NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

 

1. DESCRIPTION OF THE PLAN

The following description of the East West Bank Employees 401(k) Savings Plan (the “Plan”) provides only general information. Plan participants should refer to the Plan document for a more extensive description of the Plan’s provisions.

General — The Plan is a defined contribution plan designed to provide retirement benefits financed by participants’ tax deferred contributions and contributions from East West Bank, the Plan’s sponsor (the “Bank” or the “Plan Sponsor”) and East West Insurance Services, Inc. (“EWIS”). East West Bank and EWIS are wholly owned subsidiaries of East West Bancorp, Inc. The Plan is administered by East West Bank’s 401(k) Committee appointed by the Board of Directors of the Bank. Prudential Trust Company (the “Trustee”) serves as the trustee for the Plan. The Plan became effective January 1, 1986 and was restated on January 1, 2013. The Plan is subject to the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). On January 17, 2014, East West Bancorp, Inc. acquired MetroCorp Bancshares, Inc. (“MetroCorp”). All MetroCorp employees who became employees of the Bank were able to enroll into the Plan with the same terms as all the Bank’s employees and provided the option to rollover their account and loan balances from the MetroCorp Bancshares 401(k) and Profit Sharing Plan, which was subsequently terminated.

Eligibility — Under the terms of the Plan, employees become eligible to participate in the Plan as of the first day of the first calendar month beginning after the date the employee attains the age of 18 years and completes three months of service with the Company. Eligible employees are automatically enrolled in the Plan at a 3% contribution rate unless the participant elects another rate, including 0%. Plan participants who are automatically enrolled and do not direct investment of their accounts will be invested by default into the age-appropriate portfolio mix available under GoalMaker®, a computer asset allocation program available to the plan participants. Roth 401(k) investment option is also available to participants.

Contributions — Eligible employees may elect to defer up to 80% of their compensation before taxes (limited to $17,500 in 2014 and 2013 ). Plan participants are also able to designate part or all of their contributions as Roth 401(k) contributions, which are made on an after-tax basis. Prior to April 1, 2014, the Bank and EWIS matched 50% of the first 6% of the Plan participant’s deferred compensation. Effective April 1, 2014, employer matching contributions increased to 75% of the first 6% of the Plan participant’s deferred compensation. Plan participants who are age 50 or older may also elect to contribute an additional $5,500 to the Plan in both 2014 and 2013 . Plan participants may also contribute amounts representing rollover eligible distributions from other tax-qualified plans into the Plan.

Investments — Plan participants direct and allocate the investments of their contributions into various investment options offered by the Plan.

Vesting, Benefits, and Benefits Payable — Plan participants are 100% vested in their contributions to the Plan made from their eligible compensation and in amounts rolled over from a former employer’s qualified retirement plan or transferred from another plan, and in each case, the earnings thereon. Plan participants become vested in the matching contributions received from the Plan Sponsor at the rate of 20% per year for each full year of service after the first year such that the Plan participants become 100% vested after five years of credited service.

Benefits are recorded when paid. If a participant’s account is less than $1,000 and an election is not made, the Trustee will distribute the vested interest in the participant’s account to the participant in the form of a lump-sum payment. If the Plan participant’s vested account is greater than $1,000 and not exceeding $5,000 and has not made a distribution election, the Plan will automatically roll over the Plan participant’s distribution to an individual retirement account (“IRA”) designated under the Plan. However, if the value of the Plan participant’s vested account is in excess of $5,000, the Plan participant may elect to (1) receive a lump-sum distribution or (2) receive installments over a period no more than the participant’s assumed life expectancy. At December 31, 2014 and 2013 , no amounts were owed to terminated participants who had elected to withdraw their benefits.

Forfeited Accounts — At December 31, 2014 and 2013 , forfeited nonvested accounts totaled $21,350 and $352,000 respectively. These accounts will be used to pay certain plan expenses, reduce future employer contributions and, at the discretion of the Plan Administrator, be allocated to participants. During the years ended December 31, 2014 and 2013 , employer contributions were reduced by $597,115 and $7,499 , respectively, from forfeited nonvested accounts. No plan expenses were paid with funds from forfeited nonvested accounts during the years ended December 31, 2014 and 2013 . No discretionary allocations were made during the years ended December 31, 2014 and 2013 .

Participant Accounts — Each Plan participant’s account is credited with the participant’s contribution, employer matching contributions, the Plan’s earnings or losses, and if applicable, rollovers from plans of prior employers. Allocations of earnings or losses are based on the Plan participant’s account balances as defined in the Plan document.

Notes Receivable from Participants — Active participants in the Plan are eligible for loans under the Plan. The minimum loan amount is $1,000. The maximum aggregate amount of loan amount to any plan participant is the lesser of $50,000 (reduced by the highest loan balance outstanding during the 12-month period preceding the date of the new loan) or 50% of the vested account balance. Loan transactions are treated as transfers to (from) the investment fund from (to) the participant loan fund. Loan terms range from one to five years for general purpose loans or up to 20 years for the purchase of a primary residence. The loans are secured by a portion of the vested balances in the Plan participants’ accounts. The loan interest rate, determined quarterly, is set at 1% above the bank prime rate as reported by the U.S. Federal Reserve. Principal and interest are paid ratably through payroll deductions.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting  — The accompanying financial statements have been prepared using the accrual basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Valuation of Investments  — The Plan’s investments are stated at their fair value. Shares of mutual funds are valued at quoted market prices, which represent the net asset value of shares held by the Plan at year-end. Common stock is valued at quoted market prices. Investment in the guaranteed income fund is valued based on the Plan’s investment contract with Prudential Retirement Insurance and Annuity Company (“PRIAC”) which is reported at contract value. Contract value is the value determined by the insurance company in accordance with the terms of the contract.

Fully Benefit–Responsive Investment Contracts — Fully benefit–responsive investment contracts held by a defined contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit–responsive investment contracts because the contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The Plan’s guaranteed income fund invests in PRIAC’s general account. Investments in the accompanying Statements of Net Assets Available for Benefits presents the fair value of the Plan’s investment in investment contract, which approximates contract value.

Use of Estimates  — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein and disclosures of contingent assets and liabilities at the date the financial statements are prepared. Actual results could materially differ from those estimates and assumptions.

Risk Management  — The Plan utilizes various investment instruments, including mutual funds that invest in the securities of foreign countries. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility.  In addition, investments that include securities of foreign companies involve special risks and considerations not typically associated with investing in U.S. companies. These risks include devaluation of currencies, less reliable information about issuers, different securities transaction clearance and settlement practices, and possible adverse political and economic developments. Moreover, securities of many foreign companies and their markets may be less liquid and their prices may be more volatile than those of securities of comparable U.S. companies. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and those changes could materially affect the amounts reported in the financial statements and participants’ account balances.

Administrative Expenses  — Investment transaction expenses are offset against the related investment income. Other administrative and non-investment expenses of the Plan are either paid by the Plan Sponsor, which is a party-in-interest, or through the Plan expense account. Expenses paid by the Plan Sponsor, which are not reflected in the accompanying financial statements, constitute exempt party-in-interest transactions under ERISA.

Investment Income  — The Plan presents in the Statement of Changes in Net Assets Available for Benefits the net appreciation in the fair value of investments, which consists of realized gains or losses and unrealized appreciation or depreciation on those investments. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

Notes Receivable from Participants — Notes receivable from participants are reported at their unpaid principal balance plus any accrued but unpaid interest, with no allowance for credit losses recorded. Interest income is recorded on an accrual basis. Repayments of principal and interest are received through payroll deductions and the notes are collateralized by the participants’ account balances. If a participant fails to make loan repayments more than 90 days after the scheduled due date, the note receivable is deemed to be in default. The Plan Sponsor will offset the loan against the vested account balances.

Reclassification — Certain amounts in prior year have been reclassified to conform to the current year’s presentation.

 

3.   FAIR VALUE MEASUREMENTS

 

Accounting Standard Codification (“ASC”) 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a framework that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements), the next priority to quote values based on observable inputs (“Level 2” measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows: 

◦ Quoted prices for similar assets or liabilities in active markets;

◦ Quoted prices for identical or similar assets or liabilities in inactive markets, or other;

◦ Inputs other than quoted prices that are observable for the asset or liability;

◦ Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability; 

When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Plan considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Valuation techniques applied maximize the use of observable inputs and minimize the use of unobservable inputs.

The following tables categorize the Plan's investments that are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2014 and 2013 :

 

 

There were no transfers between levels for the year ended December 31, 2014.

The following table presents the changes in the fair value of Level 3 investments for the year ended December 31, 2014 :

 

Common Stock

 

East West Bancorp, Inc. common stock that is held in participant directed brokerage accounts is stated at fair value as quoted on a recognized securities exchange, valued at the last reported sales price on the last business day of the Plan year, and is classified as Level 1 investment.

 

Mutual Funds

 

Mutual funds are stated at fair value as quoted on a recognized securities exchange, valued at the last reported sales price on the last business day of the Plan year, and are classified as Level 1 investments.

 

Guaranteed Income Fund

 

The Plan invests in a guaranteed income fund offered by the Trustee. The fair value of the Plan’s investment contract has been determined to approximate contract value, as the terms of the contract provides for all distributions at contract value, frequent re-setting of contractual interest rates based upon market conditions, no significant liquidity restrictions and no defined maturities. Generally, there are no events that could limit the ability of the Plan to transact at contract value and there are no events that allow the issuer to terminate the contract which require the Plan to settle at an amount different than contract value. In addition, management has determined that no adjustment from contract values is required for credit quality considerations.

Contract value represents contributions made to the contract, plus earnings at guaranteed crediting rates, less withdrawals and fees. The average yield earned by the Plan, based on actual earnings, was 2.40% and 2.50% as of December 31, 2014 and 2013 , respectively. The average yield earned, based on the interest rate credited to participants, was 2.40% and 2.50% as of December 31, 2014 and 2013 , respectively. No adjustment is required to mediate between the average earnings credited to the Plan and the average earnings credited to the participants. The same crediting interest rate is applied to the entire contract value and is reviewed on a semi-annual basis for resetting. The factors considered in establishing the crediting interest rate include, current economic and market conditions, the general interest rate environment and both actual and expected experience of a reference portfolio within the general account. The guaranteed minimum interest rate is 1.50%. The guaranteed income fund is classified as a Level 3 investment given the unobservable inputs used to determine contract value.

 

The valuation methodologies described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan’s valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair values of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table presents the change in fair value of the Plan’s investments, including gains and losses on investments bought and sold, as well as held during the period, for the year ended December 31, 2014 :

 

5.   PARTY-IN-INTEREST TRANSACTIONS

 

A party-in-interest is defined under Department of Labor regulations as any fiduciary, counsel or employee of the Plan, any party rendering services to the Plan, the employer, and certain others. The Plan holds a guaranteed investment contract managed by a custodian, therefore, this transaction and the Plan’s payment of custodian fees qualify as party-in-interest transactions. Notes receivable from participants also reflect party-in-interest transactions. Fees paid by the Bank for administrative expenses for the year ended December 31, 2014 amounted to $27,260 . Certain administrative functions are performed by officers or employees of the Company. No such officer or employee received compensation from the Plan.

 

As of December 31, 2014 and 2013 , the Plan held 884,900 and 869,872 shares, respectively, of common stock of East West Bancorp, Inc., the parent company of the Plan Sponsor, with a fair value of $34,254,465 and $30,419,429 , respectively. The only common stock held by the Plan is the common stock of East West Bancorp, Inc. During the year ended December 31, 2014 , the Plan recorded dividend income from the Plan’s investment in East West Bancorp’s common stock of $649,610 .

 

6.   PLAN TERMINATION

 

Although it has not expressed any intent to do so, the Bank has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of the Plan’s termination, all participants will be notified and all participant accounts will become 100% vested. Participants may direct the distribution of their participant accounts in a manner permitted by the Plan as soon as practicable.

7. FEDERAL INCOME TAX STATUS

 

The Internal Revenue Service has issued an opinion letter dated March 31, 2008, indicating that the prototype adopted by the Plan, as then designed, was in compliance with applicable sections of the Internal Revenue Code (“IRC”). The Plan has been amended since from the original prototype document; however, the Plan Sponsor believes that the Plan is currently being operated in compliance with the applicable requirements of the IRC and the Plan and related Trust continue to be tax-exempt. Therefore, no provision for income taxes has been included in the Plan’s financial statements.

 

U.S. GAAP require plan management to evaluate tax positions taken by the plan and recognize a tax liability (or asset) if the organization has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The plan administrator has analyzed the tax positions taken by the plan and has concluded that, as of December 31, 2014 and 2013 , there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The plan administrator believes it is no longer subject to income tax examinations for plan years prior to 2011.

SUPPLEMENTAL SCHEDULES