 
Treasury
Stock
 
AOCI,
Net of Tax
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
 
 
 
BALANCE, JANUARY 1, 2017
 
144,167,451

 
$
1,727,598

 
$
2,187,676

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

Net income
 

 

 
288,066

 

 

 
288,066

Other comprehensive income
 

 

 

 

 
13,965

 
13,965

Stock compensation costs
 

 
10,115

 

 

 

 
10,115

Net activity of common stock pursuant to various stock compensation plans and agreements
 
318,875

 
1,008

 

 
(12,259
)
 

 
(11,251
)
Cash dividends on common stock
 

 

 
(58,375
)
 

 

 
(58,375
)
BALANCE, JUNE 30, 2017
 
144,486,326

 
$
1,738,721

 
$
2,417,367

 
$
(451,646
)
 
$
(34,181
)
 
$
3,670,261

BALANCE, JANUARY 1, 2018
 
144,543,060

 
$
1,755,495

 
$
2,576,302

 
$
(452,327
)
 
$
(37,519
)
 
$
3,841,951

Cumulative effect of change in accounting principle related to marketable equity securities (1)
 

 

 
(545
)
 

 
385

 
(160
)
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2)
 

 

 
6,656

 

 
(6,656
)
 

Net income
 

 

 
359,381

 

 

 
359,381

Other comprehensive loss
 

 

 

 

 
(27,677
)
 
(27,677
)
Stock compensation costs
 

 
13,215

 

 

 

 
13,215

Net activity of common stock pursuant to various stock compensation plans and agreements
 
361,569

 
(13,833
)
 

 

 

 
(13,833
)
Cash dividends on common stock
 

 

 
(58,593
)
 

 

 
(58,593
)
BALANCE, JUNE 30, 2018
 
144,904,629

 
$
1,754,877

 
$
2,883,201

 
$
(452,327
)
 
$
(71,467
)
 
$
4,114,284

 
(1)
Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018. Refer to Note 2Current Accounting Developments to the Consolidated Financial Statements for additional information.
(2)
Represents amounts reclassified from AOCI to retained earnings due to the early adoption of ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2018. Refer to Note 2Current Accounting Developments to the Consolidated Financial Statements for additional information.


See accompanying Notes to Consolidated Financial Statements.

6



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
359,381

 
$
288,066

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

 
 

Depreciation and amortization
 
62,329

 
79,166

Accretion of discount and amortization of premiums, net
 
(9,910
)
 
(13,348
)
Stock compensation costs
 
13,215

 
10,115

Deferred income tax expense
 
1,320

 
3,699

Provision for credit losses
 
35,754

 
17,753

Net gains on sales of loans
 
(3,936
)
 
(4,300
)
Net gains on sales of available-for-sale investment securities
 
(2,339
)
 
(5,194
)
Net gains on sales of premises and equipment
 
(2,200
)
 
(73,049
)
Net gain on sale of business
 
(31,470
)
 

Originations and purchases of loans held-for-sale
 
(11,547
)
 
(9,806
)
Proceeds from sales and paydowns/payoffs in loans held-for-sale
 
10,759

 
9,984

Proceeds from distributions received from equity method investees
 
1,814

 
1,185

Net change in accrued interest receivable and other assets
 
(32,226
)
 
94,438

Net change in accrued expenses and other liabilities
 
44,016

 
(14,986
)
Other net operating activities
 
(93
)
 
(733
)
Total adjustments
 
75,486

 
94,924

Net cash provided by operating activities
 
434,867

 
382,990

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Net (increase) decrease in:
 
 

 
 

Loans held-for-investment
 
(1,147,156
)
 
(1,660,828
)
Interest-bearing deposits with banks
 
28,525

 
31,060

Investments in qualified affordable housing partnerships, tax credit and other investments
 
(41,444
)
 
(73,286
)
Payment for sale of business, net of cash transferred
 
(503,687
)
 

Purchases of:
 
 

 
 

Resale agreements
 
(100,000
)
 
(550,000
)
Available-for-sale investment securities
 
(235,360
)
 
(272,698
)
Loans held-for-investment
 
(389,912
)
 
(368,698
)
Premises and equipment
 
(7,612
)
 
(4,990
)
Proceeds from sale of:
 
 

 
 

Available-for-sale investment securities
 
256,875

 
551,889

Loans held-for-investment
 
274,785

 
361,380

Other real estate owned (“OREO”)
 
3,595

 
5,298

Premises and equipment
 

 
116,021

Paydowns and maturities of resale agreements
 
175,000

 
950,000

Proceeds from distributions received from equity method investees
 
1,725

 
2,634

Repayments, maturities and redemptions of available-for-sale investment securities
 
211,303

 
244,770

Other net investing activities
 
(2,200
)
 
21,005

Net cash used in investing activities
 
(1,475,563
)
 
(646,443
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase (decrease) in:
 
 

 
 

Deposits
 
1,195,796

 
1,245,282

Short-term borrowings
 
59,895

 
(36,521
)
Proceeds from:
 
 
 
 
Issuance of common stock pursuant to various stock compensation plans and agreements
 
1,328

 
1,008

Payments for:
 
 

 
 

Repayment of long-term debt
 
(10,000
)
 
(10,000
)
Repurchase of vested shares due to employee tax liability
 
(15,161
)
 
(12,259
)
Cash dividends on common stock
 
(59,243
)
 
(58,949
)
Net cash provided by financing activities
 
1,172,615

 
1,128,561

Effect of exchange rate changes on cash and cash equivalents
 
(9,040
)
 
8,865

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
122,879

 
873,973

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
2,174,592

 
1,878,503

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
2,297,471

 
$
2,752,476

 




See accompanying Notes to Consolidated Financial Statements.

7



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid
 
$
99,176

 
$
63,416

Income taxes paid, net
 
$
67,431

 
$
14,799

Noncash investing and financing activities:
 
 

 
 

Loans transferred from held-for-investment to held-for-sale
 
$
285,631

 
$
343,977

 
 
 
 
 



See accompanying Notes to Consolidated Financial Statements.

8



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 subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of June 30, 2018, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Trusts are not included on the Consolidated Financial Statements.

The unaudited interim Consolidated Financial Statements are 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. They 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 annual report on Form 10-K for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission on February 27, 2018 (the “Company’s 2017 Form 10-K”).

Note 2Current Accounting Developments
    
New Accounting Pronouncements Adopted

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. The guidance also requires new quantitative and qualitative disclosures including the disaggregation of revenues and descriptions of performance obligations. The Company’s revenue is comprised of net interest income and noninterest income. The scope of this new guidance explicitly excludes net interest income, as well as other revenues from financial instruments including loans, leases, securities and derivatives. Accordingly, the majority of the Company’s revenues are not affected. In addition, the new guidance does not materially impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s previously existing accounting for contracts within the scope of the new standard. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method where there was no cumulative effect adjustment to retained earnings as a result of adopting this new guidance. Overall, the guidance did not have a material impact on the Company’s consolidated financial statements. The Company has provided a disaggregation of the significant categories of revenues within the scope of this guidance and expanded the qualitative disclosures of the Company’s noninterest income. See Note 12 — Revenue from Contracts with Customers for additional information.


9



In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. With the exception of the amendments related to equity investments without readily determinable fair values and the use of exit price to measure the fair value of financial instruments for disclosure purposes that were adopted prospectively, the Company adopted all other amendments of the standard effective January 1, 2018 on a modified retrospective basis. The guidance requires investments in marketable equity securities to be accounted for at fair value with unrealized gains or losses reflected in earnings. As of the date of adoption, the Company reclassified approximately $31.9 million of marketable equity securities that were previously classified as Available-for-sale investment securities, at fair value to Investments in tax credits and other investments, net. In addition, the Company recorded a cumulative-effect adjustment as of January 1, 2018 that reduced retained earnings by $545 thousand and increased AOCI by $385 thousand. The guidance also provides a measurement alternative for equity securities without readily determinable fair values to be measured at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer. Such price changes (if any) are reflected in earnings beginning in the period of adoption. As of January 1, 2018, the Company elected the measurement alternative for its privately held cost method investments, which was not a material amount. The Company’s investments in the Federal Reserve Bank of San Francisco (“FRB”) and FHLB stock are not subject to this guidance and continue to be accounted for at cost. In addition, the guidance eliminates the requirement to disclose methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the Consolidated Balance Sheet. Furthermore, for purposes of disclosing the fair value of financial instruments carried at amortized cost, the Company has updated its valuation methods as necessary to conform to an exit price concept as required by the guidance as of January 1, 2018.

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 Statement of Cash Flows. 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 borrowings; 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; and beneficial interests received in securitization transactions. The guidance also clarifies that in instances of cash flows with multiple aspects that cannot be separately identified, the classification should be based on the activity that is likely to be the predominant source or use of the cash flows. The Company adopted this guidance in the first quarter of 2018 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s 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 equivalents balances on the Consolidated Statement 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 Statement of Cash Flows. The Company adopted this guidance in the first quarter of 2018 on a retrospective basis. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which narrows the definition of a business by adding an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets (a “set”). If the screen is met, the set is not a business. ASU 2017-01 also specifies the minimum inputs and processes required for a set to be considered a business, and it removes the requirement to evaluate a market participant’s ability to replace missing elements when all of the inputs or processes that the seller used in operating a business were not obtained. The Company adopted this guidance in the first quarter of 2018 prospectively. The adoption of this guidance did not have an impact on the Company’s 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 early adopted this guidance in the first quarter of 2018. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.


10



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. The Company adopted the guidance in the first quarter of 2018 prospectively. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

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. The guidance also changes 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. The guidance should be applied using a modified retrospective transition method. The Company early adopted this guidance in the first quarter of 2018, and the adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Under current U.S. GAAP, deferred tax assets and liabilities are to be adjusted for the effect of a change in tax laws or rates in net income of the reporting period that includes the enactment date. This accounting treatment resulted in the tax effect of items within AOCI not reflecting the appropriate tax rate. This guidance permits companies to reclassify the stranded tax effects resulting from the Tax Act from AOCI to retained earnings. The guidance is effective on January 1, 2019, with early adoption permitted. The Company early adopted this guidance in the first quarter of 2018 retrospectively. The Company has identified the unrealized losses for available-for-sale securities to be the only item in AOCI with stranded tax effects, and made a policy election to reclassify the related stranded tax effects using the “investment-by-investment” approach. The adoption of the guidance resulted in a cumulative-effect adjustment as of January 1, 2018 that increased retained earnings by $6.7 million and reduced AOCI by the same amount.

Recent Accounting Pronouncements

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 Sheet, 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 has completed its review of its existing lease contracts and service contracts that may include embedded leases and is in the process of implementing a new system to address this guidance. The Company expects the adoption of this guidance to result in additional assets and liabilities, as the Company will be required to recognize operating leases on its Consolidated Balance Sheet. The Company does not expect a material impact to its recognition of operating lease expense on its Consolidated Statement of Income and is in the process of evaluating the impacts of adopting the new guidance on its disclosures.


11



In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new current expected credit loss (“CECL”) impairment model applies 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. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. 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 debt securities. The Company’s implementation efforts include, but are not limited to, identifying key interpretive issues, assessing its processes, identifying the system requirements against the new guidance to determine what modifications may be required, evaluating modeling methodologies for its portfolio segments and assessing potential macroeconomic factors that will be used to determine the reasonable and supportable forecast period.

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. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. 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 Company’s Consolidated Financial Statements.

Note 3Dispositions and Held-for-Sale

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 net book value of the property was $31.6 million at the time of the 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 Company reports a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specific criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less costs to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation and amortization expense are not recorded with respect to the assets of a business after it is classified as held-for-sale.

On November 11, 2017, the Bank entered into a Purchase and Assumption Agreement to sell all of its eight Desert Community Bank (“DCB”) branches located in the High Desert area of Southern California, and related assets and liability to Flagstar Bank, a wholly-owned subsidiary of Flagstar Bancorp, Inc. The Company determined that this transaction met the criteria for held-for-sale as of December 31, 2017. Branch assets held-for-sale as of December 31, 2017 were largely comprised of $78.1 million in loans held-for-sale and $8.0 million in premises and equipment, net. Branch liability held-for-sale as of December 31, 2017 was comprised of $605.1 million in deposits.

The sale of the Bank’s eight DCB branches was completed on March 17, 2018. The assets and liability of the DCB branches that were sold in this transaction primarily consisted of $613.7 million of deposits, $59.1 million of loans, $9.0 million of cash and cash equivalents and $7.9 million of premises and equipment. The transaction resulted in a net cash payment of $499.9 million by the Company to Flagstar Bank. After transaction costs, the sale resulted in a pre-tax gain of $31.5 million in the six months ended June 30, 2018, which was reported as Net gain on sale of business on the Consolidated Statement of Income.


12




Note 4 Fair Value Measurement and Fair Value of Financial Instruments

Fair Value Determination

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 traded in active markets; quoted prices for identical or similar instruments traded 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.

The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. 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.

Level 3 Assets and Liabilities Valuation Process

The Company generally determines the fair value of Level 3 assets and liabilities by using internal valuation methodologies, which primarily include discounted cash flows techniques that require both observable and unobservable inputs. Unobservable inputs (such as volatility and liquidity discount) are generally derived from historic performance of similar instruments or determined from previous market trades in similar instruments. Such inputs can be derived from similar portfolios with known historic experience or recent trades where particular unobservable inputs may be implied. The Company compares each unobservable input to historic experience and other third-party data where available. The models developed under internal valuation methodologies are subject to review according to the Company’s risk management policies and procedures, which include model validation. Model validation assesses the adequacy and appropriateness of the model, including reviewing its supporting documentation and key components such as inputs, logic, processing components and output results. Validation also includes ensuring significant unobservable model inputs are appropriate given observable market transactions or other market data within the same or similar asset classes. The Company has ongoing monitoring procedures in place for Level 3 assets and liabilities that use internal valuation methodologies, which include but are not limited to the following:

review of valuation results against expectations, including review of significant or unusual value fluctuations; and
quarterly analysis related to market data, where available.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.

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. The fair value of other available-for-sale investment securities is 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 value. The available-for-sale investment securities valued using such methods are classified as Level 2.


13



Equity Securities — Equity securities were comprised of mutual funds as of both June 30, 2018 and December 31, 2017. The Company uses Net Asset Value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.

Interest Rate Swaps and Options The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option products offered to bank customers. These products allow borrowers to lock in attractive intermediate and long-term interest rates by entering into an interest rate swap or option contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of 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 fair value of the interest rate options, which consist 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 fall below (rise above) the strike rate of the floors (caps).  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 model-derived credit spreads, which are Level 3 inputs. As of June 30, 2018, 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 due to the observable nature of the significant inputs utilized.

Foreign Exchange Forwards, Spot and Swaps The Company enters into short-term foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered into with its customers, the Company entered into offsetting foreign exchange contracts with third party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. The fair value is determined at each reporting period based on changes in the foreign exchange rates. 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. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result 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 are classified as Level 2. During the six months ended June 30, 2018, the Company entered into foreign currency forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China. These foreign currency forward contracts were designated as net investment hedges. As of December 31, 2017, foreign exchange forward contracts were used to economically hedge the Company’s net investment in East West Bank (China) Limited. The fair value of foreign currency forward contracts is valued by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include 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 credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a 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. Accordingly, RPAs fall within Level 2.


14



Equity 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 June 30, 2018 and December 31, 2017, the warrants included on the Consolidated Financial Statements were from both 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 a 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 model values are then 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. 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.

Commodity Swaps and Options — The Company enters into energy commodity swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black’s model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fixed cash flows are predetermined based on the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity 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) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.

15



The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of June 30, 2018
 
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
 
$
629,270

 
$
629,270

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
240,042

 

 
240,042

 

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
337,237

 

 
337,237

 

Residential mortgage-backed securities
 
936,447

 

 
936,447

 

Municipal securities
 
73,619

 

 
73,619

 

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
7,835

 

 
7,835

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Investment grade
 
11,001

 

 
11,001

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
459,433

 

 
459,433

 

Asset-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
12,560

 

 
12,560

 

Total available-for-sale investment securities
 
$
2,707,444

 
$
629,270

 
$
2,078,174

 
$

 
 
 
 
 
 
 
 
 
Investments in tax credit and other investments:
 


 
 
 
 
 
 
Equity securities with readily determinable fair value (1)
 
$
30,929

 
$
20,431

 
$
10,498

 
$

Total investments in tax credit and other investments
 
$
30,929

 
$
20,431

 
$
10,498

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
64,225

 
$

 
$
64,225

 
$

Foreign exchange forwards, spot and swaps

 
11,724

 

 
11,724

 

RPAs
 
1

 

 
1

 

Equity warrants
 
1,878

 

 
1,230

 
648

Commodity swaps and options
 
3,628

 

 
3,628

 

Total derivative assets
 
$
81,456

 
$

 
$
80,808

 
$
648

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
100,025

 
$

 
$
100,025

 
$

Foreign exchange forwards, spot and swaps
 
11,281

 

 
11,281

 

RPAs
 
77

 

 
77

 

Commodity swaps and options
 
3,159

 

 
3,159

 

Total derivative liabilities
 
$
114,542

 
$

 
$
114,542

 
$

 
 
 
 
 
 
 
 
 
(1)
Equity securities with readily determinable fair value were comprised of mutual funds as of June 30, 2018.

16



 
($ in thousands)
 
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 31, 2017
 
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
 
$
640,280

 
$
640,280

 
$

 
$

U.S. government agency and U.S. government sponsored enterprise debt securities
 
203,392

 

 
203,392

 

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
318,957

 

 
318,957

 

Residential mortgage-backed securities
 
1,190,271

 

 
1,190,271

 

Municipal securities
 
99,982

 

 
99,982

 

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Investment grade
 
9,117

 

 
9,117

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Investment grade
 
37,003

 

 
37,003

 

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade
 
486,408

 

 
486,408

 

Other securities
 
31,342

 
20,735

 
10,607

 

Total available-for-sale investment securities
 
$
3,016,752

 
$
661,015

 
$
2,355,737

 
$

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
58,633

 
$

 
$
58,633

 
$

Foreign exchange forwards, spot and swaps
 
5,840

 

 
5,840

 

RPAs
 
1

 

 
1

 

Equity warrants
 
1,672

 

 
993

 
679

Total derivative assets
 
$
66,146

 
$

 
$
65,467

 
$
679

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
6,799

 
$

 
$
6,799

 
$

Interest rate swaps and options
 
57,958

 

 
57,958

 

Foreign exchange forwards, spot and swaps
 
10,170

 

 
10,170

 

RPAs
 
8

 

 
8

 

Total derivative liabilities
 
$
74,935

 
$

 
$
74,935

 
$

 
 
 
 
 
 
 
 
 


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. As of June 30, 2018 and December 31, 2017, the only assets measured on a recurring basis that were classified as Level 3 were equity warrants issued by private companies. The following table presents a reconciliation of the beginning and ending balances for these warrants for the three and six months ended June 30, 2018:
 
 
 
($ in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
Equity warrants
 
 
 
 
Beginning balance
 
$
931

 
$
679

Total (losses) gains included in earnings (1)
 
(76
)
 
168

Issuances
 
26

 
34

Settlements
 
(233
)
 
(233
)
Ending balance
 
$
648


$
648

 
 
 
 
 
(1)
Includes unrealized (losses) gains of $(13) thousand and $231 thousand for the three and six months ended June 30, 2018, respectively. The realized/unrealized (losses) gains are included in Ancillary loan fees and other income on the Consolidated Statement of Income.

Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair value of the assets and liabilities become observable or unobservable 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 or Level 3 during the three and six months ended June 30, 2018 and 2017.

The following table presents quantitative information about the significant unobservable inputs used in the valuation of assets measured on a recurring basis classified as Level 3 as of June 30, 2018. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique
 
Unobservable
Input(s)
 
Weighted-
Average
Derivative assets:
 
 
 
 
 
 
 
 
Equity warrants
 
$
648

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

From time to time, the Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. The adjustments to fair value generally require the assets to be recorded at the lower of cost or fair value, or assessed for impairment.

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 impairment on certain non-PCI loans, application of fair value less costs to sell on OREO or lower of cost or fair value on loans held-for-sale.

Non-PCI Impaired Loans — The Company typically adjusts the carrying amount of impaired loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. Impaired loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of impaired loans:

Discounted cash flows valuation techniques generally consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate.
The Company establishes a specific reserve for an impaired loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal evaluation if a third-party appraisal is not required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.

18



Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.

The following tables present the carrying amounts of assets included on the Consolidated Balance Sheet that had fair value changes measured on a nonrecurring basis as of June 30, 2018 and December 31, 2017:
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of June 30, 2018
($ 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 lending:
 
 
 
 
 
 
 
 
Commercial and industrial (“C&I”)
 
$
18,574

 
$

 
$

 
$
18,574

Commercial real estate (“CRE”)
 
3,053

 

 

 
3,053

Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 
2,584

 

 

 
2,584

Home equity lines of credit (“HELOCs”)
 
924

 

 

 
924

Total non-PCI impaired loans
 
$
25,135

 
$

 
$

 
$
25,135

 
 
 
 
Assets Measured at Fair Value on a Nonrecurring Basis
as of December 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 lending:
 
 
 
 
 
 
 
 
C&I
 
$
31,404

 
$

 
$

 
$
31,404

CRE
 
2,667

 

 

 
2,667

Construction and land
 
3,973

 

 

 
3,973

Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 
144

 

 

 
144

Total non-PCI impaired loans
 
$
38,188

 
$

 
$

 
$
38,188

OREO
 
$
9

 
$

 
$

 
$
9

 


19



The following table presents the total change in value of assets for which a fair value adjustment has been included on the Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 and held as of those dates:
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Non-PCI impaired loans:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
C&I
 
$
4,544

 
$
(14,060
)
 
$
595

 
$
(11,418
)
CRE
 
66

 
193

 
(23
)
 
118

Multifamily residential
 

 
(106
)
 

 
(107
)
Construction and land
 

 

 

 
(147
)
Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 

 
76

 
15

 
158

HELOCs
 
(73
)
 
24

 
(73
)
 
25

Total non-PCI impaired loans nonrecurring fair value gains (losses)
 
$
4,537

 
$
(13,873
)
 
$
514

 
$
(11,371
)
OREO nonrecurring fair value losses
 
$

 
$

 
$

 
$
(285
)
 

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 June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range(s) of 
Input(s)
 
Weighted-
Average
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
21,048

 
Discounted cash flows
 
Discount
 
4% — 7%
 
6%
 
 
$
3,167

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
318

 
Fair value of collateral
 
Discount
 
15%
 
15%
 
 
$
602

 
Fair value of collateral
 
Contract value
 
NM
 
NM
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Non-PCI impaired loans
 
$
22,802

 
Discounted cash flows
 
Discount
 
4% — 10%
 
6%
 
 
$
9,773

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
 
$
3,207

 
Fair value of collateral
 
Discount
 
20% — 32%
 
29%
 
 
$
2,406

 
Fair value of collateral
 
Contract value
 
NM
 
NM
OREO
 
$
9

 
Fair value of property
 
Selling cost
 
8%
 
8%
 
NM — Not meaningful.


20



Disclosures about Fair Value of Financial Instruments

The following tables present the fair value estimates for financial instruments as of June 30, 2018 and December 31, 2017, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in Note 4Fair Value Measurement and Fair Value of Financial Instruments. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet. During the first quarter of 2018, the Company adopted ASU 2016-01 and has updated its valuation methods as necessary to conform to an “exit price” concept as required by ASU 2016-01.
 
($ in thousands)
 
June 30, 2018
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,297,471

 
$
2,297,471

 
$

 
$

 
$
2,297,471

Interest-bearing deposits with banks
 
$
360,900

 
$

 
$
360,900

 
$

 
$
360,900

Resale agreements (1)
 
$
975,000

 
$

 
$
946,643

 
$

 
$
946,643

Restricted equity securities, at cost
 
$
73,524

 
$

 
$
73,524

 
$

 
$
73,524

Loans held-for-sale
 
$
14,658

 
$

 
$
14,658

 
$

 
$
14,658

Loans held-for-investment, net
 
$
29,928,829

 
$

 
$

 
$
30,073,212

 
$
30,073,212

Mortgage servicing rights
 
$
7,865

 
$

 
$

 
$
12,111

 
$
12,111

Accrued interest receivable
 
$
128,339

 
$

 
$
128,339

 
$

 
$
128,339

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Demand, checking, savings and money market deposits
 
$
24,916,109

 
$

 
$
24,916,109

 
$

 
$
24,916,109

Time deposits
 
$
7,860,023

 
$

 
$
7,835,585

 
$

 
$
7,835,585

Short-term borrowings
 
$
58,523

 
$

 
$
58,523

 
$

 
$
58,523

FHLB advances
 
$
325,020

 
$

 
$
337,544

 
$

 
$
337,544

Repurchase agreements (1)
 
$
50,000

 
$

 
$
114,944

 
$

 
$
114,944

Long-term debt
 
$
161,704

 
$

 
$
167,573

 
$

 
$
167,573

Accrued interest payable
 
$
15,360

 
$

 
$
15,360

 
$

 
$
15,360

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of June 30, 2018, $400.0 million out of $450.0 million of repurchase agreements were eligible for netting against resale agreements.

21



 
($ in thousands)
 
December 31, 2017
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,174,592

 
$
2,174,592

 
$

 
$

 
$
2,174,592

Interest-bearing deposits with banks
 
$
398,422

 
$

 
$
398,422

 
$

 
$
398,422

Resale agreements (1)
 
$
1,050,000

 
$

 
$
1,035,158

 
$

 
$
1,035,158

Restricted equity securities, at cost
 
$
73,521

 
$

 
$
73,521

 
$

 
$
73,521

Loans held-for-sale
 
$
85

 
$

 
$
85

 
$

 
$
85

Loans held-for-investment, net
 
$
28,688,590

 
$

 
$

 
$
28,956,349

 
$
28,956,349

Branch assets held-for-sale
 
$
91,318

 
$
5,143

 
$
10,970

 
$
78,132

 
$
94,245

Mortgage servicing rights
 
$
7,771

 
$

 
$

 
$
11,324

 
$
11,324

Accrued interest receivable
 
$
121,719

 
$

 
$
121,719

 
$

 
$
121,719

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Demand, checking, savings and money market deposits
 
$
25,974,314

 
$

 
$
25,974,314

 
$

 
$
25,974,314

Time deposits
 
$
5,640,749

 
$

 
$
5,626,855

 
$

 
$
5,626,855

Branch liability held-for-sale
 
$
605,111

 
$

 
$

 
$
643,937

 
$
643,937

FHLB advances
 
$
323,891

 
$

 
$
335,901

 
$

 
$
335,901

Repurchase agreements (1)
 
$
50,000

 
$

 
$
104,830

 
$

 
$
104,830

Long-term debt
 
$
171,577

 
$

 
$
171,673

 
$

 
$
171,673

Accrued interest payable
 
$
10,724

 
$

 
$
10,724

 
$

 
$
10,724

 
(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of December 31, 2017, $400.0 million out of $450.0 million of repurchase agreements were eligible for netting against resale agreements.

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

Resale Agreements

Resale agreements are recorded at the values 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 $1.38 billion and $1.45 billion as of June 30, 2018 and December 31, 2017, respectively. The weighted-average interest rates were 2.63% and 2.43% as of June 30, 2018 and December 31, 2017, respectively.

Repurchase Agreements

Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded at the values at which the securities are 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 both June 30, 2018 and December 31, 2017. The weighted-average interest rates were 4.60% and 3.65% as of June 30, 2018 and December 31, 2017, 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 Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received 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/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.


22



The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
 
Gross
Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
1,375,000

 
$
(400,000
)
 
$
975,000

 
$

 
$
(966,410
)
(1) 
$
8,590

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

 
$
(400,000
)
 
$
50,000

 
$

 
$
(50,000
)
(2) 
$

 
 
($ in thousands)
 
December 31, 2017
 
 
Gross
Amounts
of Recognized
Assets
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
Assets
 
 
 
 
Financial
Instruments
 
Collateral
Received
 
Net Amount
Resale agreements
 
$
1,450,000

 
$
(400,000
)
 
$
1,050,000

 
$

 
$
(1,045,696
)
(1) 
$
4,304

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

 
$
(400,000
)
 
$
50,000

 
$

 
$
(50,000
)
(2) 
$

 
(1)
Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty.
(2)
Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability owed to each counterparty.

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



23



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 carried at fair value, as of June 30, 2018 and December 31, 2017:
 
 
 
June 30, 2018
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
648,271

 
$

 
$
(19,001
)
 
$
629,270

U.S. government agency and U.S. government sponsored enterprise debt securities
 
244,688

 
49

 
(4,695
)
 
240,042

U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
352,547

 
10

 
(15,320
)
 
337,237

Residential mortgage-backed securities
 
958,173

 
1,920

 
(23,646
)
 
936,447

Municipal securities
 
74,596

 
206

 
(1,183
)
 
73,619

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
8,004

 

 
(169
)
 
7,835

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
11,250

 

 
(249
)
 
11,001

Foreign bonds:
 
 
 
 
 
 
 


Investment grade (1) (2)
 
489,340

 

 
(29,907
)
 
459,433

Asset-backed securities:
 
 
 
 
 
 
 
 
Investment grade (1)
 
12,604

 

 
(44
)
 
12,560

Total available-for-sale investment securities
 
$
2,799,473

 
$
2,185

 
$
(94,214
)
 
$
2,707,444

 
 
 
 
 
 
 
December 31, 2017
($ in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale investment securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
651,395

 
$

 
$
(11,115
)
 
$
640,280

U.S. government agency and U.S. government sponsored enterprise debt securities
 
206,815

 
62

 
(3,485
)
 
203,392

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


Commercial mortgage-backed securities
 
328,348

 
141

 
(9,532
)
 
318,957

Residential mortgage-backed securities
 
1,199,869

 
3,964

 
(13,562
)
 
1,190,271

Municipal securities
 
99,636

 
655

 
(309
)
 
99,982

Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
9,136

 
3

 
(22
)
 
9,117

Corporate debt securities:
 
 
 
 
 
 
 
 

Investment grade (1)
 
37,585

 
164

 
(746
)
 
37,003

Foreign bonds:
 
 
 
 
 
 
 
 
Investment grade (1) (2)
 
505,396

 
24

 
(19,012
)
 
486,408

Other securities (3)
 
31,887

 

 
(545
)
 
31,342

Total available-for-sale investment securities
 
$
3,070,067

 
$
5,013

 
$
(58,328
)
 
$
3,016,752

 
 
 
 
 
 
 
 
 
(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 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 value of foreign bonds include $445.1 million and $456.1 million of multilateral development bank bonds as of June 30, 2018 and December 31, 2017, respectively.
(3)
Other securities are comprised of mutual funds, which are equity securities with readily determinable fair value. Prior to the adoption of ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, these securities were reported as available-for-sale investment securities with changes in fair value recorded through other comprehensive income. Upon adoption of ASU 2016-01, which became effective January 1, 2018, these securities were reclassified from Available-for-sale investment securities to Investments in tax credit and other investments, net, with changes in fair value recorded through net income.

24



Unrealized Losses

The following tables present the gross unrealized losses and related fair value of the Company’s investment portfolio, aggregated by investment category and the length of time that individual security has been in a continuous unrealized loss position, as of June 30, 2018 and December 31, 2017:
 
 
 
June 30, 2018
($ 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
 
$
192,840

 
$
(4,227
)
 
$
436,430

 
$
(14,774
)
 
$
629,270

 
$
(19,001
)
U.S. government agency and U.S. government sponsored enterprise debt securities
 
141,270

 
(3,667
)
 
86,287

 
(1,028
)
 
227,557

 
(4,695
)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
133,352

 
(3,911
)
 
189,400

 
(11,409
)
 
322,752

 
(15,320
)
Residential mortgage-backed securities
 
467,178

 
(10,405
)
 
317,707

 
(13,241
)
 
784,885

 
(23,646
)
Municipal securities
 
24,453

 
(755
)
 
8,334

 
(428
)
 
32,787

 
(1,183
)
Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
7,835

 
(169
)
 

 

 
7,835

 
(169
)
Corporate debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
9,754

 
(246
)
 
1,247

 
(3
)
 
11,001

 
(249
)
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
76,266

 
(3,158
)
 
383,167

 
(26,749
)
 
459,433

 
(29,907
)
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
12,560

 
(44
)
 

 

 
12,560

 
(44
)
Total available-for-sale investment securities
 
$
1,065,508

 
$
(26,582
)
 
$
1,422,572

 
$
(67,632
)
 
$
2,488,080

 
$
(94,214
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
 
$
168,061

 
$
(1,005
)
 
$
472,219

 
$
(10,110
)
 
$
640,280

 
$
(11,115
)
U.S. government agency and U.S. government sponsored enterprise debt securities
 
99,935

 
(623
)
 
85,281

 
(2,862
)
 
185,216

 
(3,485
)
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
 
113,775

 
(2,071
)
 
191,827

 
(7,461
)
 
305,602

 
(9,532
)
Residential mortgage-backed securities
 
413,621

 
(4,205
)
 
361,809

 
(9,357
)
 
775,430

 
(13,562
)
Municipal securities
 
8,490

 
(123
)
 
8,588

 
(186
)
 
17,078

 
(309
)
Non-agency residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
4,599

 
(22
)
 

 

 
4,599

 
(22
)
Corporate debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 

 

 
11,905

 
(746
)
 
11,905

 
(746
)
Foreign bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
103,149

 
(1,325
)
 
352,239

 
(17,687
)
 
455,388

 
(19,012
)
Other securities (1)
 
31,215

 
(545
)
 

 

 
31,215

 
(545
)
Total available-for-sale investment securities
 
$
942,845

 
$
(9,919
)
 
$
1,483,868

 
$
(48,409
)
 
$
2,426,713

 
$
(58,328
)
 
(1)
Other securities are comprised of mutual funds, which are equity securities with readily determinable fair value. Prior to the adoption of ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, these securities were reported as available-for-sale investment securities with changes in fair value recorded through other comprehensive income. Upon adoption of ASU 2016-01, which became effective January 1, 2018, these securities were reclassified from Available-for-sale investment securities, at fair value to Investments in tax credit and other investments, net, with changes in fair value recorded through net income.


25



Other-Than-Temporary Impairment

For each reporting period, the Company examines all individual securities that are in an unrealized loss position for Other-Than-Temporary-Impairment (“OTTI”). For a discussion of the factors and criteria the Company uses in analyzing securities for OTTI, see Note 1 — Summary of Significant Accounting Policies — Securities to the Consolidated Financial Statements of the Company’s 2017 Form 10-K.

The unrealized losses were primarily attributable to the movement in the yield curve, 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 presented in the previous tables are temporary and no credit losses are expected. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, no impairment losses were recorded on the Company’s Consolidated Statement of Income for each of the three and six months ended June 30, 2018 and 2017. As of June 30, 2018, the Company had 193 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily consisting of 113 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 22 U.S. Treasury securities and 16 investment grade foreign bonds. In comparison, as of December 31, 2017, the Company had 165 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily consisting of 98 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 25 U.S. Treasury securities and 16 investment grade foreign bonds. No OTTI credit losses were recognized for each of the three and six months ended June 30, 2018 and 2017.

Realized Gains and Losses

The following table presents the proceeds, gross realized gains and tax expense related to the sales of available-for-sale investment securities for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sales
 
$
42,085

 
$
249,233

 
$
256,875

 
$
551,889

Gross realized gains
 
$
210

 
$
2,720

 
$
2,339

 
$
5,194

Related tax expense
 
$
62

 
$
1,144

 
$
690

 
$
2,184

 

Scheduled Maturities of Investment Securities

The following table presents the scheduled maturities of available-for-sale investment securities as of June 30, 2018:
 
($ in thousands)
 
Amortized
Cost
 
Fair
Value
Due within one year
 
$
632,583

 
$
603,002

Due after one year through five years
 
697,172

 
675,324

Due after five years through ten years
 
199,008

 
194,040

Due after ten years
 
1,270,710

 
1,235,078

Total available-for-sale investment securities
 
$
2,799,473

 
$
2,707,444

 

Actual maturities of mortgage-backed securities can differ from contractual maturities as the 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.

As of June 30, 2018 and December 31, 2017, available-for-sale investment securities with fair value of $436.8 million and $534.3 million, respectively, were primarily pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

26



Restricted Equity Securities

Restricted equity securities include the FRB and the FHLB stock. Restricted equity securities are carried at cost as these securities do not have a readily determinable fair value. The following table presents the restricted equity securities as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
FRB stock
 
$
56,274

 
$
56,271

FHLB stock
 
17,250

 
17,250

Total
 
$
73,524

 
$
73,521

 

Note 7Derivatives

The Company uses derivatives to manage exposure to market risk, primarily 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 rate 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 Sheet 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 2017 Form 10-K.

The following table presents the total notional and gross fair value of the Company’s derivatives as of June 30, 2018 and December 31, 2017. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting arrangements, as included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
Derivative
Assets 
 
Derivative
 Liabilities 
 
 
Derivative
Assets 
 
Derivative
 Liabilities 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
35,811

 
$

 
$
8,647

 
$
35,811

 
$

 
$
6,799

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards
 
95,515

 
2,316

 

 

 

 

Total derivatives designated as hedging instruments
 
$
131,326

 
$
2,316

 
$
8,647

 
$
35,811

 
$

 
$
6,799

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
$
11,217,468

 
$
64,225

 
$
91,378

 
$
9,333,860

 
$
58,633

 
$
57,958

Foreign exchange forwards, spot and swaps
 
959,645

 
9,408

 
11,281

 
770,215

 
5,840

 
10,170

RPAs
 
118,024

 
1

 
77

 
49,033

 
1

 
8

Equity warrants
 

(1) 
1,878

 

 

(1) 
1,672

 

Commodity swaps and options
 

(2) 
3,628

 
3,159

 

 

 

Total derivatives not designated as hedging instruments
 
$
12,295,137

 
$
79,140

 
$
105,895

 
$
10,153,108

 
$
66,146

 
$
68,136

 
(1)
The Company held warrants in four public companies and 14 private companies as of June 30, 2018. In comparison, the Company held warrants in four public companies and 11 private companies as of December 31, 2017.
(2)
The notional amount of the Company’s commodity contracts entered with its customers totaled 1.8 million barrels of oil and 5.2 million units of natural gas, measured in million British thermal units (“MMBTUs”) as of June 30, 2018. The Company entered into the same notional amounts of commodity contracts with mirrored terms with third party financial institutions to mitigate its exposure.


27



Derivatives Designated as Hedging Instruments

Fair Value Hedges — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, the London Interbank Offered Rate. The Company entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. The total notional amounts of the interest rate swaps on certificates of deposit were $35.8 million as of both June 30, 2018 and December 31, 2017. The fair value liabilities of the interest rate swaps were $8.6 million and $6.8 million as of June 30, 2018 and December 31, 2017, respectively.

The following table presents the net (losses) gains recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
(Losses) gains recorded in interest expense:
 
 
 
 
 
 
 
 
Recognized on interest rate swaps
 
$
(396
)
 
$
(706
)
 
$
(1,848
)
 
$
(1,523
)
Recognized on certificates of deposit
 
$
440

 
$
664

 
$
1,719

 
$
1,352

 

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of June 30, 2018:
 
($ in thousands)
 
June 30, 2018
 
Hedged Items Currently Designated
 
Carrying Amount of the Hedged
Assets (Liabilities) (1)
 
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)
Certificates of deposit
 
$
(29,339
)
 
$
6,464

 
(1)
Represents the full carrying amount of the hedged certificates of deposit as of June 30, 2018.

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions, and ASC 815, Derivatives and Hedging, allows hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary of the Company in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate. The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The portion of the net investment hedges recorded through the point of de-designation is included in the Foreign Currency Translation Adjustment within AOCI and will be reclassified into earnings only upon the sale or liquidation of the China subsidiary. During the first quarter of 2018, the Company entered into new foreign currency forward contracts designated as net investment hedges to hedge against the foreign currency exchange rate risk in connection with its investment in East West Bank (China) Limited.

As of June 30, 2018, the total notional amount and fair value of the foreign currency forward contracts designated as net investment hedges were $95.5 million and a $2.3 million asset, respectively. As of December 31, 2017, there were no derivative contracts designated as net investment hedges. As a result of the adoption of ASU 2017-12 effective January 1, 2018, the Company recorded fair value gains of $4.9 million and $3.8 million in the Foreign Currency Translation Adjustment within AOCI during the three and six months ended June 30, 2018, respectively. During the three months ended June 30, 2017, there were no net investment hedges designated and recorded. During the six months ended June 30, 2017, before the adoption of ASU 2017-12, the Company recorded a loss of $648 thousand in the Foreign Currency Translation Adjustment within AOCI related to the effective portion of the net investment hedges, and a loss of $2.0 million in the Letters of credit fees and foreign exchange income on the Consolidated Statement of Income related to the ineffective portion of the net investment hedges.


28



Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps and Options — The Company enters into interest rate derivatives, which include interest rate swaps and options with its customers to allow them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third party financial institutions. Beginning in January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlement of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset and liability fair values of $32.2 million and $2.9 million, respectively, as of June 30, 2018. Included in the total notional amount of $5.61 billion of interest rates swaps and options entered with financial counterparties is a notional amount of $1.55 billion of interest rate swaps that cleared through LCH with a fair value asset of approximately $241 thousand as of June 30, 2018. The following tables represent the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of June 30, 2018 and December 31, 2017, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
June 30, 2018
 
Customer Counterparties
 
 
 
Financial Counterparties
 
Notional
Amount
 
Fair Value
 
 
 
Notional
Amount
 
Fair Value
 
 
Assets
 
Liabilities
 
 
 
 
Assets
 
Liabilities
Written options
 
$
843,965

 
$

 
$
696

 
Purchased options
 
$
843,965

 
$
711

 
$

Sold collars and corridors
 
335,169

 
147

 
1,004

 
Collars and corridors
 
335,169

 
1,015

 
147

Swaps
 
4,425,902

 
15,902

 
76,297

 
Swaps
 
4,433,298

 
46,450

 
13,234

Total
 
$
5,605,036

 
$
16,049

 
$
77,997

 
Total
 
$
5,612,432

 
$
48,176

 
$
13,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
December 31, 2017
 
Customer Counterparties
 
 
 
Financial Counterparties
 
Notional
Amount
 
Fair Value
 
 
 
Notional
Amount
 
Fair Value
 
 
Assets
 
Liabilities
 
 
 
 
Assets
 
Liabilities
Written options
 
$
691,548

 
$

 
$
223

 
Purchased options
 
$
691,548

 
$
233

 
$

Sold collars and corridors
 
247,542

 
204

 
267

 
Collars and corridors
 
247,542

 
271

 
211

Swaps
 
3,724,295

 
32,241

 
24,879

 
Swaps
 
3,731,385

 
25,684

 
32,378

Total
 
$
4,663,385

 
$
32,445

 
$
25,369

 
Total
 
$
4,670,475

 
$
26,188

 
$
32,589

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


29



Foreign Exchange Forwards, Spot and Swaps — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot and swap contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered into with its customers, the Company entered into offsetting foreign exchange contracts with third party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. A majority of the foreign exchange contracts have original maturities of one year or less. The following tables represent the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of June 30, 2018 and December 31, 2017, respectively:
 
($ in thousands)
 
June 30, 2018
 
Customer Counterparty
 
Financial Counterparty
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
Forwards and spot
 
$
353,439

 
$
5,298

 
$
3,778

 
$
77,152

 
$
47

 
$
462

Swaps
 
19,031

 
2

 
874

 
510,023

 
4,061

 
6,167

Total
 
$
372,470

 
$
5,300

 
$
4,652

 
$
587,175

 
$
4,108

 
$
6,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
December 31, 2017
 
Customer Counterparty
 
Financial Counterparty
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
Forwards and spot
 
$
163,389

 
$
2,189

 
$
752

 
$
155,872

 
$
662

 
$
7,800

Swaps
 
4,318

 

 
98

 
446,636

 
2,989

 
1,520

Total
 
$
167,707

 
$
2,189

 
$
850

 
$
602,508

 
$
3,651

 
$
9,320

 

Credit Risk Participation Agreements — The Company may periodically enter into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan.  The Company may enter into protection sold or protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower.  Under the RPA,  the Company will receive or make a payment if a borrower defaults on the related interest rate contract.  The Company manages its credit risk on RPAs by monitoring the creditworthiness of the borrowers and institutional counterparties, which is based on the normal credit review process.  The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table represents the notional amounts and the gross fair values of RPAs purchased and sold outstanding as of June 30, 2018 and December 31, 2017, respectively:
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
Assets 
 
Liabilities 
 
 
Assets 
 
Liabilities 
RPAs - protection sold
 
$
105,754

 
$

 
$
77

 
$
35,208

 
$

 
$
8

RPAs - protection purchased
 
12,270

 
1

 

 
13,825

 
1

 

Total RPAs
 
$
118,024

 
$
1

 
$
77

 
$
49,033

 
$
1

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 


30



Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of June 30, 2018 and December 31, 2017, the exposure from the RPAs with protections sold would be $962 thousand and $419 thousand, respectively.  As of June 30, 2018 and December 31, 2017, the weighted-average remaining maturities of the outstanding RPAs were 6.7 years and 6.0 years, respectively.

Equity Warrants — The Company has obtained warrants to purchase preferred and common stock of technology and life sciences companies, as part of the loan origination process. The Company held warrants in four public companies and 14 private companies as of June 30, 2018, and held warrants in four public companies and 11 private companies as of December 31, 2017. The fair value of the warrants held in public and private companies was a $1.9 million asset and a $1.7 million asset as of June 30, 2018 and December 31, 2017, respectively.

Commodity Swaps and Options — In 2018, the Company entered into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company entered into offsetting commodity contracts with third party financial institutions. Beginning in January 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments made to and received from CME as settlement of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to CME cleared derivative transactions resulted in a reduction in derivative asset and liability fair values of $271 thousand and $595 thousand, respectively, as of June 30, 2018. As a result, the notional quantity totaling 264 thousand barrels of oil and 5.2 million MMBTUs of natural gas that cleared through CME had an insignificant fair value as of June 30, 2018. The notional amounts and fair values of the commodity derivative positions outstanding as of June 30, 2018 are presented in the following table. The Company did not have any commodity contracts in 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
June 30, 2018
 
Customer Counterparties
 
 
 
Financial Counterparties
 
Notional
 
Fair Value
 
 
 
Notional
 
Fair Value
 
Unit
 
Amount
 
Assets
 
Liabilities
 
 
 
Unit
 
Amount
 
Assets
 
Liabilities
Crude oil:
 
 
 
 
 
 
 
 
 
Crude oil:
 
 
 
 
 
 
 
 
Written options
 
Barrels
 
736,500

 
$
576

 
$
271

 
Purchased options
 
Barrels
 
736,500

 
$

 
$
510

Collars
 
Barrels
 
812,100

 
1,720

 

 
Collars
 
Barrels
 
812,100

 

 
1,499

Swaps
 
Barrels
 
292,811

 
925

 

 
Swaps
 
Barrels
 
292,811

 

 
863

Total
 
 
 
1,841,411

 
$
3,221

 
$
271

 
Total
 
 
 
1,841,411

 
$

 
$
2,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas:
 
 
 
 
 
 
 
 
 
Natural gas:
 
 
 
 
 
 
 
 
Collars
 
MMBTUs
 
1,540,000

 
$
85

 
$

 
Collars
 
MMBTUs
 
1,540,000

 
$

 
$
4

Swaps
 
MMBTUs
 
3,650,000

 
322

 

 
Swaps
 
MMBTUs
 
3,650,000

 

 
12

Total
 
 
 
5,190,000

 
$
407

 
$

 
Total
 
 
 
5,190,000

 
$

 
$
16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 

 
$
3,628

 
$
271

 
Total
 
 
 

 
$

 
$
2,888

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


31



The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Location in
Consolidated
Statement of Income
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and options
 
Derivative fees and other income
 
$
88

 
$
(678
)
 
$
1,194

 
$
(1,744
)
Foreign exchange spot and forwards
 
Letters of credit fees and foreign exchange income
 
2,646

 
8,378

 
6,503

 
14,216

RPAs
 
Derivative fees and other income
 
(56
)
 

 
(69
)
 
1

Equity warrants
 
Ancillary loan fees and other income
 
598

 
786

 
439

 
786

Commodity swaps and options
 
Derivative fees and other income
 
40

 

 
40

 

Net gains
 
 
 
$
3,316

 
$
8,486

 
$
8,107

 
$
13,259

 

Credit-Risk-Related Contingent Features Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit-risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. As of June 30, 2018 and December 31, 2017, the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $11.4 million and $6.3 million, respectively, with collateral posted of $11.3 million and $6.2 million, respectively. In the event that East West Bank’s credit rating had been downgraded to below investment grade, the additional collateral that would have been required to be posted as of June 30, 2018 and December 31, 2017 would have been minimal.

Offsetting of Derivatives

The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present gross derivatives on the Consolidated Balance Sheet and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities and/or cash. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown:
 
($ in thousands)
 
As of June 30, 2018
 
Total
 
Contracts Not Subject to Master Netting Arrangements
 
Contracts Subject to Master Netting Arrangements
 
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts
Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
Derivative
Amount
 
Collateral
Received
 
Net Amount
Derivative Assets
 
$
81,456

 
$
27,141

 
$
54,315

 
$

 
$
54,315

 
$
(18,672
)
(1) 
$
(33,615
)
(2) 
$
2,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts
Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
Derivative
Amount
 
Collateral 
Pledged
 
Net Amount
Derivative Liabilities
 
$
114,542

 
$
82,965

 
$
31,577

 
$

 
$
31,577

 
$
(18,672
)
(1) 
$
(12,889
)
(3) 
$
16

 

32



 
($ in thousands)
 
As of December 31, 2017
 
Total
 
Contracts Not Subject to Master Netting Arrangements
 
Contracts Subject to Master Netting Arrangements
 
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts
Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
Derivative
Amounts
 
Collateral
Received
 
Net Amount
Derivative Assets
 
$
66,146

 
$
36,941

 
$
29,205

 
$

 
$
29,205

 
$
(18,955
)
(1) 
$
(9,839
)
(2) 
$
411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
 Gross
Amounts
Recognized
 
Gross Amounts
Offset on the
Consolidated
Balance Sheet
 
Net Amounts
Presented
on the
Consolidated
Balance Sheet
 
Gross Amounts Not Offset on the
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
Derivative
Amounts
 
Collateral 
Pledged
 
Net Amount
Derivative Liabilities
 
$
74,935

 
$
26,732

 
$
48,203

 
$

 
$
48,203

 
$
(18,955
)
(1) 
$
(28,796
)
(3) 
$
452

 
(1)
Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable master netting arrangements if the Company has elected to net.
(2)
Represents cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements, including $10.1 million and $8.6 million of cash collateral received as of June 30, 2018 and December 31, 2017, respectively.
(3)
Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements, including $4.1 million and $10.7 million of cash collateral posted as of June 30, 2018 and December 31, 2017, respectively.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to resale and repurchase agreements. Refer to Note 5Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer to Note 4 Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements for fair value measurement disclosures on derivatives.

Note 8Loans Receivable and Allowance for Credit Losses

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

The following table presents the composition of the Company’s non-PCI and PCI loans as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
 
Non-PCI
Loans (1) 
 
PCI
    Loans (2)
 
Total (1)(2)
 
Non-PCI
Loans (1)
 
PCI
    Loans (2)
 
Total (1)(2)
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$
11,056,225

 
$
2,794

 
$
11,059,019

 
$
10,685,436

 
$
11,795

 
$
10,697,231

CRE
 
8,836,076

 
218,491

 
9,054,567

 
8,659,209

 
277,688

 
8,936,897

Multifamily residential
 
1,988,464

 
44,058

 
2,032,522

 
1,855,128

 
61,048

 
1,916,176

Construction and land
 
623,794

 
43

 
623,837

 
659,326

 
371

 
659,697

Total commercial lending
 
22,504,559

 
265,386

 
22,769,945

 
21,859,099

 
350,902

 
22,210,001

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
5,210,014

 
106,881

 
5,316,895

 
4,528,911

 
117,378

 
4,646,289

HELOCs
 
1,758,093

 
11,418

 
1,769,511

 
1,768,917

 
14,007

 
1,782,924

Other consumer
 
374,028

 

 
374,028

 
336,504

 

 
336,504

Total consumer lending
 
7,342,135

 
118,299

 
7,460,434

 
6,634,332

 
131,385

 
6,765,717

Total loans held-for-investment
 
$
29,846,694

 
$
383,685

 
$
30,230,379

 
$
28,493,431

 
$
482,287

 
$
28,975,718

Allowance for loan losses
 
(301,511
)
 
(39
)
 
(301,550
)
 
(287,070
)
 
(58
)
 
(287,128
)
Loans held-for-investment, net
 
$
29,545,183

 
$
383,646

 
$
29,928,829

 
$
28,206,361

 
$
482,229

 
$
28,688,590

 
(1)
Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(40.4) million and $(34.0) million as of June 30, 2018 and December 31, 2017, respectively.
(2)
Includes ASC 310-30 discount of $26.8 million and $35.3 million as of June 30, 2018 and December 31, 2017, respectively.

The commercial lending portfolio includes C&I, CRE, multifamily residential, and construction and land loans. The consumer lending portfolio includes single-family residential, HELOCs and other consumer loans.

The C&I loan portfolio, which is comprised of commercial business and trade finance loans, provides financing to businesses in a wide spectrum of industries. The CRE loan portfolio includes income producing real estate loans that are either owner occupied, or non-owner occupied where 50% or more of the debt service for the loan is provided by rental income. The multifamily residential loan portfolio is largely comprised of loans secured by smaller multifamily properties ranging from 5 to 15 units in the Bank’s primary lending areas. Construction loans mainly provide construction financing for hotels, multifamily and residential condominiums, as well as mixed use (residential and retail) structures.

In the consumer lending portfolio, the Company offers residential loans through a variety of first lien mortgage loan programs. The consumer residential loan portfolio is largely comprised of single-family residential loans and HELOCs that were originated through a reduced documentation loan program, where a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60% or less. The Company is in a first lien position for many of these reduced documentation single-family residential loans and HELOCs. These loans have historically experienced low delinquency and default rates. Other consumer loans are mainly comprised of insurance premium financing loans.

As of June 30, 2018 and December 31, 2017, loans totaling $19.63 billion and $18.88 billion, respectively, were pledged to secure borrowings and to provide additional borrowing capacity from the FRB and the FHLB.


33



Credit Quality Indicators

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

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

The following tables present the credit risk ratings for non-PCI loans by portfolio segment as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Non-PCI Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
10,760,675

 
$
180,741

 
$
113,518

 
$
1,291

 
$
11,056,225

CRE
 
8,672,374

 
63,315

 
100,387

 

 
8,836,076

Multifamily residential
 
1,978,241

 

 
10,223

 

 
1,988,464

Construction and land
 
571,921

 
690

 
51,183

 

 
623,794

Total commercial lending
 
21,983,211

 
244,746

 
275,311

 
1,291

 
22,504,559

Consumer lending:
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
5,193,906

 
4,063

 
12,045

 

 
5,210,014

HELOCs
 
1,748,719

 
1,188

 
8,186

 

 
1,758,093

Other consumer
 
371,530

 
7

 
2,491

 

 
374,028

Total consumer lending
 
7,314,155

 
5,258

 
22,722

 

 
7,342,135

Total
 
$
29,297,366

 
$
250,004

 
$
298,033

 
$
1,291

 
$
29,846,694

 

34



 
($ in thousands)
 
December 31, 2017
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Non-PCI Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
10,369,516

 
$
114,769

 
$
180,269

 
$
20,882

 
$
10,685,436

CRE
 
8,484,635

 
65,616

 
108,958

 

 
8,659,209

Multifamily residential
 
1,839,958

 

 
15,170

 

 
1,855,128

Construction and land
 
614,441

 
4,590

 
40,295

 

 
659,326

Total commercial lending
 
21,308,550

 
184,975

 
344,692

 
20,882

 
21,859,099

Consumer lending:
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
4,490,672

 
16,504

 
21,735

 

 
4,528,911

HELOCs
 
1,744,903

 
11,900

 
12,114

 

 
1,768,917

Other consumer
 
333,895

 
111

 
2,498

 

 
336,504

Total consumer lending
 
6,569,470

 
28,515

 
36,347

 

 
6,634,332

Total
 
$
27,878,020

 
$
213,490

 
$
381,039

 
$
20,882

 
$
28,493,431

 

The following tables present the credit risk ratings for PCI loans by portfolio segment as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total PCI Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
2,551

 
$

 
$
243

 
$

 
$
2,794

CRE
 
189,307

 
4,813

 
24,371

 

 
218,491

Multifamily residential
 
41,182

 

 
2,876

 

 
44,058

Construction and land
 
43

 

 

 

 
43

Total commercial lending
 
233,083

 
4,813

 
27,490

 

 
265,386

Consumer lending:
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
105,219

 
275

 
1,387

 

 
106,881

HELOCs
 
10,705

 
209

 
504

 

 
11,418

Total consumer lending
 
115,924

 
484

 
1,891

 

 
118,299

Total (1)
 
$
349,007

 
$
5,297

 
$
29,381

 
$

 
$
383,685

 
 
($ in thousands)
 
December 31, 2017
 
Pass/Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total PCI Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
10,712

 
$
57

 
$
1,026

 
$

 
$
11,795

CRE
 
238,605

 
531

 
38,552

 

 
277,688

Multifamily residential
 
56,720

 

 
4,328

 

 
61,048

Construction and land
 
44

 

 
327

 

 
371

Total commercial lending
 
306,081

 
588

 
44,233

 

 
350,902

Consumer lending:
 
 

 
 

 
 

 
 

 
 

Single-family residential
 
113,905

 
1,543

 
1,930

 

 
117,378

HELOCs
 
12,642

 

 
1,365

 

 
14,007

Total consumer lending
 
126,547

 
1,543

 
3,295

 

 
131,385

Total (1)
 
$
432,628

 
$
2,131

 
$
47,528

 
$

 
$
482,287

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


35



Nonaccrual and Past Due Loans

Non-PCI loans that are 90 or more days past due are generally placed on nonaccrual status, unless the loan is well-collateralized or guaranteed by government agencies, and in the process of collection. Non-PCI loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following tables present the aging analysis on non-PCI loans as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
Accruing
Loans
30-59 Days
Past Due
 
Accruing
Loans
60-89 Days
Past Due
 
Total
Accruing
Past Due
Loans
 
Nonaccrual
Loans Less
Than 90 
Days
Past Due
 
Nonaccrual
Loans
90 or More
Days 
Past Due
 
Total
Nonaccrual
Loans
 
Current
Accruing
Loans
 
Total
Non-PCI
Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$
86,959

 
$
6

 
$
86,965

 
$
28,491

 
$
28,606

 
$
57,097

 
$
10,912,163

 
$
11,056,225

CRE
 
2,913

 

 
2,913

 
5,851

 
19,897

 
25,748

 
8,807,415

 
8,836,076

Multifamily residential
 
1,378

 
536

 
1,914

 
1,727

 

 
1,727

 
1,984,823

 
1,988,464

Construction and land
 

 

 

 

 

 

 
623,794

 
623,794

Total commercial lending
 
91,250

 
542

 
91,792

 
36,069

 
48,503

 
84,572

 
22,328,195

 
22,504,559

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
18,699

 
4,678

 
23,377

 
418

 
7,207

 
7,625

 
5,179,012

 
5,210,014

HELOCs
 
6,018

 
1,188

 
7,206

 
1,889

 
6,246

 
8,135

 
1,742,752

 
1,758,093

Other consumer
 
20

 
7

 
27

 

 
2,491

 
2,491

 
371,510

 
374,028

Total consumer lending
 
24,737

 
5,873

 
30,610

 
2,307

 
15,944

 
18,251

 
7,293,274

 
7,342,135

Total
 
$
115,987

 
$
6,415

 
$
122,402

 
$
38,376

 
$
64,447

 
$
102,823

 
$
29,621,469

 
$
29,846,694

 
 
($ in thousands)
 
December 31, 2017
 
Accruing
Loans
30-59 Days
Past Due
 
Accruing
Loans
60-89 Days
Past Due
 
Total
Accruing
Past Due
Loans
 
Nonaccrual
Loans Less
Than 90 
Days
Past Due
 
Nonaccrual
Loans
90 or More
Days 
Past Due
 
Total
Nonaccrual
Loans
 
Current
Accruing
Loans
 
Total
Non-PCI
Loans
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$
30,964

 
$
82

 
$
31,046

 
$
27,408

 
$
41,805

 
$
69,213

 
$
10,585,177

 
$
10,685,436

CRE
 
3,414

 
466

 
3,880

 
5,430

 
21,556

 
26,986

 
8,628,343

 
8,659,209

Multifamily residential
 
4,846

 
14

 
4,860

 
1,418

 
299

 
1,717

 
1,848,551

 
1,855,128

Construction and land
 
758

 

 
758

 

 
3,973

 
3,973

 
654,595

 
659,326

Total commercial lending
 
39,982

 
562

 
40,544

 
34,256

 
67,633

 
101,889

 
21,716,666

 
21,859,099

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
13,269

 
5,355

 
18,624

 
6

 
5,917

 
5,923

 
4,504,364

 
4,528,911

HELOCs
 
4,286

 
4,186

 
8,472

 
89

 
3,917

 
4,006

 
1,756,439

 
1,768,917

Other consumer
 
14

 
23

 
37

 

 
2,491

 
2,491

 
333,976

 
336,504

Total consumer lending
 
17,569

 
9,564

 
27,133

 
95

 
12,325

 
12,420

 
6,594,779

 
6,634,332

Total
 
$
57,551

 
$
10,126

 
$
67,677

 
$
34,351

 
$
79,958

 
$
114,309

 
$
28,311,445

 
$
28,493,431

 

For information on the policy for recording payments received and resuming accrual of interest on non-PCI loans that are placed on nonaccrual status, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2017 Form 10-K.

PCI loans are excluded from the above aging analysis tables as the Company has elected to account for these loans on a pool level basis under ASC 310-30 at the time of acquisition. Refer to the discussion on PCI loans within this note for additional details on interest income recognition. As of June 30, 2018 and December 31, 2017, PCI loans on nonaccrual status totaled $6.3 million and $5.3 million, respectively.


36



Loans in Process of Foreclosure

As of June 30, 2018 and December 31, 2017, consumer mortgage loans of $5.6 million and $6.6 million, respectively, were secured by residential real estate properties, for which formal foreclosure proceedings were in process in accordance with local requirements of the applicable jurisdictions. As of June 30, 2018, there were no foreclosed residential real estate properties included in total net OREO of $709 thousand. In comparison, a foreclosed residential real estate property with a carrying amount of $188 thousand was included in total net OREO of $830 thousand as of December 31, 2017.

Troubled Debt Restructurings

Potential troubled debt restructurings (“TDR”s) are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered.

The following tables present the additions to non-PCI TDRs for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Loans Modified as TDRs During the Three Months Ended June 30,
 
2018
 
2017
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
 
$

 
$

 
$

 
6
 
$
17,039

 
$
15,673

 
$
10,010

CRE
 
1
 
$
750

 
$
837

 
$

 
 
$

 
$

 
$

Multifamily residential
 
 
$

 
$

 
$

 
1
 
$
3,655

 
$
3,638

 
$
107

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
2
 
$
405

 
$
404

 
$
(26
)
 
 
$

 
$

 
$

HELOCs
 
2
 
$
1,546

 
$
1,536

 
$

 
 
$

 
$

 
$

 
 
 
 
Loans Modified as TDRs During the Six Months Ended June 30,
($ in thousands)
 
2018
 
2017
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
 
Number
of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
(1)
 
Financial
Impact 
(2)
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
 
$

 
$

 
$

 
8
 
$
18,189

 
$
17,272

 
$
11,202

CRE
 
1
 
$
750

 
$
837

 
$

 
1
 
$
1,527

 
$
1,494

 
$

Multifamily residential
 
 
$

 
$

 
$

 
1
 
$
3,655

 
$
3,638

 
$
107

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
2
 
$
405

 
$
404

 
$
(26
)
 
 
$

 
$

 
$

HELOCs
 
2
 
$
1,546

 
$
1,536

 
$

 
 
$

 
$

 
$

 
(1)
Includes subsequent payments after modification and reflects the balance as of June 30, 2018 and 2017.
(2)
The financial impact includes increases (decreases) in charge-offs and specific reserves recorded at the modification date.


37



The following tables present the non-PCI TDR modifications for the three and six months ended June 30, 2018 and 2017 by modification type:
 
($ in thousands)
 
Modification Type During the Three Months Ended June 30,
 
2018
 
2017
 
Principal (1)
 
Principal
and
Interest
(2)
 
Interest
Rate
Reduction
 
Other
 
Total
 
Principal (1)
 
Principal
and
Interest
(2)
 
Interest
Rate
Reduction
 
Other
 
Total
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$

 
$

 
$

 
$

 
$

 
$
3,388

 
$
12,285

 
$

 
$

 
$
15,673

CRE
 

 

 
837

 

 
837

 

 

 

 

 

Multifamily residential
 

 

 

 

 

 
3,638

 

 

 

 
3,638

Total commercial lending
 

 

 
837

 

 
837

 
7,026

 
12,285

 

 

 
19,311

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
65

 

 

 
339

 
404

 

 

 

 

 

HELOCs
 
1,464

 

 

 
72

 
1,536

 

 

 

 

 

Total consumer lending
 
1,529

 

 

 
411

 
1,940

 

 

 

 

 

Total
 
$
1,529

 
$

 
$
837

 
$
411

 
$
2,777

 
$
7,026

 
$
12,285

 
$

 
$

 
$
19,311

 
 
($ in thousands)
 
Modification Type During the Six Months Ended June 30,
 
2018
 
2017
 
Principal (1)
 
Principal
and
Interest
(2)
 
Interest
Rate
Reduction
 
Other
 
Total
 
Principal (1)
 
Principal
and
Interest
(2)
 
Interest
Rate
Reduction
 
Other
 
Total
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$

 
$

 
$

 
$

 
$

 
$
3,388

 
$
13,884

 
$

 
$

 
$
17,272

CRE
 

 

 
837

 

 
837

 
1,494

 

 

 

 
1,494

Multifamily residential
 

 

 

 

 

 
3,638

 

 

 

 
3,638

Total commercial lending
 

 

 
837

 

 
837

 
8,520

 
13,884

 

 

 
22,404

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
65

 

 

 
339

 
404

 

 

 

 

 

HELOCs
 
1,464

 

 

 
72

 
1,536

 

 

 

 

 

Total consumer lending
 
1,529

 

 

 
411

 
1,940

 

 

 
846

 

 

Total
 
$
1,529

 
$

 
$
837

 
$
411

 
$
2,777

 
$
8,520

 
$
13,884

 
$
6,722

 
$

 
$
22,404

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

Subsequent to restructuring, a TDR that becomes delinquent, generally beyond 90 days, is considered to be in default. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the allowance for loan losses. The following tables present information on loans modified as TDRs within the previous 12 months that have subsequently defaulted during the three and six months ended June 30, 2018 and 2017, and were still in default at the respective period end:
 
($ in thousands)
 
Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended June 30,
 
2018
 
2017
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
Consumer lending:
 
 
 
 
 
 
 
 
HELOCs
 

 
$

 
1

 
$
48

 

38



 
($ in thousands)
 
Loans Modified as TDRs that Subsequently Defaulted During the Six Months Ended June 30,
 
2018
 
2017
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
Consumer lending:
 
 
 
 
 
 
 
 
HELOCs
 

 
$

 
1

 
$
48

 

The amount of additional funds committed to lend to borrowers whose terms have been modified was $2.9 million and $5.1 million as of June 30, 2018 and December 31, 2017, respectively.

Impaired Loans

The following tables present information on non-PCI impaired loans as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
Unpaid
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
85,975

 
$
27,397

 
$
36,257

 
$
63,654

 
$
10,920

CRE
 
38,567

 
26,677

 
5,469

 
32,146

 
520

Multifamily residential
 
6,562

 
2,998

 
3,104

 
6,102

 
99

Total commercial lending
 
131,104

 
57,072

 
44,830

 
101,902

 
11,539

Consumer lending:
 
 

 
 

 
 

 
 

 
 

Single-family residential
 
17,109

 
4,037

 
11,879

 
15,916

 
53

HELOCs
 
9,642

 
4,493

 
4,989

 
9,482

 
78

Other consumer
 
2,491

 

 
2,491

 
2,491

 
2,491

Total consumer lending
 
29,242

 
8,530

 
19,359

 
27,889

 
2,622

Total non-PCI impaired loans
 
$
160,346

 
$
65,602

 
$
64,189

 
$
129,791

 
$
14,161

 
 
($ in thousands)
 
December 31, 2017
 
Unpaid
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
Commercial lending:
 
 
 
 
 
 
 
 
 
 
C&I
 
$
130,773

 
$
36,086

 
$
62,599

 
$
98,685

 
$
16,094

CRE
 
41,248

 
28,699

 
6,857

 
35,556

 
684

Multifamily residential
 
11,164

 
8,019

 
2,617

 
10,636

 
88

Construction and land
 
4,781

 
3,973

 

 
3,973

 

Total commercial lending
 
187,966

 
76,777

 
72,073

 
148,850

 
16,866

Consumer lending:
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
15,501

 

 
14,338

 
14,338

 
534

HELOCs
 
5,484

 
2,287

 
2,921

 
5,208

 
4

Other consumer
 
2,491

 

 
2,491

 
2,491

 
2,491

Total consumer lending
 
23,476

 
2,287

 
19,750

 
22,037

 
3,029

Total non-PCI impaired loans
 
$
211,442

 
$
79,064

 
$
91,823

 
$
170,887

 
$
19,895

 


39



The following table presents the average recorded investment and interest income recognized on non-PCI impaired loans for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
 
Average
Recorded
Investment
 
Recognized
Interest
   Income (1)
Commercial lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C&I
 
$
67,342

 
$
1,494

 
$
113,858

 
$
140

 
$
67,290

 
$
2,893

 
$
119,608

 
$
362

CRE
 
32,524

 
837

 
37,897

 
33

 
32,813

 
1,666

 
38,116

 
80

Multifamily residential
 
6,161

 
58

 
12,720

 
81

 
6,203

 
127

 
12,771

 
129

Construction and land
 

 

 
4,414

 

 

 

 
4,584

 

Total commercial lending
 
106,027

 
2,389

 
168,889

 
254

 
106,306

 
4,686

 
175,079

 
571

Consumer lending:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family residential
 
15,962

 
115

 
16,985

 
35

 
16,012

 
269

 
17,038

 
93

HELOCs
 
9,502

 
138

 
4,541

 
13

 
9,514

 
249

 
4,548

 
32

Other consumer
 
2,491

 
47

 

 

 
2,491

 
92

 

 

Total consumer lending
 
27,955

 
300

 
21,526

 
48

 
28,017

 
610

 
21,586

 
125

Total non-PCI impaired loans
 
$
133,982

 
$
2,689

 
$
190,415

 
$
302

 
$
134,323

 
$
5,296

 
$
196,665

 
$
696

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


40



Allowance for Credit Losses

The following table presents a summary of activities in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2018 and 2017:
 
 
 
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Non-PCI Loans
 
 
 
 
 
 
 
 
Allowance for non-PCI loans, beginning of period
 
$
297,607

 
$
263,007

 
$
287,070

 
$
260,402

Provision for loan losses on non-PCI loans
 
15,139

 
10,680

 
35,072

 
18,726

Gross charge-offs:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
C&I
 
(13,534
)
 
(5,386
)
 
(31,979
)
 
(12,443
)
Construction and land
 

 
(1
)
 

 
(149
)
Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 

 
(1
)
 
(1
)
 
(1
)
Other consumer
 
(162
)
 
(3
)
 
(179
)
 
(7
)
Total gross charge-offs
 
(13,696
)
 
(5,391
)
 
(32,159
)
 
(12,600
)
Gross recoveries:
 
 
 
 
 
 
 
 
Commercial lending:
 
 
 
 
 
 
 
 
C&I
 
511

 
7,038

 
8,198

 
7,493

CRE
 
2

 
423

 
429

 
992

Multifamily residential
 
1,061

 
128

 
1,394

 
695

Construction and land
 
258

 
88

 
693

 
112

Consumer lending:
 
 
 
 
 
 
 
 
Single-family residential
 
629

 
243

 
813

 
254

HELOCs
 

 

 

 
24

Other consumer
 

 
22

 
1

 
140

Total gross recoveries
 
2,461

 
7,942

 
11,528

 
9,710

Net (charge-offs) recoveries
 
(11,235
)
 
2,551

 
(20,631
)
 
(2,890
)
Allowance for non-PCI loans, end of period
 
301,511

 
276,238

 
301,511

 
276,238

 
 
 
 
 
 
 
 
 
PCI Loans
 
 
 
 
 
 
 
 
Allowance for PCI loans, beginning of period
 
47

 
87

 
58

 
118

Reversal of loan losses on PCI loans
 
(8
)
 
(9
)
 
(19
)
 
(40
)
Allowance for PCI loans, end of period
 
39

 
78

 
39

 
78

Allowance for loan losses
 
$
301,550

 
$
276,316

 
$
301,550

 
$
276,316

 
 
 
 

For further information on accounting policies and the methodologies used to estimate the allowance for credit losses and loan charge-offs, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2017 Form 10-K.

The following table presents a summary of activities in the allowance for unfunded credit reserves for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Allowance for unfunded credit reserves, beginning of period
 
$
13,614

 
$
15,174

 
$
13,318

 
$
16,121

Provision for (reversal of) unfunded credit reserves
 
405

 
14

 
701

 
(933
)
Allowance for unfunded credit reserves, end of period
 
$
14,019

 
$
15,188

 
$
14,019

 
$
15,188

 
 
 
 
 


41



The allowance for unfunded credit reserves is maintained at a level management believes to be sufficient to absorb estimated probable losses related to unfunded credit facilities. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. See Note 11Commitments and Contingencies to the Consolidated Financial Statements for additional information related to unfunded credit reserves.

The following tables present the Company’s allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
Commercial Lending
 
Consumer Lending
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-
Family
Residential
 
HELOCs
 
Other
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
10,920

 
$
520

 
$
99

 
$

 
$
53

 
$
78

 
$
2,491

 
$
14,161

Collectively evaluated for impairment
 
151,484

 
44,061

 
18,387

 
30,362

 
33,335

 
7,199

 
2,522

 
287,350

Acquired with deteriorated credit quality
 

 
39

 

 

 

 

 

 
39

Total
 
$
162,404

 
$
44,620

 
$
18,486

 
$
30,362

 
$
33,388

 
$
7,277

 
$
5,013

 
$
301,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
63,654

 
$
32,146

 
$
6,102

 
$

 
$
15,916

 
$
9,482

 
$
2,491

 
$
129,791

Collectively evaluated for impairment
 
10,992,571

 
8,803,930

 
1,982,362

 
623,794

 
5,194,098

 
1,748,611

 
371,537

 
29,716,903

Acquired with deteriorated credit quality (1)
 
2,794

 
218,491

 
44,058

 
43

 
106,881

 
11,418

 

 
383,685

Total (1)
 
$
11,059,019

 
$
9,054,567

 
$
2,032,522

 
$
623,837

 
$
5,316,895

 
$
1,769,511

 
$
374,028

 
$
30,230,379

 
 
($ in thousands)
 
December 31, 2017
 
Commercial Lending
 
Consumer Lending
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-
Family
Residential
 
HELOCs
 
Other
Consumer
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
16,094

 
$
684

 
$
88

 
$

 
$
534

 
$
4

 
$
2,491

 
$
19,895

Collectively evaluated for impairment
 
146,964

 
40,495

 
19,021

 
26,881

 
25,828

 
7,350

 
636

 
267,175

Acquired with deteriorated credit quality
 

 
58

 

 

 

 

 

 
58

Total
 
$
163,058

 
$
41,237

 
$
19,109

 
$
26,881

 
$
26,362

 
$
7,354

 
$
3,127

 
$
287,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
98,685

 
$
35,556

 
$
10,636

 
$
3,973

 
$
14,338

 
$
5,208

 
$
2,491

 
$
170,887

Collectively evaluated for impairment
 
10,586,751

 
8,623,653

 
1,844,492

 
655,353

 
4,514,573

 
1,763,709

 
334,013

 
28,322,544

Acquired with deteriorated credit quality (1)
 
11,795

 
277,688

 
61,048

 
371

 
117,378

 
14,007

 

 
482,287

Total (1)
 
$
10,697,231

 
$
8,936,897

 
$
1,916,176

 
$
659,697

 
$
4,646,289

 
$
1,782,924

 
$
336,504

 
$
28,975,718

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


42



Purchased Credit Impaired Loans

At the date of acquisition, PCI loans are pooled and accounted for at fair value, which represents the discounted value of the expected cash flows of the loan portfolio. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flows expectation. The cash flows expected over the life of the pools are estimated by an internal cash flows model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to cumulative loss rates, loss curves and prepayment speeds are utilized to calculate the expected cash flows. The amount of expected cash flows over the initial investment in the loan represents the “accretable yield,” which is recognized as interest income on a level yield basis over the life of the loan. Prepayment speeds affect the estimated life of PCI loans, which may change the amount of interest income, and possibly principal, expected to be collected. The excess of total contractual cash flows over the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the “nonaccretable difference.”

The following table presents the changes in accretable yield for PCI loans for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Accretable yield for PCI loans, beginning of period
 
$
95,864

 
$
127,990

 
$
101,977

 
$
136,247

Accretion
 
(11,084
)
 
(11,082
)
 
(20,218
)
 
(21,361
)
Changes in expected cash flows
 
272

 
1,717

 
3,293

 
3,739

Accretable yield for PCI loans, end of period
 
$
85,052

 
$
118,625

 
$
85,052

 
$
118,625

 

Loans Held-for-Sale

At the time of commitment to originate or purchase a loan, the loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including asset/liability and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value. As of June 30, 2018, loans held-for-sale of $14.7 million consisted of C&I and single-family residential loans. In comparison, as of December 31, 2017, loans held-for-sale of $85 thousand consisted of single-family residential loans.

Loan Purchases, Sales and Transfers

From time to time, the Company purchases and sells loans in the secondary market. Certain purchased loans are transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The following tables present information on the loan purchases into the held-for-investment portfolio, transfers from held-for-investment to held-for-sale, and sales during the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended June 30, 2018
 
Commercial Lending
 
Consumer Lending
 
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-Family
Residential
 
Other
Consumer
 
Total
 
Loans transferred from held-for-investment to held-for-sale
 
$
99,449

 
$
30,415

 
$

 
$

 
$

 
$

 
$
129,864

(1) 
Sales
 
$
140,326

 
$
30,415

 
$

 
$

 
$
8,175

 
$

 
$
178,916

(2)(3)(4) 
Purchases
 
$
285,615

 
$

 
$
3,249

 
$

 
$
20,912

 
$

 
$
309,776

(5) 
 

43



 
($ in thousands)
 
Three Months Ended June 30, 2017
 
Commercial Lending
 
Consumer Lending
 
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-Family
Residential
 
Other
Consumer
 
Total
 
Loans transferred from held-for-investment to held-for-sale
 
$
58,817

 
$
5,668

 
$
532

 
$
687

 
$
249

 
$

 
$
65,953

(1) 
Sales
 
$
76,441

 
$
5,668

 
$
532

 
$
687

 
$
5,432

 
$

 
$
88,760

(2)(3)(4) 
Purchases
 
$
220,612

 
$

 
$
714

 
$

 
$
128

 
$

 
$
221,454

(5) 
 
 
($ in thousands)
 
Six Months Ended June 30, 2018
 
Commercial Lending
 
Consumer Lending
 
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-Family
Residential
 
Other
Consumer
 
Total
 
Loans transferred from held-for-investment to held-for-sale
 
$
245,840

 
$
39,791

 
$

 
$

 
$

 
$

 
$
285,631

(1) 
Sales
 
$
242,691

 
$
39,791

 
$

 
$

 
$
10,721

 
$

 
$
293,203

(2)(3)(4) 
Purchases
 
$
350,362

 
$

 
$
3,435

 
$

 
$
36,025

 
$

 
$
389,822

(5) 
 
 
($ in thousands)
 
Six Months Ended June 30, 2017
 
Commercial Lending
 
Consumer Lending
 
 
 
 
C&I
 
CRE
 
Multifamily
Residential
 
Construction
and Land
 
Single-Family
Residential
 
Other
Consumer
 
Total
 
Loans transferred from held-for-investment to held-for-sale
 
$
324,076

 
$
18,433

 
$
532

 
$
687

 
$
249

 
$

 
$
343,977

(1) 
Sales
 
$
313,120

 
$
18,433

 
$
532

 
$
687

 
$
9,742

 
$
22,191

 
$
364,705

(2)(3)(4) 
Purchases
 
$
367,728

 
$

 
$
840

 
$

 
$
128

 
$

 
$
368,696

(5) 
 
(1)
The Company recorded $13.3 million and $13.4 million in write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three and six months ended June 30, 2018, respectively, and $117 thousand and $209 thousand for the three and six months ended June 30, 2017, respectively.
(2)
Includes originated loans sold of $103.5 million and $193.2 million for the three and six months ended June 30, 2018, respectively, and $38.3 million and $67.6 million for the three and six months ended June 30, 2017, respectively. Originated loans sold during the three and six months ended June 30, 2018 and 2017 were primarily C&I and CRE loans.
(3)
Includes purchased loans sold in the secondary market of $75.4 million and $100.0 million for the three and six months ended June 30, 2018, respectively, and $50.5 million and $297.1 million for the three and six months ended June 30, 2017, respectively.
(4)
Net gains on sales of loans, excluding the lower of cost or fair value adjustments, were $2.3 million and $3.9 million for the three and six months ended June 30, 2018, respectively, and $1.6 million and $4.4 million for the three and six months ended June 30, 2017, respectively. No lower of cost or fair value adjustments were recorded for the three and six months ended June 30, 2018. In comparison, the Company reversed the lower of cost or fair value adjustment of $8 thousand during the three months ended June 30, 2017 and recorded a lower of cost or fair value adjustment of $61 thousand for the six months ended June 30, 2017. These adjustments were included in Net gains on sales of loans on the Consolidated Statement of Income.
(5)
C&I loan purchases for each of the three and six months ended June 30, 2018 and 2017 were mainly comprised of C&I syndicated loans.


44



Note 9Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net

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

Investments in Qualified Affordable Housing Partnerships, Net

The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.

The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
Investments in qualified affordable housing partnerships, net
 
$
152,556

 
$
162,824

Accrued expenses and other liabilities — Unfunded commitments
 
$
52,110

 
$
55,815

 

The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three and six months ended June 30, 2018 and 2017:
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Tax credits and other tax benefits recognized
 
$
8,940

 
$
9,566

 
$
18,095

 
$
19,187

Amortization expense included in income tax expense
 
$
6,700

 
$
7,051

 
$
13,773

 
$
14,001

 
 
 
 
 
 
 
 
 

Investments in Tax Credit and Other Investments, Net

The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of June 30, 2018 and December 31, 2017:
 
($ in thousands)
 
June 30, 2018
 
December 31, 2017
Investments in tax credit and other investments, net
 
$
242,595

 
$
224,551

Accrued expenses and other liabilities — Unfunded commitments
 
$
109,432

 
$
113,372

 


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The following table presents additional information related to the Company’s investments in tax credit and other investments, net, for the three and six months ended June 30, 2018 and 2017:
 
($ in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Amortization expense included in noninterest expense
 
$
20,481

 
$
27,872

 
$
37,881

 
$
42,232

 

As a result of the adoption of ASU 2016-01 in the first quarter of 2018, $30.9 million of equity securities with readily determinable fair values were included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet as of June 30, 2018. These equity securities are CRA investments and were measured at fair value with changes in fair value recorded through net income. The unrealized losses recognized during the three and six months ended June 30, 2018 on these equity securities totaled $159 thousand and $613 thousand, respectively.

The Company is not the primary beneficiary of the investments in tax credit and other investments and, therefore, is not required to consolidate these investments on the Consolidated Financial Statements. Depending on the ownership percentage and the influence the Company has on the investments, the Company applies the equity or cost method of accounting, or the