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EAST WEST BANCORP INC - Quarter Report: 2020 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, 2020

OR

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

For the transition period from to

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

Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading
Symbol(s)
Name of each exchange
on which registered
Common Stock, $0.001 Par ValueEWBCThe Nasdaq Global Select Market

        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 No

        Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes No

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 filerAccelerated filer
Non-accelerated filerSmaller 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 
        Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,486,780 shares as of July 31, 2020.



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,
2020
December 31,
2019
(Unaudited)
ASSETS
Cash and due from banks$602,974  $536,221  
Interest-bearing cash with banks3,930,528  2,724,928  
Cash and cash equivalents4,533,502  3,261,149  
Interest-bearing deposits with banks531,591  196,161  
Securities purchased under resale agreements (“resale agreements”)1,260,000  860,000  
Securities:
Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,823,714 in 2020; includes assets pledged as collateral of $745,163 in 2020 and $479,432 in 2019)
3,884,574  3,317,214  
Restricted equity securities, at cost 78,963  78,580  
Loans held-for-sale3,875  434  
Loans held-for-investment (net of allowance for loan losses of $632,071 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $27,408,027 in 2020 and $22,431,092 in 2019)
36,597,341  34,420,252  
Investments in qualified affordable housing partnerships, net201,888  207,037  
Investments in tax credit and other investments, net
251,318  254,140  
Premises and equipment (net of accumulated depreciation of $122,372 in 2020 and $116,790 in 2019)
110,709  118,364  
Goodwill465,697  465,697  
Operating lease right-of-use assets94,898  99,973  
Other assets1,393,237  917,095  
TOTAL$49,407,593  $44,196,096  
LIABILITIES
Deposits:
Noninterest-bearing$13,940,420  $11,080,036  
Interest-bearing26,732,258  26,244,223  
Total deposits40,672,678  37,324,259  
Short-term borrowings252,851  28,669  
Federal Home Loan Bank (“FHLB”) advances656,759  745,915  
Securities sold under repurchase agreements (“repurchase agreements”)300,000  200,000  
Long-term debt and finance lease liabilities1,580,442  152,270  
Operating lease liabilities102,708  108,083  
Accrued expenses and other liabilities854,912  619,283  
Total liabilities44,420,350  39,178,479  
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,143,278 and 166,621,959 shares issued in 2020 and 2019, respectively
167  167  
Additional paid-in capital1,841,748  1,826,345  
Retained earnings3,755,649  3,689,377  
Treasury stock, at cost — 25,656,881 shares in 2020 and 20,996,574 shares in 2019
(633,455) (479,864) 
Accumulated other comprehensive income (loss) (“AOCI”), net of tax23,134  (18,408) 
Total stockholders’ equity4,987,243  5,017,617  
TOTAL$49,407,593  $44,196,096  
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,
2020201920202019
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees$367,393  $434,450  $779,262  $857,984  
AFS debt securities21,004  15,685  41,146  31,433  
Resale agreements5,514  7,404  11,139  15,310  
Restricted equity securities301  505  747  1,218  
Interest-bearing cash and deposits with banks4,564  16,800  15,672  32,210  
Total interest and dividend income398,776  474,844  847,966  938,155  
INTEREST EXPENSE
Deposits46,399  97,964  122,802  189,969  
Short-term borrowings
265  361  821  977  
FHLB advances3,343  4,011  7,509  6,990  
Repurchase agreements3,540  3,469  7,531  6,961  
Long-term debt and finance lease liabilities1,454  1,713  2,821  3,471  
Total interest expense55,001  107,518  141,484  208,368  
Net interest income before provision for credit losses343,775  367,326  706,482  729,787  
Provision for credit losses102,443  19,245  176,313  41,824  
Net interest income after provision for credit losses241,332  348,081  530,169  687,963  
NONINTEREST INCOME
Lending fees21,946  16,423  37,719  31,392  
Deposit account fees10,872  9,607  21,319  19,075  
Foreign exchange income4,562  7,286  12,381  12,301  
Wealth management fees3,091  3,800  8,444  7,574  
Interest rate contracts and other derivative income6,107  10,398  13,180  13,614  
Net gains on sales of loans132  15  1,082  930  
Gains on sales of AFS debt securities9,640  1,447  11,169  3,008  
Other investment income966  706  2,887  1,908  
Other income1,321  3,077  4,505  5,088  
Total noninterest income58,637  52,759  112,686  94,890  
NONINTEREST EXPENSE
Compensation and employee benefits96,955  100,531  198,915  202,830  
Occupancy and equipment expense16,217  17,362  33,293  34,680  
Deposit insurance premiums and regulatory assessments3,700  2,919  7,127  6,007  
Legal expense1,530  2,355  4,727  4,580  
Data processing4,480  3,460  8,306  6,617  
Consulting expense1,413  2,069  2,630  4,128  
Deposit related expense3,353  3,338  6,916  6,842  
Computer software expense7,301  6,211  13,467  12,289  
Other operating expense19,248  22,679  40,367  44,968  
Amortization of tax credit and other investments24,759  16,739  42,084  41,644  
Repurchase agreements’ extinguishment cost8,740  —  8,740  —  
Total noninterest expense187,696  177,663  366,572  364,585  
INCOME BEFORE INCOME TAXES112,273  223,177  276,283  418,268  
INCOME TAX EXPENSE12,921  72,797  32,107  103,864  
NET INCOME$99,352  $150,380  $244,176  $314,404  
EARNINGS PER SHARE (“EPS”)
BASIC$0.70  $1.03  $1.71  $2.16  
DILUTED$0.70  $1.03  $1.70  $2.15  
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC141,486  145,546  143,150  145,402  
DILUTED141,827  146,052  143,560  146,016  
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,
2020201920202019
Net income$99,352  $150,380  $244,176  $314,404  
Other comprehensive income (loss), net of tax:
Net changes in unrealized gains on AFS debt securities
17,816  29,027  45,269  51,038  
Net changes in unrealized losses on cash flow hedges(1,333) —  (1,333) —  
Foreign currency translation adjustments(230) (6,016) (2,394) (2,836) 
Other comprehensive income16,253  23,011  41,542  48,202  
COMPREHENSIVE INCOME$115,605  $173,391  $285,718  $362,606  
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 EarningsTreasury StockAOCI,
Net of Tax
Total
Stockholders’ Equity
SharesAmount
BALANCE, APRIL 1, 2019145,501,301  $1,799,124  $3,305,054  $(479,265) $(32,983) $4,591,930  
Net income—  —  150,380  —  —  150,380  
Other comprehensive income—  —  —  —  23,011  23,011  
Net activity of common stock pursuant to various stock compensation plans and agreements
45,268  9,938  —  (133) —  9,805  
Cash dividends on common stock ($0.275 per share)
—  —  (40,533) —  —  (40,533) 
BALANCE, JUNE 30, 2019145,546,569  $1,809,062  $3,414,901  $(479,398) $(9,972) $4,734,593  
BALANCE, APRIL 1, 2020141,435,099  $1,833,784  $3,695,759  $(633,439) $6,881  $4,902,985  
Net income—  —  99,352  —  —  99,352  
Other comprehensive income—  —  —  —  16,253  16,253  
Net activity of common stock pursuant to various stock compensation plans and agreements
51,298  8,131  —  (16) —  8,115  
Cash dividends on common stock ($0.275 per share)
—  —  (39,462) —  —  (39,462) 
BALANCE, JUNE 30, 2020141,486,397  $1,841,915  $3,755,649  $(633,455) $23,134  $4,987,243  

Common Stock and
Additional Paid-in Capital
Retained
Earnings
Treasury
Stock
AOCI,
Net of Tax
Total
Stockholders’
Equity
SharesAmount
BALANCE, JANUARY 1, 2019144,961,363  $1,789,977  $3,160,132  $(467,961) $(58,174) $4,423,974  
Cumulative-effect of change in accounting principle related to leases (1)
—  —  14,668  —  —  14,668  
Net income—  —  314,404  —  —  314,404  
Other comprehensive income—  —  —  —  48,202  48,202  
Warrants exercised
180,226  1,711  —  2,732  —  4,443  
Net activity of common stock pursuant to various stock compensation plans and agreements
404,980  17,374  —  (14,169) —  3,205  
Cash dividends on common stock ($0.505 per share)
—  —  (74,303) —  —  (74,303) 
BALANCE, JUNE 30, 2019145,546,569  $1,809,062  $3,414,901  $(479,398) $(9,972) $4,734,593  
BALANCE, JANUARY 1, 2020145,625,385  $1,826,512  $3,689,377  $(479,864) $(18,408) $5,017,617  
Cumulative-effect of change in accounting principle related to credit losses (2)
—  —  (97,967) —  —  (97,967) 
Net income
—  —  244,176  —  —  244,176  
Other comprehensive income
—  —  —  —  41,542  41,542  
Net activity of common stock pursuant to various stock compensation plans and agreements
332,694  15,403  —  (7,625) —  7,778  
Repurchase of common stock pursuant to the Stock Repurchase Program
(4,471,682) —  —  (145,966) —  (145,966) 
Cash dividends on common stock ($0.550 per share)
—  —  (79,937) —  —  (79,937) 
BALANCE, JUNE 30, 2020141,486,397  $1,841,915  $3,755,649  $(633,455) $23,134  $4,987,243  
 

(1) Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related ASUs in the first quarter of 2019.
(2) Represents the impact of the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020. Refer to Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) 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,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $244,176  $314,404  
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization 68,926  72,113  
Accretion of discount and amortization of premiums, net(18,901) (9,817) 
Stock compensation costs14,280  15,525  
Deferred income tax benefit(111) (2,110) 
Provision for credit losses176,313  41,824  
Net gains on sales of loans(1,082) (930) 
Gains on sales of AFS debt securities(11,169) (3,008) 
Loans held-for-sale:
Originations and purchases(21,791) (3,339) 
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale18,386  3,632  
Proceeds from distributions received from equity method investees1,107  1,538  
Net change in accrued interest receivable and other assets (456,374) (150,154) 
Net change in accrued expenses and other liabilities257,397  10,320  
Other net operating activities(241)  
Total adjustments 26,740  (24,403) 
Net cash provided by operating activities270,916  290,001  
CASH FLOWS FROM INVESTING ACTIVITIES  
Net (increase) decrease in:  
Investments in qualified affordable housing partnerships, tax credit and other investments(68,884) (61,555) 
Interest-bearing deposits with banks(315,497) 222,387  
Resale agreements:
Proceeds from paydowns and maturities350,000  50,000  
Purchases(500,000) (25,000) 
AFS debt securities:
Proceeds from sales484,380  375,102  
Proceeds from repayments, maturities and redemptions848,633  117,325  
Purchases(1,834,087) (316,740) 
Loans held-for-investment:
Proceeds from sales of loans originally classified as held-for-investment144,015  170,174  
Purchases(145,695) (326,456) 
Other changes in loans held-for-investment, net(2,475,089) (1,196,094) 
Premises and equipment:  
Proceeds from sales1,883  —  
Purchases(1,846) (4,414) 
Proceeds from distributions received from equity method investees1,948  3,636  
Other net investing activities(374) (5,516) 
Net cash used in investing activities(3,510,613) (997,151) 
CASH FLOWS FROM FINANCING ACTIVITIES  
Net increase in deposits3,355,168  1,035,650  
Net increase (decrease) in short-term borrowings225,834  (38,107) 
FHLB advances:
Proceeds 10,100  1,500,000  
Repayment(100,099) (1,082,000) 
Repayment of repurchase agreements(150,000) —  
Repurchase agreements’ extinguishment cost(8,740) —  
Long-term debt and lease liabilities:
Proceeds from long-term debt1,437,269  —  
Repayment of long-term debt and lease liabilities(9,320) (435) 
Common stock:
Repurchase of common stocks pursuant to the Stock Repurchase Program(145,965) —  
Proceeds from issuance pursuant to various stock compensation plans and agreements1,170  1,894  
Stocks tendered for payment of withholding taxes(7,626) (14,169) 
Cash dividends paid(80,271) (74,949) 
Net cash provided by financing activities4,527,520  1,327,884  
Effect of exchange rate changes on cash and cash equivalents(15,470) (497) 
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,272,353  620,237  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD3,261,149  3,001,377  
CASH AND CASH EQUIVALENTS, END OF PERIOD$4,533,502  $3,621,614  
See accompanying Notes to Consolidated Financial Statements.

7


EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Six Months Ended June 30,
20202019
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest$145,723  $203,577  
Income taxes, net$5,609  $76,153  
Noncash investing and financing activities:
Loans transferred from held-for-investment to held-for-sale$143,283  $173,394  
Loans transferred to OREO$19,504  $—  

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, 2020, 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, Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. In 2019, the Company acquired East West Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly-owned subsidiaries of East West.

The unaudited interim Consolidated Financial Statements are presented in accordance with United States (“U.S.”) generally accepted accounting principles (“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 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, 2019, filed with the U.S. Securities and Exchange Commission on February 27, 2020 (the “Company’s 2019 Form 10-K”).

9


Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies

New Accounting Pronouncements Adopted
StandardRequired Date of AdoptionDescriptionEffect on Financial Statements
Standards Adopted in 2020
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent related ASUs
January 1, 2020

Early adoption is permitted on January 1, 2019.
The ASU introduces a new current expected credit loss (“CECL”) model that applies to most financial assets measured at amortized cost and certain instruments, including trade and other receivables, loan receivables, AFS 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 eliminates the guidance for purchased credit impaired (“PCI”) loans, but requires an allowance for loan losses for purchased financial assets with more than an insignificant deterioration of credit since origination. The ASU also modifies the other-than-temporary impairment (“OTTI”) model for AFS debt securities to require an allowance for credit losses instead of a direct write-down. A reversal of the allowance for credit losses is allowed in future periods based on improvements in credit performance expectations. This ASU 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). 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. The new guidance also allows optional relief for certain instruments measured at amortized cost with an option to irrevocably elect the fair value option under ASC Topic 825, Financial Instruments.
The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2020 without electing the fair value option on eligible financial instruments under ASU 2019-05. The adoption of this ASU increased the allowance for loan losses by $125.2 million, and allowance for unfunded credit commitments by $10.5 million and an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios. The Company did not record an allowance for credit losses related to the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in the Company’s 2019 Form 10-K.

The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period.
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 1, 2020

Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017.
The ASU simplifies 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 and the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. This guidance should be applied prospectively.
The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
January 1, 2020The ASU amends ASC Topic 350-40 to align the accounting for costs incurred in a cloud computing arrangement with the guidance on developing internal use software. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.The Company adopted this guidance on a prospective basis on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
10


Recent Accounting Pronouncement
StandardRequired Date of AdoptionDescriptionEffect on Financial Statements
Standard Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Effective for all entities as of March 12, 2020
through December 31, 2022.
In March 2020, the FASB issued a new accounting standard related to contracts or hedging relationships that reference London interbank offered rate or other reference rates that are expected to be discontinued due to reference rate reform. This ASU provides temporary optional expedients and exceptions regarding the accounting requirements related to the modification of certain contracts, hedging relationships and other transactions that are affected by the reference rate reform. The guidance permits the Company to make a one-time election to sell and/or transfer qualifying held-to-maturity securities, and not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022.
The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment. The Company will continue to assess the impact as the reference rate transition occurs over the next two years.

Summary of Significant Accounting Policies

The Company has revised the following significant accounting policies.

Allowance for Loan Losses — The allowance for loan losses is established as management’s estimate of expected credit losses inherent in the Company’s lending activities and increased by the provision for credit losses and decreased by net charge-offs. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses is evaluated quarterly by management based on regular reviews of the collectability of the loans. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level the commercial loan portfolio is comprised of C&I, CRE, multifamily residential, and construction and land loans; and the consumer loan portfolio is comprised of single-family residential, home equity lines of credit (“HELOC”), and other consumer loans.

The allowance for loan losses represents the portion of the loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life. The Company measures the expected loan losses on a collective pool basis when similar risk characteristics exist. Models consisting of quantitative and qualitative components are designed for each pool to develop the expected credit loss estimates. Reasonable and supportable forecast periods vary by loan portfolio. The collectively evaluated loans include non-classified and classified loans that have not been determined to be impaired. The Company has adopted lifetime loss rate models for the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool.

When impaired loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis. Impaired loans include nonaccrual and troubled debt restructuring (“TDR”) loans. The Company considers loans to be impaired if, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. For loans determined to be impaired, three different asset valuation measurement methods are available: (1) the present value of expected future cash flows, (2) the fair value of collateral less costs to sell, and (3) the loan's observable market price. The allowance for loan losses for collateral-dependent loans is determined based on the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company applies the present value of expected future cash flows valuation or the market value of the loan. When the loan is deemed uncollectible, the Company’s policy is to promptly charge off the estimated impaired amount.

The amortized cost of loans held-for-investment excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not recognize an allowance for credit losses for accrued interest receivables as the Company reverses accrued interest if a loan is on nonaccrual status.

The allowance for loan losses is reported separately on the Consolidated Balance Sheet and the Provision for credit losses is reported on the Consolidated Statement of Income.

11


Allowance for Unfunded Credit Commitments — The allowance for unfunded credit commitments includes reserves provided for unfunded loan commitments, letters of credit, standby letters of credit (“SBLCs”) and recourse obligations for loans sold. The Company estimates the allowance for unfunded credit commitments over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit. Within the period of credit exposure, the estimate of credit losses will consider both the likelihood that funding will occur, and an estimate of the expected credit losses on the commitments that are expected to fund over their estimated lives.

The allowance for unfunded credit commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities. For all off-balance sheet instruments and commitments, the unfunded credit exposure is calculated using utilization assumptions based on the Company's historical utilization experience in related portfolio segments. Loss rates are applied to the calculated exposure balances to estimate the allowance for unfunded credit commitments. Other elements such as credit risk factors for loans outstanding, terms and expiration dates of the unfunded credit facilities, and other pertinent information are considered to determine the adequacy of the allowance.

The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Changes to the allowance for unfunded credit commitments are included in Provision for credit losses on the Consolidated Income Statements.

Allowance for Credit Losses on Available-for-Sale Debt Securities — ASU 2016-13 modifies the OTTI model for AFS debt securities to apply an allowance approach for credit impairment as opposed to permanently writing down the cost basis of the security. For each reporting period, AFS debt securities that are in an unrealized loss position are individually analyzed as part of the Company’s ongoing assessments to determine whether a fair value below the amortized cost basis has resulted from a credit loss or other factors. The initial indicator of impairment is a decline in fair value below the amortized cost, excluding accrued interest, of the AFS debt security. The Company first considers whether there is a plan to sell the AFS debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. In determining whether an impairment is due to credit related factors, the Company considers the severity of the decline in fair value, nature of the security, the underlying collateral, the financial condition of the issuer, changes in the AFS debt securities’ ratings and other qualitative factors. For securities that are fully guaranteed by the U.S. government, or certain government enterprises, the Company believes that the credit loss exposure on these securities is remote and applies a zero credit loss assumption.

When the Company does not intend to sell the impaired AFS debt security and it is more-likely-than-not that the Company will not be required to sell the impaired debt security prior to recovery of its amortized cost basis, the credit component of the unrealized loss of the impaired AFS debt security is recognized as an allowance for credit losses, with a corresponding Provision for credit losses on the Consolidated Statement of Income and the non-credit component is recognized in Other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income, net of applicable taxes. At each reporting period, the Company increases or decreases the allowance for credit losses as appropriate, while limiting reversals of the allowance for credit losses to the extent of the amounts previously recorded. If the Company intends to sell the impaired debt security or it is more-likely-than-not that the Company will be required to sell the impaired debt security prior to recovering its amortized cost basis, the entire impairment amount is recognized as an adjustment to the debt security’s amortized cost basis, with a corresponding Provision for credit losses on the Consolidated Statement of Income.

The amortized cost of the Company’s AFS debt securities excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not recognize an allowance for credit losses for accrued interest receivables on AFS debt securities as the Company reverses any accrued interest if a debt security is impaired. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security’s specific security structure.

12


Allowance for Collateral-Dependent Financial Assets A financial asset is considered collateral-dependent if repayment is expected to be provided substantially through the operation or sale of the collateral. The allowance for credit losses is measured on an individual basis for collateral-dependent financial assets and determined by comparing the fair value of the collateral, minus the cost to sell, to the amortized cost basis of the related financial asset at the reporting date. Other than impaired loans, collateral-dependent financial assets could also include resale agreements. In arrangements which the borrower must continually adjust the collateral securing the asset to reflect changes in the collateral’s fair value (e.g., resale agreements), the Company estimates the expected credit losses on the basis of the unsecured portion of the amortized cost as of the balance sheet date. If the fair value of the collateral is equal to or greater than the amortized cost of the resale agreement, the expected losses would be zero. If the fair value of the collateral is less than the amortized cost of the asset, the expected losses are limited to the difference between the fair value of the collateral and the amortized cost basis of the resale agreement.

Allowance for Purchased Credit Deteriorated Assets — ASU 2016-13 replaces the concept of PCI accounting under ASC 310-30 Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality with the concept of purchased financial assets with credit deterioration. The Company adopted ASU 2016-13 using the prospective transition approach for Purchased credit deteriorated (“PCD”) assets that were previously classified as PCI assets. PCD financial assets are defined as acquired individual financial assets (or groups with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination. For PCD debt securities and PCD loans, the company records the allowance for credit losses by grossing up the initial amortized cost, which includes the purchase price and the allowance for credit losses. The expected credit losses of PCD debt securities are measured at the individual security level. The expected credit losses for PCD loans are measured based on the loan’s unpaid principal balance. Beginning January 1, 2020, for any asset designated as a PCD asset at the time of acquisition, the Company estimates and records an allowance for credit losses, which is added to the purchase price to establish the initial amortized cost basis of the financial asset. Hence, there is no income statement impact from the acquisition. Subsequent changes in the allowance for credit losses on PCD assets will be recognized in Provision for credit losses on the Consolidated Statement of Income. The noncredit discount or premium will be accreted to interest income based on the effective interest rate on the PCD assets determined after the gross-up for the allowance for credit losses.

Troubled Debt RestructuringsThe Company has implemented various loan modification programs to provide its borrowers relief from the economic impacts of the Coronavirus Disease 2019 (“COVID-19”). In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company has elected to not apply TDR classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. For loans modified in response to the COVID-19 pandemic that do not meet the CARES Act criteria (e.g., current payment status at December 31, 2019), the Company has applied the guidance included in “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued by the federal banking regulators on April 7, 2020. The Interagency Statement states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs. The delinquency of the loans modified under the CARES Act and Interagency Statement is frozen at the time of the modification, and interest income continues to be recognized over the contractual life of the loan. For more information on the Company's TDR accounting, see Note 1 — Summary of Significant Accounting Principles — Troubled Debt Restructurings to the Consolidated Financial Statements of the Company’s 2019 Annual Report on Form 10-K.

Paycheck Protection Program (“PPP”) — In April 2020, the Company started accepting PPP applications and began to originate loans to qualified small businesses under the PPP established by the CARES Act. These loans are included in the C&I portfolio, carry an interest rate of 1%, and are 100% guaranteed by the Small Business Administration (“SBA”). No allowance for loan losses were recorded for these loans as of June 30, 2020. As of June 30, 2020, the Company has funded over 7,200 PPP loans for customers with an outstanding loan balance totaling $1.75 billion. The majority of the Company’s PPP loans have a term of two years. The SBA pays the Company fees for processing PPP loans in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. Loan processing fees paid to the Company by the SBA are accounted for as loan origination fees, where net deferred fees are recognized over the estimated life of the loan as a yield adjustment on the loans. Payments by borrowers on PPP loans begin ten months after the loan forgiveness covered period. Under the terms of the PPP, such loans are eligible to be forgiven if certain conditions are satisfied, in which case the SBA will make payments to the Company for the forgiven amounts. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period.

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Note 3 — 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.

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 Debt Securities — When available, the Company uses quoted market prices to determine the fair value of AFS debt securities, which are classified as Level 1. Level 1 AFS debt securities are comprised of U.S. Treasury securities. The fair value of other AFS debt securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, inputs used by third-party pricing service providers also include material event notices.

On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service providers to prices from other available independent sources for the same securities. When variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the documentation received from the third-party pricing service providers regarding the valuation inputs and methodology used for each category of securities.

When pricing is unavailable from third-party pricing service providers for certain securities, the Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. These valuations are based on observable inputs in the current marketplace and are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation technique are reviewed.

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Equity Securities — Equity securities consisted of mutual funds as of both June 30, 2020 and December 31, 2019. 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 Contracts The Company enters into interest rate swap and option contracts with its borrowers to lock in attractive intermediate and long-term interest rates, resulting in the customer obtaining a synthetic fixed-rate loan. 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. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued and certain variable interest rate borrowings. 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, Fair Value Measurement, 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, 2020 and December 31, 2019, 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 were 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 Contracts The Company enters into foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered 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. As of June 30, 2020 and December 31, 2019, the Bank held foreign currency non-deliverable 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 non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange 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 Contracts — The Company may periodically enter into credit risk participation agreements (“RPAs”) to manage the credit exposure on interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The majority of the inputs used to value the RPAs are observable. Accordingly, RPAs fall within Level 2.

15


Equity Contracts — As part of the loan origination process, from time to time, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies it provides loans to. As of June 30, 2020 and December 31, 2019, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company values 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 Company applies proxy volatilities based on the industry sectors of the private companies. 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. Since both option volatility and liquidity discount assumptions are subject to management’s judgment, measurement uncertainty is inherent in the valuation of private companies’ warrants. Given that the Company holds long positions in all warrants, an increase in volatility assumption would generally result in an increase in fair value. A higher liquidity discount would result in a decrease in fair value. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.

Commodity Contracts — The Company enters 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. The fair value of the commodity option contracts is determined using the Black-Scholes 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.

16


The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands)Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of June 30, 2020
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
AFS debt securities:
U.S. Treasury securities$251,201  $—  $—  $251,201  
U.S. government agency and U.S. government- sponsored enterprise debt securities
—  442,644  —  442,644  
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities—  858,440  —  858,440  
Residential mortgage-backed securities—  1,280,895  —  1,280,895  
Municipal securities—  215,184  —  215,184  
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities—  151,368  —  151,368  
Residential mortgage-backed securities—  114,338  —  114,338  
Corporate debt securities—  30,826  —  30,826  
Foreign bonds—  204,080  —  204,080  
Asset-backed securities—  61,619  —  61,619  
Collateralized loan obligations (“CLOs”)—  273,979  —  273,979  
Total AFS debt securities
$251,201  $3,633,373  $—  $3,884,574  
Investments in tax credit and other investments:
Equity securities (1)
$22,462  $8,680  $—  $31,142  
Total investments in tax credit and other investments
$22,462  $8,680  $—  $31,142  
Derivative assets:
Interest rate contracts$—  $613,480  $—  $613,480  
Foreign exchange contracts—  24,289  —  24,289  
Credit contracts—  41  —  41  
Equity contracts—  8,857  316  9,173  
Commodity contracts—  117,447  —  117,447  
Gross derivative assets$—  $764,114  $316  $764,430  
Netting adjustments (2)
$—  $(122,218) $—  $(122,218) 
Net derivative assets$—  $641,896  $316  $642,212  
Derivative liabilities:
Interest rate contracts$—  $401,803  $—  $401,803  
Foreign exchange contracts—  19,741  —  19,741  
Credit contracts—  327  —  327  
Commodity contracts—  138,298  —  138,298  
Gross derivative liabilities$—  $560,169  $—  $560,169  
Netting adjustments (2)
$—  $(205,004) $—  $(205,004) 
Net derivative liabilities$—  $355,165  $—  $355,165  
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
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($ in thousands)Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of December 31, 2019
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
AFS debt securities:
U.S. Treasury securities$176,422  $—  $—  $176,422  
U.S. government agency and U.S. government- sponsored enterprise debt securities
—  581,245  —  581,245  
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities—  603,471  —  603,471  
Residential mortgage-backed securities—  1,003,897  —  1,003,897  
Municipal securities—  102,302  —  102,302  
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities—  88,550  —  88,550  
Residential mortgage-backed securities—  46,548  —  46,548  
Corporate debt securities—  11,149  —  11,149  
Foreign bonds—  354,172  —  354,172  
Asset-backed securities—  64,752  —  64,752  
CLOs—  284,706  —  284,706  
Total AFS debt securities
$176,422  $3,140,792  $—  $3,317,214  
Investments in tax credit and other investments:
Equity securities (1)
$21,746  $9,927  $—  $31,673  
Total investments in tax credit and other investments
$21,746  $9,927  $—  $31,673  
Derivative assets:
Interest rate contracts$—  $192,883  $—  $192,883  
Foreign exchange contracts—  54,637  —  54,637  
Credit contracts—   —   
Equity contracts—  993  421  1,414  
Commodity contracts—  81,380  —  81,380  
Gross derivative assets$—  $329,895  $421  $330,316  
Netting adjustments (2)
$—  $(125,319) $—  $(125,319) 
Net derivative assets$—  $204,576  $421  $204,997  
Derivative liabilities:
Interest rate contracts$—  $127,317  $—  $127,317  
Foreign exchange contracts—  48,610  —  48,610  
Credit contracts—  84  —  84  
Commodity contracts—  80,517  —  80,517  
Gross derivative liabilities$—  $256,528  $—  $256,528  
Netting adjustments (2)
$—  $(159,799) $—  $(159,799) 
Net derivative liabilities$—  $96,729  $—  $96,729  
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.

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For the three and six months ended June 30, 2020 and 2019, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three and six months ended June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Equity Contracts
Beginning balance$713  $442  $421  $673  
Total gains included in earnings (1)
7,976  769  8,268  538  
Issuances—  28  —  28  
Settlements—  (847) —  (847) 
Transfers out of Level 3 (2)
(8,373) —  (8,373) —  
Ending balance$316  $392  $316  $392  
(1)Includes unrealized gains (losses) of $8.0 million and $(4) thousand for the three months ended June 30, 2020 and 2019, respectively, and $8.3 million and $(235) thousand for the six months ended June 30, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income.
(2)During the three and six months ended June 30, 2020, the Company transferred $8.4 million of equity contracts measured on a recurring basis out of Level 3 into Level 2 after the corresponding issuer of the equity warrant, which was previously a private company, completed its initial public offering and became a public company.

The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of June 30, 2020 and December 31, 2019, respectively. 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
Inputs
Range of Inputs
Weighted-
Average (1)
June 30, 2020
Derivative assets:
Equity contracts$316  
Black-Scholes option pricing model
Equity volatility
58% — 70%
63%
Liquidity discount47%47%
December 31, 2019
Derivative assets:
Equity contracts$421  
Black-Scholes option pricing model
Equity volatility
39% — 44%
42%
Liquidity discount47%47%
(1)Weighted-average is calculated based on fair value of equity warrants as of June 30, 2020 and December 31, 2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis include certain loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or from the application of lower of cost or fair value on loans held-for-sale.

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

Discounted cash flows valuation techniques that 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.
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A specific reserve is established for an individually evaluated 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 valuation 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.

Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of its monitoring process, the Company conducts ongoing due diligence on the investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the placed-in-service-date. After these investments are either acquired or placed into service, periodic monitoring is performed. This includes the quarterly review of the financial statements of the investment entity, the annual review of the financial statements of the guarantor (if any), the review of the annual tax returns of the investment entity, and the comparison of the actual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit and other investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the investments may not be realizable. These circumstances can include, but are not limited to the following factors:

The expected future cash flows is less than the carrying amount of the investment;
Changes in the economic, market or technological environment that could adversely affect the investee’s operations; and
Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.

All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.

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.

Other Nonperforming Assets Other nonperforming assets are recorded at fair value upon transfers from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimates of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. Other nonperforming assets are classified as Level 3.

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The following tables present the carrying amounts of assets that were still held and had fair value changes measured on a nonrecurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands)Assets Measured at Fair Value on a Nonrecurring Basis
as of June 30, 2020
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Individually evaluated loans (1):
Commercial:
C&I$—  $—  $53,122  $53,122  
CRE:
CRE—  —  50,453  50,453  
Total commercial—  —  103,575  103,575  
Consumer:
Residential mortgage:
HELOCs—  —  3,338  3,338  
Other consumer—  —  2,491  2,491  
Total consumer—  —  5,829  5,829  
Total individually evaluated loans$—  $—  $109,404  $109,404  
Investments in tax credit and other investments, net
$—  $—  $6,216  $6,216  
($ in thousands)Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2019
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Non-PCI impaired loans:
Commercial:
C&I$—  $—  $47,554  $47,554  
CRE:
CRE—  —  753  753  
Total commercial—  —  48,307  48,307  
Consumer:
Residential mortgage:
HELOCs—  —  1,372  1,372  
Total consumer—  —  1,372  1,372  
Total non-PCI impaired loans$—  $—  $49,679  $49,679  
OREO (2)
$—  $—  $125  $125  
Investments in tax credit and other investments, net
$—  $—  $3,076  $3,076  
Other nonperforming assets$—  $—  $1,167  $1,167  
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans as of June 30, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 include only non-PCI loans.
(2)Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO.

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The following table presents the increase (decrease) in fair value of assets for which a nonrecurring fair value adjustment has been recognized for the three and six months ended June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Individually
Evaluated Loans (1)
Non-PCI Impaired Loans
Individually
Evaluated Loans (1)
Non-PCI Impaired Loans
Loans:
Commercial:
C&I$(8,846) $(24,001) $(30,372) $(25,823) 
CRE:
CRE(271)  (276)  
Total commercial(9,117) (23,999) (30,648) (25,819) 
Consumer:
Residential mortgage:
HELOCs(64) —  (257) —  
Other consumer—  —  2,491  —  
Total consumer
(64) —  2,234  —  
Total loans
$(9,181) $(23,999) $(28,414) $(25,819) 
OREO$—  $(3) $—  $(3) 
Investments in tax credit and other investments, net
$(733) $(2,892) $(583) $(9,870) 
Other nonperforming assets
$—  $—  $—  $(3,000) 
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans during the three and six months ended June 30, 2020 considers PCD loans, if impaired, whereas impaired loans during the three and six months ended June 30, 2019 include only non-PCI loans.

The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands)Fair Value
Measurements
(Level 3)
Valuation
Techniques
Unobservable
Inputs
Range of 
Inputs
Weighted-
Average of Inputs (1)
June 30, 2020
Individually evaluated loans (2)
$29,949  Discounted cash flowsDiscount