Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. EAST WEST BANCORP INC (1069157) 10-Q published on May 08, 2019 at 4:17 pm
Reporting Period: Mar 30, 2019
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — These investments are evaluated for impairment on an annual basis, at a minimum, as well as upon the occurrence of a triggering event indicating that the investment in question is other-than-temporarily-impaired. This evaluation involves comparing the expected future tax benefits against the current carrying value of the investment. Expected future tax benefit schedules are provided by the partnerships’ general partners on a quarterly basis. Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments are impaired when it is more likely than not that the carrying amount of the investments will not be realized through the future recognition of tax credits and other tax benefits. Investments in tax credit and other investments are classified as Level 3.
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and all subsequent related ASUs using the alternative transition method with a cumulative-effect adjustment to retained earnings without revising comparable prior periods’ financial information. As both a lessee and lessor, the Company elected the package of practical expedients available for leases that commenced before the adoption date where the Company need not reassess: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) the initial direct costs for any expired or existing leases (i.e., whether those costs qualify for capitalization). The Company also elected the hindsight practical expedient to determine the lease term and in assessing impairment on the Company’s right-of-use assets, and the practical expedient to not separate lease and non-lease components, consistently across all leases.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company leases certain retail banking branches and office spaces in the U.S. and Greater China under operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As of March 31, 2019, the Company had 128 operating leases with lease expiration in the years ranging from 2019 to 2030, exclusive of renewal options. Certain operating leases include options to extend the leases for up to 15 years, while some of which include options to terminate the leases after four to five years of occupancy. The Company's measurement of the operating lease liability and right-of-use asset does not include payments associated with the options to extend or terminate the lease since it is not reasonably certain that the Company will exercise that option. The Company also has equipment and air rights finance leases. As of March 31, 2019, the Company has four finance leases with lease expiration in the years ranging from 2021 to 2047.
A portion of the operating leases includes variable lease payments that are primarily based on the usage of the asset or the consumer price index ("CPI") as specified in the lease agreements. The Company does not remeasure lease liabilities as a result of changes to variable lease payments. As most of the Company’s operating and financing leases do not provide an implicit rate, the Company’s incremental borrowing rate (“IBR”) based on the information available at the later of adoption date or lease commencement date is used in determining the present value of future payments. The FHLB of San Francisco secured advance rate, effected for the Company’s borrowing capacity ratio, and the rate of interest on the unsecured borrowings are blended in a weighted average calculation to arrive at the Company’s IBR that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The Consumer and Business Banking segment reported segment net income of $63.7 million for the first quarter of 2019, compared to $93.1 million for the same period in 2018. The $29.5 million or 32% year-over-year decrease in net income was primarily driven by decreases in noninterest income and net interest income, partially offset by a decrease in tax provision. Noninterest income for this segment decreased $30.7 million or 69% to $13.8 million for the first quarter of 2019, down from $44.4 million for the same period in 2018. During the first quarter of 2018, noninterest income included $31.5 million pre-tax gain from the sale of the Bank’s eight DCB branches. Net interest income for this segment decreased $9.8 million or 6% to $166.2 million during the first quarter of 2019 compared to $175.9 million for the same period in 2018. This decrease was primarily driven by the decrease in this segment’s net interest income from deposits as a result of the year-over-year decline in the spread between the FTP credits for deposits received and interest expense paid on deposits, outpacing the year-over-year deposit growth. With the relatively stable effective tax rate comparing the first quarter of 2019 to the same period in 2018, tax provision decreased by $11.5 million mainly due to a decrease in pre-tax income during the first quarter of 2019, comparing to the same period in 2018.
The Other segment reported a pretax income of $24.4 million and a net income of $41.9 million for the first quarter of 2019, reflecting an income tax benefit of $17.5 million. The Other segment reported a pretax loss of $11.7 million and net income of $26.9 million for the first quarter of 2018, reflecting income tax benefit of $38.6 million. The year-over-year increase in pretax income was primarily driven by an increase in net interest income, partially offset by an increase in noninterest expense. Net interest income attributable to the Other segment increased $42.8 million or 683% to $49.0 million for the first quarter of 2019, up from $6.3 million for the same period in 2018. This increase in net interest income reflects the increase in the net spread between the total FTP charges from loans and total FTP credits for deposits. Noninterest expense for this segment increased $8.0 million or 39% to $28.5 million for the first quarter of 2019, up from $20.5 million for the same period in 2018. The increase in noninterest expense was primarily due to an increase in amortization of tax credit and other investments, primarily due to a $7.0 million impairment charge related to certain tax credit investments recognized during the first quarter of 2019.