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.

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TABLE OF CONTENTS

			Page
PART I — FINANCIAL INFORMATION			3
	Item 1.	Consolidated Financial Statements	3
		Consolidated Balance Sheet (Unaudited)	3
		Consolidated Statement of Income (Unaudited)	4
		Consolidated Statement of Comprehensive Income (Unaudited)	5
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)	6
		Consolidated Statement of Cash Flows (Unaudited)	7
		Notes to Consolidated Financial Statements (Unaudited)	9
		1 — Basis of Presentation	9
		2 — Current Accounting Developments	9
		3 — Dispositions and Held-for-Sale	12
		4 — Fair Value Measurement and Fair Value of Financial Instruments	13
		5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements	22
		6 — Securities	24
		7 — Derivatives	27
		8 — Loans Receivable and Allowance for Credit Losses	33
		9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net	45
		10 — Goodwill and Other Intangible Assets	46
		11 — Commitments and Contingencies	47
		12 — Revenue from Contracts with Customers	48
		13 — Stock Compensation Plans	50
		14 — Stockholders’ Equity and Earnings Per Share	51
		15 — Accumulated Other Comprehensive Income (Loss)	52
		16 — Business Segments	54
		17 — Subsequent Events	56
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
		Overview	57
		Financial Highlights	57
		Results of Operations	60
		Balance Sheet Analysis	70
		Off-Balance Sheet Arrangements	86
		Asset Liability and Market Risk Management	87
		Critical Accounting Policies and Estimates	93
		Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures	93
		Forward-Looking Statements	95
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	97
	Item 4.	Controls and Procedures	97
PART II — OTHER INFORMATION			98
	Item 1.	Legal Proceedings	98
	Item 1A.	Risk Factors	98
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98
	Item 6.	Exhibits	98
GLOSSARY OF ACRONYMS			99
SIGNATURE			100
EXHIBIT INDEX			101

2

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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

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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

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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

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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 2 — Current 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 2 — Current Accounting Developments to the Consolidated Financial Statements for additional information.

See accompanying Notes to Consolidated Financial Statements.

6

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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

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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

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation

 

East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank 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 2 — Current 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

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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.

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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.

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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 3 — Dispositions 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.

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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.

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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.

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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.

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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.

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($ 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			$	—

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At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. 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.

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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

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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.

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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 4 — Fair 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.

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($ 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.

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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.

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Note 6 — Securities

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.

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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.

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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: