UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192020
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)
(626) 768-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Common Stock, $0.001 Par Value | EWBC | ||||||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 filer | ☒ | Accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $6,765,665,370$5,090,501,829 (based on the June 30, 20192020 closing price of Common Stock of $46.77$36.24 per share). As of January 31, 2020, 145,625,5652021, 141,565,473 shares of East West Bancorp, Inc. Common Stock were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to its 20202021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
PART I
Forward-Looking Statements
This Annual Report on Form 10-K (“this Form 10-K”) contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts.facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control, particularly with regard to developments related to the Coronavirus Disease 2019 (“COVID-19”) pandemic. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” “assumes,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs, and the negative thereof. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such differences, some of which are beyond the Company’s control, include, but are not limited to:
•the impact of disease pandemics, such as the resurgences and subsequent waves of the COVID-19 pandemic on the Company, its operations and its customers, employees and the markets in which the Company operates and in which its loans are concentrated; and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may precipitate or exacerbate one or more of the below-mentioned and/or other risks, and significantly disrupt or prevent the Company from operating its business in the ordinary course for an extended period;
•changes in governmental policy and effects thereofregulation, including measures taken in trade, monetaryresponse to economic, business, political and fiscal policiessocial conditions, such as the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), the Coronavirus Aid, Relief, and laws, includingEconomic Security Act (“CARES Act”) and any similar or related rules and regulations, the ongoing trade dispute betweenBoard of Governors of the Federal Reserve System (“Federal Reserve”) efforts to provide liquidity to the United States (“U.S.”) financial system, including changes in government interest rate policies, and to provide credit to private commercial and municipal borrowers, and other programs designed to address the People’s Republiceffects of China;
the COVID-19 pandemic, as well as the resulting effect of all such items on the Company’s ability to compete effectively against otheroperations, liquidity and capital position, and on the financial institutions in its banking markets;
•changes in the U.S. economy, including an economic slowdown or recession, inflation, deflation, housing prices, employment levels, rate of growth and general business conditions;
•changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve, Board System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (“SEC”), the Consumer Financial Protection Bureau (“CFPB”) and the California Department of Business OversightFinancial Protection and Innovation (“DBO”DFPI”) - Division of Financial Institutions;Institutions, and SBA;
•changes in the commercial and consumer real estate markets;
•changes in consumer spending and savings habits;
•fluctuations in the Company’s stock price;
•changes in income tax laws and regulations;
•the Company’s ability to compete effectively against other financial institutions in its banking markets;
•success and timing of the Dodd-Frank Wall Street ReformCompany’s business strategies;
•the Company’s ability to retain key officers and Consumer Protection Act (the “Dodd-Frank Act”)employees;
•impact on the Company’s funding costs, net interest income and net interest margin from changes in key variable market interest rates, competition, regulatory requirements and the Company’s product mix;
•changes in the Company’s costs of operation, compliance and expansion;
•the Company’s ability to adopt and successfully integrate new technologies into its business in a strategic manner;
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•impact of benchmark interest rate reform in the U.S. that resulted in the Secured Overnight Financing Rate (“SOFR”) being selected as the preferred alternative reference rate to the London Interbank Offered Rate (“LIBOR”);
•impact of a communications or technology disruption, failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, practices, costincluding as a result of cyber-attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused and materially impact the Company’s ability to provide services to its clients;
•adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
•future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;
•impact of adverse changes to the Company’s credit ratings from major credit rating agencies;
•impact of adverse judgments or settlements in litigation;
•impact on the Company’s international operations and executive compensation;due to political developments, disease pandemics, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
•heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;
•impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions and from the Company’s interactions with business partners, counterparties, service providers and other third parties;
•impact of regulatory enforcement actions;
•changes in accounting standards as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies and their impact on critical accounting policies and assumptions;
•impact of other potential federal tax changes and spending cuts;
•the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;
•impact on the Company’s liquidity due to changes in the Company’s ability to receive dividends from its subsidiaries;
•any future strategic acquisitions or divestitures;
•continuing consolidation in the financial services industry;
•changes in the equity and debt securities markets;
•fluctuations in foreign currency exchange rates;
•a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increases in funding costs, a reduction in investor demand for mortgage loans and declines in asset values and/or recognition of other-than-temporary impairment (“OTTI”) on securities held in the Company’s available-for-sale (“AFS”) investmentdebt securities portfolio; and
•impact of natural or man-made disasters or calamities, such as wildfires and earthquakes, which are particular to California, or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance.
Given the ongoing and dynamic nature of the COVID-19 pandemic circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. The extent to which the COVID-19 pandemic impacts the Company will depend on future developments that are uncertain and unpredictable, including the scope, severity and duration of the pandemic and its impact on the Company’s customers, the actions taken by governmental authorities in response to the pandemic as well as its impact on global and regional economies, and the pace of recovery when the COVID-19 pandemic subsides, among others.
For a more detailed discussion of some of the factors that might cause such differences, see Item 1A. Risk Factors presented elsewhere in this report. The Company does not undertake, and specifically disclaims any obligation to update or revise any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
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ITEM 1. BUSINESS
Organization
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”,“Company,” “we”, or “EWBC”) is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of East West Bank (the “Bank”), which became its principal asset. In addition to the Bank, East West has six subsidiaries as of December 31, 2019 that were established as statutory business trusts for the purpose of issuing junior subordinated debt to third party investors. East West also owns East West Insurance Services, Inc. (“EWIS”). In 2017, the Company sold the insurance brokerage business of EWIS, and EWIS remains a subsidiary of East West and continues to maintain its insurance broker license. In 2019, East West acquired Enstream Capital Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both Enstream Capital Markets, LLC (subsequently renamed as East West Markets, LLC) and East West Investment Management LLC are wholly-owned subsidiaries of East West.
East West’s principal business is to serve as a holding company for the Bank and other banking or banking-related subsidiaries that East West may establish or acquire. AsThe Company operates in more than 120 locations in the U.S. and Greater China. In the U.S., the Bank’s corporate headquarters and main administrative offices are located in California, and its branches are located in California, Texas, New York, Washington, Georgia, Massachusetts and Nevada. The Bank has a legal entity separate and distinct from its subsidiaries,banking subsidiary based in China - East West’s principal source of funds is, and will continue to be, dividends that may be paid by its subsidiaries. West Bank (China) Limited.
As of December 31, 2019,2020, the Company had $44.20$52.16 billion in total assets, $34.42$37.77 billion in total loans (including loans held-for-sale, net of allowance), $37.32$44.86 billion in total deposits, and $5.02$5.27 billion in total stockholders’ equity.
The Bank continues to develop its international banking presence with its network of overseas branches and representative offices that include fivefour full-service branches in Greater China, located in Hong Kong, Shanghai, Shantou and Shenzhen. The Bank has two branches in Shanghai with one in the Shanghai Pilot Free Trade Zone. The Bank also has four representative offices in Greater China, located in Beijing, Chongqing, Guangzhou and Xiamen. In addition to facilitating traditional letters of credit and trade financing to businesses, these representative offices allow the Bank to assist existing clients and to develop new business relationships. Through these branches and offices, the Bank is focused on growing its cross-border client base between the U.S. and Greater China, helping U.S. based businesses expand in Greater China and companies based in Greater China pursue business opportunities in the U.S.
The Bank believes that its customers benefit from the Bank’s understanding of the Greater China markets through its physical presence, corporate and organizational ties in Greater China, as well as the Bank’s international banking products and services. The Bank believes that this approach, combined with its senior management’s and Board of Directors’ extensive ties to Chinese business opportunities and Chinese-American communities, provides the Bank with a competitive advantage. The Bank utilizes its presence in Greater China to identify and build corporate relationships, which the Bank may leverage to create business opportunities in California and other U.S. markets.
The Bank continues to explore opportunities to establish other foreign offices, subsidiaries, strategic investments and partnerships to expand its international banking capabilities and to capitalize on long-term cross-border business opportunities between the U.S. and Greater China.
Banking Services
As of December 31, 2019,2020, the Bank was the fourth largest independent commercial bank headquartered in California based on total assets. The Bank is the largest bank in the U.S. focused on the financial service needs of individuals and businesses that operate both in the U.S. and Greater China. The Bank also has a strong focus on the Chinese-American community. Through its network of over 125120 banking locations in the U.S. and Greater China, the Bank provides a wide range of personal and commercial banking services to businesses and individuals. The Bank provides multilingual services to its customers in English Chinese, Spanish and Vietnamese. The Bank also offers a variety ofin over 10 other languages. In addition to offering traditional deposit products that include personal and business checking and savings accounts, money market, and time deposits, andthe Bank also offers foreign exchange, treasury management, and wealth management services. The Bank’s lending activities include commercial and residential real estate, lines of credit, construction, trade finance, letters of credit, commercial business, affordable housing lending, asset-based lending and equipment financing. In addition, the Bank is focused on providing financing to clients in need of a financial bridge to facilitate their business transactions between the U.S. and Greater China.
The integration of digital channels and brick and mortar channels has been our focus, and an area of investment for the bank, for both commercial and consumer banking platforms. Our strategic priorities include the use of technology to innovate and expand commercial payments and treasury management products and services. We are also developing a digital consumer banking platform to enhance our customer user experience and offer a full suite of banking services tailored to our customers’ unique needs. The omnichannel banking service approach increases efficiency, enables us to provide a better customer experience and deepen customer relationships.
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Operating Segments
The Bank’s three operating segments, (1) Consumer and Business Banking, (2) Commercial Banking and (3) Other, are based on the Bank’s core strategy. The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. The Commercial Banking segment primarily generates commercial loans and deposits. The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have beenare aggregated and included in the Other segment. For complete discussion and disclosure, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations(“MD&A”) — Operating Segment Results and Note 2118 — Business Segments to the Consolidated Financial Statements.Statements in this Form 10-K.
The Bank operates in a highly competitive environment. The Company faces intense competition from domestic and foreign lending institutions and numerous other providers of financial services. Competition is based on a number of factors including, among others, customer service and convenience, quality and range of products and services offered, reputation, interest rates on loans and deposits, and lending limits and customer convenience.limits. Competition also varies based on the types of customers and locations served. The Company has the leadingis a leader of banking market share among the Chinese-American community, and maintains a differentiated presence within selected markets by providing cross-border expertise to customers in a number of industry specializations between the U.SU.S. and Greater China.
While the Company believes it is well positioned within a highly competitive industry, the industry could become even more competitive as a result of legislative, regulatory, economic, and technological changes, as well as continuing consolidation.
Human Capital
As a company that delivers relationship-driven financial solutions to a diverse customer base, we believe that the strength of our workforce is one of the significant contributors to our success. Our key human capital objectives are to attract, retain and develop quality talent, who we reward through competitive pay and benefits. To achieve these objectives, our human resource programs have been designed based on our core values and attributes which include absolute integrity, customer-centric principles, creativity, respect, teamwork, expertise, and selflessness. These core values and attributes are used to prepare our employees for leadership positions and to advance their careers. East West is committed to promoting diversity in employment and advancement.
As of December 31, 2020, we had approximately 3,200 full-time equivalent employees, of which 220 are in China and Hong Kong. None of our employees are subject to a collective bargaining agreement.
Diversity and Inclusion
East West Bank was founded in 1973 in Chinatown, Los Angeles, California as a savings & loan association for immigrants who were underserved by mainstream banks, and, as such, we have a long history of, and commitment to, diversity and inclusion. As of December 31, 2020, the Bank had grown to be the largest FDIC-insured, minority-operated depository institution headquartered in the continental United States, serving communities with diverse ethnicities and socio-economic backgrounds in seven states across the nation. Our operations are concentrated in areas that include larger numbers of immigrants and minorities. We proudly offer financing for affordable housing, provide community development loans, and partner with a diverse list of nonprofit and community-based organizations to promote wealth generation and entrepreneurship in underserved communities. Throughout our history, the diversity of our employees has been essential to successfully grow customer relationships.
Our commitment to diversity is reflected in the composition of our employees. In 2020, 74% of the Company’s employees are Asian or Asian-American, 15% are other minorities of color, and 11% are Caucasian. Nearly two-thirds of our employees are women. Our managers are equally as diverse as our employees: 75% of our managers are Asian or Asian-American and 11% are other minorities of color, and 57% of our managers are women. In addition, given our diverse customer base and the diversity of the communities that we serve, our retail bankers are able to assist customers in English and in over 10 other languages.
The composition of our Board of Directors exemplifies our commitment to diversity. Of our eight directors, six are minorities, representing four ethnic groups, and three are women.
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Talent Acquisition, Development and Promotion
We endeavor to attract, retain and develop diverse talent as part of our ongoing commitment to building a stronger workforce to serve our customers and communities. We offer a total compensation package, including salary, benefits and incentive pay, which is competitive with those offered by our peers in the businesses and markets where we operate. We are committed to fair and equitable compensation programs, and regularly assess the current business environment and labor markets to review our compensation and benefits programs for pay equity.
To foster a strong sense of ownership and to align the interests of our employees with our shareholders, restricted stock units are awarded to eligible employees under our stock incentive programs. We award stock grants under our “Spirit of Ownership” program to all of our employees, regardless of job title or part-time/full-time status. The program allows each employee to share directly in the success they help create. The fact that our employees are also owners is a source of pride for EWBC.
We recognize the importance of employee development and career growth in achieving personal development for our employees and also the Company’s strategic objectives. We provide a variety of resources to help our employees grow in their current roles and build new skills for future advancement, including tuition reimbursement and a management trainee program. Our success in talent development is evident by our internal promotions into leadership positions.
Health, Safety and Wellness
We are committed to supporting our employees’ well-being by offering flexible and competitive benefits. Comprehensive health insurance coverage is offered to employees working at least 30 hours or more each week. Prior to the COVID-19 pandemic, we offered a variety of programs and benefits designed to promote employee wellness. In addition, we encourage our employees to engage with our local communities by leading or participating in events to foster community and development, as COVID-19 safety protocols permit. Based on the guidance from health authorities regarding the COVID-19 pandemic, we provided resources and implemented measures to limit the risk of exposure to our employees, and the communities in which they live and work. Refer to Item 7 MD&A — Overview — Our response to the COVID-19 pandemic for further discussion.
Available Information
The Company’s website is www.eastwestbank.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy statements, Current Reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other filings with the SEC are available free of charge at http://investor.eastwestbank.com under the heading “SEC Filings”, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. These reports are also available for free on the SEC’s website at www.sec.gov. In addition, the Company’s Code of Conduct, Corporate Governance Guidelines, charters of the Audit Committee, Compensation Committee, Executive Committee, Risk Oversight Committee and Nominating/Corporate Governance Committee, and other corporate governance materials are available on the Investor Relations section of the Company’s website. The information contained on the Company’s website as referenced in this report is not part of this report.
Shareholders may also request a copy of any of the above-referenced reports and corporate governance documents free of charge by writing to: Investor Relations, East West Bancorp, Inc., 135 N. Los Robles Avenue, 7th Floor, Pasadena, California 91101; by calling (626) 768-6000; or by sending an e-mail to InvestorRelations@eastwestbank.com.
Supervision and Regulation
Overview
East West and the Bank are subject to extensive and comprehensive regulation under U.S. federal and state laws. Regulation and supervision by the federal and state banking agencies are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) administered by the FDIC, consumers and the banking system as a whole, and not for the protection of our investors. As a bank holding company, East West is subject to primary inspection,regulation, supervision, regulation, and examination by the Federal Reserve under the BHC Act. The Bank is regulated, supervised, and examined by the Federal Reserve, the DBO,DFPI, and, with respect to consumer laws, the CFPB. As insurer of the Bank’s deposits, the FDIC has back-up examination authority of the Bank as well. In addition, the Bank is regulated by certain foreign regulatory agencies in international jurisdictions where we now, or may in the future wish to conduct business, including Greater China and Hong Kong.
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The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, of 1934 (the “Exchange Act”), as amended, both as administered by the SEC. Our common stock is listed on the NASDAQNasdaq Global Select Market under the trading symbol “EWBC” and is subject to NASDAQNasdaq rules for listed companies. The Company is also subject to the accounting oversight and corporate governance of the Sarbanes-Oxley Act of 2002.
Described below are material elements of selected laws and regulations applicable to East West and the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. A change in applicable statutes, regulations or regulatory policies may have a material effect on the Company’s business.
East West
As a bank holding company and pursuant to its election of the financial holding company status, East West is subject to regulationsregulation, supervision, and examinations by the Federal Reserve under the BHC Act. The BHC Act provides a federal framework for the supervisionregulation and regulationsupervision of all domesticbank holding companies and foreign companies that control a bank and the subsidiaries of such companies.their nonbank subsidiaries. The BHC Act and other federal statutes grant the Federal Reserve authority to, among other things:
•require periodic reports and such additional information as the Federal Reserve may require in its discretion;
•require bank holding companies to maintain certain levels of capital and, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), limit the ability of bank holding companies to pay dividends or bonuses unless their capital levels exceed the capital conservation buffer (see Item 1. Business — Supervision and Regulation — Capital Requirements); • |
require bank holding companies to serve as a source of financial and managerial strength to subsidiary banks and commit resources, as necessary, to support each subsidiary bank, including at times when bank holding companies may not be inclined to do so, and the failure to do so generally may be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of Federal Reserve regulations or both;
•restrict dividends and other distributions from subsidiary banks to their parent bank holding companies;
•require bank holding companies to terminate an activity or terminate control of or liquidate or divest certain nonbank subsidiaries, affiliates or investments if the Federal Reserve believes that the activity or the control of the nonbank subsidiary or affiliate constitutes a serious risk to the financial safety, soundness or stability of the bank holding company; andcompany, or if the activity, ownership, or control is inconsistent with the purposes of the BHC Act;
•regulate provisions of certain bank holding company debt, including the authority to imposeby imposing interest ceilings and reserve requirements on such debt and requirerequiring a bank holding company to obtain prior approval to purchase or redeem the Company’sits securities in certain situations;
•approve in advance senior executive officer or director changes and prohibit (under certain circumstances) golden parachute payments to officers and employees, including change in control agreements and new employment agreements, that are contingent upon termination; and
•approve in advance acquisitions of and mergers with bank holding companies, banks and other financial companies, and consider certain competitive, management, financial, financial stability and other factors in granting these approvals. DBO approvalsDFPI approval may also be required for certain acquisitions and mergers.mergers involving a California-chartered bank such as the Bank.
East West’s election to be a financial holding company as permitted under the Gramm-Leach-Bliley Act of 1999 (“GLBA”), generally allows East West generally to engage in any activity, or acquire and retain the shares of a company engaged in any activity that the Federal Reserve has determined to be financial in nature or incidental or complementary to activities that are financial in nature, or acquire and retain the shares of a company engaged in any such activity, without prior Federal Reserve approval. Activities that are considered to be financial in nature include securities underwriting and dealing, insurance agency and underwriting, merchant banking activities and activities that the Federal Reserve, in consultation with the U.S. Secretary of the U.S. Treasury, determines to be financial in nature or incidental to such financial activity. “Complementary activities” are activities that the Federal Reserve determines upon application to be complementary to a financial activity and do not pose a safety and soundness risk. To maintain financial holding company status and continue to be able to engage in new activities or investments that are financial in nature, a financial holding company and all of its depository institution subsidiaries must be “well capitalized”, and “well managed”, and in satisfactory compliance with the financial holding company’s depository institution subsidiaries must have Community Reinvestment Act (“CRA”). records of at least “satisfactory.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the sections captioned “Capital Requirements” and “Prompt Corrective Action,” included elsewhere under this item. A depository institution subsidiary is considered “well managed” if it received a composite rating and a management rating of at least “satisfactory” in its most recent examination. See the section captioned “Community Reinvestment Act” included elsewhere under this item. As of December 31, 2019,2020, East West is a financial holding company and has financial subsidiaries, as discussed in Item 1. Business — Organization.
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The Bank and its Subsidiaries
East West Bank is a California state-chartered bank and a member of the Federal Reserve, and a bank whoseits deposits are insured by the FDIC. The Bank’s foreign operations in the U.S. are primarily regulated and supervised by the Federal Reserve and the DBO, as well asDFPI, and its activities outside the U.S. are regulated and supervised by both its U.S. regulators and the applicable regulatory authoritiesauthority in the host countriescountry in which the Bank’seach overseas offices reside.office is located. Specific federal and state laws and regulations that are applicable to banks regulate, among other things, their regulatory capital levels, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of collateral for certain loans. TheBank regulatory structureagencies also gives the bank regulatory agencieshave extensive discretion to impose various restrictions on management or operations and to issue policies and guidance in connection with their supervisory and enforcement activities and examination policies. California law permits state charteredstate-chartered commercial banks to engage in any activity permissible for national banks, unless such activity is expressly prohibited by state law. Therefore, theThe Bank may also form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, and further,subsidiaries. Further, pursuant to the GLBA, the Bank may conduct certain “financial” activities in a subsidiary to the same extent permitted for a national bank, provided the Bank is and remains “well capitalized,”capitalized” and “well managed” and in “satisfactory” compliance with the CRA.has a CRA rating of at least “satisfactory.”
Regulation of Subsidiaries/Subsidiaries and Branches
The Bank’s foreign-based subsidiary, East West Bank (China) Limited, is subject to applicable foreign laws and regulations, such as those implemented by the China Banking and Insurance Regulatory Commission. Nonbank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. The East West BankBank’s Hong Kong branch is subject to applicable foreign laws and regulations, such as those implemented by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong.
Capital Requirements
The federal banking agencies have imposed risk-based capital adequacy guidelinesrequirements intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with their operations. In July 2013, the federal banking agencies adopted final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations.organizations that became effective for the Company and the Bank beginning January 1, 2015. The Basel III Capital Rules revised the definitions anddefine the components of regulatory capital, in part through the introductioninclude a required ratio of a Common Equity Tier 1 (“CET1”) capital requirement and a related regulatory capital ratio of CET1 to risk-weighted assets restrictedand restrict the type of instruments that may be recognized in Tier 1 and 2 capital (including the phaseby phasing out of trust preferred securities from Tier 1 capital for bank holding companies). The Basel III Capital Rules also prescribedprescribe a new standardized approach for risk weighting assets and expanded theinclude a number of risk weighting categories to a larger and more risk-sensitive number of categories that affect the denominator in banking institutions’ regulatory capital ratios.
Under the Basel III Capital Rules, to be considered adequately capitalized, standardized approach banking organizations, such as the Company and the Bank are required to maintain minimum capital ratios of at least 4.5% CET1 capital to risk-weighted assets, 6.0% Tier 1 capital to risk-weighted assets, 8.0% total capital (Tier 1 plus Tier 2) to risk-weighted assets and a 4.0% Tier 1 leverage ratio.ratio of Tier 1 capital to average total consolidated assets. The Basel III Capital Rules also introducedinclude a “capital conservation buffer” of 2.5% that fully phased in on January 1, 2019, that is composed entirely of CET1, on top of theseeach of the minimum risk-weighted assetrisk-based capital ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a risk-based capital ratio of CET1 to risk-weighted assets abovethat meets or exceeds the minimum requirement but belowdoes not meet the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. To avoid these constraints, a banking organization must maintainmeet or exceed the following risk-based capital ratios (after any distribution): (i) CET1 capital to risk-weighted assets more thanof 7.0%, (ii) Tier 1 capital to risk-weighted assets more thanof 8.5%, and (iii) total risk-based capital to risk-weighted assets more thanof 10.5%.
The Bank the Basel III Capital Rulesis also resulted in changessubject to additional capital requirements under the Prompt Corrective Action (“PCA”) regulations pursuant tothat implement Section 38 of the Federal Deposit Insurance Act (“FDIA”), as discussed below under the Prompt Corrective Action section.
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Recent Regulatory Capital-Related Developments
From time to time, the regulatory agencies propose changes and amendments to, and issue interpretations of, risk-based capital guidelinesrequirements and related reporting instructions. Such proposals and interpretations could, if implemented in the future, affect our regulatory capital requirements and reported capital ratios.
In April 2020, in recognition of the CARES Act requirements and to facilitate the use of the Paycheck Protection Program Liquidity Facility (“PPPLF”), the U.S. banking agencies issued an interim final rule that allows banking organizations to exclude from risk-based and leverage capital requirements any eligible assets sold or pledged to the Federal Reserve on a non-recourse basis through the PPPLF. The interim final rule states that PPP loans originated by a banking organization under the PPP will be risk-weighted at zero percent for certain acquisition, developmentregulatory capital purposes and construction (“ADC”) loans. The Basel III Capital Rule required that an institution risk weight commercial real estate (“CRE”)PPP loans that did not meet certain prerequisites, among them a requirement that a borrower contribute cash or marketable securities or pay development expenses out of pocket equalpledged as collateral to at least 15%PPPLF may be excluded from the denominator of the equity inTier 1 leverage ratio. In addition, the financed project, at 150%CARES Act, the banking agencies’ “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued on March 22, 2020 and April 7, 2020, and the Consolidated Appropriations Act, 2021 (the “CAA”), rather than 100%. EGRRCPA narrowed the scopeenacted December 27, 2020, provided options for financial institutions to elect to temporarily suspend troubled debt restructurings (“TDR”) accounting under Accounting Standards Codification (“ASC”) Subtopic 310-40. For additional information, see Note 1 — Summary of ADC loans subjectSignificant Accounting Policies, Troubled Debt Restructurings, to the Consolidated Financial Statements in this Form 10-K. The election to apply the TDR relief under these regulatory guidance provided banking organizations such as the Bank a capital benefit by increasing its regulatory capital ratios as the loan modifications related to the COVID-19 pandemic are not adjusted to a higher risk weight in several ways, includingweighting normally associated with a provision that allows a borrower to make the 15% equity contribution in the form of real estate or improvements.TDR classification.
In December 2018, the regulatory agencies approved a final rule to address changes to credit loss accounting, including with respect to banking organizations’ implementation of the new Accounting Standards Update (“ASU”) 2016-13 Financial Instruments—Instruments — Credit Losses (Topic(Topic 326) Measurement of Credit Losses on Financial Instruments, which introducesintroduced the current expected credit losses (“CECL”) methodology. See Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-K for additional information. The final rule among other things provides banking organizations with the option to phase in over a three-year period the day-one adverse effects on regulatory capital upon the adoption of ASU 2016-13. In addition, it revises2016-13. On March 31, 2020, the regulatory capital rule, stress testing rules, disclosure requirements to reflect CECL and amends other regulations that reference credit loss allowances. Thefederal banking agencies issued an interim final rule is applicable tothat provided banking organizations that are subjectadopted CECL during 2020, the option to delay for two years the estimated impact of CECL on regulatory capital, rule, includingfollowed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total). The Company adopted the five-year transition in 2020. As a result, the effects of CECL on the Company’s and the Bank, and is effective on April 1, 2019 upon banking organizations’ adoption of ASU 2016-13.
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Prompt Corrective Action
The FDIA, as amended, requires federal banking agencies to take PCA with respect to depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized”,capitalized,” “adequately capitalized”, “undercapitalized”,capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules revised the PCA requirements effective January 1, 2015. Under the revisedfederal banking agencies’ regulations implementing the PCA provisions of the FDIA, an insured depository institution generally is classified in the following categories based on the capital measures indicated:
| PCA Category | Risk-Based Capital Ratios | |||||||||||||||||||||||||
| Total Capital | Tier 1 Capital | CET1 | Tier 1 Leverage | |||||||||||||||||||||||
Well capitalized(1) | ≥ 10% | ≥ 8% | ≥ 6.5% | ≥ 5% | ||||||||||||||||||||||
| Adequately capitalized | ≥ 8% | ≥ 6% | ≥ 4.5% | ≥ 4% | ||||||||||||||||||||||
| Undercapitalized | < 8% | < 6% | < 4.5% | < 4% | ||||||||||||||||||||||
| Significantly undercapitalized | < 6% | < 4% | < 3.0% | < 3% | ||||||||||||||||||||||
| Critically undercapitalized | Tangible Equity/Total Assets ≤ 2% | |||||||||||||||||||||||||
(1)Additionally, to be classified as well capitalized, an insured depository institution may not be subject to any written agreement, order, capital directive, or PCA directive issued by its primary federal regulator to meet and maintain a specific capital level for any capital measure.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of any dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized”. “Undercapitalized”“undercapitalized.” Undercapitalized institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized”undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”,capitalized,” requirements to reduce total assets, cessation of receipt of deposits from correspondent banks and/or restrictions on interest rates paid on deposits. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. The FDIA also generally permits only “well capitalized” insured depository institutions to accept brokered deposits, buthowever an “adequately capitalized” institution may apply to the FDIC for a waiver of this restriction.
Economic Growth, Regulatory Relief, and Consumer Act and Stress Testing
In May 2018, the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) amended certain provisions in the Dodd-Frank Act and other statutes administered by the Federal Reserve. Amongst other things, the EGRRCPA provided regulatory relief, including from risk committee requirements, for bank holding companies and state member banks with total consolidated assets between $10 billion and $50 billion. We were among the bank holding companies and banks in this range until we exceeded $50 billion in total consolidated assets as of September 30, 2020.
The EGRRCPA also lifted the asset size threshold and provided relief for banks with assets between $50 billion and $100 billion with respect to many of the Dodd-Frank Act’s enhanced prudential standards, except for the risk committee requirements. The EGRRCPA also raised the asset size threshold for required company-run stress testing at banks and bank holding companies from $10 billion to $250 billion. Additionally, based on authority provided in the EGRRCPA, the Federal Reserve raised the asset size threshold for required supervisory stress testing at bank holding companies from $50 billion to $100 billion. Although the Company and the Bank are not required to conduct stress tests, we continue to conduct annual capital and quarterly liquidity stress tests.
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Consumer Financial Protection Bureau Supervision
The Dodd-Frank Act established the CFPB, which has the authority to implement, examine and enforce compliance with federal consumer financial laws that apply to banking institutions and certain other companies. The CFPB has exclusive authority to examine insured depository institutions with assets exceeding $10 billion (such as the Bank) and their affiliates with respect to these consumer financial laws, and may also take enforcement action. The CFPB is focused on:may focus its supervisory, examination, and enforcement efforts on, among other things:
•risks to consumers and compliance with federal consumer financial laws when it evaluatesevaluating the policies and practices of a financial institution;
•unfair, deceptive, or abusive acts or practices, which the Dodd-Frank Act empowers the CFPB to prevent through rulemaking, enforcement and examination;
•rulemaking to implement various federal consumer statutes such as the Home Mortgage Disclosure Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Electronic Fund Transfer Act, Equal Credit Opportunity Act and Fair Credit Billing Act; and
•the markets in which firms operate and risks to consumers posed by activities in those markets.
The statutes and regulations that the CFPB enforces mandate certain disclosure and other requirements, and regulate the manner in which financial institutions must deal with consumers when taking deposits, making loans, collecting payments on loans and providing other services. Failure to comply with these laws can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines or criminal penalties, punitive damages or restitution to consumers, and the loss of certain contractual rights. The BankCompany and the CompanyBank are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.
Federal Home Loan Bank and the Federal Reserve’s Reserve Requirements
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. As a FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. The Bank may also access the FHLB for both short-term and long-term secured credit.
The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts either in the form of vault cash or an interest-bearing account at the Federal Reserve Bank, or a pass-through account as defined by the Federal Reserve. On March 26, 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent, eliminating the reserve requirement for all deposit institutions, an action that provides liquidity in the banking system to support lending to households and businesses. The Bank is also a member bank and stockholder of the Federal Reserve Bank of San Francisco (“FRB”FRBSF”). As of December 31, 2019, the Bank was in compliance with these requirements.
Dividends and Other Transfers of Funds
The principal source of incomeliquidity of East West is dividends received from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. In addition, the banking agencies have an authority to prohibit or limit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Furthermore, under the federal PCA regulations,regime, the Federal Reserve or FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized”“significantly undercapitalized” or, below.in some circumstances, “undercapitalized.” It is the Federal Reserve’s policy that a bank holding companiescompany should generally pay dividends on common stock only if the organization’scompany’s net income available to common stockholders over the past year has beenfour quarters, net of distributions, would be sufficient to fully fund the dividends, and if the prospective rate of earnings retention appears consistent with the organization’scompany’s capital needs, asset quality and overall financial condition. It is also the Federal Reserve’s policy that a bank holding companiescompany should not maintain dividend levels that undermine the company’s ability to be a financial source of strength to its banking subsidiaries. The Federal Reserve requires bank holding companies to continuously review their dividend policy in light of their organizations’ financial condition and compliance with regulatory capital requirements, and has discouraged payment ratios that are at maximum allowable levels, unless both asset quality and capital are very strong.
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Transactions with Affiliates and Insiders
Pursuant to Sections 23A and 23B of the Federal Reserve Act, as implemented by the Federal Reserve’s Regulation W, banks are subject to restrictions that strictly limit their ability to engage in transactions with their affiliates, including their parent bank holding companies. Regulations promulgated by the Federal Reserve limit the types, terms and amounts of these transactions and generally require the transactions to be on an arm's-lengtharm’s-length basis. In general, these regulations require that “covered transactions” typically transactions, that create” which include bank’s extensions of credit risk for a bank between a subsidiary bank and any oneto or purchase of assets from an affiliate, (e.g., its parent company or the non-bank subsidiaries of the bank holding company) arebe limited to 10% of the subsidiary bank'sbank’s capital and surplus with respect to any one affiliate, and 20% of the bank’s capital and surplus with respect to the aggregate of all covered transactions with all affiliates,affiliates. In addition, a bank generally may not extend credit to an affiliate unless the limitextension of credit is 20%secured by specified amounts of the subsidiary bank's capital and surplus.collateral. The Dodd-Frank Act treatsexpanded the coverage and scope of the limitations on affiliate transactions, including by treating derivative transactions resulting in a bank’s credit exposure to an affiliate as covered transactions. In addition, East West and other affiliates may not borrow from, or enter into other credit transactions with the Bank or its operating subsidiaries, unless the loans or other credit transactions are secured by specified amounts of collateral. In addition, the Volcker Rule under the Dodd-Frank Act establishes certain prohibitions, restrictions and requirements (known as “Super 23A” and “Super 23B”) on transactions between a covered fund and a banking entity that serves as an investment manager, investment adviser, organizer and offeror, or sponsor with respect to that covered fund, regardless of whether the banking entity has an ownership interest in the fund.
Federal law also limits a bank'sbank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. The terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank'sbank’s capital.
Community Reinvestment Act
Under the terms of the CRA, as implemented by Federal Reserve regulations, an insured depository institution has a continuing and affirmative obligation to help serve the credit needs of its communities, including the extension of credit to low tolow- and moderate-income borrowers and neighborhoods. When evaluatingThe Federal Reserve periodically evaluates a state member bank’s performance under the applicable performance criteria the FDIC assignsand assign a rating of “outstanding”, “satisfactory”,“outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance”.noncompliance.” The Federal Reserve periodically evaluates the CRA performance of state member banks and takes this performance into account when reviewing applications by banks and their parent companies to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchaseacquire other financial institutions. Unsatisfactory CRA performance may result in the denial of such applications. On September 21, 2020, the Federal Reserve issued an Advance Notice of Proposed Rulemaking that invites the public to comment on its proposal to modernize CRA regulations by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The impact on the Company from any changes in CRA regulations will depend on how they are implemented and applied.
FDIC Deposit Insurance Assessments
The FDIC insures the Bank’s customer deposits through the DIF up to $250,000 for each depositor, per FDIC-insured bank, perfor each account ownership category. The DIF is funded mainly through quarterly insurance assessments on member banks.insured banks based on their assessment base. The Dodd-Frank Act revised the FDIC'sFDIC’s fund management authority by setting requirements for theestablishing a minimum Designated Reserve Ratio (reserve ratio or “DRR”) that the DIF must meetof 1.35 percent of total estimated insured deposits and redefining the assessment base which is used to calculate banks' quarterly assessments. The reserve ratio is the DIF balance divided by estimated insured deposits.be calculated as average consolidated total assets minus average tangible equity. The Bank’s DIF quarterly assessment is calculated by multiplying its assessment base which is defined as the average consolidated total assets less the average tangible equity of the Bank by the applicable assessment rate. The initial base assessment rate is assignedcalculated based on an institution’s risk profile, including capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and a measure of loss severity that estimates the relative magnitude of potential losses to the FDIC in the event of the Bank’s failure. Assessment rates are
As of June 30, 2020, the DIF reserve ratio fell to 1.30 percent, below the statutory minimum of 1.35 percent. The decline in the ratio was due to extraordinary insured deposit growth, which was resulted mainly from the COVID-19 pandemic, specifically monetary policy action, direct government assistance to the consumers and businesses, and an overall reduction in spending. The FDIC projects that the DIF reserve ratio would return to 1.35 percent without further action by the FDIC and has continued to maintain existing schedule of assessment rates.
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In June 2020, the FDIC published a final rule that mitigates the deposit insurance assessment effects of participating in the PPP, PPPLF and the Money Market Mutual Fund Liquidity Facility (“MMLF”). Under the rule, the FDIC provided adjustments to the risk based premium formula and certain of its risk ratios, and an offset to an insured institution’s total assessment amount due for the increase to its assessment base attributable to participation in the PPP and MMLF. Absent such a change to the assessment rules, an insured depository institution could have become subject to adjustment from the initial base assessment rate.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound, that the institution has engaged in unsafe or unsound practices, or has violated any applicable rule, regulation, condition, or order imposed by the FDIC.
Bank Secrecy Act and Anti-Money Laundering and Office of Foreign Assets Control Regulation
The Bank Secrecy Act (“BSA”), USA PATRIOT Act of 2001 (“PATRIOT Act”), federal laws and its implementing regulations impose obligations on U.S. financial institutions to implement and parallel requirements of the federal banking regulators require the Bank to maintain a risk-based Anti-Money Laundering (“AML”) programappropriate policies, procedures and controls, which are reasonably designed to prevent, detect and detectreport instances of money laundering, and terroristthe financing of terrorism and to comply with the recordkeeping and reporting requirements of the BSA, including the requirement to report suspicious activities. The Federal Reserve expectsrequirements. Regulatory agencies expect that the Bank will have an effective governance structure for the program which includes effective oversight by our Board of Directors and management. The program must include, at a minimum, a designated compliance officer, written policies, proceduresWe regularly evaluate and internal controls, training of appropriate personnel, and independent testing of the program and risk-based customer due diligence procedures. The U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the federal banking agencies continue to issue regulationsenhance our systems and guidanceprocedures to comply with respect to the applicationPATRIOT Act and requirements of the BSA and their expectations for effective AML programs. Banking regulators also examine banks for compliance with regulations administered by the Office of Foreign Assets Controlother anti-money laundering (“OFAC”AML”) for economic sanctions against targeted foreign countries, nationals and others.initiatives. Failure of a financial institution to maintain and implement adequate BSA/AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution. The Anti-Money Laundering Act of 2020, which became law in January 2021, made a number of changes to anti-money laundering laws, including increasing penalties for anti-money laundering violations. The Bank regularly evaluates and continues to enhance its systems and procedures to ensure compliance with the regulations.
Office of Foreign Assets Control Regulation
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. financial institutions do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. Banking regulators also examine banks for compliance with regulations administered by the OFAC for economic sanctions against designated foreign countries, designated nationals, and others. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally, if a bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in civil money penalties on the Company and the Bank.
Privacy and Cybersecurity
Consumer data privacy and data protection are also the subject of state laws. For example, on January 1, 2020, the Bank became subject to the California Consumer Privacy Act (“CCPA”). This statute grants consumers several rights, including the right to request disclosure of information collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), and the right to opt out of the sale of their personal information. However, a consumer does not have these rights with respect to information that is collected, processed, sold, or disclosed pursuant to the GLBA.GLBA or the California Financial Information Privacy Act. The California Attorney General has proposed but not yet finalizedadopted regulations to implement the CCPA.
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The Federal Reserve pays close attention to the cybersecurity practices of state nonmembermember banks and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council (“FFIEC”), has issued severala number of policy statements and other guidance for banks as newin light of the growing threat posed by cybersecurity threats arise.threats. FFIEC has recently focused on such matters as compromised customer credentials, cyber resilience and business continuity planning. Examinations by the banking agencies now include review of an institution’s information technology and its ability to thwart or mitigate cyber attacks.cyber-attacks. Additionally, on December 18, 2020, the federal banking agencies released a notice of proposed rulemaking that would require a banking organization to notify its primary federal regulator within 36 hours of a significant cybersecurity incident.
Future Legislation and Regulation
ITEM 1A. RISK FACTORS
In the course of conducting the Company’sits businesses, the Company is exposed to a variety of risks, some of which are inherent into the financial services industry and others of which are more specific to the Company’s businesses. The Company’s Enterprise Risk Managemententerprise risk management (“ERM”) program incorporates risk management throughout the organization in identifying, managing, monitoring, and reporting risks. Our ERM program identifies EWBC’sthe Company’s major risk categories as market risk,risks related to the COVID-19 pandemic; geopolitical uncertainties; financial risks; capital and liquidity risks,risks; credit risk,risk; operational risk,risk; regulatory, compliance and legal risks,risks; accounting and tax risks,risks; and strategic and reputational risks. The ERM is comprised of senior management of the Company and is headedchaired by the Chief Risk Officer.
The discussion below addresses the most significantmaterial factors, of which we are currently aware, that could have a material and adverse effect on our businesses, results of operations and financial condition. Many of the following risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. These risk factors and other forward-looking statements that relate to future events, expectations, trends and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties should not be considered a complete discussion of all the risks and uncertainties the Company may face.face and although the risks are organized by headings and each risk is discussed separately, many are interrelated.
Risks Related to the COVID-19 Pandemic
The effects of the COVID-19 pandemic have impacted, and may continue to impact, the Company’s businesses, financial condition, liquidity, capital and results of operations, and the extent and duration of these impacts depend on future developments, which remain uncertain and cannot be predicted. The COVID-19 pandemic and governmental responses to the pandemic have had and will likely continue to have a severe impact on global economic conditions, including disruption and volatility in the financial markets, disruption of global supply chains, temporary closures or failures of businesses, increased unemployment, and the imposition of social distancing and restrictions on movement in the U.S. and other countries.
East West Bank is considered an essential business in the seven states where we have branches or office locations. In response to the COVID-19 pandemic and to enhanced health and safety measures, the Company has implemented business continuity plans, prepared all East West Bank facilities with employee safety protocols, including personal protection equipment, visual safety reminders related to social distancing, social distancing markers, temperature checks and sanitary products, and continued to provide financial services to our customers. Subsequent waves of the COVID-19 pandemic may negatively affect our ability to provide services due to increased illnesses among our employees, quarantines, new “stay-at-home” orders or other restrictions on our employees, or the safety measures implemented to prevent illnesses of our employees, including the potential closure of particular branches and certain employees working remotely.
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Governments and regulatory authorities worldwide have taken and may continue to take measures to stabilize the markets and support economic growth. However, the success of these measures is unknown, and these measures may not be sufficient to address the negative economic effects of the COVID-19 pandemic or to avert severe and prolonged slowdowns in economic activity.
We may face increased cybersecurity risks due to the shifting of a majority of our corporate and division office functions to operating remotely in regions impacted by “stay-at-home” orders.Increased levels of remote access may create additional opportunities for cybercriminals to attempt to exploit vulnerabilities, and our employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family and work responsibilities at home. In addition, our technological resources may be strained due to the number of remote users.
The conditions caused by the COVID-19 pandemic could continue to adversely affect the ability of the Company’s borrowers to satisfy their obligations. Given that many of the Company’s loans are secured by real estate, a potential decline in real estate markets could further impact the Company’s business and financial condition, and the credit quality of the Company’s loan portfolio. In addition, some of the Company’s business customers are in volatile businesses and industries, which are sensitive to global economic conditions, supply chain disruptions and/or commodity prices. Any decline in these businesses and industries could cause decreased borrowings and potentially increase credit losses, which in turn could adversely affect the Company’s financial condition. If unemployment continues to rise and our customers experience credit deterioration, including inability to pay loans as they come due or a decrease in the value of collateral and/or higher than usual draws on outstanding lines of credit, our level of charge-offs and provision for credit losses could continue to increase. Further, the disruptions related to the COVID-19 pandemic may decrease our borrowers’ confidence with respect to purchasing real estate or homes and adversely affect the demand for the Company’s loans and other products and services, the valuation of our loans, securities, derivatives portfolios, goodwill and intangibles, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations.
In addition, the unprecedented developments relating to the COVID-19 pandemic have contributed to heightened volatility in financial markets in the U.S. and worldwide. The continuation of prolonged adverse economic conditions primarily in the U.S. and/or Greater China can be expected to have adverse effects on the Company’s businesses, results of operations and financial condition. Market Risksdeclines or volatility due to the COVID-19 pandemic could have material impacts on the value of securities, derivatives and other financial instruments which the Company owns. The Company executes transactions with various counterparties in the financial industry, including broker-dealers, commercial banks and investment banks, and defaults by financial services institutions and uncertainty in the financial services industry in general could lead to market-wide liquidity problems and may expose the Company to credit risk in the event of default of its counterparties or clients and further increase the possibility of downgrades in the Company’s credit ratings. Any further measures undertaken by governmental authorities to address the COVID-19 pandemic could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, which could have a significant adverse effect on our results of operations and financial condition. Economic distress due to the COVID-19 pandemic could exacerbate these effects.Additionally, the earnings impact from recent and continued emergency interest rate cuts could further compress interest margins, which could potentially have an adverse effect on our results of operations and financial condition.
The extent to which the COVID-19 pandemic and associated economic downturn continue to impact our businesses, results of operations and financial condition is uncertain and will depend on numerous evolving factors that are outside our control and cannot be accurately predicted, including the scope, severity and duration of the pandemic, the governmental, business and individual actions in response to the pandemic, the impact of those actions on global economic activities, and the pace of economic recovery when the COVID-19 pandemic subsides.
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The impact of the U.S. federal government actions to mitigate the effects of the COVID-19 pandemic, and our participation in those efforts, may materially and adversely affect our businesses, results of operations and financial condition. The U.S. federal government has taken significant action to address the economic and financial effects of the COVID-19 pandemic. The Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures, as well as domestic and global capital market support programs. In addition, Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the enactment on March 27, 2020 of the CARES Act, which, among other things, established various initiatives to protect individuals, businesses and local economies in an effort to lessen the impact of the COVID-19 pandemic on consumers and businesses. These initiatives included the PPP, funding and authority for the Federal Reserve and U.S. Department of Treasury to establish the Main Street Lending Program (“MSLP”), relief with respect to TDRs, mortgage forbearance, and extended unemployment benefits. In response to the continued market disruption and economic impact of the COVID-19 pandemic, the President signed into law the CAA on December 27, 2020. The CAA extended some of these relief provisions in certain respects as well as provided other forms of relief.
The PPP permitted small businesses, sole proprietorships, independent contractors and self-employed individuals to apply for forgivable loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The CARES Act appropriated $349 billion to fund the PPP, and Congress appropriated an additional $310 billion for PPP commitments on April 24, 2020, and amended the PPP on June 5, 2020 to make the terms of the PPP loans and loan forgiveness more flexible. From April to August 2020, we accepted PPP applications and originated loans to qualified small businesses under this program. Consistent with the terms of the PPP, these loans carry an interest rate of 1% and are 100% guaranteed by the SBA. The substantial majority of the Company’s PPP loans have a term of two years. The Federal Reserve established the PPPLF to enable Federal Reserve Banks to extend credit to financial institutions that originate PPP loans, while taking the PPP loans as collateral. Earlier in 2020, we borrowed under the PPPLF by pledging PPP loans as collateral, and paid down all borrowings in the month of October 2020. The CAA provided additional funding to the PPP, expanded eligibility of business for the PPP, extended the PPP to March 31, 2021, and allowed eligible borrowers to obtain a second PPP loan with a maximum amount of $2 million. In January 2021, the Company began processing applications under this latest round of the SBA’s PPP. The Bank was also a participating lender in the MSLP, which was established by the Federal Reserve to support lending to small- and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. The Company’s participation in these programs could subject us to increased governmental and regulatory scrutiny, negative publicity or increased exposure to litigation, which could increase our operational, legal and compliance costs and damage our reputation. Moreover, if the federal stimulus measures are not effective in mitigating the effect of the COVID-19 pandemic, credit issues for our loan customers may be severe and adversely affect our businesses, results of operations, and financial condition more substantially over a longer period of time.
The CARES Act, as amended by the CAA, and related guidance from the federal banking agencies provide financial institutions the option to temporarily suspend requirements under the U.S. Generally Accepted Accounting Principles (“GAAP”) related to classification of certain loan modifications as TDRs, to account for the current and anticipated effects of the COVID-19 pandemic. The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of the COVID-19 pandemic on financial institutions and their customers. Among other provisions, sections 4022 and 4023 of the CARES Act, respectively, require mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or forbearance up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed multifamily mortgage loan when the borrowers experience financial hardship due to the COVID-19 pandemic.
Further, in response to the COVID-19 pandemic, the Federal Reserve implemented a number of facilities in addition to the PPPLF and MSLP to provide emergency liquidity to various segments of the U.S. economy and financial markets. Many of these facilities expired December 31, 2020, or were extended for brief periods into 2021. The expiration of these facilities could have adverse effect on U.S. economy and ultimately on our businesses,financial condition and results of operations.
In response to the COVID-19 pandemic, all of the federal banking regulatory agencies have encouraged lenders to extend additional loans, and the federal government is considering additional stimulus and support legislation focused on providing aid to various sectors, including small businesses. The full impact on our business activities as a result of government and regulatory policies, programs and guidelines, as well as regulators’ reactions to such activities, remains uncertain.
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Risks Related to Geopolitical Uncertainties
Unfavorable general economic, political or industry conditions, either domestically or internationally, may adversely affect our businessbusinesses, results of operations and operating results.financial condition. Our businesses and results of operations are affected by the financial markets and general economic conditions in the U.S. and Greater China, including factors such as the level and volatility of short-term and long-term interest rates, inflation, deflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending,behavior, fluctuations in both debt and equity capital markets and currencies, liquidity of the global financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, and sustainability of economic growth in the U.S. and Greater China. The deterioration of any of these conditions could adversely affect our consumer and commercial businesses, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels, and liquidity, and our results of operations. In addition, because the Company’s operations and the collateral securing its real estate lending portfolio are concentrated in Northern and Southern California, the Company may be particularly susceptible to the adverse economic conditions in the state of California. Any unfavorable changes in the economic and market conditions could lead to the following risks:
•the process the Company uses to estimate the expected losses inherent in the Company’s credit exposure requires difficult, subjective and complex judgments, including consideration of how these economic conditions might impair the ability of the borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of the Company’s estimates of expected losses inherent in the Company’s credit exposure which may, in turn, adversely impact the Company’s operating results of operations and financial condition;
•the Company’s commercial and residential borrowers may not be able to make timely repayments of their loans, or a decrease in the value of real estate collateral securing the payment of such loans could result in credit losses, delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on the Company’s operating results;results of operations and financial condition;
•a decrease in the demand for loans and other products and services;
•a decrease in deposit balances;
•future disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;
•the value of the AFS investmentdebt securities portfolio that the Company holds may be adversely affected by defaults by debtors;debt defaults; and
•a loss of confidence in the financial services industry, our market sector and the equity markets by investors, placing pressure on the Company’s stock price.
Changes in the U.S. and Greater China trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact the Company’s business, financial condition and results of operations.operations and financial condition. There hashave been ongoing discussiondiscussions regarding potential changes to trade policies, legislation, treaties and tariffs between the U.S. and Greater China. Tariffs and retaliatory tariffs have been imposed and proposed. Changes in tariffs, retaliatory tariffs or other trade restrictions on products and materials that the Company’s customers import or export could cause the prices of their products to increase, and possibly reduce demand and hence may negatively impact the Company’s customer margins and their ability to service debt. The Company may also experience a decrease in the demand for loans and other financial products, or experience a deterioration in the credit quality of the loans extended to the customers whose industry sectors that are most sensitive to the tariffs.
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We face risks associated with international operations. A substantial number of our customers have economic and cultural ties to Asia. The Bank’s international presence includes four full-service branches and four representative offices in Greater China. Our presence in Greater China carries certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations, risks associated with leveraging and conducting business on an international basis, including among others, legal, regulatory and tax requirements and restrictions, cross-border trade restrictions or tariffs, uncertainties regarding liability, trade barriers, difficulties in staffing and managing foreign operations, political and economic risks, and financial risks including currency and payment risks. Additionally, our business could be adversely affected by the effects of a widespread outbreak of disease pandemics, including the current spread of the COVID-19 pandemic. Any outbreak of disease pandemics, and other adverse public health developments, particularly in Asia, could have a material and adverse effect on our business operations. These could include temporary closures of our branches and offices and reduced consumer spending in the impacted regions or in the U.S., depending upon the severity, globally, which could adversely impact our operating results and the performance of loans to impacted borrowers in Greater China or in the U.S. In addition, a significant outbreak of disease pandemics in the human population, specifically the COVID-19 pandemic, has resulted in a widespread health crisis that have had and continue to adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers’ financial results. Further, volatility in the Shanghai and Hong Kong stock exchanges and/or a potential fall in real estate prices in China, among other things, may negatively impact asset values and the profitability and liquidity of the Company’s customers operating in this region. These risks could adversely affect the success of our international operations and could have a material adverse effect on our overall business, results of operations and financial condition. In addition, we face risks that our employees and affiliates may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act, anti-corruption laws, and other U.S. and foreign laws and regulations. Failure to comply with such laws and regulations could, among other things, result in enforcement actions and fines against us, as well as limitations on our conduct, any of which could have a material adverse effect on our businesses, results of operations and financial condition.
Natural disasters and geopolitical events beyond the Company’s control could adversely affect the Company. Natural disasters such as wildfires, earthquakes, extreme weather conditions, hurricanes, floods, widespread health emergencies or disease pandemics and other acts of nature and geopolitical events involving political unrest, terrorism or military conflicts could adversely affect the Company’s business operations and those of the Company’s customers and cause substantial damage and loss to real and personal property. For example, California, in which the Company’s operations and the collateral securing its real estate lending portfolio are concentrated, contains active earthquake zones and has been, and continues to be, subject to numerous devastating wildfires. These natural disasters and geopolitical events could impair borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of nonperforming assets, net charge-offs, and provision for credit losses, which could adversely affect the Company’s businesses, results of operations and financial condition.
Risks Related to Financial Matters
A portion of the Company’s loan portfolio is secured by real estate and thus the Company has a higher degree of risk from a downturn in real estate markets. Because many of the Company’s loans are secured by real estate, a decline in the real estate markets could impact the Company’s business and financial condition. Real estate values and real estate markets are generally affected by changes in general economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and natural disasters, such as wildfires and earthquakes, which are particular to California, where a significant portion of the Company’s real estate collateral is located. If real estate values decline, the value of real estate collateral securing the Company’s loans could be significantly reduced. The Company’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be further diminished, and the Company would be more likely to suffer losses on defaulted loans. Furthermore, CREcommercial real estate (“CRE”) and multifamily loans typically involve large balances to single borrowers or groups of related borrowers. Since payments on these loans are often dependent on the successful operation or management of the properties, as well as the business and financial condition of the borrower,borrowers, repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions, or changes in applicable government regulations. Borrowers’ inability to repay such loans may have an adverse effect on the Company’s businesses, results of operations and financial condition.
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The Company’s businesses are subject to interest rate risk and variations in interest rates may have a material adverse effect on the Company’s financial performance. Our financial results depend substantially on net interest income, which is the difference between the interest income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Interest-earning assets primarily include loans extended, securities held in our investment portfolio and excess cash held to manage short-term liquidity. We fund our assets using deposits and borrowings. While we offer interest-bearing deposit products, a portion of our deposit balances are from noninterest-bearing products. Overall, the interest rates we receive on our interest-earning assets and pay on our interest-bearing liabilities could be affected by a variety of factors, including market interest rate changes, competition, regulatory requirements and a change in our product mix. Changes in key variable market interest rates such as the Federal Funds, National Prime, LIBOR or Treasury rates generally impact our interest rate spread. Because of the differences in maturities and repricing characteristics of the Company’s interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. Increases in interest rates may result in a change in the mix of noninterest and interest-bearing deposit accounts. Rising interest rates may cause our funding costs to increase at a faster pace than the yield we earn on our assets, ultimately causing our net interest margin to decrease. Higher interest rates may also result in lower mortgage production income and increased charge-offs in certain segments of the loan portfolio, such as CRE and home equity. In contrast, declining interest rates would increase the Bank’s lending capacity, decrease funding cost, increase prepayments of loans and mortgage related securities, as borrowers refinance to reduce borrowing costs. Accordingly, changes in levels of interest rates could materially and adversely affect our net interest income, net interest margin, cost of deposits, loan origination volume, average loan portfolio balance, asset quality, liquidity and overall profitability.
Reforms to and uncertainty regarding LIBOR may adversely affect our business.On July 27, 2017, the United Kingdom’sKingdom (“U.K.”)’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it will no longer compel banks to submit rates for the calculation of LIBOR by the end of 2021. This indicates that LIBOR will be discontinued on December 31,after 2021. In June 2017, U.S. Federal Reserve Bank's Alternative Reference Rates Committee (“ARRC”) selected the SOFR as the preferred alternative rate to LIBOR. SOFR differs from LIBOR in two key respects: SOFR is a single overnight rate, while LIBOR includes rates of several tenors; and SOFR is deemed a credit risk-free rate, while LIBOR incorporates an evaluation of credit risk. In addition, the SOFR methodology has not been tested for an extended period of time, which may limit market acceptance of the use of SOFR. The ARRC and other entities intend for the transition to be economically neutral. The Federal Reserve Bank of New YorkDuring 2020, the ARRC has proposedissued updated hardwired fallback language for bilateral business loans and syndicated loans, and a recommended spread methodology for generating SOFRs of three different tenorsnon-consumer cash products, as well as guidance on several matters related to the transition. On October 23, 2020, the International Swaps and plansDerivatives Association, Inc. (“ISDA”) launched its 2020 IBOR Fallbacks Supplement (“Supplement”) and IBOR Fallbacks Protocol (“Protocol”). The Supplement amended ISDA’s standard definitions for interest rate derivatives to publish an indexincorporate robust fallbacks for derivatives linked to certain IBORs, with the changes effective on a daily basisJanuary 25, 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions include the fallbacks. The Protocol enabled market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the Protocol. The Protocol was open for adherence beginning inOctober 23, 2020 and became effective on the first half of 2020.same date as the Supplement, January 25, 2021. The ARRC has developedsupports the ISDA Protocol. On November 30, 2020, LIBOR’s administrator, the ICE Benchmark Administration (“IBA”), in coordination with U.K. and U.S. regulators, announced the IBA’s intention to cease publication of the one-week and two-month U.S. dollar (“USD”) LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. Banks are encouraged to cease entering new contracts that use USD LIBOR as a methodology for adjusting SOFRreference rate as soon as practicable and in any event by December 31, 2021. The Company created a cross-functional team to reflectmanage the risk considerations that underlie LIBOR. On July 12, 2019,communication of the SEC issued a statement on LIBORCompany’s transition indicating the significant impactplans with both internal and external stakeholders and to ensure that the discontinuationCompany appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the LIBOR transition. However, due to the uncertainty surrounding the future of LIBOR, could have on financial marketsthe transition is anticipated to span several reporting periods through the end of 2021 and market participants.potentially into 2023 with newly released timing of LIBOR cessation. Since the volume of our products that are indexed to LIBOR is significant, the transition, if not sufficiently planned for and managed by our cross-functional teams, could adversely affect the Company’s financial condition and results of operations. Although implementation of the SOFR benchmark is intended to have minimal economic effect on the parties to a LIBOR-based contract, the transition from LIBOR to a new benchmark rate could result in significant operational,increased systems increased compliance and legal costs. Inconsistent approaches to a transition from LIBOR to an alternative rate among different market participants and for different financial products may cause market disruption and operational costs.problems, which could adversely affect us, including by exposing us to increased basis risk and resulting costs in connection with remediating these problems, and by creating the possibility of disagreements with counterparties. This transition may also result in our customers challenging the determination of their interest payments or entering into fewer transactions or postponing their financing needs, which could reduce the Company’s revenue and adversely impact our business. In addition, the uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect the Company’s financial condition and results of operations.operations and financial condition.
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The monetary policies of the federal government and its agencies could have a material adverse effect on our earnings. The Federal Reserve Board regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and also affect the return earned on those loans and investments, both of which in turn affect our net interest margin. They can also materially decrease the value of financial assets we hold. Federal Reserve policies may also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans, or could adversely create asset bubbles which result from prolonged periods of accommodative policy. This, in turn, may result in volatile markets and rapidly declining collateral values. Changes in Federal Reserve policies are beyond our control and difficult to predict. Consequently, the impact of these changes on our business and results of operations is difficult to predict.
The Company is subject to fluctuations in foreign currency exchange rates. The Company’s foreign currency translation exposure relates primarily to its China subsidiary that has its functional currency denominated in Chinese Renminbi (“RMB”). In addition, as the Company continues to expand its businesses in China and Hong Kong, certain transactions are conducted in currencies other than the U.S. Dollar (“USD”).USD. Although the Company has entered into derivative instruments to offset the impact of the foreign exchange fluctuations, given the volatility of exchange rates, there is no assurance that the Company will be able to effectively manage foreign currency translation risk. Fluctuations in foreign currency exchange rates could have a material unfavorable impact on the Company’s net income, therefore adversely affecting the Company’s business, results of operations and financial condition.
Risks Related to Our Capital Resources and Liquidity Risks
As a regulated entity, we are subject to capital requirements, and a failure to meet these standards could adversely affect our financial condition. The Company and the Bank are subject to certain capital and liquidity rules, including the Basel III Capital Rules, which establish the minimum capital adequacy requirements and may require us to increase our regulatory capital or liquidity targets, increase regulatory capital ratios, or change how we calculate regulatory capital. We may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, and enhance capital planning based on hypothetical future adverse economic scenarios. As of January 1,December 31, 2020, we met the requirements of the Basel III Capital Rules, including the capital conservation buffer. Compliance with these capital requirements may limit capital-intensive operations and increase operational costs, and we may be limited or prohibited from distributing dividends or repurchasing stocks.our stock. This could adversely affect our ability to expand or maintain present business levels, which may adversely affect our businesses, results of operations and financial condition. Additional information on the regulatory capital requirements applicable to the Company and the Bank is set forth in Item 1. Business — Supervision and Regulation — Capital Requirements in this Form 10-K.
The Company’s dependence on dividends from the Bank could affect the Company’s liquidity and ability to pay dividends. East West is dependent on the Bank for dividends, distributions and other payments. Our principal source of cash flows, including cash flows to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividend incomedividends received from the Bank. The ability of the Bank to pay dividends to East West is limited by federal and California law. Subject to the Bank meeting or exceeding regulatory capital requirements, regulatory approval is required under federal law if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net income for that year and its retained earnings for the preceding two years. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits.profits, unless the Bank has received prior approval of the Federal Reserve and of at least two-thirds of the shareholders of each class of stock. Likewise, California law imposes its own limitations on capital distributions by California-charted banks that could require the Bank to obtain the approval of the DFPI prior to making a distribution to the Company. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with the Federal Reserve in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income, net of distributions, for the period. Further description of regulatory requirements applicable to dividends by us and the Bank is set forth in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds in this Form 10-K.
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The Company is subject to liquidity risk, which could negatively affect the Company’s funding levels. Market conditions or other events could negatively affect the level of or cost of funding, which in turn could affect the Company’s ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences. Although the Company has implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on the Company’s businesses, results of operations and financial condition. If the cost effectiveness or the availability of supply in the credit markets is reduced for a prolonged period of time, the Company’s funding needs may require the Company to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, and further managing loan growth and investment opportunities. These alternative means of funding may not be available under stressed market conditions or realized in a timely fashion.
Any downgrades in our credit ratings could have a material adverse effect on our liquidity, cost of funding, cash flows, results of operations and financial condition. Credit rating agencies regularly evaluate us, and their ratings are based on a number of factors, including our financial strength, capital adequacy, liquidity, asset quality and ability to generate earnings. Some of these factors are not entirely within our control, such asincluding conditions affecting the financial services industry.industry as a whole. Severe downgrades in credit ratings could impact our business and reduce the Company’s profitability in different ways, including a reduction in the Company’s access to capital markets, triggering additional collateral or funding obligations which could negatively affect our liquidity. In addition, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate the risks of doing business with us. If we experience a decline in our credit rating, this could result in a decrease in the number of counterparties and clients who may be willing to transact with us. Our borrowing costs may also be affected by various external factors, including market volatility and concerns or perceptions about the financial services industry. There can be no assurance that we can maintain our credit ratings nor that they will be lowered in the future.
Risks Related to Credit Risks
The Company’s allowance for credit losses level may not be adequate to cover actual losses. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”),GAAP, we maintain an allowance for loan losses to provide for loan defaults and non-performance, andnonperformance, and an allowance for unfunded credit commitments which, when combined, are referred to as the allowance for credit losses. Our allowance for loan losses is based on our evaluation of risks associated with our loans held-for-investment portfolio, including historical loss experience, expected loss calculations,current economic conditions, reasonable and supportable forecasts of future economic conditions, delinquencies, performing status, the size and composition of the loan portfolio, economic conditions, and concentrations within the portfolio. The allowance estimation process requires subjective and complex judgments, including analysis of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. Current economic conditions in the U.S. and in the international markets could further deteriorate, which could result in, among other things, greater than expected deterioration in credit quality of our loan portfolio or in the value of collateral securing these loans. Our allowance for credit losses may not be adequate to absorb actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. The amount of future losses is influenced by changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates.
Moreover, we adopted new guidance for estimating credit losses on loans receivable, held-to-maturity debt securities, and unfunded loan commitments effective January 1, 2020.The CECL model significantly changed how entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses that occur over the life of the financial asset. This requires reserves over the life of the loan rather than the loss emergence period used in the prior model.The CECL guidance requires the implementation of new modeling to quantify this estimate by using principles of not only relevant historical experience and current conditions, but also reasonable and supportable forecasts of future events and circumstances, thus incorporating a broad range of estimates and assumptions in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance.Adoption of, and efforts to implement this guidance has caused and may in the future cause our allowance for credit losses to change, which could have a material adverse effect on our businesses, financial condition, results of operations and future prospects.
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Additionally, in order to maximize the collection of loan balances, we sometimes modify loan terms when there is a reasonable chance that an appropriate modification would allow the borrower to continue servicing the debt. If such modifications ultimately are less effective at mitigating loan losses than we expect, we may incur losses in excess of the specific amount of allowance for loan losses associated with a modified loan, and this would result in additional provision for loan losses. In addition, we establish a reserve for losses associated with our unfunded credit commitments. The level of the allowance for unfunded credit commitments is determined by following a methodology similar to that used to establish our allowance for loan losses in our loans held-for-investment portfolio. There can be no assurance that our allowance for unfunded credit commitments will be adequate to provide for the actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit commitments in any period may result in a charge to earnings.
We may be subject to increased credit risk and higher credit losses to the extent that our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Our credit risk and credit losses can increase if our loans are concentrated in borrowers affected by the same or similar economic conditions in the markets in which we operate or elsewhere, which could result in materially higher credit losses. For example, the Bank has a concentration of real estate loans in California. Potential deterioration in the California real estate market could result in additional loan charge-offs and provision for loan losses, which could have a material adverse effect on the Company’s business, results of operations and financial condition. If any particular industry or market sector were to experience economic difficulties, loan collectability from customers operating in those industries or sectors may differ from what we expected, which could have a material adverse impact on our results of operations and financial condition.
A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, financial condition, cash flows, and liquidity, as well as cause reputational harm. The potential for operational risk exposure exists throughout our organization and from our interactions with third parties. Our operational and security systems, infrastructure, including our computer systems, network infrastructure, data management and internal processes, as well as those of third parties, are integral to our performance. In addition, weour ongoing operations rely on our employees and third parties, in our ongoing operations, who may, as a result of human error or malfeasance or failure or breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to the third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or may become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control which could adversely affect our ability to process transactions or provide certain services. There could be electrical, telecommunications or other major physical infrastructure outages, natural disasters such as wildfires, disease pandemics, earthquakes, tornadoes, hurricanes and floods, and events arising from local or larger scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth, and this entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, financial condition, cash flows, and liquidity, and may result in loss of confidence, significant litigation exposure and harm to our reputation.
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A cyber-attack, information or security breach, or a technology failure of our systems or of a third party’s systems could adversely affect our ability to conduct businesses,business, manage our exposure to risk or expand our businesses. This could also result in the misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, financial condition, cash flows and liquidity, as well as result in reputational harm. The Company offers various internet-based services to its clients, including online banking services. The secure transmission of confidential information over the internet is essential in maintaining our clients’ confidence in the Company’s online services. In addition, our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks, including ransomware and malware attacks, for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunication technologies to conduct financial transactions, especially as more employees are working remotely, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states and other external parties. Our businessesbusiness rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems, software and networks. Notwithstandingnetworks; notwithstanding our defensive systems and processes that are designed to prevent security breaches and periodically test the Company’s security. The Company utilizesemploys a combination of preventative and detective controls such as Firewalls, Intrusion Detection Systems, Data Loss Prevention,firewalls, intrusion detection systems, data loss prevention, anti-malware, Endpoint Detectionendpoint detection and Responseresponse solutions to safeguard against cyber-attacks. There is no assurance that all of our security measures will be effective, especially as the threat from cyber-attacks is continuous and severe, attacks are becoming more sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Failure to mitigate breaches of security, or to comply with frequent imposition of increasingly demanding new and changing industry standards and regulatory requirements, could result in violation of applicable privacy laws, reputational damage, regulatory fines, litigation exposure, increase security compliance costs, affect the Company’s ability to offer and grow the online services, and could have an adverse effect on the Company’s businesses, results of operations and financial condition. We have not experienced any known attacks on our information technology systems that have resulted in any material system failure, incident or security breach to date.
Failure to keep pace with technological change could adversely affect the Company’s businesses. The Company may face risks associated with the ability to utilize information technology systems to support our operations effectively. The financial services industry is continuously undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s businesses and, in turn, the Company’s results of operations and financial condition. In addition, if we do not implement systems effectively or if our outsourcing business partners do not perform their functions properly, there could be an adverse effect on us. There can be no assurance that we will be able to effectively maintain or improve our systems and processes, or utilize outsourced talent, to meet our business needs efficiently. Any such failure could adversely affect our businesses, results of operations, financial condition and reputation.
The actions and soundness of other financial institutions could affect the Company. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company executes transactions with various counterparties in the financial industry, including brokers and dealers,broker-dealers, commercial banks and investment banks. Defaults by financial services institutions and uncertainty in the financial services industry in general could lead to market-wide liquidity problems and may expose the Company to credit risk in the event of default of its counterparties or clients.risk. Further, the Company’s credit risk may increase when the underlying collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any such losses could materially and adversely affect the Company’s businesses, results of operations and financial condition.
The Company’s controls and procedures could fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, reporting controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of the Company’s controls and procedures, and any failure to comply with regulations or supervisory expectations related to controls and procedures could adversely affect the Company’s businesses, results of operations and financial condition.
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The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company’s prospects. Competition for qualified personnel in the banking industry is intense and there is a limited number of qualified persons with knowledge of, and experience in, the regional banking industry, especially in the West Coast market. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. The Company’s success depends, to a significant degree, upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel, as well as upon the continued contributions of its management and personnel. In particular, the Company’s success has been and continues to be highly dependent upon the abilities of certain key executives.
We face strong competition in the financial services industry and we could lose business or suffer margin declines as a result. The Company operates in a highly competitive environment. The Company conducts the majority of its operations in California. Our competitors include commercial banks, savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other regional, national, and global financial institutions. Some of the major competitors include multinational financial service companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates on loans and deposits, customer services, and a range of price and quality of products and services, including new technology-driven products and services. Failure to attract and retain banking customers may adversely impact the Company’s loan and deposit growth.
The Company has engaged in and may continue to engage in further expansion through acquisitions, which could negatively affect the Company’s businesses and earnings. There are risks associated with expanding through acquisitions. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance fromfailing to retain customers or employees, and being unable to profitably deploy assets acquired in the transaction. Additional country or region-specific risks are associated with transactions outside the U.S., including in Greater China. To the extent the Company issues capital stock in connection with additional transactions, these transactions and related stock issuances may have a dilutive effect on earnings per share (“EPS”) and share ownership.
Risks Related to Regulatory, Compliance and Legal RisksMatters
Changes in current and future legislation and regulation may require the Company to change its business practices, increase costs, limit the Company’s ability to make investments and generate revenue, or otherwise adversely affect business operations and/or competitiveness. EWBC is subject to extensive regulation under federal and state laws, as well as supervisionssupervision and examinationsexamination by the DBO,DFPI, FDIC, Federal Reserve, FHLB, SEC, CFPB, U.S. and State Attorneys General, and other government bodies.agencies and self-regulatory organizations. We are also subject to enforcement oversight by the U.S. Department of Justice and state attorneys general. Our overseas operations in Greater China are subject to extensive regulation under the laws of those jurisdictions as well as supervision and examinations by financial regulators for those jurisdictions. Moreover, regulation of the financial services industry continues to undergo major changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies could affect the manner in which EWBC conducts business. In addition, such changes could also subject us to additional costs and may limit the types of financial services and products we offer, and the investments we make.
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Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by U.S. federal and state, federal and non-U.S. agencies, the loss of FDIC insurance, the revocation of our banking charter, civil or criminal monetary penalties and/or reputational damage, which could have a material adverse impact on the Company’s businesses, results of operations and financial condition. We continue to make adjustmentsadjust to our businessbusinesses and operations, capital, policies, procedures and controls to comply with these laws and regulations, final rulemaking, and interpretations from the regulatory authorities. See Item 1. Business — Supervision and Regulation for more information about the regulations to which we are subject.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The BSA, the USA PATRIOT Act, of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective AML program and file suspicious activity reports and currency transaction reports when appropriate. We are also required to ensure our third party vendors adhere to the sameBSA laws and regulations. FinCENFinancial Crimes Enforcement Network is authorized to implement, administer, and enforce compliance with the BSA and associated regulation.regulations. It has the authority to impose significant civil money penalties for violations of those requirements and has been engaging in coordinated enforcement efforts with the statefederal and federalstate banking regulators, as well as the U.S. Department of Justice, CFPB, Drug Enforcement Administration, and the Internal Revenue Service (“IRS”). Further, we may provide banking services to customers considered to be higher risk customers, which subjects us to greater enforcement risk under the BSA.
We are also required to comply with U.S. economic and trade sanctions administered by OFAC regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the U.S. A violation of any anti-corruptionAML or AML laws and regulationsOFAC-related law or regulation could subject us to significant civil and criminal penalties as well as regulatory enforcement actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisition plans. Any violation also could damage our reputation. Any of these resultsviolations could have a material adverse effect on our business,businesses, results of operations, financial condition, reputation and future prospects.
We are subject to significant financial and reputational risk arising from lawsuits and other legal proceedings. We face significant risk from lawsuits and claims brought by consumers, borrowers and counterparties. These actions include claims for monetary damages, penalties and fines, as well as demands for injunctive relief. If these lawsuits or claims, whether founded or unfounded, are not resolved in a favorable manner to us, they could lead to significant financial obligations for the Company, as well as restrictions or changes to how we conduct our businesses. Although we establish accruals for legal matters when and as required by GAAP and certain expenses and liabilities in connection with such matters may or may not be covered by insurance, the amount of loss ultimately incurred in relation to those matters may be substantially higher than the amounts accrued and/or insured. Substantial legal liability could adversely affect our business, financial condition, results of operations, and reputation.financial condition. In addition, we may suffer significant reputational harm as a result of lawsuits and claims, adversely impacting our ability to attract and retain customers and investors. Moreover, it may be difficult to predict the outcome of certain legal proceedings, which may present additional uncertainty to our business prospects.
Risks Related to Accounting and Tax RisksMatters
Changes in accounting standards or changes in how the accounting standards are interpreted or applied could materially impact the Company’s financial statements. The preparation of the Company’s financial statements is based on accounting standards established by the FASB and the SEC. From time to time, these accounting standards may change and such changes may have a material impact on the Company’s financial statements. In addition, the FASB, SEC, banking regulators and the Company’s independent registered public accounting firm may amend or reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report the Company’s financial statements. In some cases, the Company could be required to adopt a new or revised standard retroactively, potentially resulting in restatements to thea prior period’s financial statements. ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) issued by the FASB in June 2016, referred to as CECL, requires the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. The Company adopted ASU 2016-13 on January 1, 2020. For more information related to the impacts of ASU 2016-13, see Note 1 — Summary of Significant Accounting Policies — Recent Accounting Pronouncements — Standards Adopted in 2020 to the Consolidated Financial Statements in this Form 10-K.
The Company’s consolidated financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in the future. Pursuant to GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. Accounting policies related to these estimates and assumptions are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain. If these estimates and assumptions are incorrect, we may be required to restate prior-period financial statements. For a description of these policies, refer to Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-K.
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Changes to fiscal policies and tax legislation may adversely affect our businessbusiness.. From time to time, the U.S. government may introduce new fiscal policies and tax laws or make substantial changes to existing tax legislation. These changes could have a material impact on the Company’s businesses, results of operations and financial condition. The Company’s positions or its actions taken prior to such changes, may be compromised by such changes. In addition, the Company’s actions taken in response to, or in reliance upon, such changes in the tax laws may impact our tax position in a manner that may result in adverse financial conditions. On December 22, 2017,The Company also provides for current and deferred taxes in our financial statements, based on our results of operations and financial condition. We may take tax return filing positions for which the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted and made significant changes to the U.S. Internal Revenue Code. The Tax Act reformed a broad rangefinal determination of tax legislation affecting businesses, among other things, reducing the statutory corporateis uncertain and our income tax rate from 35%expense could be increased if a federal, state, or local authority were to 21%, limiting on net interest expense deductionassess additional taxes that have not been provided for in our consolidated financial statements. There can be no assurance that we will achieve our anticipated effective tax rate. The CARES Act included a number of tax relief provisions for eligible individuals and accelerating expensing of investment in certain qualified property.businesses. It is possible that the U.S. government could further introduce new tax legislation or amend current tax laws that would adversely affect the Company. In addition, the President’s proposed budget, negotiations with Congress over the details of the budget, and the terms of the approved budget could create uncertainty about the U.S. economy, ultimately having an adverse effect on our business.
The Company’s investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on the Company’s results of operations. The Company invests in certain tax-advantaged investments that support qualified affordable housing projects, community development and renewable energy resources. The Company’s investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. Due diligence review is performed both prior to the initial investment and on an ongoing basis, however, there may be assessments that we failed or were unable to discover or identify in the course of performing due diligence review. The Company is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized. The possible inability to realize these tax credits and other tax benefits may have a negative impact on the Company’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside the Company’s control, including changes in the applicable tax code and the ability of the projects to be completed.
Anti-takeover provisions could negatively impact the Company’s stockholders. Provisions of Delaware and California law and of the Company’s certificate of incorporation, as amended, and bylaws could make it more difficult for a third party to acquire control of the Company or could have the effect of discouraging a third party from attempting to acquire control of the Company. For example, the Company’s certificate of incorporation requires the approval of the holders of at least two-thirds of the outstanding shares of voting stock to approve certain business combinations. The Company is also subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire the Company without the approval of the Board of Directors. Additionally, the Company’s certificate of incorporation, as amended, authorizes the Board of Directors to issue preferred stock which could be issued as a defensive measure in response to a takeover proposal.
Further, prior approval of the Federal Reserve and the DFPI is required for any person to acquire control of us, and control for these purposes may be presumed to exist when a person owns 10% or more of our outstanding common stock. Federal Reserve approval is also required for a bank holding company to acquire more than 5% of our outstanding common stock. These and other provisions could make it more difficult for a third party to acquire the Company, even if an acquisition might be in the best interest of the stockholders.
Managing reputational risk is important to attracting and maintaining customers, investors and employees. Threats to the Company’s reputation can come from many sources, including unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company’s customers. The Company has policies and procedures in place to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Company’s businesses, employees or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
The price of the Company’s common stock may be volatile or may decline. The price of the Company’s common stock may fluctuate in response to a number of factors, thatsome of which are outside the Company’s control. These factors include, among other things:
•actual or anticipated quarterly fluctuations in the Company’s results of operations and financial condition;
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•changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;analysts and rating agencies;
•speculation in the press or investment community;
•strategic actions by the Company or its competitors, such as acquisitions or restructurings;
•actions by institutional stockholders;
•addition or departure of key personnel;
•fluctuations in the stock price and operating results of the Company’s competitors;
•general market conditions and, in particular, developments related to market conditions in the financial services industry;
•proposed or adopted regulatory changes or developments;
•cyclical fluctuations;
•trading volume of the Company’s common stock; and
•anticipated or pending investigations, proceedings or litigation that involve or affect the Company.
Industry factors, general economic and political conditions and events, such as cyber or terrorist attacks, economic downturn or recessions, interest rate changes, credit lossdefault trends, currency fluctuations, changes to trade policies or disease pandemicspublic health issues could also cause our stock price to decline regardless of our operating results. A significant decline in the Company’s stock price could result in substantial losses for stockholders.
If the Company’s goodwill was determined to be impaired, it would result in a charge against earnings and thus a reduction in stockholders’ equity. The Company tests goodwill for impairment on an annual basis, or more frequently, if necessary. Quoted market pricesA significant decline in active markets areour expected future cash flows, a material change in interest rates, a significant adverse change in the best evidencebusiness climate, slower growth rates, or a significant or sustained decline in the price of fair value and arethe Company’s common stock may necessitate taking charges in the future related to be used as the basis for measuring impairment when available. Other acceptable valuation methods include present value measurements based on multiples of earnings or revenues, or similar performance measures.goodwill. If the Company were to determinedetermines that a future write-down of goodwill is necessary, the carrying amount of the goodwill exceeded its implied fair value, the Company wouldsuch impairment charge could be required to write down the value of the goodwill on the balance sheet,significant and could adversely affectingaffect earnings as well as capital.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
East West’s corporate headquarters is located at 135 North Los Robles Avenue, Pasadena, California, an eight-story office building that it owns. The Company operates in 119116 locations in the U.S. and 9eight locations in Greater China. In the U.S., the Bank’s corporate headquarters and main administrative offices are located in California, and branches are located in California, Texas, New York, Washington, Georgia, Massachusetts and Nevada. In Greater China, East West’s presence includes full service branches in Hong Kong, Shanghai, Shantou and Shenzhen, and representative offices in Beijing, Chongqing, Guangzhou and Xiamen.
As of December 31, 2019,2020, the Bank owns approximately 162 thousand154,000 square feet of property at 2019 U.S. locations and leases approximately 780 thousand783,000 square feet in the remaining U.S. locations. Expiration dates for these leases range from 20202021 to 2030,2036, exclusive of renewal options. The Bank leases all of its branches and offices in Greater China, totaling approximately 84 thousand58,000 square feet. Expiration dates for these leases range from 20202021 to 2022.2026. All properties occupied by the Bank are used across all business segments and for corporate purposes. For further information concerning leases, see Note 10 — Leases to the Consolidated Financial Statements in this Form 10-K.
On an ongoing basis, the Company evaluates its current and projected space requirements and, from time to time, it may determine that certain premises or facilities are no longer necessary for its operations. The Company believes that, if necessary, it could secure alternative properties on similar terms without adversely affecting its operations.
ITEM 3. LEGAL PROCEEDINGS
See Note 1512 — Commitments, Contingencies and Related Party Transactions — Litigation to the Consolidated Financial Statements in this Form 10-K, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders of Common Stock and Dividends
The Company’s common stock is traded on the NASDAQNasdaq Global Select Market under the symbol “EWBC”.“EWBC.” As of January 31, 2020, 145,625,5652021, the Company had 712 stockholders of record holding 141,565,473 shares of the Company’s common stock, werenot including beneficial owners whose shares are held by 737 stockholdersin record names of record and by approximately 88,033 additional stockholders whose common stock were held for them in street namebrokers or nominee accounts.other nominees.
Holders of the Company’s common stock are entitled to receive cash dividends when declared by the Company’s Board of Directors out of legally available funds. The Board of Directors presently intends to continue the policy of paying quarterly cash dividends, however, there can be no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements and financial condition.
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding securities authorized for issuance under the Company’s equity compensation plans, see Note 1613 — Stock Compensation Plans to the Consolidated Financial Statements andItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matterspresented elsewhere in this report,Form 10-K, which are incorporated herein by reference.
Five-Year Stock Performance
The following graph and table compare the Company’s cumulative total return on its common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 500 Index and the Keefe, Bruyette and Woods NASDAQNasdaq Regional Banking Index (“KRX”) over the five-year period through December 31, 2019.2020. The S&P 500 Index is utilized as a benchmark against performance and is a commonly referenced U.S. equity benchmark consisting of leading companies from different economic sectors. The KRX is used to align EWBC with those companies of a relatively similar size. This index seeks to reflect the performance of publicly traded U.S. companies that do business as regional banks or thrifts, and is composed of 50 companies. The graph and table below assume that on December 31, 2014,2015, $100 was invested in EWBC’s common stock, the S&P 500 Index and the KRX, and that all dividends were reinvested. Historical stock price performance shown on the graph is not necessarily indicative of future price performance. The information set forth under the heading “Five-Year Stock Performance” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that such information to be treated as soliciting material or specifically to be incorporated by reference into a filing under the Securities Act or the Exchange Act.
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| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||||||||||||
| East West Bancorp, Inc. | $100.00 | $109.40 | $136.60 | $165.80 | $120.50 | $138.00 | East West Bancorp, Inc. | $100.00 | $124.90 | $151.60 | $110.20 | $126.10 | $135.50 | |||||||||||||||||||||||||||||||||||||
| KRX | $100.00 | $105.90 | $147.20 | $149.80 | $123.60 | $153.00 | KRX | $100.00 | $139.00 | $141.50 | $116.70 | $144.50 | $131.90 | |||||||||||||||||||||||||||||||||||||
| S&P 500 Index | $100.00 | $101.40 | $113.50 | $138.30 | $132.20 | $173.90 | S&P 500 Index | $100.00 | $112.00 | $136.40 | $130.40 | $171.50 | $203.00 | |||||||||||||||||||||||||||||||||||||
Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
On July 17, 2013,March 3, 2020, the Company’s Board of Directors authorized a stockthe repurchase program to buy backof up to $100.0$500.0 million of the Company’s common stock. This $500.0 million repurchase authorization is inclusive of the unused portion of the Company’s $100.0 million stock repurchase authorization previously outstanding in 2013. The share repurchase authorization has no expiration date. In March 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company’s total remaining available share repurchase authorization as of December 31, 2020 was $354.0 million. The Company did not repurchase any shares under this program thereafter, including during 2019 and 2018. Although this program has no stated expiration date, the Company does not intend to repurchase any stock pursuant to this program absent further action of the Company’s Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
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EAST WEST BANCORP, INC.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
| Page | |||||||||||
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Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company,” “we” or “EWBC”), and its subsidiaries, including its subsidiary bank, East West Bank and its subsidiaries (referred to herein as “East West Bank” or the “Bank”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report.Form 10-K.
Company Overview
East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the BHC Act. The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered in California that has a strong focus on the financial service needs of the Chinese-AmericanAsian-American community. Through over 125120 locations in the U.S. and Greater China, the Company provides a full range of consumer and commercial products and services through three business segments: Consumer and Business Banking, Commercial Banking, with the remaining operations included in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and investmentdebt securities and interest paid on deposits and other funding sources. As of December 31, 2019,2020, the Company had $44.20$52.16 billion in assets and approximately 3,3003,200 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services.
Corporate Strategy
We are committed to enhancing long-term shareholder value by executing on the fundamentals of growing loans, deposits and revenue, improving profitability, and investing for the future while managing risk,risks, expenses and capital. Our business model is built on customer loyalty and engagement, understanding of our customers’ financial goals, and meeting our customers’ financial needs through our diverse products and services. The Company’s approach is concentrated on seeking out and deepening client relationships that meet our risk/return measures. This focus guides our decision-making across every aspect of our operations: the products we develop, the expertise we cultivate and the infrastructure we build to help our customers conduct business.businesses. We expect our relationship-focused business model to continue to generate organic growth and to expand our targeted customer bases. On an ongoing basis, we invest in technology related to improve the customer user experience, strengthen critical business infrastructure, and streamliningstreamline core processes, in the context of maintaining appropriate expense management.while appropriately managing operating expenses. Our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.
Coronavirus Disease 2019 Global Pandemic
The COVID-19 pandemic has caused significant disruption around the world, as well as economic and financial market deterioration, which did not exist at the beginning of 2020. These economic and operating conditions caused by the COVID-19 pandemic have created financial difficulties for many of the Company’s commercial and consumer customers. As a result, some borrowers may not be able to satisfy their obligations to us. As many of the Company’s loans are secured by real estate, a potential decline in the real estate markets could also negatively impact the Company’s business, financial condition and the credit quality of the Company’s loan portfolio. It has adversely affected, and is likely continue to adversely affect, our business, financial condition and results of operations. We cannot predict at this time the scope and duration of the pandemic as the COVID-19 pandemic has not yet been contained. While there have been various governmental and other responses to slow or control the spread of the COVID-19 pandemic, and to mitigate its adverse impacts, such as stay-at-home orders, restrictions on business activities, economic relief for individuals and businesses, and monetary policy measures, these responses have met varying degrees of success, and it remains uncertain whether these actions will be successful as the pandemic continues. Although effective vaccines have been developed, their distribution is still in the early stages and it is uncertain how long the process will take to complete, nationally or globally.
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Regulatory Developments Relating to the COVID-19 Pandemic
Coronavirus Aid, Relief, and Economic Security Act —The CARES Act was enacted on March 27, 2020 to lessen the economic impact of the COVID-19 pandemic on individuals, businesses and local economies. The CARES Act initiatives included extended unemployment benefits, mortgage forbearance, the SBA PPP and funding and authorization for the MSLP. The Company participated in the Federal Reserve’s MSLP and funded $233.6 million in MSLP loans as of December 31, 2020. The related Main Street special purpose vehicle purchased participations in these loans which amounted to $221.9 million or 95%. The CARES Act also required mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which could be extended for up to another 180 days) on a federally-backed single-family mortgage loan or forbearance up to 30 days (which could be extended for two additional 30-day periods) on a federally-backed multifamily mortgage loan when the borrowers experience financial hardship due to the COVID-19 pandemic.
In response to the continued market disruption and economic impact of the COVID-19 pandemic, President Trump signed into law the CAA on December 27, 2020. The CAA contains a variety of provisions for emergency relief to individuals and business related to the COVID-19 pandemic, including measures to, among other things, provide additional funding to businesses, facilitate emergency capital investments by community development financial institutions, fund rental assistance for certain individuals and extend regulatory relief relating to the adoption of CECL until the earlier of the first day of the fiscal year of the institution that begins after the national emergency termination date or January 1, 2022. The CAA provided additional funding to the PPP, expanded eligibility of businesses for the PPP, extended the PPP to March 31, 2021, and allows eligible borrowers to obtain a second PPP loan (“second draw”) up to a maximum amount of $2 million. Second draw PPP borrowers are eligible for loan forgiveness on the same terms as the first draw borrowers. The CAA also simplified the loan forgiveness process for first and second draw borrowers with PPP loans of $150,000 or less and includes a “hold harmless” provision, which provides that a lender may rely on any certification or documentation submitted by a borrower for a PPP loan and that no enforcement action may be taken against the lender, and the lender will not be subject to any penalties relating to loan origination or forgiveness, if (i) the lender acts in good faith relating to loan origination or forgiveness and (ii) all other applicable statutory and regulatory requirements are satisfied.
Paycheck Protection Program — The PPP provides forgivable loans to businesses in order to keep their employees on the payroll and make certain other eligible payments. The SBA guarantees 100% of the PPP loans made to eligible borrowers, and the entire principal amount and any accrued interest on the loans are eligible to be forgiven if certain conditions are met, at which point the SBA will pay the bank that originated the PPP loan the forgiven amount. The Company is a participant in the PPP. As of December 31, 2020, the Company had approximately 6,200 PPP loans outstanding with balances totaling $1.57 billion, which were recorded in the commercial and industrial (“C&I”) portfolio. Related to the PPP loans made in 2020, as of February 25, 2021, the Company has submitted and received approval from the SBA for forgiveness approximately 2,700 PPP loan applications, totaling $341.9 million. In January 2021, the Company began processing applications under the newly funded PPP, largely second draw PPP loans. Since the start of the second draw PPP through February 25, 2021, the Company has funded over 4,300 new PPP loans, totaling $700.3 million.
Other U.S. Government Facilities and Programs—In connection with our participation in the PPP under the CARES Act as discussed above, the Company participated in the PPPLF. During the second quarter of 2020, the Federal Reserve established the PPPLF to allow eligible lenders to facilitate lending under the SBA’s PPP, taking PPP loans as collateral. The Company drew down $1.44 billion from the Federal Reserve PPPLF and pledged the same amount in PPP loans as collateral during the second quarter of 2020. The Company paid off the outstanding amounts under the PPPLF in full during the fourth quarter of 2020.
Loan Modifications — The CARES Act and related guidance from the federal banking agencies provide financial institutions the option to temporarily suspend requirements under GAAP related to classification of certain loan modifications as TDRs to account for the current and anticipated effects of the COVID-19 pandemic. The CARES Act, as amended by the CAA, specified that COVID-19 related loan modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. We have granted loan modifications to our customers in the form of maturity extensions, payment deferrals and forbearance. For a summary of the loans that we have modified in response to the COVID-19 pandemic, please refer to Item 7. MD&A — Risk Management — Credit Risk Management in this Form 10-K.
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Regulatory Capital — The CARES Act requires PPP loans to be assigned a zero percent risk weight under the federal banking agencies’ risk-based capital rules. Additionally, under an interim final rule of the federal banking agencies, PPP loans that an institution pledges as collateral to the PPPLF may be deducted from the institution’s average total consolidated assets for purposes of the Tier 1 leverage ratio.
Federal Reserve Requirements — On March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent, eliminating the reserve requirement for all depository institutions, an action that provides liquidity in the banking system to support lending to households and businesses, in response to the economic stress stemming from the COVID-19 pandemic.
Our Response to the COVID-19 Pandemic
In response to the pandemic, the Company has implemented protocols and processes to execute its business continuity plans to help protect its employees and support its customers. The Company is managing its response to the COVID-19 pandemic according to its Enterprise Business Continuity Policy, which invokes centralized management of the crisis event and the integration of its response. The CEO and key members of the Company’s management team meet regularly with senior executives to help drive decisions, communication and consistency of response across all businesses and functions. In addition, we have implemented measures to assist our employees and customers as discussed below:
•Employees:
The majority of the Company’s employees are able to work from home. The Company continues to evaluate its continuity plans and work-from-home strategy to best protect the health and safety of its employees. For employees with jobs that are required to be performed on-site, we have taken significant actions to ensure employee safety by providing personal protection equipment, adopting social distancing measures, placing visual safety reminders related to social distancing, implementing an enhanced cleaning program, installing plexiglass panels, and requiring temperature screenings and the wearing of masks for all employees.
•Customers:
We assisted our commercial, consumer and small business clients affected by the COVID-19 pandemic through payment deferrals, suspension of foreclosures on certain residential mortgage loans, and participation in the SBA PPP and the MSLP.We intend to evaluate participation in additional new government-sponsored programs, as they are established. In addition, the Company continues to make a wide range of banking services accessible to customers through mobile and other digital channels to reduce the need for in-person branch visits.
Impact on our Financial Position and Results of Operations— Our financial position and results of operations are sensitive to the ability of our loan customers to meet loan obligations, the availability of our workforce and the decline in the value of assets held by us. While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout our operating footprint. This decrease in commercial activity has caused and may continue to cause our customers to be unable to meet existing payment or other obligations to us. The greatest impact of the COVID-19 pandemic on our financial condition has been in the increase of the provision for credit losses and the allowance for loan losses. We recorded approximately $210.7 million of provision for credit losses during 2020, bringing our allowance for loan losses to $620.0 million as of December 31, 2020, with an allowance for loan losses to loans held-for-investment ratio of 1.61%. Despite the impact of the increased provision for credit losses, we maintained solid profitability for the full year of 2020, earning 1.16% on return on average assets (“ROA”) and 11.17% on return on average equity (“ROE”). Our capital ratios are strong, and we remain well-positioned from a liquidity perspective, enabling us to weather adverse economic scenarios while continuing to support our customers and invest in our business.
For additional information, see Item 7. MD&A — Risk Management — Credit Risk Management and — Liquidity Risk Management, and — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-K. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A — Risk Factors in this Form 10-K.
Accounting Standards Update 2016-13 Adoption
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses, which establishes a single allowance framework for all financial assets carried at amortized cost, and for certain off-balance sheet exposures. Replacing the prior incurred loss model, this framework requires that management estimate credit losses over the full remaining expected life of a loan, and consider expected future changes in macroeconomic conditions. The adoption of CECL on January 1, 2020 increased the allowance for loan losses by $125.2 million, and the allowance for unfunded credit commitments by $10.5 million, and an after-tax decrease to retained earnings of $98.0 million.
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Five-Year Summary of Selected Financial Data
| ($ and shares in thousands, except per share, ratio and headcount data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Summary of operations: | ||||||||||||||||||||||||||||||||
Net interest income before provision for credit losses (1) | $ | 1,377,193 | $ | 1,467,813 | $ | 1,386,508 | $ | 1,185,069 | $ | 1,032,638 | ||||||||||||||||||||||
Noninterest income (2) | 235,547 | 222,245 | 217,433 | 263,654 | 186,921 | |||||||||||||||||||||||||||
| Total revenue | 1,612,740 | 1,690,058 | 1,603,941 | 1,448,723 | 1,219,559 | |||||||||||||||||||||||||||
| Provision for credit losses | 210,653 | 98,685 | 64,255 | 46,266 | 27,479 | |||||||||||||||||||||||||||
Noninterest expense (3) | 716,322 | 747,456 | 720,990 | 667,357 | 619,892 | |||||||||||||||||||||||||||
| Income before income taxes | 685,765 | 843,917 | 818,696 | 735,100 | 572,188 | |||||||||||||||||||||||||||
Income tax expense (4) | 117,968 | 169,882 | 114,995 | 229,476 | 140,511 | |||||||||||||||||||||||||||
Net income (1)(2)(3)(4) | $ | 567,797 | $ | 674,035 | $ | 703,701 | $ | 505,624 | $ | 431,677 | ||||||||||||||||||||||
| Per common share: | ||||||||||||||||||||||||||||||||
| Basic earnings | $ | 3.99 | $ | 4.63 | $ | 4.86 | $ | 3.50 | $ | 3.00 | ||||||||||||||||||||||
| Diluted earnings | $ | 3.97 | $ | 4.61 | $ | 4.81 | $ | 3.47 | $ | 2.97 | ||||||||||||||||||||||
| Dividends declared | $ | 1.10 | $ | 1.06 | $ | 0.86 | $ | 0.80 | $ | 0.80 | ||||||||||||||||||||||
| Book value | $ | 37.22 | $ | 34.46 | $ | 30.52 | $ | 26.58 | $ | 23.78 | ||||||||||||||||||||||
Non-GAAP tangible common equity per share (5) | $ | 33.85 | $ | 31.15 | $ | 27.15 | $ | 23.13 | $ | 20.27 | ||||||||||||||||||||||
| Weighted-average number of shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 142,336 | 145,497 | 144,862 | 144,444 | 144,087 | |||||||||||||||||||||||||||
| Diluted | 142,991 | 146,179 | 146,169 | 145,913 | 145,172 | |||||||||||||||||||||||||||
| Common shares outstanding at period-end | 141,565 | 145,625 | 144,961 | 144,543 | 144,167 | |||||||||||||||||||||||||||
| Performance metrics: | ||||||||||||||||||||||||||||||||
| ROA | 1.16 | % | 1.59 | % | 1.83 | % | 1.41 | % | 1.30 | % | ||||||||||||||||||||||
| ROE | 11.17 | % | 14.16 | % | 17.04 | % | 13.71 | % | 13.06 | % | ||||||||||||||||||||||
Return on average non-GAAP tangible equity (5) | 12.42 | % | 15.88 | % | 19.48 | % | 16.03 | % | 15.62 | % | ||||||||||||||||||||||
| Total average equity to total average assets | 10.38 | % | 11.21 | % | 10.72 | % | 10.30 | % | 9.97 | % | ||||||||||||||||||||||
| Common dividend payout ratio | 27.97 | % | 23.04 | % | 17.90 | % | 23.14 | % | 27.01 | % | ||||||||||||||||||||||
| Net interest margin | 2.98 | % | 3.64 | % | 3.78 | % | 3.48 | % | 3.30 | % | ||||||||||||||||||||||
Efficiency ratio (6) | 44.42 | % | 44.23 | % | 44.95 | % | 46.07 | % | 50.83 | % | ||||||||||||||||||||||
Non-GAAP efficiency ratio (5) | 39.30 | % | 38.14 | % | 39.39 | % | 41.26 | % | 44.04 | % | ||||||||||||||||||||||
| At year end: | ||||||||||||||||||||||||||||||||
| Total assets | $ | 52,156,913 | $ | 44,196,096 | $ | 41,042,356 | $ | 37,121,563 | $ | 34,788,840 | ||||||||||||||||||||||
Total loans (7) | $ | 38,392,743 | $ | 34,778,973 | $ | 32,385,464 | $ | 29,053,935 | $ | 25,526,215 | ||||||||||||||||||||||
| AFS debt securities | $ | 5,544,658 | $ | 3,317,214 | $ | 2,741,847 | $ | 3,016,752 | $ | 3,335,795 | ||||||||||||||||||||||
| Total deposits | $ | 44,862,752 | $ | 37,324,259 | $ | 35,439,628 | $ | 31,615,063 | $ | 29,890,983 | ||||||||||||||||||||||
| Long-term debt and finance lease liabilities | $ | 151,739 | $ | 152,270 | $ | 146,835 | $ | 171,577 | $ | 186,327 | ||||||||||||||||||||||
| FHLB advances | $ | 652,612 | $ | 745,915 | $ | 326,172 | $ | 323,891 | $ | 321,643 | ||||||||||||||||||||||
Stockholders’ equity (8) | $ | 5,269,175 | $ | 5,017,617 | $ | 4,423,974 | $ | 3,841,951 | $ | 3,427,741 | ||||||||||||||||||||||
Non-GAAP tangible common equity (5) | $ | 4,791,579 | $ | 4,535,841 | $ | 3,936,062 | $ | 3,343,693 | $ | 2,922,638 | ||||||||||||||||||||||
| Head count (full-time equivalent) | 3,214 | 3,294 | 3,196 | 2,933 | 2,838 | |||||||||||||||||||||||||||
| EWBC capital ratios: | ||||||||||||||||||||||||||||||||
| CET1 capital | 12.7 | % | 12.9 | % | 12.2 | % | 11.4 | % | 10.9 | % | ||||||||||||||||||||||
| Tier 1 capital | 12.7 | % | 12.9 | % | 12.2 | % | 11.4 | % | 10.9 | % | ||||||||||||||||||||||
| Total capital | 14.3 | % | 14.4 | % | 13.7 | % | 12.9 | % | 12.4 | % | ||||||||||||||||||||||
| Tier 1 leverage capital | 9.4 | % | 10.3 | % | 9.9 | % | 9.2 | % | 8.7 | % | ||||||||||||||||||||||
| Total stockholders’ equity to total assets | 10.1 | % | 11.4 | % | 10.8 | % | 10.3 | % | 9.9 | % | ||||||||||||||||||||||
Non-GAAP tangible common equity to tangible assets (5) | 9.3 | % | 10.4 | % | 9.7 | % | 9.1 | % | 8.5 | % | ||||||||||||||||||||||
(1)2020 includes $43.3 million of interest income related to PPP loans.
(2)2018 includes $31.5 million of gain recognized from the sale of the Desert Community Bank (“DCB”) branches. 2017 includes $71.7 million and $3.8 million of gains recognized from the sales of a commercial property in California and EWIS’s insurance brokerage business, respectively.
(3)2020 includes $10.7 million of recovery related to DC Solar and affiliates (“DC Solar”) tax credit investments, of which $1.1 million was recorded as an impairment recovery. 2020 also includes $8.7 million in extinguishment costs related to assets sold under repurchase agreements’ (“repurchase agreements”). 2019 includes $7.0 million in impairment charge related to DC Solar, of which $1.6 million was subsequently recovered.
(4)2020 includes $5.1 million of tax expense to record an uncertain tax position related to DC Solar. 2019 includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to DC Solar. 2017 includes an additional $41.7 million in income tax expense recognized due to the enactment of the Tax Cuts and Jobs Act of 2017.
(5)For a discussion of non-GAAP tangible common equity per share, return on average non-GAAP tangible equity, non-GAAP efficiency ratio, non-GAAP tangible common equity and total non-GAAP tangible common equity to tangible assets, refer to Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.
(6)The efficiency ratio is noninterest expense divided by total revenue.
(7)Includes $1.57 billion of PPP loans as of December 31, 2020.
(8)On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the modified retrospective approach. The Company recorded $125.2 million increase to allowance for loan losses and $98.0 million after-tax decrease to opening retained earnings as of January 1, 2020.
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| ($ and shares in thousands, except per share, ratio and headcount data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Summary of operations: | ||||||||||||||||||||
| Interest and dividend income | $ | 1,882,300 | $ | 1,651,703 | $ | 1,325,119 | $ | 1,137,481 | $ | 1,053,815 | ||||||||||
| Interest expense | 414,487 | 265,195 | 140,050 | 104,843 | 103,376 | |||||||||||||||
| Net interest income before provision for credit losses | 1,467,813 | 1,386,508 | 1,185,069 | 1,032,638 | 950,439 | |||||||||||||||
| Provision for credit losses | 98,685 | 64,255 | 46,266 | 27,479 | 14,217 | |||||||||||||||
| Net interest income after provision for credit losses | 1,369,128 | 1,322,253 | 1,138,803 | 1,005,159 | 936,222 | |||||||||||||||
Noninterest income (1) | 209,377 | 210,909 | 257,748 | 182,278 | 182,779 | |||||||||||||||
| Noninterest expense | 734,588 | 714,466 | 661,451 | 615,249 | 540,280 | |||||||||||||||
| Income before income taxes | 843,917 | 818,696 | 735,100 | 572,188 | 578,721 | |||||||||||||||
Income tax expense (2) | 169,882 | 114,995 | 229,476 | 140,511 | 194,044 | |||||||||||||||
| Net income | $ | 674,035 | $ | 703,701 | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||||||
| Per common share: | ||||||||||||||||||||
| Basic earnings | $ | 4.63 | $ | 4.86 | $ | 3.50 | $ | 3.00 | $ | 2.67 | ||||||||||
| Diluted earnings | $ | 4.61 | $ | 4.81 | $ | 3.47 | $ | 2.97 | $ | 2.66 | ||||||||||
| Dividends declared | $ | 1.06 | $ | 0.86 | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||||||
| Book value | $ | 34.46 | $ | 30.52 | $ | 26.58 | $ | 23.78 | $ | 21.70 | ||||||||||
Non-GAAP tangible common equity per share (3) | $ | 31.15 | $ | 27.15 | $ | 23.13 | $ | 20.27 | $ | 18.15 | ||||||||||
| Weighted-average number of shares outstanding: | ||||||||||||||||||||
| Basic | 145,497 | 144,862 | 144,444 | 144,087 | 143,818 | |||||||||||||||
| Diluted | 146,179 | 146,169 | 145,913 | 145,172 | 144,512 | |||||||||||||||
| Common shares outstanding at period-end | 145,625 | 144,961 | 144,543 | 144,167 | 143,909 | |||||||||||||||
| At year end: | ||||||||||||||||||||
Total assets (4) | $ | 44,196,096 | $ | 41,042,356 | $ | 37,121,563 | $ | 34,788,840 | $ | 32,350,922 | ||||||||||
Total loans (4) | $ | 34,778,973 | $ | 32,385,464 | $ | 29,053,935 | $ | 25,526,215 | $ | 23,675,706 | ||||||||||
| Investment securities | $ | 3,317,214 | $ | 2,741,847 | $ | 3,016,752 | $ | 3,335,795 | $ | 3,773,226 | ||||||||||
| Total deposits, excluding held-for-sale deposits | $ | 37,324,259 | $ | 35,439,628 | $ | 31,615,063 | $ | 29,890,983 | $ | 27,475,981 | ||||||||||
| Long-term debt and finance lease liabilities | $ | 152,270 | $ | 146,835 | $ | 171,577 | $ | 186,327 | $ | 206,084 | ||||||||||
| FHLB advances | $ | 745,915 | $ | 326,172 | $ | 323,891 | $ | 321,643 | $ | 1,019,424 | ||||||||||
| Stockholders’ equity | $ | 5,017,617 | $ | 4,423,974 | $ | 3,841,951 | $ | 3,427,741 | $ | 3,122,950 | ||||||||||
Non-GAAP tangible common equity (3) | $ | 4,535,841 | $ | 3,936,062 | $ | 3,343,693 | $ | 2,922,638 | $ | 2,611,919 | ||||||||||
| Head count (full-time equivalent) | 3,294 | 3,196 | 2,933 | 2,838 | 2,804 | |||||||||||||||
| Performance metrics: | ||||||||||||||||||||
| Return on average assets (“ROA”) | 1.59 | % | 1.83 | % | 1.41 | % | 1.30 | % | 1.27 | % | ||||||||||
| Return on average equity (“ROE”) | 14.16 | % | 17.04 | % | 13.71 | % | 13.06 | % | 12.74 | % | ||||||||||
| Net interest margin | 3.64 | % | 3.78 | % | 3.48 | % | 3.30 | % | 3.35 | % | ||||||||||
Efficiency ratio (5) | 43.80 | % | 44.73 | % | 45.84 | % | 50.64 | % | 47.68 | % | ||||||||||
Non-GAAP efficiency ratio (3) | 38.43 | % | 39.55 | % | 41.44 | % | 44.21 | % | 41.75 | % | ||||||||||
| Credit quality metrics: | ||||||||||||||||||||
| Allowance for loan losses | $ | 358,287 | $ | 311,322 | $ | 287,128 | $ | 260,520 | $ | 264,959 | ||||||||||
Allowance for loan losses to loans held-for-investment (4) | 1.03 | % | 0.96 | % | 0.99 | % | 1.02 | % | 1.12 | % | ||||||||||
Non-purchased credit-impaired (“PCI”) nonperforming assets to total assets (4) | 0.27 | % | 0.23 | % | 0.31 | % | 0.37 | % | 0.40 | % | ||||||||||
| Net charge-offs to average loans held-for-investment | 0.16 | % | 0.13 | % | 0.08 | % | 0.15 | % | 0.01 | % | ||||||||||
| Selected metrics: | ||||||||||||||||||||
| Total average equity to total average assets | 11.21 | % | 10.72 | % | 10.30 | % | 9.97 | % | 9.95 | % | ||||||||||
| Common dividend payout ratio | 23.04 | % | 17.90 | % | 23.14 | % | 27.01 | % | 30.21 | % | ||||||||||
Loan-to-deposit ratio (4) | 93.18 | % | 91.38 | % | 90.17 | % | 85.40 | % | 86.17 | % | ||||||||||
| EWBC capital ratios: | ||||||||||||||||||||
| CET1 capital | 12.9 | % | 12.2 | % | 11.4 | % | 10.9 | % | 10.5 | % | ||||||||||
| Tier 1 capital | 12.9 | % | 12.2 | % | 11.4 | % | 10.9 | % | 10.7 | % | ||||||||||
| Total capital | 14.4 | % | 13.7 | % | 12.9 | % | 12.4 | % | 12.2 | % | ||||||||||
| Tier 1 leverage capital | 10.3 | % | 9.9 | % | 9.2 | % | 8.7 | % | 8.5 | % | ||||||||||
Financial HighlightsReview
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Noteworthy items about the Company’s performance for 20192020 included:
•Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $1.61 billion in 2020, compared with $1.69 billion in 2019, a decrease of $77.3 million or 5%. This decrease was primarily due to lower net interest income, partially offset by an increase in noninterest income.
•Net Interest Income and Net Interest Margin: 2020 net interest income was $1.38 billion, a decrease of $90.6 million or 6%, compared with 2019 net interest income of $1.47 billion. 2020 net interest margin was 2.98%, a decrease of 66 basis points from 3.64% for 2019. The decreases in the net interest income and net interest margin reflected significantly lower interest rates year-over-year, including a 150 basis points reduction to the target federal funds rate in March 2020.
•Provision for credit losses: 2020 provision for credit losses was $210.7 million, an increase of $112.0 million or 113%, compared with $98.7 million for 2019. The year-over-year increase in the provision for credit losses reflected the deteriorating macroeconomic conditions and outlook due to the COVID-19 pandemic. Provision expense in the first half of 2020 was $176.3 million, compared with $34.4 million in the second half of 2020.
•Tax: 2020 income tax expense was $118.0 million and the effective income tax rate was 17.2%, compared with income tax expense of $169.9 million and an effective tax rate of 20.1%, for 2019. 2020 income tax expense included $8.1 million of income tax expense related to DC Solar tax credit investments; $5.1 million due to an uncertain tax position and $3.0 million of tax expense for $10.7 million of recoveries included in Amortization of tax credit and other investments. 2019 income tax expense included $30.1 million for the reversal of certain previously claimed tax credits related to DC Solar and $1.6 million of income tax benefit related to an impairment and recovery related to DC Solar.
•Profitability: 2020 ROA was 1.16%, compared with 1.59% for 2019. 2020 ROE was 11.17%, compared with 14.16% for 2019. Adjusted for the non-recurring items related to DC Solar in 2020 and 2019, 2020 non-GAAP ROA was 1.16%, compared with 1.67% for 2019. 2020 non-GAAP ROE was 11.12%, compared with 14.87% for 2019. For additional detail, refer to the reconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.
•Loans: Total loans were $38.39 billion as of December 31, 2020, an increase of $3.61 billion or 10% from $34.78 billion as of December 31, 2019. Loan growth was well-diversified across each of the Company’s major loan portfolios of C&I, driven by PPP loan funding, single-family residential and CRE.
•Deposits: Total deposits were $44.86 billion as of December 31, 2020, an increase of $7.54 billion or 20% from $37.32 billionas of December 31, 2019. Growth was primarily driven by noninterest-bearing demand deposits and money market accounts, partially offset by a decrease in time deposits.
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•Allowance for Loan Losses: The allowance for loan losses was $620.0 million, or 1.61% of loans held-for-investment, as of December 31, 2020, compared with $358.3 million, or 1.03% of loans held-for-investment, as of December 31, 2019. On January 1, 2020, the allowance for loan losses increased by $125.2 million, reflecting the adoption of ASU 2016-13. Between January 2 and December 31, 2020, the allowance for loan losses increased by $136.5 million, primarily reflecting the negative impact of the COVID-19 pandemic and a deterioration of the macroeconomic forecast for the first half of 2020.
•Asset Quality Metrics: Nonperforming assets were $234.9 million or 0.45% of total assets, as of December 31, 2020, an increase of $113.4 million or 93% from $121.5 million or 0.27% of total assets, as of December 31, 2019. For 2020, net charge-offs were $63.2 million or 0.17% of average loans held-for-investment, compared with net charge-offs of $52.8 million or 0.16% of average loans held-for-investment for 2019.
•Capital Levels: Our capital levels are strong. As of December 31, 2020, all of the Company’s and the Bank’s regulatory capital ratios were well above the required well-capitalized levels. See Item 7. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Kfor more information regarding capital.
•Capital Return: The annual cash dividend on common stock was $1.10 per share in 2020, compared with $1.055 per share in 2019. The Company returned $158.2 million and $155.1 million in cash dividends to stockholders during 2020 and 2019, respectively. On March 3, 2020, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $500.0 million of the Company’s common stock. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. As of December 31, 2020, $354.0 million remains available under the outstanding authorization.
Results of Operations
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between interest income earned on interest-earning assets less interest expense paid on interest-bearing liabilities. Net interest margin is the ratio of net interest income to average interest-earning assets. Net interest income and net interest margin are impacted by several factors, including changes in average balances and the composition of interest-earning assets and funding sources, market interest rate fluctuations and the slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, volume of noninterest-bearing sources of funds and asset quality.
 | ||
37
 |  |
Net interest income for 20192020 was $1.47$1.38 billion, an increasea decrease of $81.3$90.6 million or 6%, compared with $1.39$1.47 billion in 2018.2019. The increasedecrease in net interest income for 20192020 was primarily driven by loan growth and higher loandue to lower interest-earning asset yields, reflecting significantly lower benchmark interest rates in 2020, partially offset by a higher cost of deposits. Net interest income for 2018 was $1.39 billion, an increase of $201.4 million or 17%, compared with $1.19 billion in 2017. The increase in net interest income for 2018 was primarily due to the expansion of loan yields and loan growth, partially offset by a higherlower cost of funds. Net interest margin for 20192020 was 3.64%2.98%, a 14 basis point decrease from 3.78% in 2018. Net interest margin for 2018 increased 30of 66 basis points from 3.48%3.64% in 2017.2019.
Average interest-earning assets were $46.24 billion in 2020, an increase of $5.92 billion or 15% from $40.32 billion in 2019, an increase of $3.61 billion or 10% from $36.71 billion in 2018.2019. This was primarily due to loan growth, as well as increases of $3.14$1.19 billion in average loans and $441.5 million in average interest-bearing cash and deposits with banks. Average interest-earning assets were $36.71 billion in 2018, an increase of $2.67 billion or 8% from $34.03 billion in 2017. This was primarily due to increases of $2.98 billion in average loans and $367.2 million in average interest-bearing cash and deposits with banks, partially offset by decreases of $417.9 millionand $1.17 billion in average securities purchased under resale agreements (“resale agreements”)AFS debt securities. Average loans were $36.80 billion in 2020, an increase of $3.43 billion or 10% from $33.37 billion in 2019.
The yield on average interest-earning assets for 2020 was 3.45%, a decrease of 122 basis points from 4.67% in 2019. The year-over-year yield compression reflected the lower average loan yield, as well as yield compression for all other earning asset categories, in response to the low interest rate environment. The average loan yield for 2020 was 3.98%, a decrease of 117 basis points from 5.15% in 2019. The year-over-year yield compression reflected materially lower benchmark interest rates, including a 150 basis points reduction to the target federal funds rate in March 2020. Approximately 65% and $253.5 million64% of loans held-for-investment were variable-rate or hybrid loans in average investment securities.their adjustable rate period as of December 31, 2020 and 2019, respectively.
Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demandtotal deposits totaled $10.50were $40.76 billion in 2019, compared with $11.092020, an increase of $4.71 billion or 13% from $36.05 billion in 2018, a decrease of $586.9 million or 5%.2019. Average noninterest-bearing demand deposits in 2018 increased $461.8 million or 4% from $10.63were $13.82 billion in 2017.2020, an increase of $3.32 billion or 32% from $10.50 billion in 2019. Average interest-bearing deposits were $26.94 billion in 2020, an increase of $1.39 billion or 5% from $25.55 billion in 2019. Due to the strong growth in average noninterest-bearing deposits, the share of noninterest-bearing demand deposits made up 29%, 33% andincreased to 34% of average total deposits in 2019, 2018 and 2017, respectively. Average interest-bearing deposits of $25.54 billion2020, compared with 29% in 2019 increased $3.40 billion or 15% from $22.14 billion in 2018. Average interest-bearing deposits in 2018 increased $1.95 billion or 10% from $20.19 billion in 2017.2019.
The average cost of funds in 2020 was 1.12%0.51%, 0.78% and 0.44%a decrease of 61 basis points from 1.12% in 2019, 2018 and 2017, respectively.2019. The year-over-year increasesdecrease in the average cost of funds were primarily duereflected a 150 basis points reduction to increasesthe target federal funds rate in the cost of interest-bearing deposits.March 2020. The average cost of interest-bearing deposits increased 41decreased 78 basis points to 0.69% in 2020, from 1.47% in 2019, and 48 basis points to 1.06% in 2018, up from 0.58% in 2017.2019. Other sources of funding included in the calculation of the average cost of funds primarily consist of long-term debt, FHLB advances, long-term debt and securities sold under repurchase agreements, (“repurchase agreements”).and short-term borrowings.
The Company utilizes various tools to manage interest rate risk. Refer to the “Interest Rate Risk Management” section of Item 7. MD&A — Risk Management — Market Risk Management for details.
38
The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component in 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | $ | 4,236,430 | $ | 25,175 | 0.59 | % | $ | 3,050,954 | $ | 66,518 | 2.18 | % | $ | 2,609,463 | $ | 54,700 | 2.10 | % | ||||||||||||||||||||||||||||||||||||||
Assets purchased under resale agreements (“resale agreements”) (1) | 1,101,434 | 21,389 | 1.94 | % | 969,384 | 28,061 | 2.89 | % | 1,020,822 | 29,432 | 2.88 | % | ||||||||||||||||||||||||||||||||||||||||||||
AFS debt securities (2)(3) | 4,023,668 | 82,553 | 2.05 | % | 2,850,476 | 67,838 | 2.38 | % | 2,773,152 | 60,911 | 2.20 | % | ||||||||||||||||||||||||||||||||||||||||||||
Loans (4)(5) | 36,799,017 | 1,464,382 | 3.98 | % | 33,373,136 | 1,717,415 | 5.15 | % | 30,230,014 | 1,503,514 | 4.97 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted equity securities | 79,160 | 1,543 | 1.95 | % | 76,854 | 2,468 | 3.21 | % | 73,691 | 3,146 | 4.27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 46,239,709 | $ | 1,595,042 | 3.45 | % | $ | 40,320,804 | $ | 1,882,300 | 4.67 | % | $ | 36,707,142 | $ | 1,651,703 | 4.50 | % | ||||||||||||||||||||||||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 528,406 | 471,060 | 445,768 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (577,560) | (330,125) | (298,600) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 2,747,238 | 2,023,146 | 1,688,259 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 48,937,793 | $ | 42,484,885 | $ | 38,542,569 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Checking deposits (6) | $ | 5,357,934 | $ | 24,213 | 0.45 | % | $ | 5,244,867 | $ | 58,168 | 1.11 | % | $ | 4,477,793 | $ | 34,657 | 0.77 | % | ||||||||||||||||||||||||||||||||||||||
Money market deposits (6) | 9,881,284 | 42,720 | 0.43 | % | 8,220,236 | 111,081 | 1.35 | % | 7,985,526 | 83,696 | 1.05 | % | ||||||||||||||||||||||||||||||||||||||||||||
Saving deposits (6) | 2,234,913 | 6,398 | 0.29 | % | 2,118,060 | 9,626 | 0.45 | % | 2,245,644 | 8,621 | 0.38 | % | ||||||||||||||||||||||||||||||||||||||||||||
Time deposits (6) | 9,465,608 | 111,411 | 1.18 | % | 9,961,289 | 196,927 | 1.98 | % | 7,431,749 | 107,778 | 1.45 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 108,398 | 1,504 | 1.39 | % | 44,881 | 1,763 | 3.93 | % | 32,222 | 1,398 | 4.34 | % | ||||||||||||||||||||||||||||||||||||||||||||
| FHLB advances | 664,370 | 13,792 | 2.08 | % | 592,257 | 16,697 | 2.82 | % | 327,435 | 10,447 | 3.19 | % | ||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements (1) | 350,849 | 11,766 | 3.35 | % | 74,926 | 13,582 | 18.13 | % | 50,000 | 12,110 | 24.22 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt and finance lease liabilities | 734,921 | 6,045 | 0.82 | % | 152,445 | 6,643 | 4.36 | % | 159,185 | 6,488 | 4.08 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 28,798,277 | $ | 217,849 | 0.76 | % | $ | 26,408,961 | $ | 414,487 | 1.57 | % | $ | 22,709,554 | $ | 265,195 | 1.17 | % | ||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits (6) | 13,823,152 | 10,502,618 | 11,089,537 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 1,234,178 | 812,461 | 612,656 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 5,082,186 | 4,760,845 | 4,130,822 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 48,937,793 | $ | 42,484,885 | $ | 38,542,569 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate spread | 2.69 | % | 3.10 | % | 3.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income and net interest margin | $ | 1,377,193 | 2.98 | % | $ | 1,467,813 | 3.64 | % | $ | 1,386,508 | 3.78 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1)Average balances of resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 1.94%, 2.66% and 2.63% for 2020, 2019 and 2018, respectively. The weighted-average interest rates of gross repurchase agreements were 3.25%, 4.74% and 2017:4.46% for 2020, 2019 and 2018, respectively.
(2)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(3)Includes the amortization of premiums on debt securities of $33.9 million, $10.9 million and $16.1 million for 2020, 2019 and 2018, respectively.
(4)Average balances include nonperforming loans and loans held-for-sale.
(5)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled $52.4 million, $36.8 million and $39.2 million for 2020, 2019 and 2018, respectively.
(6)Average balance of deposits for 2018 includes average deposits held-for-sale related to the sale of DCB branches.
39
| ($ in thousands) | Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | |||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | $ | 3,050,954 | $ | 66,760 | 2.19 | % | $ | 2,609,463 | $ | 54,804 | 2.10 | % | $ | 2,242,256 | $ | 33,390 | 1.49 | % | |||||||||||||||
Resale agreements (1) | 969,384 | 27,819 | 2.87 | % | 1,020,822 | 29,328 | 2.87 | % | 1,438,767 | 32,095 | 2.23 | % | |||||||||||||||||||||
Investment securities (2)(3) | 2,850,476 | 67,838 | 2.38 | % | 2,773,152 | 60,911 | 2.20 | % | 3,026,693 | 58,670 | 1.94 | % | |||||||||||||||||||||
Loans (4)(5) | 33,373,136 | 1,717,415 | 5.15 | % | 30,230,014 | 1,503,514 | 4.97 | % | 27,252,756 | 1,198,440 | 4.40 | % | |||||||||||||||||||||
| Restricted equity securities | 76,854 | 2,468 | 3.21 | % | 73,691 | 3,146 | 4.27 | % | 73,593 | 2,524 | 3.43 | % | |||||||||||||||||||||
| Total interest-earning assets | $ | 40,320,804 | $ | 1,882,300 | 4.67 | % | $ | 36,707,142 | $ | 1,651,703 | 4.50 | % | $ | 34,034,065 | $ | 1,325,119 | 3.89 | % | |||||||||||||||
| Noninterest-earning assets: | |||||||||||||||||||||||||||||||||
| Cash and due from banks | 471,060 | 445,768 | 395,092 | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (330,125 | ) | (298,600 | ) | (272,765 | ) | |||||||||||||||||||||||||||
| Other assets | 2,023,146 | 1,688,259 | 1,631,221 | ||||||||||||||||||||||||||||||
| Total assets | $ | 42,484,885 | $ | 38,542,569 | $ | 35,787,613 | |||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||
Checking deposits (6) | $ | 5,244,867 | $ | 58,168 | 1.11 | % | $ | 4,477,793 | $ | 34,657 | 0.77 | % | $ | 3,951,930 | $ | 18,305 | 0.46 | % | |||||||||||||||
Money market deposits (6) | 8,220,236 | 111,081 | 1.35 | % | 7,985,526 | 83,696 | 1.05 | % | 8,026,347 | 44,181 | 0.55 | % | |||||||||||||||||||||
Saving deposits (6) | 2,118,060 | 9,626 | 0.45 | % | 2,245,644 | 8,621 | 0.38 | % | 2,369,398 | 6,431 | 0.27 | % | |||||||||||||||||||||
Time deposits (6) | 9,961,289 | 196,927 | 1.98 | % | 7,431,749 | 107,778 | 1.45 | % | 5,838,382 | 47,474 | 0.81 | % | |||||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 44,881 | 1,763 | 3.93 | % | 32,222 | 1,398 | 4.34 | % | 34,546 | 1,003 | 2.90 | % | |||||||||||||||||||||
| FHLB advances | 592,257 | 16,697 | 2.82 | % | 327,435 | 10,447 | 3.19 | % | 391,480 | 7,751 | 1.98 | % | |||||||||||||||||||||
Repurchase agreements (1) | 74,926 | 13,582 | 18.13 | % | 50,000 | 12,110 | 24.22 | % | 140,000 | 9,476 | 6.77 | % | |||||||||||||||||||||
| Long-term debt and finance lease liabilities | 152,445 | 6,643 | 4.36 | % | 159,185 | 6,488 | 4.08 | % | 178,882 | 5,429 | 3.03 | % | |||||||||||||||||||||
| Total interest-bearing liabilities | $ | 26,408,961 | $ | 414,487 | 1.57 | % | $ | 22,709,554 | $ | 265,195 | 1.17 | % | $ | 20,930,965 | $ | 140,050 | 0.67 | % | |||||||||||||||
| Noninterest-bearing liabilities and stockholders’ equity: | |||||||||||||||||||||||||||||||||
Demand deposits (6) | 10,502,618 | 11,089,537 | 10,627,718 | ||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 812,461 | 612,656 | 541,717 | ||||||||||||||||||||||||||||||
| Stockholders’ equity | 4,760,845 | 4,130,822 | 3,687,213 | ||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 42,484,885 | $ | 38,542,569 | $ | 35,787,613 | |||||||||||||||||||||||||||
| Interest rate spread | 3.10 | % | 3.33 | % | 3.22 | % | |||||||||||||||||||||||||||
| Net interest income and net interest margin | $ | 1,467,813 | 3.64 | % | $ | 1,386,508 | 3.78 | % | $ | 1,185,069 | 3.48 | % | |||||||||||||||||||||
The following table summarizes the extent to which changes in (1) interest rates; and (2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and interest rates.yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Nonaccrual loans are included in average loans to compute the table below:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 vs. 2019 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||
| Total Change | Changes Due to | Total Change | Changes Due to | |||||||||||||||||||||||||||||||||||
| Volume | Yield/Rate | Volume | Yield/Rate | |||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | $ | (41,343) | $ | 19,300 | $ | (60,643) | $ | 11,818 | $ | 9,554 | $ | 2,264 | ||||||||||||||||||||||||||
| Resale agreements | (6,672) | 3,454 | (10,126) | (1,371) | (1,489) | 118 | ||||||||||||||||||||||||||||||||
| AFS debt securities | 14,715 | 25,037 | (10,322) | 6,927 | 1,734 | 5,193 | ||||||||||||||||||||||||||||||||
| Loans | (253,033) | 163,842 | (416,875) | 213,901 | 160,392 | 53,509 | ||||||||||||||||||||||||||||||||
| Restricted equity securities | (925) | 72 | (997) | (678) | 130 | (808) | ||||||||||||||||||||||||||||||||
| Total interest and dividend income | $ | (287,258) | $ | 211,705 | $ | (498,963) | $ | 230,597 | $ | 170,321 | $ | 60,276 | ||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
| Checking deposits | $ | (33,955) | $ | 1,228 | $ | (35,183) | $ | 23,511 | $ | 6,666 | $ | 16,845 | ||||||||||||||||||||||||||
| Money market deposits | (68,361) | 18,949 | (87,310) | 27,385 | 2,526 | 24,859 | ||||||||||||||||||||||||||||||||
| Saving deposits | (3,228) | 506 | (3,734) | 1,005 | (511) | 1,516 | ||||||||||||||||||||||||||||||||
| Time deposits | (85,516) | (9,365) | (76,151) | 89,149 | 43,130 | 46,019 | ||||||||||||||||||||||||||||||||
| Short-term borrowings | (259) | 1,387 | (1,646) | 365 | 507 | (142) | ||||||||||||||||||||||||||||||||
| FHLB advances | (2,905) | 1,864 | (4,769) | 6,250 | 7,590 | (1,340) | ||||||||||||||||||||||||||||||||
| Repurchase agreements | (1,816) | 16,640 | (18,456) | 1,472 | 5,028 | (3,556) | ||||||||||||||||||||||||||||||||
| Long-term debt and finance lease liabilities | (598) | 8,397 | (8,995) | 155 | (282) | 437 | ||||||||||||||||||||||||||||||||
| Total interest expense | $ | (196,638) | $ | 39,606 | $ | (236,244) | $ | 149,292 | $ | 64,654 | $ | 84,638 | ||||||||||||||||||||||||||
| Change in net interest income | $ | (90,620) | $ | 172,099 | $ | (262,719) | $ | 81,305 | $ | 105,667 | $ | (24,362) | ||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||
| 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
Total Change | Changes Due to | Total Change | Changes Due to | |||||||||||||||||||||
| Volume | Yield/Rate | Volume | Yield/Rate | |||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | $ | 11,956 | $ | 9,584 | $ | 2,372 | $ | 21,414 | $ | 6,108 | $ | 15,306 | ||||||||||||
| Resale agreements | (1,509 | ) | (1,476 | ) | (33 | ) | (2,767 | ) | (10,671 | ) | 7,904 | |||||||||||||
| Investment securities | 6,927 | 1,734 | 5,193 | 2,241 | (5,167 | ) | 7,408 | |||||||||||||||||
| Loans | 213,901 | 160,392 | 53,509 | 305,074 | 138,724 | 166,350 | ||||||||||||||||||
| Restricted equity securities | (678 | ) | 130 | (808 | ) | 622 | 3 | 619 | ||||||||||||||||
| Total interest and dividend income | $ | 230,597 | $ | 170,364 | $ | 60,233 | $ | 326,584 | $ | 128,997 | $ | 197,587 | ||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Checking deposits | $ | 23,511 | $ | 6,666 | $ | 16,845 | $ | 16,352 | $ | 2,706 | $ | 13,646 | ||||||||||||
| Money market deposits | 27,385 | 2,526 | 24,859 | 39,515 | (226 | ) | 39,741 | |||||||||||||||||
| Saving deposits | 1,005 | (511 | ) | 1,516 | 2,190 | (351 | ) | 2,541 | ||||||||||||||||
| Time deposits | 89,149 | 43,130 | 46,019 | 60,304 | 15,579 | 44,725 | ||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 365 | 507 | (142 | ) | 395 | (71 | ) | 466 | ||||||||||||||||
| FHLB advances | 6,250 | 7,590 | (1,340 | ) | 2,696 | (1,432 | ) | 4,128 | ||||||||||||||||
| Repurchase agreements | 1,472 | 5,028 | (3,556 | ) | 2,634 | (9,226 | ) | 11,860 | ||||||||||||||||
| Long-term debt | 155 | (282 | ) | 437 | 1,059 | (648 | ) | 1,707 | ||||||||||||||||
| Total interest expense | $ | 149,292 | $ | 64,654 | $ | 84,638 | $ | 125,145 | $ | 6,331 | $ | 118,814 | ||||||||||||
| Change in net interest income | $ | 81,305 | $ | 105,710 | $ | (24,405 | ) | $ | 201,439 | $ | 122,666 | $ | 78,773 | |||||||||||
Noninterest Income
The following table presents the components of noninterest income for the periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Change from 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2018 | ||||||||||||||||||||||||||||
| Lending fees | $ | 74,842 | $ | 63,670 | $ | 11,172 | 18 | % | $ | 59,758 | ||||||||||||||||||||||
| Deposit account fees | 48,148 | 38,648 | 9,500 | 25 | % | 39,176 | ||||||||||||||||||||||||||
| Interest rate contracts and other derivative income | 31,685 | 39,865 | (8,180) | (21) | % | 18,980 | ||||||||||||||||||||||||||
| Foreign exchange income | 22,370 | 26,398 | (4,028) | (15) | % | 21,259 | ||||||||||||||||||||||||||
| Wealth management fees | 17,494 | 16,547 | 947 | 6 | % | 13,624 | ||||||||||||||||||||||||||
| Net gains on sales of loans | 4,501 | 4,035 | 466 | 12 | % | 6,590 | ||||||||||||||||||||||||||
| Gains on sales of AFS debt securities | 12,299 | 3,930 | 8,369 | 213 | % | 2,535 | ||||||||||||||||||||||||||
| Net gain on sale of business | — | — | — | — | % | 31,470 | ||||||||||||||||||||||||||
| Other investment income | 10,641 | 18,117 | (7,476) | (41) | % | 7,731 | ||||||||||||||||||||||||||
| Other income | 13,567 | 11,035 | 2,532 | 23 | % | 16,310 | ||||||||||||||||||||||||||
| Total noninterest income | $ | 235,547 | $ | 222,245 | $ | 13,302 | 6 | % | $ | 217,433 | ||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 % Change | 2018 vs. 2017 % Change | ||||||||||||||
| Lending fees | $ | 63,670 | $ | 59,758 | $ | 58,395 | 7 | % | 2 | % | ||||||||
| Deposit account fees | 38,648 | 39,176 | 40,299 | (1 | )% | (3 | )% | |||||||||||
| Foreign exchange income | 26,398 | 21,259 | 9,908 | 24 | % | 115 | % | |||||||||||
| Wealth management fees | 16,668 | 13,785 | 13,974 | 21 | % | (1 | )% | |||||||||||
| Interest rate contracts and other derivative income | 39,865 | 18,980 | 17,671 | 110 | % | 7 | % | |||||||||||
| Net gains on sales of loans | 4,035 | 6,590 | 8,870 | (39 | )% | (26 | )% | |||||||||||
| Net gains on sales of AFS investment securities | 3,930 | 2,535 | 8,037 | 55 | % | (68 | )% | |||||||||||
| Net gains on sales of fixed assets | 114 | 6,683 | 77,388 | (98 | )% | (91 | )% | |||||||||||
| Net gain on sale of business | — | 31,470 | 3,807 | (100 | )% | NM | ||||||||||||
| Other investment income | 5,249 | 1,207 | 3,903 | 335 | % | (69 | )% | |||||||||||
| Other income | 10,800 | 9,466 | 15,496 | 14 | % | (39 | )% | |||||||||||
| Total noninterest income | $ | 209,377 | $ | 210,909 | $ | 257,748 | (1 | )% | (18 | )% | ||||||||
Noninterest income represented 12%,comprised 15% and 13% and 18% of total revenue forin 2020 and 2019, 2018 and 2017, respectively. 20192020 noninterest income was $209.4$235.5 million, a decreasean increase of $1.5$13.3 million or 1%6%, compared with $210.9$222.2 million in 2018.2019. This decreaseincrease was primarily due to a decreaseincreases in net gain on sale of businesslending fees, deposit account fees and a decrease in net gains on sales of fixed assets,AFS debt securities, partially offset by increasesdecreases in interest rate contracts and other derivative income, and foreign exchangeother investment income. 2018 noninterest income was $210.9
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Lending fees were $74.8 million a decreasein 2020, an increase of $46.8$11.1 million or 18%, compared with $257.7$63.7 million in 2017.2019. This decreaseincrease was primarily due to decreases in netvaluation gains on saleswarrants received as part of fixed assets, other income,lending relationships and net gains on salesthe subsequent exercise of AFS investment securities, partially offset by increaseswarrants during the fourth quarter of 2020.
Deposit account fees were $48.1 million in net gain on sale2020, an increase of business and foreign exchange income.
Interest rate contracts and other derivative income increased $20.9was $31.7 million in 2020, a decrease of $8.2 million or 110% to21%, compared with $39.9 million in 2019,2019. This decrease was primarily due to the impact of negative credit valuation adjustments, which primarily reflected stronghigher loss probabilities for borrowers impacted by the COVID-19 pandemic, as well as a decline in customer demand for interest rate swaps in response to the inverted yield curve and overall low level of interest rates. This increase was partially offset by the fair value changes of the interest rate derivative contracts that were primarily driven by the decline in long-term interest rates. The $1.3 million or 7% increase in interest rate contracts and other derivative income from $17.7 million in 2017 to $19.0 million in 2018 was primarily related to energy commodity contracts which the Bank began offering during the year.swap transactions.
Other investment income was $10.6 million in 2020, a decrease of $7.5 million or 41%, compared with $18.1 million in 2019. This decrease was due to reduced earnings from CRA tax credit investments accounted for under the equity method, and decreased $5.5 million or 68%distributions from $8.0 millioninvestments in 2017 to $2.5 million in 2018. These changes were primarily due to the quantities of AFS investment securities sold each year.
Noninterest Expense
The following table presents the components of noninterest expense for the periods indicated:
| Year Ended December 31, | ||||||||||||||||||
| ($ in thousands) | 2019 | 2018 | 2017 | 2019 vs. 2018 % Change | 2018 vs. 2017 % Change | |||||||||||||
| Compensation and employee benefits | $ | 401,700 | $ | 379,622 | $ | 335,291 | 6 | % | 13 | % | ||||||||
| Occupancy and equipment expense | 69,730 | 68,896 | 64,921 | 1 | % | 6 | % | |||||||||||
| Deposit insurance premiums and regulatory assessments | 12,928 | 21,211 | 23,735 | (39 | )% | (11 | )% | |||||||||||
| Legal expense | 8,441 | 8,781 | 11,444 | (4 | )% | (23 | )% | |||||||||||
| Data processing | 13,533 | 13,177 | 12,093 | 3 | % | 9 | % | |||||||||||
| Consulting expense | 9,846 | 11,579 | 14,922 | (15 | )% | (22 | )% | |||||||||||
| Deposit related expense | 14,175 | 11,244 | 9,938 | 26 | % | 13 | % | |||||||||||
| Computer software expense | 26,471 | 22,286 | 18,183 | 19 | % | 23 | % | |||||||||||
| Other operating expense | 92,249 | 88,042 | 82,974 | 5 | % | 6 | % | |||||||||||
| Amortization of tax credit and other investments | 85,515 | 89,628 | 87,950 | (5 | )% | 2 | % | |||||||||||
| Total noninterest expense | $ | 734,588 | $ | 714,466 | $ | 661,451 | 3 | % | 8 | % | ||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Change from 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2018 | ||||||||||||||||||||||||||||
| Compensation and employee benefits | $ | 404,071 | $ | 401,700 | $ | 2,371 | 1 | % | $ | 379,622 | ||||||||||||||||||||||
| Occupancy and equipment expense | 66,489 | 69,730 | (3,241) | (5) | % | 68,896 | ||||||||||||||||||||||||||
| Deposit insurance premiums and regulatory assessments | 15,128 | 12,928 | 2,200 | 17 | % | 21,211 | ||||||||||||||||||||||||||
| Deposit account expense | 13,530 | 14,175 | (645) | (5) | % | 11,244 | ||||||||||||||||||||||||||
| Data processing | 16,603 | 13,533 | 3,070 | 23 | % | 13,177 | ||||||||||||||||||||||||||
| Computer software expense | 29,033 | 26,471 | 2,562 | 10 | % | 22,286 | ||||||||||||||||||||||||||
| Consulting expense | 5,391 | 9,846 | (4,455) | (45) | % | 11,579 | ||||||||||||||||||||||||||
| Legal expense | 7,766 | 8,441 | (675) | (8) | % | 8,781 | ||||||||||||||||||||||||||
| Other operating expense | 79,489 | 92,249 | (12,760) | (14) | % | 88,042 | ||||||||||||||||||||||||||
| Amortization of tax credit and other investments | 70,082 | 98,383 | (28,301) | (29) | % | 96,152 | ||||||||||||||||||||||||||
| Repurchase agreements’ extinguishment cost | 8,740 | — | 8,740 | 100 | % | — | ||||||||||||||||||||||||||
| Total noninterest expense | $ | 716,322 | $ | 747,456 | $ | (31,134) | (4) | % | $ | 720,990 | ||||||||||||||||||||||
Efficiency ratio (1) | 44.42 | % | 44.23 | % | 44.95 | % | ||||||||||||||||||||||||||
(1)2019Refer to Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K for the detailed calculation of GAAP and non-GAAP efficiency ratios.
2020 noninterest expense was $734.6$716.3 million, an increasea decrease of $20.1$31.2 million or 3%4%, compared with $714.5$747.5 million in 2018.2019. This increasedecrease was primarily due to increasesdecreases in compensationamortization of tax credit and employee benefits, computer software expense, deposit related expensesother investments, and other operating expense, partially offset by lower deposit insurance premiums and regulatory assessments and a decrease in amortization of tax credit and other investments. 2018 noninterest expense of $714.5 million, increased $53.0 million or 8%, compared with $661.5 million in 2017. This increase was primarily due to increases in compensation and employee benefits, other operating expense and computer software expense.repurchase agreements’ extinguishment cost.
Amortization of tax credit and other investments decreased $4.1was $70.1 million in 2020, a decrease of $28.3 million or 5% from $89.6 million in 2018 to $85.529%, compared with $98.4 million in 2019. This decrease in 2019 compared with 2018, year-over-year change was primarily due to fewerthe recognition pattern of production and renewable energy tax credit investments placed in serviceservice; $10.7 million of recoveries recorded in the fourth quarter of 2020 related to DC Solar tax credit investments, and lower OTTI charges. In 2020, there were $5.2 million of OTTI charges related to three historic tax credit investments and a CRA investment. In comparison, during 2019, partially offset bythere were $7.6 million of OTTI charges related to five historic tax credit investments and a CRA investment, and theas well as $5.4 million of net write-off of theOTTI charges related to DC Solar tax credit investments.
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Other operating expense primarily consists of telecommunications and postage, loan related expenses, marketing, other real estate owned expense (“OREO”), charitable contributions, travel, and other miscellaneous expense categories. Other operating expense was $79.5 million in 2020, a decrease of $12.7 million or 2% increase14%, compared with $92.2 million in 2019. This decrease was largely driven by lower travel and marketing expenses, partially offset by a write-down on OREO.
In the second quarter of 2020, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million. No such expense was incurred in 2019.
Efficiency ratio, calculated as noninterest expense divided by total revenue, was 44.42% and 44.23% in 2020 and 2019, respectively. Non-GAAP efficiency ratio, adjusted for the amortization of tax credit and other investments, to $89.6 millionthe amortization of core deposit intangibles, and repurchase agreements’ extinguishment cost (where applicable), was 39.30% in 2018, compared with 2017, was primarily due to2020, an increase of 116 basis points from 38.14% in renewable energy tax credit investments placed 2019. For additional detail, see the reconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in service in 2018, partially offset by a reduction in historical tax credit investments.this Form 10-K.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Income before income taxes | $ | 685,765 | $ | 843,917 | $ | 818,696 | ||||||||||||||
| Income tax expense | $ | 117,968 | $ | 169,882 | $ | 114,995 | ||||||||||||||
| Effective tax rate | 17.2 | % | 20.1 | % | 14.0 | % | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Income before income taxes | $ | 843,917 | $ | 818,696 | $ | 735,100 | ||||||
| Income tax expense | $ | 169,882 | $ | 114,995 | $ | 229,476 | ||||||
| Effective tax rate | 20.1 | % | 14.0 | % | 31.2 | % | ||||||
Management regularly reviews the Company’s tax positions and deferred tax balances. Factors considered in this analysis include the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes) and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized and settled. Net deferred tax assets decreased $11.2increased $57.3 million or 9%53.8% to $163.8 million as of December 31, 2020, compared with $106.5 million as of December 31, 2019, compared with $117.6 million as of December 31, 2018,2019. This increase was mainly attributabledue to an increase in allowance for credit losses due to the decreasesCompany’s CECL adoption, partially offset by an increase in deferred tax credit carryover andliabilities arising from net unrealized loss on securities, offset bysecurities. For additional details on the write-offcomponents of net deferred tax liabilities relatedassets, see Note 11 — Income Taxes to DC Solar.the Consolidated Financial Statements in this Form 10-K.
A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more-likely-than-not to be realized. To determine whether a valuation allowance is needed, the Company considers evidence such as the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes), and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company expects to have sufficient taxable income in future years to fully realize its deferred tax assets. The Company also performed an overall assessment by weighing all positive evidence against all negative evidence, and concluded that it is more-likely-than-not that all of the benefits of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state net operating losses (“NOL”) carryforwards. For states other than California, Georgia, Massachusetts and New York, becauseAs of December 31, 2020, management believes that the state NOL carryforwards may not be fully utilized, areleased $21 thousand of valuation allowance of $21 thousand and $128 thousand was recorded for such carryforwardsprovided as of December 31, 2019, and 2018, respectively.which related to the state NOL carryforwards. No additional valuation allowance was recorded as of December 31, 2020. For additional details on the components of net deferred tax assets, see Note 1411 — Income Taxes to the Consolidated Financial Statements.Statements in this Form 10-K.
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Impact of Investment in DC Solar Tax Credit Funds
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. DC Solar had its assets frozen in December 2018 and filed for bankruptcy protection in February 2019. In February 2019, an affidavit from athe Federal Bureau of Investigation special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to have been received by DC Solar might not have existed. In January 2020, the owners of DC Solar pleaded guilty to charges of conspiracy to commit wire fraud and money laundering in a Ponzi scheme related to DC Solar.
During the first quarter of 2019, the Company fully wrote off the remainder of its tax credit investments related to DC Solar, and recorded a $7.0 million OTTI charge withinand a subsequent $1.6 million recovery. During 2020, the Company further recorded $10.7 million in recoveries, of which $1.1 million is recorded as an impairment recovery. The recoveries were recorded in Amortization of tax credit and other investments, net on the Consolidated Statement of Income. The Company concluded at that time that there would be no material future cash flows related to these investments, in part because of the fact that DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. During the fourth quarter of 2019, the Company recorded a $1.6 million pre-tax impairment recovery related to DC Solar. There were no balances recorded in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of December 31, 20192020 and December 31, 2018.2019. More discussion on the Company’s impairment evaluation and monitoring process of tax credit investments is provided in Note 32 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.
ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. The Company received a “should” level legal opinion from an external law firm supporting the legal structure of these investments for tax credit purposes. A subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the latest quarterly reporting date. A change in judgment that results in a subsequent derecognition or change in measurement of a tax position is recognized as a discrete item in the period in which the change occurs.
Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. Between 2014 and 2018, the Company had invested in four DC Solar energy tax credit funds and claimed tax credits of approximately $53.9 million, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact of $48.2 million to the Consolidated Financial Statements.
Operating Segment Results
The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers served and the related products and services provided, andprovided. The segments reflect how financial information is currently evaluated by management. For additional description of the Company’s internal management reporting process, including the segment cost allocation methodology, see Note 2118 — Business Segments to the Consolidated Financial Statements in this Form 10-K.
43
Segment net interest income represents the first quarterdifference between actual interest earned on assets and interest incurred on liabilities of 2019, the Company enhanced its segment cost allocation methodology related to stock compensation expense and bonus accrual. Effective first quarter of 2019, stock compensation expense is allocated to all three segments, whereas it was previously recorded in the Other segment as a corporate expense. In addition, bonus expense is now allocated at a more granular level at the segment, level atadjusted for funding charges or credits through the time of accrual. For comparability, segment information for the years ended December 31, 2018 and 2017 have been restated to conform to the current presentation. During the third quarter of 2019, the Company enhanced itsCompany’s internal funds transfer pricing (“FTP”) methodology related to deposits by setting a minimum floor rate forprocess. The process was effective in the FTP credits for deposits in considerationcurrent market conditions as of the flattened and inverted yield curve. This methodology has been retrospectively applied to segment financial results throughout the year of 2019. This change in FTP methodology related to deposits had no impact on 2018 and 2017 segment results.December 31, 2020.
The following tables present the selectedresults by operating segment information in 2019, 2018 and 2017:for the periods indicated:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer and Business Banking | Commercial Banking | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 597,944 | $ | 754,471 | $ | 812,822 | $ | 845,651 | $ | 786,035 | $ | 715,937 | $ | 169,145 | $ | 149,552 | $ | 75,182 | |||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 3,885 | 14,178 | 9,364 | 206,768 | 84,507 | 54,891 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | 331,750 | 343,001 | 341,396 | 266,923 | 263,064 | 237,520 | 117,649 | 141,391 | 142,074 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment income (loss) before income taxes | 262,309 | 397,292 | 462,062 | 371,960 | 438,464 | 423,526 | 51,496 | 8,161 | (66,892) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment net income | $ | 187,931 | $ | 284,161 | $ | 330,683 | $ | 266,342 | $ | 313,833 | $ | 303,553 | $ | 113,524 | $ | 76,041 | $ | 69,465 | |||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2019 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income before provision for credit losses | $ | 696,551 | $ | 651,413 | $ | 119,849 | $ | 1,467,813 | ||||||||
| Provision for credit losses | 14,178 | 84,507 | — | 98,685 | ||||||||||||
| Noninterest income | 57,920 | 134,622 | 16,835 | 209,377 | ||||||||||||
| Noninterest expense | 343,001 | 263,064 | 128,523 | 734,588 | ||||||||||||
| Segment income before income taxes | 397,292 | 438,464 | 8,161 | 843,917 | ||||||||||||
| Segment net income | $ | 284,161 | $ | 313,833 | $ | 76,041 | $ | 674,035 | ||||||||
| Average loans | $ | 10,647,814 | $ | 22,725,322 | $ | — | $ | 33,373,136 | ||||||||
| Average deposits | $ | 25,124,827 | $ | 8,591,285 | $ | 2,330,958 | $ | 36,047,070 | ||||||||
| ($ in thousands) | Year Ended December 31, 2018 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income before provision for credit losses | $ | 727,215 | $ | 605,650 | $ | 53,643 | $ | 1,386,508 | ||||||||
| Provision for credit losses | 9,364 | 54,891 | — | 64,255 | ||||||||||||
| Noninterest income | 85,607 | 110,287 | 15,015 | 210,909 | ||||||||||||
| Noninterest expense | 341,396 | 237,520 | 135,550 | 714,466 | ||||||||||||
| Segment income (loss) before income taxes | 462,062 | 423,526 | (66,892 | ) | 818,696 | |||||||||||
| Segment net income | $ | 330,683 | $ | 303,553 | $ | 69,465 | $ | 703,701 | ||||||||
| Average loans | $ | 9,469,764 | $ | 20,760,250 | $ | — | $ | 30,230,014 | ||||||||
| Average deposits | $ | 24,700,474 | $ | 6,897,424 | $ | 1,632,351 | $ | 33,230,249 | ||||||||
| ($ in thousands) | Year Ended December 31, 2017 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income before provision for credit losses | $ | 590,821 | $ | 553,817 | $ | 40,431 | $ | 1,185,069 | ||||||||
| Provision for credit losses | 1,812 | 44,454 | — | 46,266 | ||||||||||||
| Noninterest income | 54,451 | 110,089 | 93,208 | 257,748 | ||||||||||||
| Noninterest expense | 323,318 | 200,153 | 137,980 | 661,451 | ||||||||||||
| Segment income (loss) before income taxes | 320,142 | 419,299 | (4,341 | ) | 735,100 | |||||||||||
| Segment net income | $ | 187,571 | $ | 246,404 | $ | 71,649 | $ | 505,624 | ||||||||
| Average loans | $ | 8,107,502 | $ | 19,145,254 | $ | — | $ | 27,252,756 | ||||||||
| Average deposits | $ | 24,647,741 | $ | 4,893,341 | $ | 1,272,693 | $ | 30,813,775 | ||||||||
Consumer and Business Banking
The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for smallsmall- and medium-sized enterprises through the Company’s branch network.enterprises. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services. The integration of digital channels and our brick and mortar channels has been a priority for the Bank. The Company is developing a digital consumer banking platform to enhance the customer user experience and offer a full suite of banking services. Customer adoption of the digital banking application is in progress, and has contributed to growth in segment fee income and deposit growth in 2020.
The following table presents additional financial information for the Consumer and Business Banking segment reportedfor the periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Change from 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2018 | ||||||||||||||||||||||||||||
| Net interest income before provision for credit losses | $ | 530,829 | $ | 696,551 | $ | (165,722) | (24) | % | $ | 727,215 | ||||||||||||||||||||||
| Noninterest income | 67,115 | 57,920 | 9,195 | 16 | % | 85,607 | ||||||||||||||||||||||||||
| Total revenue | 597,944 | 754,471 | (156,527) | (21) | % | 812,822 | ||||||||||||||||||||||||||
| Provision for credit losses | 3,885 | 14,178 | (10,293) | (73) | % | 9,364 | ||||||||||||||||||||||||||
| Noninterest expense | 331,750 | 343,001 | (11,251) | (3) | % | 341,396 | ||||||||||||||||||||||||||
| Segment income before income taxes | 262,309 | 397,292 | (134,983) | (34) | % | 462,062 | ||||||||||||||||||||||||||
| Segment net income | $ | 187,931 | $ | 284,161 | $ | (96,230) | (34) | % | $ | 330,683 | ||||||||||||||||||||||
| Average loans | $ | 12,056,987 | $ | 10,647,814 | $ | 1,409,173 | 13 | % | $ | 9,469,764 | ||||||||||||||||||||||
| Average deposits | $ | 27,201,737 | $ | 25,124,827 | $ | 2,076,910 | 8 | % | $ | 24,700,474 | ||||||||||||||||||||||
Segment net income of $284.2decreased $96.2 million, or 34%, to $187.9 million in 2019,2020 compared with $330.7 million in 2018. The $46.5 million or 14% decrease in segment income reflected decreases in2019, primarily due to lower net interest income before provision for credit losses and noninterest income, partially offset by a decrease in income tax expense. losses.
Net interest income before provision for credit losses for this segment was $696.6decreased $165.7 million, or 24%, to $530.8 million in 2019,2020, primarily reflecting a decrease of $30.7lower credit assigned to deposits under the FTP system in a near-zero interest environment. Noninterest income increased $9.2 million, or 4%16%, compared with $727.2to $67.1 million in 2018. This decrease was primarily due to an increase in deposit cost of funds, partially offset by the impact of loan growth. Noninterest income was $57.9 million in 2019, a decrease of $27.7 million or 32%, compared with $85.6 million in 2018. Noninterest income in 2018 included a pre-tax gain of $31.5 million recognized in 2018 from the sale of the Bank’s eight DCB branches. Excluding the impact of this non-recurring item, Consumer and Business Banking’s noninterest income in 2019 increased $3.8 million or 7% from $54.1 million in 2018. The decrease in income tax expense reflected the decrease in segment income before income taxes between 2019 and 2018. Average loans for this segment was $10.65 billion in 2019, an increase of $1.18 billion or 12% from $9.47 billion in 2018, which was2020, primarily driven by an increasehigher deposit account fees due to higher customer-driven transactions.
The provision for credit losses decreased $10.3 million, to $3.9 million in single-family residential loans. Average deposits for this segment was $25.12 billion2020, primarily driven by the methodology change to credit loss estimates under CECL. The loan portfolio in 2019, which remained relatively flat as compared with average deposits of $24.7 billion in 2018.
44
Noninterest expense decreased $11.3 million, or 3%, to $331.8 million in 2018, compared with $187.6 million in 2017. The $143.1 million or 76% increase in segment net income reflected increases in net interest income before provision for credit losses and noninterest income, partially offset by an increase in noninterest expense. Net interest income before provision for credit losses was $727.2 million in 2018, an increase of $136.4 million or 23%, compared with $590.8 million in 2017. This increase was primarily attributable to higher FTP credits received for deposits, partially offset by the impact of an increase in deposit cost of funds. Noninterest income was $85.6 million in 2018, an increase of $31.2 million or 57%, compared with $54.5 million in 2017. Excluding the impact of the aforementioned non-recurring sale of the Bank’s eight DCB branches, noninterest income in 2018 remained relatively flat compared with 2017. Noninterest expense was $341.4 million in 2018, an increase of $18.1 million or 6%, compared with $323.3 million in 2017. The increase was2020, primarily due to an increase in compensation and employee benefits driven by increased investment in human capital and technology. Average loans for this segment were $9.47 billion in 2018, an increase of $1.36 billion or 17% from $8.11 billion in 2017, which was primarily driven by an increase in single-family residential loans. Average deposits for this segment were $24.70 billion in 2018 which remained relatively flat as compared with average deposits of $24.65 billion in 2017.
Commercial Banking
The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land lending, affordable housing loans and letters of credit, asset-based lending, and equipment financings.financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.
The following table present additional financial information for Commercial Banking segment reportedfor the periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Change from 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2018 | ||||||||||||||||||||||||||||
| Net interest income before provision for credit losses | $ | 706,286 | $ | 651,413 | $ | 54,873 | 8 | % | $ | 605,650 | ||||||||||||||||||||||
| Noninterest income | 139,365 | 134,622 | 4,743 | 4 | % | 110,287 | ||||||||||||||||||||||||||
| Total revenue | 845,651 | 786,035 | 59,616 | 8 | % | 715,937 | ||||||||||||||||||||||||||
| Provision for credit losses | 206,768 | 84,507 | 122,261 | 145 | % | 54,891 | ||||||||||||||||||||||||||
| Noninterest expense | 266,923 | 263,064 | 3,859 | 1 | % | 237,520 | ||||||||||||||||||||||||||
| Segment income before income taxes | 371,960 | 438,464 | (66,504) | (15) | % | 423,526 | ||||||||||||||||||||||||||
| Segment net income | $ | 266,342 | $ | 313,833 | $ | (47,491) | (15) | % | $ | 303,553 | ||||||||||||||||||||||
| Average loans | $ | 24,742,030 | $ | 22,725,322 | $ | 2,016,708 | 9 | % | $ | 20,760,250 | ||||||||||||||||||||||
| Average deposits | $ | 10,811,020 | $ | 8,591,285 | $ | 2,219,735 | 26 | % | $ | 6,897,424 | ||||||||||||||||||||||
Segment net income of $313.8decreased $47.5 million, or 15%, to $266.3 million in 2019,2020 compared with $303.6 million in 2018. The $10.3 million or 3% increase in segment net income reflected increases in2019, reflecting a higher provision for credit losses, partially offset by higher net interest income before provision for credit losses and noninterest income, partially offset by increases in provision for credit losses and noninterest expense. Net interest income before provision for credit loss was $651.4 million in 2019, an increase of $45.7 million or 8%, compared with $605.7 million in 2018. This increase was primarily due to loan growth. Noninterest income was $134.6 million in 2019, an increase of $24.3 million or 22%, compared with $110.3 million in 2018. This increase was mainly attributable to an increase in interest rate contracts and other derivative income driven by strong customer demand for interest rate swaps. Provision for credit losses was $84.5 million in 2019, an increase of $29.6 million or 54%, compared with $54.9 million in 2018. This increase was primarily due to loan portfolio growth, increased charge-offs, and a downward migration in the credit risk ratings of C&I loans. Noninterest expense was $263.1 million in 2019, an increase of $25.6 million or 11%, compared with $237.5 million in 2018. The increase was primarily due to increases in compensation and employee benefits driven by increased investments in human capital to support the business growth. Average Loans for this segment were $22.73 billion in 2019, an increase of $1.97 billion or 9% from $20.76 billion in 2018, which was primarily driven by growth in C&I and CRE loans. Average deposits for this segment was $8.59 billion in 2019, an increase of $1.69 billion or 25% from $6.90 billion in 2018, which was primarily driven by growth in time deposits and interest-bearing checking deposits.losses.
The provision for credit losses increased $122.3 million, or 19% from $200.2to $206.8 million in 2017. The increase was2020, primarily due to increasesdeteriorating macroeconomic conditions and outlook in compensationthe first half of 2020, as a result of the COVID-19 pandemic. The loan portfolio in the Commercial Banking segment primarily consists of commercial and employee benefits driven byCRE loans, the loss estimates for which are highly sensitive to changes in the macroeconomic conditions.
Noninterest expense increased investments$3.9 million in human capital. Average loans for this segment were $20.76 billion in 2018, an increase of $1.61 billion or 8% from $ 19.15 billion in 2017, which was2020, primarily driven by increases in CRE and C&I loans. Average deposits for this segment was $6.90 billion in 2018, an increase of $2.01 billion or 41% from $4.89 billion in 2017, which was primarily driven by growth in noninterest-bearing demand deposits, money market accounts and time deposits.due to a write-down on OREO.
Other
Centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
45
The following table presents additional financial information for Other segment reported segment income before income taxes of $8.2 million and segmentfor the periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| Change from 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2018 | ||||||||||||||||||||||||||||
| Net interest income before provision for credit losses | $ | 140,078 | $ | 119,849 | $ | 20,229 | 17 | % | $ | 53,643 | ||||||||||||||||||||||
| Noninterest income | 29,067 | 29,703 | (636) | (2) | % | 21,539 | ||||||||||||||||||||||||||
| Total revenue | 169,145 | 149,552 | 19,593 | 13 | % | 75,182 | ||||||||||||||||||||||||||
| Noninterest expense | 117,649 | 141,391 | (23,742) | (17) | % | 142,074 | ||||||||||||||||||||||||||
| Segment income (loss) before income taxes | 51,496 | 8,161 | 43,335 | 531 | % | (66,892) | ||||||||||||||||||||||||||
| Segment net income | $ | 113,524 | $ | 76,041 | $ | 37,483 | 49 | % | $ | 69,465 | ||||||||||||||||||||||
| Average deposits | $ | 2,750,134 | $ | 2,330,958 | $ | 419,176 | 18 | % | $ | 1,632,351 | ||||||||||||||||||||||
Segment net income of $76.0increased $37.5 million, or 49%, to $113.5 million in 2020 compared with 2019, reflecting an income tax benefit of $67.9 million. The Other segment reported segment loss before income taxes of $66.9 million and segment net income of $69.5 million in 2018, reflecting income tax benefit of $136.4 million. The increase in segment income before income taxes between 2019 and 2018 was primarily driven by an increase inlower noninterest expense and higher net interest income before provision for credit losses and a decrease in noninterest expense. losses.
Net interest income before provision for credit loss was $119.8losses increased $20.2 million, or 17%, to $140.1 million in 2019, an increase of $66.2 million or 123%, compared with $53.6 million in 2018. This increase reflected an increase in the net spread between the total internal FTP charges for loans and the total internal FTP credits for deposits, which widened due to the flattened and inverted yield curve in 2019. Noninterest expense was $128.5 million in 2019, a decrease of $7.0 million or 5%, compared with $135.6 million in 2018, primarily due to a decrease in compensation and employee benefits. This decrease reflected a one-time stock-based compensation and severance expense recognized in 2018.
Noninterest expense decreased $23.7 million, or 17%, to $117.6 million in 2018, a decrease2020, reflecting lower amortization of $78.2 million or 84%, compared with $93.2 million in 2017. Noninterest income in 2017 included a pre-tax gain of $71.7 million from the sale of a commercial property in California. Excluding the impact of this nonrecurring item, noninterest income for this segment decreased $6.5 million or 30% during 2018. This $6.5 million decrease was primarily driven by decreases in rental incometax credit and lower net gains on sales of AFS investment securities, partially offset by an increase in foreign exchange income due to remeasurement of balance sheet items denominated in foreign currencies. Net interest income before provision for credit loss was $53.6 million in 2018, an increase of $13.2 million or 33%, compared with $40.4 million in 2017. This increase reflected an increase in the net spread between the total internal FTP charges for loans and the total internal FTP credits for deposits provided to the Consumer and Business Banking and Commercial Banking segments.other investments.
The income tax expense or benefit in the Other segment consists of the remaining unallocated income tax expense or benefit after allocating income tax expense to the two core segments. Income tax expense is allocated to the Consumer and Business Banking as well asand the Commercial Banking segments by applying segment effectivebased on statutory income tax rates, applied to the segment income before income taxes.
Balance Sheet Analysis
The following table presents a discussion of the significant changes between December 31, 20192020 and 2018:2019:
Selected Consolidated Balance Sheet Data
| ($ in thousands) | December 31, | Change | ||||||||||||||||||||||||
| 2020 | 2019 | $ | % | |||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 4,017,971 | $ | 3,261,149 | $ | 756,822 | 23 | % | ||||||||||||||||||
| Interest-bearing deposits with banks | 809,728 | 196,161 | 613,567 | 313 | % | |||||||||||||||||||||
| Resale agreements | 1,460,000 | 860,000 | 600,000 | 70 | % | |||||||||||||||||||||
| AFS debt securities, at fair value (amortized cost of $5,470,523 in 2020 and $3,320,648 in 2019) | 5,544,658 | 3,317,214 | 2,227,444 | 67 | % | |||||||||||||||||||||
| Restricted equity securities, at cost | 83,046 | 78,580 | 4,466 | 6 | % | |||||||||||||||||||||
| Loans held-for-sale | 1,788 | 434 | 1,354 | 312 | % | |||||||||||||||||||||
Loans held-for-investment (net of allowance (1) for loan losses of $619,983 in 2020 and $358,287 in 2019) | 37,770,972 | 34,420,252 | 3,350,720 | 10 | % | |||||||||||||||||||||
| Investments in qualified affordable housing partnerships, net | 213,555 | 207,037 | 6,518 | 3 | % | |||||||||||||||||||||
| Investments in tax credit and other investments, net | 266,525 | 254,140 | 12,385 | 5 | % | |||||||||||||||||||||
| Premises and equipment | 103,251 | 118,364 | (15,113) | (13) | % | |||||||||||||||||||||
| Goodwill | 465,697 | 465,697 | — | — | % | |||||||||||||||||||||
| Operating lease right-of-use assets | 95,460 | 99,973 | (4,513) | (5) | % | |||||||||||||||||||||
| Other assets | 1,324,262 | 917,095 | 407,167 | 44 | % | |||||||||||||||||||||
| TOTAL | $ | 52,156,913 | $ | 44,196,096 | $ | 7,960,817 | 18 | % | ||||||||||||||||||
| LIABILITIES | ||||||||||||||||||||||||||
| Noninterest-bearing | $ | 16,298,301 | $ | 11,080,036 | $ | 5,218,265 | 47 | % | ||||||||||||||||||
| Interest-bearing | 28,564,451 | 26,244,223 | 2,320,228 | 9 | % | |||||||||||||||||||||
| Total deposits | 44,862,752 | 37,324,259 | 7,538,493 | 20 | % | |||||||||||||||||||||
| Short-term borrowings | 21,009 | 28,669 | (7,660) | (27) | % | |||||||||||||||||||||
| FHLB advances | 652,612 | 745,915 | (93,303) | (13) | % | |||||||||||||||||||||
| Repurchase agreements | 300,000 | 200,000 | 100,000 | 50 | % | |||||||||||||||||||||
| Long-term debt and finance lease liabilities | 151,739 | 152,270 | (531) | 0 | % | |||||||||||||||||||||
| Operating lease liabilities | 102,830 | 108,083 | (5,253) | (5) | % | |||||||||||||||||||||
| Accrued expenses and other liabilities | 796,796 | 619,283 | 177,513 | 29 | % | |||||||||||||||||||||
| Total liabilities | 46,887,738 | 39,178,479 | 7,709,259 | 20 | % | |||||||||||||||||||||
STOCKHOLDERS’ EQUITY (1) | 5,269,175 | 5,017,617 | 251,558 | 5 | % | |||||||||||||||||||||
| TOTAL | $ | 52,156,913 | $ | 44,196,096 | $ | 7,960,817 | 18 | % | ||||||||||||||||||
| ($ in thousands) | December 31, | Change | |||||||||||||
| 2019 | 2018 | $ | % | ||||||||||||
| ASSETS | |||||||||||||||
| Cash and cash equivalents | $ | 3,261,149 | $ | 3,001,377 | $ | 259,772 | 9 | % | |||||||
| Interest-bearing deposits with banks | 196,161 | 371,000 | (174,839 | ) | (47 | )% | |||||||||
| Resale agreements | 860,000 | 1,035,000 | (175,000 | ) | (17 | )% | |||||||||
| AFS investment securities, at fair value | 3,317,214 | 2,741,847 | 575,367 | 21 | % | ||||||||||
| Restricted equity securities, at cost | 78,580 | 74,069 | 4,511 | 6 | % | ||||||||||
| Loans held-for-sale | 434 | 275 | 159 | 58 | % | ||||||||||
| Loans held-for-investment (net of allowance for loan losses of $358,287 in 2019 and $311,322 in 2018) | 34,420,252 | 32,073,867 | 2,346,385 | 7 | % | ||||||||||
| Investments in qualified affordable housing partnerships, net | 207,037 | 184,873 | 22,164 | 12 | % | ||||||||||
| Investments in tax credit and other investments, net | 254,140 | 231,635 | 22,505 | 10 | % | ||||||||||
| Premises and equipment | 118,364 | 119,180 | (816 | ) | (1 | )% | |||||||||
| Goodwill | 465,697 | 465,547 | 150 | 0 | % | ||||||||||
| Operating lease right-of-use assets | 99,973 | — | 99,973 | 100 | % | ||||||||||
| Other assets | 917,095 | 743,686 | 173,409 | 23 | % | ||||||||||
| TOTAL | $ | 44,196,096 | $ | 41,042,356 | $ | 3,153,740 | 8 | % | |||||||
| LIABILITIES | |||||||||||||||
| Noninterest-bearing | $ | 11,080,036 | $ | 11,377,009 | $ | (296,973 | ) | (3 | )% | ||||||
| Interest-bearing | 26,244,223 | 24,062,619 | 2,181,604 | 9 | % | ||||||||||
| Total deposits | 37,324,259 | 35,439,628 | 1,884,631 | 5 | % | ||||||||||
| Short-term borrowings | 28,669 | 57,638 | (28,969 | ) | (50 | )% | |||||||||
| FHLB advances | 745,915 | 326,172 | 419,743 | 129 | % | ||||||||||
| Repurchase agreements | 200,000 | 50,000 | 150,000 | 300 | % | ||||||||||
| Long-term debt and finance lease liabilities | 152,270 | 146,835 | 5,435 | 4 | % | ||||||||||
| Operating lease liabilities | 108,083 | — | 108,083 | 100 | % | ||||||||||
| Accrued expenses and other liabilities | 619,283 | 598,109 | 21,174 | 4 | % | ||||||||||
| Total liabilities | 39,178,479 | 36,618,382 | 2,560,097 | 7 | % | ||||||||||
| STOCKHOLDERS’ EQUITY | 5,017,617 | 4,423,974 | 593,643 | 13 | % | ||||||||||
| TOTAL | $ | 44,196,096 | $ | 41,042,356 | $ | 3,153,740 | 8 | % | |||||||
As of December 31, 2019,2020, total assets were $44.20$52.16 billion, an increase of $3.15$7.96 billion or 8%18% from $44.20 billion as of December 31, 2018,2019, primarily due to to loan growth, and an increase in purchases of AFS investmentdebt securities.The loan growth was primarilycame from C&I lending, driven by strong increases inoriginations of PPP loans, single-family residential and CRE loans. These increases were partially offset by decreases in resale agreements and interest-bearing deposits with banks.CRE.
As of December 31, 2019,2020, total liabilities were $39.18$46.89 billion, an increase of $2.56$7.71 billion or 7%20% from $39.18 billion as of December 31, 2018,2019, primarily due to an increase in deposits, which was largelydeposit growth, driven by an increasestrong growth in timenoninterest-bearing deposits.
As of December 31, 2019,2020, total stockholders’ equity was $5.02$5.27 billion, an increase of $593.6$251.6 million or 13%5% from $5.02 billion as of December 31, 2018. This increase was2019, primarily due to $674.0$567.8 million in 2020 net income and a $39.8 million increase in accumulated other comprehensive income, partially offset by $155.3 million of cash dividends declared on common stock.stock and common stock repurchases.
The Company maintains an investment securitiesa portfolio that consists of high quality and liquid debt securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s AFS investmentdebt securities provide:
•interest income for earnings and yield enhancement;
•availability for funding needs arising during the normal course of business;
47
•the ability to execute interest rate risk management strategies in response to changes in economic or market conditions; and
•collateral to support pledging agreements as required and/or to enhance the Company’s borrowing capacity.
Available-for-Sale InvestmentDebt Securities
The following table presents the amortized cost anddistribution of the Company’s AFS debt securities portfolio by fair value and percentage of AFS investment securities by major categoriesfair value as of December 31, 2020 and 2019, 2018 and 2017:by credit ratings as of December 31, 2020:
| ($ in thousands) | December 31, | Ratings (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | % of Total | Fair Value | % of Total | AAA/AA | A | BBB | No Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AFS debt securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 50,761 | 1 | % | $ | 176,422 | 5 | % | 100 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities | 814,319 | 15 | % | 581,245 | 18 | % | 100 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | 2,814,664 | 51 | % | 1,607,368 | 48 | % | 100 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | 396,073 | 7 | % | 102,302 | 3 | % | 91 | % | 5 | % | — | % | 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities | 529,617 | 10 | % | 135,098 | 4 | % | 89 | % | — | % | — | % | 11 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 405,968 | 7 | % | 11,149 | — | % | — | % | 30 | % | 70 | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign government bonds (1) | 182,531 | 3 | % | 354,172 | 11 | % | 17 | % | 83 | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities (1) | 63,231 | 1 | % | 64,752 | 2 | % | 100 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CLOs (1) | 287,494 | 5 | % | 284,706 | 9 | % | 92 | % | 8 | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total AFS debt securities | $ | 5,544,658 | 100 | % | $ | 3,317,214 | 100 | % | 88 | % | 6 | % | 5 | % | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
Amortized Cost (1) | Fair Value (1) | Amortized Cost (1) | Fair Value (1) | Amortized Cost | Fair Value | |||||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | 177,215 | $ | 176,422 | $ | 577,561 | $ | 564,815 | $ | 651,395 | $ | 640,280 | ||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 584,275 | 581,245 | 219,485 | 217,173 | 206,815 | 203,392 | ||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities | 1,598,261 | 1,607,368 | 1,377,705 | 1,355,296 | 1,528,217 | 1,509,228 | ||||||||||||||||||
| Municipal securities | 101,621 | 102,302 | 82,965 | 82,020 | 99,636 | 99,982 | ||||||||||||||||||
| Non-agency mortgage-backed securities | 133,439 | 135,098 | 35,935 | 35,983 | 9,136 | 9,117 | ||||||||||||||||||
| Corporate debt securities | 11,250 | 11,149 | 11,250 | 10,869 | 37,585 | 37,003 | ||||||||||||||||||
Foreign bonds (1) | 354,481 | 354,172 | 489,378 | 463,048 | 505,396 | 486,408 | ||||||||||||||||||
| Asset-backed securities | 66,106 | 64,752 | 12,621 | 12,643 | — | — | ||||||||||||||||||
| CLOs | 294,000 | 284,706 | — | — | — | — | ||||||||||||||||||
Other securities (2) | — | — | — | — | 31,887 | 31,342 | ||||||||||||||||||
| Total AFS investment securities | $ | 3,320,648 | $ | 3,317,214 | $ | 2,806,900 | $ | 2,741,847 | $ | 3,070,067 | $ | 3,016,752 | ||||||||||||
(2)Primarily based upon the lowest of the credit ratings issued by S&P, Moody’s Investors Service (“Moody’s”) or Fitch Ratings (“Fitch”). Rating percentages are allocated based on fair value. |
The fair value of AFS investmentdebt securities totaled $5.54 billion as of December 31, 2020, an increase of $2.23 billion or 67% from $3.32 billion as of December 31, 2019, compared with $2.74 billion as of December 31, 2018.2019. The $575.4 million or 21% increase was primarily attributable to purchases oflargest net change came from U.S. government agency and U.S. government sponsored enterprise debt securities, U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, which increased $1.21 billion, followed by corporate debt securities, which increased $394.8 million, and CLOs, partially offset by the sales, repayments and redemptions of U.S. government agency and U.S. government sponsored enterprisenon-agency mortgage-backed securities, and U.S. government agency and U.S. government sponsored enterprise debt securities, and maturities and sales of U.S. Treasury securities.which increased $394.5 million.
The Company’s investmentdebt securities portfolio had an effective duration of 4.2 years as of December 31, 2020 which increased from 3.1 years as of December 31, 2019, which shortened from 4.1 years as of December 31, 2018, primarily due to an increase in the declinetarget duration of securities purchases to achieve enhancement in interest rates.portfolio yield. As of December 31, 2019 and 2018, 97% and 99%, respectively,2020, 88% of the carrying value of the investmentCompany’s debt securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized statisticalcredit rating organizations.agencies, compared with 97% as of December 31, 2019. The decrease in higher-rated securities was primarily due to the strategic growth in non-agency securities within the portfolio mix. Credit ratings of BBB- or higher by S&P and Fitch, Ratings (“Fitch”), or Baa3 or higher by Moody’s, Investors Service (“Moody’s”), are considered investment grade.
The Company’s AFS investmentdebt securities are carried at fair value with changesnoncredit-related unrealized gains and losses, net of tax, reported in fair value reflected in Other comprehensive income (loss) unlesson the Consolidated Statement of Comprehensive Income. Pre-tax net unrealized gain on AFS debt securities was $74.1 million as of December 31, 2020, a security is deemed to be OTTI. Netnet improvement of $77.6 million from pre-tax net unrealized losses on AFS investment securities wereof $3.4 million as of December 31, 2019, which improved from net unrealized losses of $65.1 million as of December 31, 2018.2019. This change was primarily due to thea decrease in benchmark interest rates.rates as of December 31, 2020. Gross unrealized losses on AFS investmentdebt securities totaled $22.5 million as of December 31, 2020, compared with $23.2 million as of December 31, 2019, compared with $70.8 million as2019. As of December 31, 2018. 2020, the Company had no intention to sell securities with unrealized losses and believed it is more-likely-than-not that it would not be required to sell such securities before recovery of their amortized costs.
48
Of the securities with gross unrealized losses, substantially all were rated investment grade as of both December 31, 2020 and 2019, and 2018,as classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. AsThe Company believes that the gross unrealized losses were due to non-credit related factors and the gross unrealized losses were primarily attributable to yield curve movement and widened spreads. The Company believes that the credit support levels of December 31, 2019,the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received, even if near term credit performance is impacted by the COVID-19 pandemic.
If a credit loss exists, the Company hadrecords an impairment related to credit losses through the allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of Income. There were no intention to sell securities with unrealizedcredit losses recognized in earnings for 2020 and believed it was more-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost.
no OTTI credit losses were recognized in earnings for 2019. The Company assesses individual securities for OTTIcredit losses for each reporting period. There were no OTTI credit losses recognized in earnings for both 2019 and 2018. For a complete discussion and disclosure related toadditional information of the Company’s investment securities,accounting policies, valuation and composition, see Note 1 — Summary of Significant Accounting Policies, Note 32 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 54 — Securities to the Consolidated Financial Statements in this Form 10-K.
49
The following table presents the weighted-average yields and contractual maturity distribution, excluding periodic principal payments, of the Company’s investmentAFS debt securities as of December 31, 20192020 and 2018.2019. Actual maturities of mortgage-backedcertain securities can differ from contractual maturities as the borrowers have the right to prepay obligations with or without prepayment penalties. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of mortgage-backedthese securities.
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Yield (1) | Amortized Cost | Fair Value | Yield (1) | |||||||||||||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 50,310 | $ | 50,761 | 1.26 | % | $ | — | $ | — | — | % | ||||||||||||||||||||||||||
| Maturing after one year through five years | — | — | — | % | 177,215 | 176,422 | 1.33 | % | ||||||||||||||||||||||||||||||
| Total | 50,310 | 50,761 | 1.26 | % | 177,215 | 176,422 | 1.33 | % | ||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 640,153 | 640,366 | 1.78 | % | 328,628 | 326,341 | 2.62 | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 118,053 | 122,012 | 2.38 | % | 158,490 | 156,431 | 2.69 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 11,091 | 11,697 | 2.54 | % | 44,908 | 45,189 | 2.38 | % | ||||||||||||||||||||||||||||||
| Maturing after ten years | 37,517 | 40,244 | 2.74 | % | 52,249 | 53,284 | 2.78 | % | ||||||||||||||||||||||||||||||
| Total | 806,814 | 814,319 | 1.92 | % | 584,275 | 581,245 | 2.63 | % | ||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 4,185 | 4,232 | 3.46 | % | 112 | 113 | 2.72 | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 21,566 | 22,668 | 2.72 | % | 23,144 | 23,289 | 2.29 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 216,332 | 222,905 | 2.17 | % | 85,970 | 88,261 | 2.72 | % | ||||||||||||||||||||||||||||||
| Maturing after ten years | 2,517,644 | 2,564,859 | 2.11 | % | 1,489,035 | 1,495,705 | 2.66 | % | ||||||||||||||||||||||||||||||
| Total | 2,759,727 | 2,814,664 | 2.12 | % | 1,598,261 | 1,607,368 | 2.66 | % | ||||||||||||||||||||||||||||||
Municipal securities (2): | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 18,663 | 18,868 | 3.04 | % | 37,136 | 37,291 | 2.67 | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 36,000 | 37,716 | 2.89 | % | 18,699 | 18,948 | 2.52 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 230,851 | 239,883 | 2.07 | % | 12,151 | 12,451 | 3.15 | % | ||||||||||||||||||||||||||||||
| Maturing after ten years | 97,059 | 99,606 | 2.08 | % | 33,635 | 33,612 | 2.63 | % | ||||||||||||||||||||||||||||||
| Total | 382,573 | 396,073 | 2.20 | % | 101,621 | 102,302 | 2.69 | % | ||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 7,920 | 7,920 | 0.63 | % | — | — | — | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 49,704 | 49,870 | 3.80 | % | 7,920 | 7,914 | 3.78 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 21,332 | 21,376 | 1.50 | % | — | — | — | % | ||||||||||||||||||||||||||||||
| Maturing after ten years | 444,529 | 450,451 | 2.48 | % | 125,519 | 127,184 | 3.21 | % | ||||||||||||||||||||||||||||||
| Total | 523,485 | 529,617 | 2.48 | % | 133,439 | 135,098 | 3.24 | % | ||||||||||||||||||||||||||||||
| Corporate debt securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 126,250 | 124,846 | 1.71 | % | 1,250 | 1,262 | 5.20 | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 276,073 | 277,103 | 3.56 | % | 10,000 | 9,887 | 4.00 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 4,000 | 4,019 | 4.50 | % | — | — | — | % | ||||||||||||||||||||||||||||||
| Total | 406,323 | 405,968 | 2.99 | % | 11,250 | 11,149 | 4.13 | % | ||||||||||||||||||||||||||||||
| Foreign government bonds: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | 45,681 | 45,655 | 0.85 | % | 354,481 | 354,172 | 2.22 | % | ||||||||||||||||||||||||||||||
| Maturing after one year through five years | 138,147 | 136,876 | 2.41 | % | — | — | — | % | ||||||||||||||||||||||||||||||
| Total | 183,828 | 182,531 | 2.02 | % | 354,481 | 354,172 | 2.22 | % | ||||||||||||||||||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Maturing after ten years | 63,463 | 63,231 | 0.85 | % | 66,106 | 64,752 | 2.65 | % | ||||||||||||||||||||||||||||||
| CLOs: | ||||||||||||||||||||||||||||||||||||||
| Maturing after ten years | 294,000 | 287,494 | 1.34 | % | 294,000 | 284,706 | 3.08 | % | ||||||||||||||||||||||||||||||
| Total AFS debt securities | $ | 5,470,523 | $ | 5,544,658 | 2.13 | % | $ | 3,320,648 | $ | 3,317,214 | 2.60 | % | ||||||||||||||||||||||||||
| Total aggregated by maturities: | ||||||||||||||||||||||||||||||||||||||
| Maturing in one year or less | $ | 893,162 | $ | 892,648 | 1.72 | % | $ | 721,607 | $ | 719,179 | 2.43 | % | ||||||||||||||||||||||||||
| Maturing after one year through five years | 639,543 | 646,245 | 3.05 | % | 395,468 | 392,891 | 2.11 | % | ||||||||||||||||||||||||||||||
| Maturing after five years through ten years | 483,606 | 499,880 | 2.12 | % | 143,029 | 145,901 | 2.65 | % | ||||||||||||||||||||||||||||||
| Maturing after ten years | 3,454,212 | 3,505,885 | 2.08 | % | 2,060,544 | 2,059,243 | 2.76 | % | ||||||||||||||||||||||||||||||
| Total AFS debt securities | $ | 5,470,523 | $ | 5,544,658 | 2.13 | % | $ | 3,320,648 | $ | 3,317,214 | 2.60 | % | ||||||||||||||||||||||||||
(1)Weighted-average yields are computed based on amortized cost balances.
(2)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
50
| December 31, | ||||||||||||||||||||||
| ($ in thousands) | 2019 | 2018 | ||||||||||||||||||||
Amortized Cost | Fair Value | Yield (1) | Amortized Cost | Fair Value | Yield (1) | |||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||
| U.S. Treasury securities: | ||||||||||||||||||||||
| Maturing in one year or less | $ | — | $ | — | — | % | $ | 50,134 | $ | 49,773 | 1.08 | % | ||||||||||
| Maturing after one year through five years | 177,215 | 176,422 | 1.33 | % | 527,427 | 515,042 | 1.69 | % | ||||||||||||||
| Total | 177,215 | 176,422 | 1.33 | % | 577,561 | 564,815 | 1.64 | % | ||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities: | ||||||||||||||||||||||
| Maturing in one year or less | 328,628 | 326,341 | 2.62 | % | 26,955 | 26,909 | 3.51 | % | ||||||||||||||
| Maturing after one year through five years | 158,490 | 156,431 | 2.69 | % | 10,181 | 10,037 | 2.18 | % | ||||||||||||||
| Maturing after five years through ten years | 44,908 | 45,189 | 2.38 | % | 114,771 | 113,812 | 2.30 | % | ||||||||||||||
| Maturing after ten years | 52,249 | 53,284 | 2.78 | % | 67,578 | 66,415 | 2.79 | % | ||||||||||||||
| Total | 584,275 | 581,245 | 2.63 | % | 219,485 | 217,173 | 2.59 | % | ||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||
| Maturing in one year or less | 112 | 113 | 2.72 | % | 2,633 | 2,600 | 1.62 | % | ||||||||||||||
| Maturing after one year through five years | 23,144 | 23,289 | 2.29 | % | 30,808 | 30,487 | 2.11 | % | ||||||||||||||
| Maturing after five years through ten years | 85,970 | 88,261 | 2.72 | % | 96,822 | 95,365 | 2.68 | % | ||||||||||||||
| Maturing after ten years | 1,489,035 | 1,495,705 | 2.66 | % | 1,247,442 | 1,226,844 | 2.74 | % | ||||||||||||||
| Total | 1,598,261 | 1,607,368 | 2.66 | % | 1,377,705 | 1,355,296 | 2.72 | % | ||||||||||||||
Municipal securities (2): | ||||||||||||||||||||||
| Maturing in one year or less | 37,136 | 37,291 | 2.67 | % | 29,167 | 28,974 | 2.60 | % | ||||||||||||||
| Maturing after one year through five years | 18,699 | 18,948 | 2.52 | % | 48,398 | 47,681 | 2.39 | % | ||||||||||||||
| Maturing after five years through ten years | 12,151 | 12,451 | 3.15 | % | 500 | 476 | 2.38 | % | ||||||||||||||
| Maturing after ten years | 33,635 | 33,612 | 2.63 | % | 4,900 | 4,889 | 5.03 | % | ||||||||||||||
| Total | 101,621 | 102,302 | 2.69 | % | 82,965 | 82,020 | 2.62 | % | ||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||
| Maturing after one year through five years | 7,920 | 7,914 | 3.78 | % | — | — | — | % | ||||||||||||||
| Maturing after ten years | 125,519 | 127,184 | 3.21 | % | 35,935 | 35,983 | 3.67 | % | ||||||||||||||
| Total | 133,439 | 135,098 | 3.24 | % | 35,935 | 35,983 | 3.67 | % | ||||||||||||||
| Corporate debt securities: | ||||||||||||||||||||||
| Maturing in one year or less | 1,250 | 1,262 | 5.20 | % | 1,250 | 1,231 | 5.50 | % | ||||||||||||||
| Maturing after one year through five years | 10,000 | 9,887 | 4.00 | % | 10,000 | 9,638 | 4.00 | % | ||||||||||||||
| Total | 11,250 | 11,149 | 4.13 | % | 11,250 | 10,869 | 4.17 | % | ||||||||||||||
| Foreign bonds: | ||||||||||||||||||||||
| Maturing in one year or less | 354,481 | 354,172 | 2.22 | % | 439,378 | 414,065 | 2.19 | % | ||||||||||||||
| Maturing after one year through five years | — | — | — | % | 50,000 | 48,983 | 3.12 | % | ||||||||||||||
| Total | 354,481 | 354,172 | 2.22 | % | 489,378 | 463,048 | 2.28 | % | ||||||||||||||
| Asset-backed securities: | ||||||||||||||||||||||
| Maturing after ten years | 66,106 | 64,752 | 2.65 | % | 12,621 | 12,643 | 3.22 | % | ||||||||||||||
| CLOs: | ||||||||||||||||||||||
| Maturing after ten years | 294,000 | 284,706 | 3.08 | % | — | — | — | % | ||||||||||||||
| Total AFS investment securities | $ | 3,320,648 | $ | 3,317,214 | 2.60 | % | $ | 2,806,900 | $ | 2,741,847 | 2.43 | % | ||||||||||
| Total aggregated by maturities: | ||||||||||||||||||||||
| Maturing in one year or less | $ | 721,607 | $ | 719,179 | 2.43 | % | $ | 549,517 | $ | 523,552 | 2.18 | % | ||||||||||
| Maturing after one year through five years | 395,468 | 392,891 | 2.11 | % | 676,814 | 661,868 | 1.91 | % | ||||||||||||||
| Maturing after five years through ten years | 143,029 | 145,901 | 2.65 | % | 212,093 | 209,653 | 2.47 | % | ||||||||||||||
| Maturing after ten years | 2,060,544 | 2,059,243 | 2.76 | % | 1,368,476 | 1,346,774 | 2.78 | % | ||||||||||||||
| Total AFS investment securities | $ | 3,320,648 | $ | 3,317,214 | 2.60 | % | $ | 2,806,900 | $ | 2,741,847 | 2.43 | % | ||||||||||
Loan Portfolio
The Company offers a broad range of financial products designed to meet the credit needs of its borrowers. The Company’s loan portfolio segments include commercial loans, which consist of C&I, CRE, multifamily residential, and construction and land loans; and consumer loans, which consist of single-family residential, home equity lines of credit (“HELOCs”) and other consumer loans. Total net loans, including loans held-for-sale, were $37.77 billion as of December 31, 2020, an increase of $3.35 billion or 10% from $34.42 billion as of December 31, 2019, an increase of $2.35 billion or 7% from $32.07 billion as of December 31, 2018.2019. This was primarily driven by increases of $1.07$1.48 billion or 18%12% in C&I loans, driven by PPP loan growth; $1.08 billion or 15% in single-family residential loans and $1.02 billion$896.2 million or 11%9% in CRE loans. The composition of the loan portfolio as of December 31, 20192020 was similar to the composition as compared withof December 31, 2018.2019.
The following table presents the composition of the Company’s total loan portfolio by loan type as of the periods indicated:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
C&I (2) | $ | 13,631,726 | 36 | % | $ | 12,150,931 | 35 | % | $ | 12,056,970 | 37 | % | $ | 10,697,231 | 37 | % | $ | 9,640,563 | 38 | % | ||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 11,174,611 | 29 | % | 10,278,448 | 30 | % | 9,260,199 | 28 | % | 8,758,818 | 31 | % | 7,890,368 | 31 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 3,033,998 | 8 | % | 2,856,374 | 8 | % | 2,470,668 | 8 | % | 2,094,255 | 7 | % | 1,711,680 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 599,692 | 2 | % | 628,499 | 2 | % | 538,794 | 2 | % | 659,697 | 2 | % | 674,754 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 14,808,301 | 39 | % | 13,763,321 | 40 | % | 12,269,661 | 38 | % | 11,512,770 | 40 | % | 10,276,802 | 40 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 28,440,027 | 75 | % | 25,914,252 | 75 | % | 24,326,631 | 75 | % | 22,210,001 | 77 | % | 19,917,365 | 78 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 8,185,953 | 21 | % | 7,108,590 | 20 | % | 6,036,454 | 19 | % | 4,646,289 | 16 | % | 3,509,779 | 14 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,601,716 | 4 | % | 1,472,783 | 4 | % | 1,690,834 | 5 | % | 1,782,924 | 6 | % | 1,760,776 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 9,787,669 | 25 | % | 8,581,373 | 24 | % | 7,727,288 | 24 | % | 6,429,213 | 22 | % | 5,270,555 | 21 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 163,259 | — | % | 282,914 | 1 | % | 331,270 | 1 | % | 336,504 | 1 | % | 315,219 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 9,950,928 | 25 | % | 8,864,287 | 25 | % | 8,058,558 | 25 | % | 6,765,717 | 23 | % | 5,585,774 | 22 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans held-for-investment | 38,390,955 | 100 | % | 34,778,539 | 100 | % | 32,385,189 | 100 | % | 28,975,718 | 100 | % | 25,503,139 | 100 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (619,983) | (358,287) | (311,322) | (287,128) | (260,520) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held-for-sale (3) | 1,788 | 434 | 275 | 78,217 | 23,076 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans, net | $ | 37,772,760 | $ | 34,420,686 | $ | 32,074,142 | $ | 28,766,807 | $ | 25,265,695 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)On January 1, 2020, the Company adopted ASU 2016-13. Total loans include net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(58.8) million, $(43.2) million, $(48.9) million, $(34.0) million and $1.2 million as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively. Net origination fees related to PPP loans were $(12.7) million as of December 31, 2020.
(2)Includes $1.57 billion of PPP loans as of December 31, 2020.
(3)Includes $78.1 million of loans held-for-sale in Branch assets held-for-sale as of December 31, 2017.
Actions to Support Customers during the COVID-19 Pandemic
In response to the COVID-19 pandemic, the Company assisted customers by offering SBA PPP loans to help struggling businesses in our communities pay their employees and sustain their businesses, and by providing payment relief through various loan modification programs. For a summary of the loans that the Company has modified in response to the COVID-19 pandemic, refer to Item 7. MD&A — Risk Management — Credit Risk Management in this Form 10-K.
As of December 31, 2020, the Company had approximately 6,200 SBA PPP loans outstanding with balances totaling $1.57 billion, which were included in the C&I portfolio. These loans carry an interest rate of 1%, and are 100% guaranteed by the SBA. The substantial majority of the Company’s PPP loans have a term of two years. Related to the PPP loans made in 2020, as of February 25 2021, the Company has submitted and received approval from the SBA for forgiveness approximately 2,700 PPP loan applications, totaling $341.9 million.
51
| ($ in thousands) | December 31, | ||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | ||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| C&I | $ | 12,150,931 | 35 | % | $ | 12,056,970 | 37 | % | $ | 10,697,231 | 37 | % | $ | 9,640,563 | 38 | % | $ | 8,991,535 | 38 | % | |||||||||||||||
| CRE: | |||||||||||||||||||||||||||||||||||
| CRE | 10,278,448 | 30 | % | 9,260,199 | 28 | % | 8,758,818 | 31 | % | 7,890,368 | 31 | % | 7,471,812 | 32 | % | ||||||||||||||||||||
| Multifamily residential | 2,856,374 | 8 | % | 2,470,668 | 8 | % | 2,094,255 | 7 | % | 1,711,680 | 6 | % | 1,524,367 | 6 | % | ||||||||||||||||||||
| Construction and land | 628,499 | 2 | % | 538,794 | 2 | % | 659,697 | 2 | % | 674,754 | 3 | % | 628,260 | 3 | % | ||||||||||||||||||||
| Total CRE | 13,763,321 | 40 | % | 12,269,661 | 38 | % | 11,512,770 | 40 | % | 10,276,802 | 40 | % | 9,624,439 | 41 | % | ||||||||||||||||||||
| Total commercial | 25,914,252 | 75 | % | 24,326,631 | 75 | % | 22,210,001 | 77 | % | 19,917,365 | 78 | % | 18,615,974 | 79 | % | ||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||
| Single-family residential | 7,108,590 | 20 | % | 6,036,454 | 19 | % | 4,646,289 | 16 | % | 3,509,779 | 14 | % | 3,069,969 | 13 | % | ||||||||||||||||||||
| HELOCs | 1,472,783 | 4 | % | 1,690,834 | 5 | % | 1,782,924 | 6 | % | 1,760,776 | 7 | % | 1,681,228 | 7 | % | ||||||||||||||||||||
| Total residential mortgage | 8,581,373 | 24 | % | 7,727,288 | 24 | % | 6,429,213 | 22 | % | 5,270,555 | 21 | % | 4,751,197 | 20 | % | ||||||||||||||||||||
| Other consumer | 282,914 | 1 | % | 331,270 | 1 | % | 336,504 | 1 | % | 315,219 | 1 | % | 276,577 | 1 | % | ||||||||||||||||||||
| Total consumer | 8,864,287 | 25 | % | 8,058,558 | 25 | % | 6,765,717 | 23 | % | 5,585,774 | 22 | % | 5,027,774 | 21 | % | ||||||||||||||||||||
Total loans held-for-investment (2) | 34,778,539 | 100 | % | 32,385,189 | 100 | % | 28,975,718 | 100 | % | 25,503,139 | 100 | % | 23,643,748 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (358,287 | ) | (311,322 | ) | (287,128 | ) | (260,520 | ) | (264,959 | ) | |||||||||||||||||||||||||
Loans held-for-sale (3) | 434 | 275 | 78,217 | 23,076 | 31,958 | ||||||||||||||||||||||||||||||
| Total loans, net | $ | 34,420,686 | $ | 32,074,142 | $ | 28,766,807 | $ | 25,265,695 | $ | 23,410,747 | |||||||||||||||||||||||||
Commercial
The commercial loan portfolio which comprised 75% of total loans as of both December 31, 20192020 and 2018, is discussed as follows.2019. The Company actively monitors the commercial lending portfolio for elevated levels of credit risk and reviews credit exposures for sensitivity to changing economic conditions.
Commercial — Commercial and Industrial Loans. C&I loans totaled $13.63 billion, or 36% of total loans held-for-investment, as of December 31, 2020, compared with $12.15 billion, or 35% of total loans held-for-investment, as of December 31, 2019 and $12.062019. Year-over-year, C&I loans increased $1.48 billion, or 37% of total loans as of December 31, 2018.12%, driven by PPP loan funding. The C&I loan portfolio is well diversified by industry, with higher concentrationsincludes loans and financing for businesses in the wholesalea wide spectrum of industries, and includes asset-based lending, equipment financing and leasing, project-based finance, revolving lines of credit, SBA lending, structured finance, term loans and trade manufacturing, energy, private equity, entertainment, and technology and life sciences. The Company monitors concentrations within C&I loan portfolio by customer exposure and industry classifications, setting diversification targets and limits for specialized portfolios. The Company’s wholesale trade exposure largely consists of U.S. domiciled companies, many of which are based in California, that import goods from Greater China for U.S. consumer consumption.finance. The Company also hadhas a portfolio of broadly syndicated C&I term loans, primarily Term B, which totaled $894.6$892.1 million and $778.7$894.6 million as of December 31, 20192020 and 2018,2019, respectively. The majority of the C&I loans have variable interest rates.
Oil & gas loans outstanding comprised 7% of C&I loans and 3% of total loans held-for-investment as of December 31, 2020, a decrease from 11% of C&I loans and 4% of total loans held-for-investment as of December 31, 2019. As of December 31, 2020, oil & gas outstanding totaled $1.03 billion, a decrease of 23% from $1.33 billion as of December 31, 2019. Unfunded commitments to oil & gas borrowers were $312.1 million as of December 31, 2020, a decrease of 35% from $477.6 million as of December 31, 2019. Based on total commitment as of December 31, 2020, the oil & gas portfolio mix was: 59% exploration and production (“E&P”) companies, 34% midstream and downstream companies, and 7% oilfield services and other companies. In comparison, the oil & gas portfolio mix was: 64% E&P companies, 29% midstream and downstream companies, and 7% oilfield services and other companies as of December 31, 2019. The COVID-19 pandemic, fallen global commodity demand, and oil & gas price volatility have unfavorably impacted the credit risk of the oil & gas industry sector. Accordingly, the Company increased its allowance for loan loss coverage for oil & gas loans outstanding to 11% as of December 31, 2020, up from 5% as of December 31, 2019.
Commercial — Commercial Real Estate Loans. The CRE portfolio consists of income-producing CRE, multifamily residential, and construction and land loans. Total CRE loans totaled $10.28outstanding were $14.81 billion, or 30%39% of total loans held-for-investment as of December 31, 2019, and $9.262020, compared with $13.76 billion, or 28%40% of total loans held-for-investment as of December 31, 2018. 2019. Year-over-year, total CRE loans increased $1.04 billion, or 8%, primarily driven by growth in income-producing CRE.
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The Company focuses on providing financingCompany’s total CRE portfolio is granular and broadly diversified by property type, which serves to experienced real estate investorsmitigate a portion of its geographical concentration in California. The average size of total CRE loans was $2.4 million and developers who have moderate levels of leverage, many of whom are long-time customers. Loans are underwritten with conservative standards for cash flows, debt service coverage and loan-to-value. As$2.1 million as of December 31, 2020 and 2019, respectively. The following table summarizes the Company’s total CRE loans by property type as of December 31, 2020 and 2018, 20% and 21%, respectively,2019:
| ($ in thousands) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||
| Amount | % | Amount | % | |||||||||||||||||||||||
| Property types: | ||||||||||||||||||||||||||
| Retail | $ | 3,466,141 | 23 | % | $ | 3,300,106 | 24 | % | ||||||||||||||||||
| Multifamily | 3,033,998 | 20 | % | 2,856,374 | 21 | % | ||||||||||||||||||||
| Offices | 2,747,082 | 19 | % | 2,375,087 | 17 | % | ||||||||||||||||||||
| Industrial | 2,407,594 | 16 | % | 2,163,769 | 16 | % | ||||||||||||||||||||
| Hospitality | 1,888,797 | 13 | % | 1,865,031 | 14 | % | ||||||||||||||||||||
| Construction and land | 599,692 | 4 | % | 628,499 | 4 | % | ||||||||||||||||||||
| Other | 664,997 | 5 | % | 574,455 | 4 | % | ||||||||||||||||||||
| Total CRE loans | $ | 14,808,301 | 100 | % | $ | 13,763,321 | 100 | % | ||||||||||||||||||
The weighted-average loan-to-value (“LTV”) ratio of the total CRE portfolio was 51% as of December 31, 2020, compared with 50% as of December 31, 2019. The low weighted-average LTV ratio was consistent by CRE property type. Approximately 89% of total CRE loans were owner occupied properties; the remainder were non-owner occupied properties where 50%had an LTV ratio of 65% or morelower as of December 31, 2020, compared with 85% as of December 31, 2019. The consistency of the debt serviceCompany’s low LTV underwriting standards has historically resulted in lower credit losses for the loan is primarily provided by unaffiliated rental income from a third party. Interest rates onincome-producing CRE loans may be fixed, variable or hybrid.and multifamily residential loans.
The following tables provide a summary of the Company’s income-producing CRE, multifamily residential, and construction and land loans by geographic marketgeography as of December 31, 20192020 and 2018:
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | Total | % | |||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||
| Southern California | $ | 5,446,786 | $ | 1,728,086 | $ | 247,170 | $ | 7,422,042 | ||||||||||||||||||||
| Northern California | 2,359,808 | 603,135 | 203,706 | 3,166,649 | ||||||||||||||||||||||||
| California | 7,806,594 | 76 | % | 2,331,221 | 82 | % | 450,876 | 72 | % | 10,588,691 | 77 | % | ||||||||||||||||
| New York | 701,902 | 7 | % | 116,923 | 4 | % | 79,962 | 13 | % | 898,787 | 7 | % | ||||||||||||||||
| Texas | 628,576 | 6 | % | 124,646 | 4 | % | 8,604 | 1 | % | 761,826 | 6 | % | ||||||||||||||||
| Washington | 306,247 | 3 | % | 55,913 | 2 | % | 37,552 | 6 | % | 399,712 | 3 | % | ||||||||||||||||
| Arizona | 149,151 | 1 | % | 37,208 | 1 | % | 6,951 | 1 | % | 193,310 | 1 | % | ||||||||||||||||
| Nevada | 102,891 | 1 | % | 138,577 | 5 | % | 40 | 0 | % | 241,508 | 2 | % | ||||||||||||||||
| Other markets | 583,087 | 6 | % | 51,886 | 2 | % | 44,514 | 7 | % | 679,487 | 4 | % | ||||||||||||||||
Total loans (1) | $ | 10,278,448 | 100 | % | $ | 2,856,374 | 100 | % | $ | 628,499 | 100 | % | $ | 13,763,321 | 100 | % | ||||||||||||
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | Total | % | |||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||
| Southern California | $ | 5,106,098 | $ | 1,512,753 | $ | 215,370 | $ | 6,834,221 | ||||||||||||||||||||
| Northern California | 2,112,789 | 600,566 | 133,828 | 2,847,183 | ||||||||||||||||||||||||
| California | 7,218,887 | 79 | % | 2,113,319 | 86 | % | 349,198 | 65 | % | 9,681,404 | 79 | % | ||||||||||||||||
| New York | 651,510 | 7 | % | 110,840 | 4 | % | 46,702 | 9 | % | 809,052 | 7 | % | ||||||||||||||||
| Texas | 508,473 | 5 | % | 72,585 | 3 | % | 12,055 | 2 | % | 593,113 | 5 | % | ||||||||||||||||
| Washington | 288,522 | 3 | % | 58,294 | 2 | % | 29,079 | 5 | % | 375,895 | 3 | % | ||||||||||||||||
| Arizona | 108,102 | 1 | % | 24,808 | 1 | % | 24,890 | 5 | % | 157,800 | 1 | % | ||||||||||||||||
| Nevada | 94,924 | 1 | % | 44,052 | 2 | % | 47,897 | 9 | % | 186,873 | 2 | % | ||||||||||||||||
| Other markets | 389,781 | 4 | % | 46,770 | 2 | % | 28,973 | 5 | % | 465,524 | 3 | % | ||||||||||||||||
Total loans (1) | $ | 9,260,199 | 100 | % | $ | 2,470,668 | 100 | % | $ | 538,794 | 100 | % | $ | 12,269,661 | 100 | % | ||||||||||||
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | Total | % | |||||||||||||||||||||||||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Southern California | $ | 5,884,691 | $ | 1,867,646 | $ | 249,282 | $ | 8,001,619 | ||||||||||||||||||||||||||||||||||||||||||
| Northern California | 2,476,510 | 674,813 | 197,195 | 3,348,518 | ||||||||||||||||||||||||||||||||||||||||||||||
| California | 8,361,201 | 75 | % | 2,542,459 | 84 | % | 446,477 | 74 | % | 11,350,137 | 77 | % | ||||||||||||||||||||||||||||||||||||||
| New York | 696,712 | 6 | % | 137,114 | 4 | % | 93,806 | 16 | % | 927,632 | 6 | % | ||||||||||||||||||||||||||||||||||||||
| Texas | 864,639 | 8 | % | 116,367 | 4 | % | 2,581 | 0 | % | 983,587 | 7 | % | ||||||||||||||||||||||||||||||||||||||
| Washington | 341,374 | 3 | % | 91,824 | 3 | % | 22,724 | 4 | % | 455,922 | 3 | % | ||||||||||||||||||||||||||||||||||||||
| Arizona | 147,187 | 1 | % | 12,406 | 0 | % | — | — | % | 159,593 | 1 | % | ||||||||||||||||||||||||||||||||||||||
| Nevada | 88,959 | 1 | % | 86,644 | 3 | % | 22,384 | 4 | % | 197,987 | 1 | % | ||||||||||||||||||||||||||||||||||||||
| Other markets | 674,539 | 6 | % | 47,184 | 2 | % | 11,720 | 2 | % | 733,443 | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 11,174,611 | 100 | % | $ | 3,033,998 | 100 | % | $ | 599,692 | 100 | % | $ | 14,808,301 | 100 | % | ||||||||||||||||||||||||||||||||||
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| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | Total | % | |||||||||||||||||||||||||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Southern California | $ | 5,446,786 | $ | 1,728,086 | $ | 247,170 | $ | 7,422,042 | ||||||||||||||||||||||||||||||||||||||||||
| Northern California | 2,359,808 | 603,135 | 203,706 | 3,166,649 | ||||||||||||||||||||||||||||||||||||||||||||||
| California | 7,806,594 | 76 | % | 2,331,221 | 82 | % | 450,876 | 72 | % | 10,588,691 | 77 | % | ||||||||||||||||||||||||||||||||||||||
| New York | 701,902 | 7 | % | 116,923 | 4 | % | 79,962 | 13 | % | 898,787 | 7 | % | ||||||||||||||||||||||||||||||||||||||
| Texas | 628,576 | 6 | % | 124,646 | 4 | % | 8,604 | 1 | % | 761,826 | 6 | % | ||||||||||||||||||||||||||||||||||||||
| Washington | 306,247 | 3 | % | 55,913 | 2 | % | 37,552 | 6 | % | 399,712 | 3 | % | ||||||||||||||||||||||||||||||||||||||
| Arizona | 149,151 | 1 | % | 37,208 | 1 | % | 6,951 | 1 | % | 193,310 | 1 | % | ||||||||||||||||||||||||||||||||||||||
| Nevada | 102,891 | 1 | % | 138,577 | 5 | % | 40 | 0 | % | 241,508 | 2 | % | ||||||||||||||||||||||||||||||||||||||
| Other markets | 583,087 | 6 | % | 51,886 | 2 | % | 44,514 | 7 | % | 679,487 | 4 | % | ||||||||||||||||||||||||||||||||||||||
Total loans (1) | $ | 10,278,448 | 100 | % | $ | 2,856,374 | 100 | % | $ | 628,499 | 100 | % | $ | 13,763,321 | 100 | % | ||||||||||||||||||||||||||||||||||
(1)Loans net of ASC 310-30 discount.
Since 77% these loans were concentrated in California accounting for 76% and 79% of the CRE loan portfolio as of both December 31, 2020 and 2019, and 2018, respectively. Changeschanges in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses. For additional information related to the higher degree of risk from a downturn in real estate markets in California, see Item 1A. Risk Factors in this Form 10-K.
Commercial — Income-Producing Commercial Real Estate Loans.The Company’s CRE portfolio is broadly diversified by property type, which servesCompany focuses on providing financing to mitigate someexperienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers of the geographical concentration in California. The following table summarizes the Company’sBank. Income-producing CRE loan portfolio by property type,loans totaled $11.17 billion, or 29% of total loans held-for-investment, as of December 31, 2019 and 2018:
| ($ in thousands) | December 31, | |||||||||||||
| 2019 | 2018 | |||||||||||||
| Amount | % | Amount | % | |||||||||||
| Property types: | ||||||||||||||
| Retail | $ | 3,300,106 | 32 | % | $ | 3,171,374 | 34 | % | ||||||
| Office | 2,375,087 | 23 | % | 2,160,382 | 23 | % | ||||||||
| Industrial | 2,163,769 | 21 | % | 1,883,444 | 20 | % | ||||||||
| Hotel/Motel | 1,865,031 | 18 | % | 1,619,905 | 17 | % | ||||||||
| Other | 574,455 | 6 | % | 425,094 | 6 | % | ||||||||
Total CRE loans (1) | $ | 10,278,448 | 100 | % | $ | 9,260,199 | 100 | % | ||||||
Owner-occupied properties comprised 20% of totalthe income-producing CRE loans as of both dates.December 31, 2020 and 2019. The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by unaffiliated rental income from a third party.
Commercial —Multifamily Residential Loans. The multifamily residential loan portfolio is largely made up of loans secured by residential properties with five or more units in the Bank’s primary lending areas. Asunits. Multifamily residential loans totaled $3.03 billion as of December 31, 2020, compared with $2.86 billion as of December 31, 2019, and 2018, 82% and 86%, respectively,accounted for 8% of the Company’s multifamily residentialtotal loans were concentrated in California.held-for-investment as of both dates. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period of three to seven years.
Commercial — Construction and Land Loans.Loans. Construction and land loans provide financing for a portfolio of projects diversified by real estate property type. These loans totaled $628.5$599.7 million and $538.8December 31, 2020, compared with $628.5 million as of December 31, 2019, and 2018, respectively, and accounted for 2% of total loans held-for-investment as of both dates. IncludedConstruction loan exposure was made up of $554.7 million in the portfolio were construction loans of $558.2outstanding, plus $288.2 million with additionalin unfunded commitments, of $351.4 million as of December 31, 2019, and construction2020, compared with $558.2 million in loans of $477.2outstanding, plus $351.4 million with additionalin unfunded commitments, of $525.1 million as of December 31, 2018. The construction loans provide financing for hotels, offices and industrial structures. Similar to CRE and multifamily residential loans, the Company has a geographic concentration of construction and land loans in California.2019.
54
Consumer
The following tables summarize the Company’s single-family residential and HELOCHELOCs loan portfolios by geographic marketgeography as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Single- Family Residential | % | HELOCs | % | Total Residential Mortgage | % | |||||||||||||||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||||||||||||
| Southern California | $ | 3,462,067 | $ | 728,733 | $ | 4,190,800 | ||||||||||||||||||||||||||||||||
| Northern California | 1,059,832 | 354,014 | 1,413,846 | |||||||||||||||||||||||||||||||||||
| California | 4,521,899 | 55 | % | 1,082,747 | 68 | % | 5,604,646 | 57 | % | |||||||||||||||||||||||||||||
| New York | 2,277,722 | 28 | % | 244,425 | 15 | % | 2,522,147 | 26 | % | |||||||||||||||||||||||||||||
| Washington | 597,231 | 7 | % | 180,765 | 11 | % | 777,996 | 8 | % | |||||||||||||||||||||||||||||
| Massachusetts | 259,368 | 3 | % | 44,633 | 3 | % | 304,001 | 3 | % | |||||||||||||||||||||||||||||
| Texas | 209,737 | 3 | % | — | — | % | 209,737 | 2 | % | |||||||||||||||||||||||||||||
| Other markets | 319,996 | 4 | % | 49,146 | 3 | % | 369,142 | 4 | % | |||||||||||||||||||||||||||||
| Total | $ | 8,185,953 | 100 | % | $ | 1,601,716 | 100 | % | $ | 9,787,669 | 100 | % | ||||||||||||||||||||||||||
| Lien priority: | ||||||||||||||||||||||||||||||||||||||
| First mortgage | $ | 8,185,953 | 100 | % | $ | 1,372,270 | 86 | % | $ | 9,558,223 | 98 | % | ||||||||||||||||||||||||||
| Junior lien mortgage | — | — | % | 229,446 | 14 | % | 229,446 | 2 | % | |||||||||||||||||||||||||||||
| Total | $ | 8,185,953 | 100 | % | $ | 1,601,716 | 100 | % | $ | 9,787,669 | 100 | % | ||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | ($ in thousands) | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Single- Family Residential | % | HELOCs | % | Total | % | Single- Family Residential | % | HELOCs | % | Total Residential Mortgage | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Geographic markets: | Geographic markets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Southern California | $ | 3,081,368 | $ | 702,915 | $ | 3,784,283 | Southern California | $ | 3,081,368 | $ | 702,915 | $ | 3,784,283 | ||||||||||||||||||||||||||||||||||||||||||||||
| Northern California | 1,038,945 | 309,883 | 1,348,828 | Northern California | 1,038,945 | 309,883 | 1,348,828 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| California | 4,120,313 | 58 | % | 1,012,798 | 69 | % | 5,133,111 | 60 | % | California | 4,120,313 | 58 | % | 1,012,798 | 69 | % | 5,133,111 | 60 | % | ||||||||||||||||||||||||||||||||||||||||
| New York | 1,657,732 | 23 | % | 257,344 | 17 | % | 1,915,076 | 22 | % | New York | 1,657,732 | 23 | % | 257,344 | 17 | % | 1,915,076 | 22 | % | ||||||||||||||||||||||||||||||||||||||||
| Washington | 630,307 | 9 | % | 133,625 | 9 | % | 763,932 | 9 | % | Washington | 630,307 | 9 | % | 133,625 | 9 | % | 763,932 | 9 | % | ||||||||||||||||||||||||||||||||||||||||
| Massachusetts | 235,393 | 3 | % | 31,310 | 2 | % | 266,703 | 3 | % | Massachusetts | 235,393 | 3 | % | 31,310 | 2 | % | 266,703 | 3 | % | ||||||||||||||||||||||||||||||||||||||||
| Texas | 188,838 | 3 | % | — | — | % | 188,838 | 2 | % | Texas | 188,838 | 3 | % | — | — | % | 188,838 | 2 | % | ||||||||||||||||||||||||||||||||||||||||
| Other markets | 276,007 | 4 | % | 37,706 | 3 | % | 313,713 | 4 | % | Other markets | 276,007 | 4 | % | 37,706 | 3 | % | 313,713 | 4 | % | ||||||||||||||||||||||||||||||||||||||||
Total (1) | $ | 7,108,590 | 100 | % | $ | 1,472,783 | 100 | % | $ | 8,581,373 | 100 | % | Total (1) | $ | 7,108,590 | 100 | % | $ | 1,472,783 | 100 | % | $ | 8,581,373 | 100 | % | ||||||||||||||||||||||||||||||||||
| Lien priority: | Lien priority: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| First mortgage | $ | 7,108,588 | 100 | % | $ | 1,238,186 | 84 | % | $ | 8,346,774 | 97 | % | First mortgage | $ | 7,108,588 | 100 | % | $ | 1,238,186 | 84 | % | $ | 8,346,774 | 97 | % | ||||||||||||||||||||||||||||||||||
| Junior lien mortgage | 2 | 0 | % | 234,597 | 16 | % | 234,599 | 3 | % | Junior lien mortgage | 2 | 0 | % | 234,597 | 16 | % | 234,599 | 3 | % | ||||||||||||||||||||||||||||||||||||||||
Total (1) | $ | 7,108,590 | 100 | % | $ | 1,472,783 | 100 | % | $ | 8,581,373 | 100 | % | Total (1) | $ | 7,108,590 | 100 | % | $ | 1,472,783 | 100 | % | $ | 8,581,373 | 100 | % | ||||||||||||||||||||||||||||||||||
(1)Loans net of ASC 310-30 discount.
| ($ in thousands) | December 31, 2018 | ||||||||||||||||||||
Single- Family Residential | % | HELOCs | % | Total | % | ||||||||||||||||
| Geographic markets: | |||||||||||||||||||||
| Southern California | $ | 2,768,725 | $ | 839,790 | $ | 3,608,515 | |||||||||||||||
| Northern California | 954,835 | 350,008 | 1,304,843 | ||||||||||||||||||
| California | 3,723,560 | 62 | % | 1,189,798 | 70 | % | 4,913,358 | 64 | % | ||||||||||||
| New York | 1,165,135 | 19 | % | 279,792 | 17 | % | 1,444,927 | 19 | % | ||||||||||||
| Washington | 572,017 | 9 | % | 149,579 | 9 | % | 721,596 | 9 | % | ||||||||||||
| Massachusetts | 206,920 | 3 | % | 32,333 | 2 | % | 239,253 | 3 | % | ||||||||||||
| Texas | 165,873 | 3 | % | — | — | % | 165,873 | 2 | % | ||||||||||||
| Other markets | 202,949 | 4 | % | 39,332 | 2 | % | 242,281 | 3 | % | ||||||||||||
Total (1) | $ | 6,036,454 | 100 | % | $ | 1,690,834 | 100 | % | $ | 7,727,288 | 100 | % | |||||||||
| Lien priority: | |||||||||||||||||||||
| First mortgage | $ | 6,036,450 | 100 | % | $ | 1,438,414 | 85 | % | $ | 7,474,864 | 97 | % | |||||||||
| Junior lien mortgage | 4 | 0 | % | 252,420 | 15 | % | 252,424 | 3 | % | ||||||||||||
Total (1) | $ | 6,036,454 | 100 | % | $ | 1,690,834 | 100 | % | $ | 7,727,288 | 100 | % | |||||||||
Consumer — Single-Family Residential Loans.Single-family residential loans totaled $8.19 billion, or 21% of total loans held-for-investment, as of December 31, 2020, compared with $7.11 billion, or 20% of total loans held-for-investment as of December 31, 2019, and $6.042019. Year-over-year, single-family residential loans increased $1.08 billion, or 19% of total loans as of December 31, 2018.15%, primarily driven by growth in New York and Southern California. The Company was in a first lien position for virtually all of the single-family residential loans as of both December 31, 20192020 and 2018.2019. Many of these loans are reduced documentation loans, wherefor which a substantial down payment is required, resulting in a low loan-to-valueLTV ratio at origination, typically 60%65% or less. These loans have historically experienced low delinquency and defaultloss rates. As of December 31, 2019 and 2018, 58% and 62% of the Company’s single-family residential loans, respectively, were concentrated in California. The Company offers a variety of single-family residential first lien mortgage loan programs, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period.
55
Consumer — Home Equity Lines of Credit LoansCredit.. HELOCs totaled $1.60 billion as of December 31, 2020, compared with $1.47 billion or 4% of total loans as of December 31, 2019, and $1.69 billion or 5%accounted for 4% of total loan portfolioloans held-for-investment as of December 31, 2018.both dates. Year-over-year, HELOCs increased $128.9 million, or 9%, primarily driven by growth in California and Washington. The Company was in a first lien position for 86% and 84% and 85% of totalits HELOCs as of December 31, 20192020 and 2018,2019, respectively. Many of the loans within this portfolio are reduced documentation loans, wherefor which a substantial down payment is required, resulting in a low loan-to-valueLTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and defaultloss rates. As of December 31, 2019 and 2018, 69% and 70%Virtually all of the Company’s HELOCs respectively, were concentrated in California. The HELOC portfolio is comprised largely of variable-rate loans.
All originated commercial and consumer loans originated are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements, to ensure that the Company is in compliancecompliant with these requirements.
The following table presents the contractual loan maturities by loan categoriescategory and the contractual distribution of loans in those categories to changes in interest rates as of December 31, 2019:2020:
| ($ in thousands) | Due within one year | Due after one year through five years | Due after five years | Total | ||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||
| C&I | $ | 4,648,509 | $ | 7,697,855 | $ | 1,285,362 | $ | 13,631,726 | ||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||
| CRE | 808,302 | 5,047,922 | 5,318,387 | 11,174,611 | ||||||||||||||||||||||
| Multifamily residential | 167,854 | 580,924 | 2,285,220 | 3,033,998 | ||||||||||||||||||||||
| Construction and land | 323,627 | 221,375 | 54,690 | 599,692 | ||||||||||||||||||||||
| Total CRE | 1,299,783 | 5,850,221 | 7,658,297 | 14,808,301 | ||||||||||||||||||||||
| Total commercial | 5,948,292 | 13,548,076 | 8,943,659 | 28,440,027 | ||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||
| Single-family residential | 329 | 6,696 | 8,178,928 | 8,185,953 | ||||||||||||||||||||||
| HELOCs | — | 366 | 1,601,350 | 1,601,716 | ||||||||||||||||||||||
| Total residential mortgage | 329 | 7,062 | 9,780,278 | 9,787,669 | ||||||||||||||||||||||
| Other consumer | 59,496 | 98,268 | 5,495 | 163,259 | ||||||||||||||||||||||
| Total consumer | 59,825 | 105,330 | 9,785,773 | 9,950,928 | ||||||||||||||||||||||
| Total loans held-for-investment | $ | 6,008,117 | $ | 13,653,406 | $ | 18,729,432 | $ | 38,390,955 | ||||||||||||||||||
| Distribution of loans to changes in interest rates: | ||||||||||||||||||||||||||
| Variable-rate loans | $ | 4,864,904 | $ | 10,762,372 | $ | 9,332,028 | $ | 24,959,304 | ||||||||||||||||||
| Fixed-rate loans | 1,143,213 | 2,693,339 | 3,296,293 | 7,132,845 | ||||||||||||||||||||||
| Hybrid adjustable-rate loans | — | 197,695 | 6,101,111 | 6,298,806 | ||||||||||||||||||||||
| Total loans held-for-investment | $ | 6,008,117 | $ | 13,653,406 | $ | 18,729,432 | $ | 38,390,955 | ||||||||||||||||||
| ($ in thousands) | Due within one year | Due after one year through five years | Due after five years | Total | ||||||||||||
| Commercial: | ||||||||||||||||
| C&I | $ | 4,376,313 | $ | 6,365,319 | $ | 1,409,299 | $ | 12,150,931 | ||||||||
| CRE: | ||||||||||||||||
| CRE | 811,433 | 4,067,649 | 5,399,366 | 10,278,448 | ||||||||||||
| Multifamily residential | 89,387 | 564,010 | 2,202,977 | 2,856,374 | ||||||||||||
| Construction and land | 354,755 | 222,276 | 51,468 | 628,499 | ||||||||||||
| Total CRE | 1,255,575 | 4,853,935 | 7,653,811 | 13,763,321 | ||||||||||||
| Total commercial | 5,631,888 | 11,219,254 | 9,063,110 | 25,914,252 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgage: | ||||||||||||||||
| Single-family residential | 159 | 9,389 | 7,099,042 | 7,108,590 | ||||||||||||
| HELOCs | — | 159 | 1,472,624 | 1,472,783 | ||||||||||||
| Total residential mortgage | 159 | 9,548 | 8,571,666 | 8,581,373 | ||||||||||||
| Other consumer | 193,319 | 75,238 | 14,357 | 282,914 | ||||||||||||
| Total consumer | 193,478 | 84,786 | 8,586,023 | 8,864,287 | ||||||||||||
Total loans held-for-investment (1) | $ | 5,825,366 | $ | 11,304,040 | $ | 17,649,133 | $ | 34,778,539 | ||||||||
| Distribution of loans to changes in interest rates: | ||||||||||||||||
| Variable-rate loans | $ | 4,924,842 | $ | 9,996,181 | $ | 8,815,263 | $ | 23,736,286 | ||||||||
| Fixed-rate loans | 900,524 | 1,128,812 | 2,362,846 | 4,392,182 | ||||||||||||
| Hybrid adjustable-rate loans | — | 179,047 | 6,471,024 | 6,650,071 | ||||||||||||
Total loans held-for-investment (1) | $ | 5,825,366 | $ | 11,304,040 | $ | 17,649,133 | $ | 34,778,539 | ||||||||
Purchased Credit-ImpairedCredit Deteriorated Loans
56
Loans Held-for-Sale
As of December 31, 20192020 and 2018,2019, loans held-for-sale oftotaled $1.8 million and $434 thousand, respectively, and $275 thousand, respectively, consisted of single-family residential loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future”,future,” subject to periodic reviews under the Company’s evaluation processes, including asset/liabilityliquidity and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value.
All loans originated by the Company are underwritten pursuant to the Company’s policies and procedures. Although the Company’s primary focus is on directly originated loans, in certain circumstances, the Company also investspurchases loans and participates in broadly syndicated and participation loans. The broadly syndicated C&I loans are marketed and sold primarily to institutional investors and generally more liquid than the Company’s directly originated loans.with other banks. The Company may participate in these loans in the primary syndication market, or may purchase an interest in the post-syndication secondary market. As the Company typically receives more attractive financing terms on these loans, the Company is able to leverage the broadly syndicated portion of the loan portfolio in such a way that maximizes the levered return potential of the loan portfolio. The Companyalso participates out interests in directly originated commercial loans to other financial institutions and also purchases participationor sells loans from lead banks.in the normal course of business.
The following tables provide information abouton loan purchases, transfers and sales during the years ended December 31, 2020, 2019 2018 and 2017:2018. Refer to Note 6 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-K for additional information on loan purchases and transfers.
| ($ in thousands) | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | $ | 291,740 | $ | 26,994 | $ | 1,398 | $ | — | $ | 80,309 | $ | 400,441 | ||||||||||||||||||||||||||||||||||||||
| Net gains | $ | 565 | $ | 2,940 | $ | — | $ | — | $ | 996 | $ | 4,501 | ||||||||||||||||||||||||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amount (1) | $ | 11,780 | $ | — | $ | — | $ | — | $ | — | $ | 11,780 | ||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | $ | 179,280 | $ | 39,062 | $ | — | $ | 1,573 | $ | 10,410 | $ | 230,325 | ||||||||||||||||||||||||||||||||||||||
| Net gains | $ | 875 | $ | 3,045 | $ | — | $ | — | $ | 115 | $ | 4,035 | ||||||||||||||||||||||||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amount (1) | $ | 66,511 | $ | — | $ | — | $ | — | $ | — | $ | 66,511 | ||||||||||||||||||||||||||||||||||||||
57
| ($ in thousands) | Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | ||||||||||||||||||||||||||
| Loans purchased | $ | 397,615 | $ | — | $ | 8,988 | $ | — | $ | 117,227 | $ | — | $ | — | $ | 523,830 | ||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 245,002 | $ | 39,062 | $ | — | $ | 1,573 | $ | — | $ | — | $ | — | $ | 285,637 | ||||||||||||||||
| Write-downs to allowance for loan losses | $ | (789 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (789 | ) | ||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 179,280 | $ | 39,062 | $ | — | $ | 1,573 | $ | 10,410 | $ | — | $ | — | $ | 230,325 | ||||||||||||||||
| Net gains | $ | 875 | $ | 3,045 | $ | — | $ | — | $ | 115 | $ | — | $ | — | $ | 4,035 | ||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 66,511 | (1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 66,510 | |||||||||||||||
| ($ in thousands) | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | ||||||||||||||||||||||||||
| Loans purchased | $ | 525,767 | $ | — | $ | 7,389 | $ | — | $ | 63,781 | $ | — | $ | — | $ | 596,937 | ||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 404,321 | $ | 62,291 | $ | — | $ | — | $ | 14,981 | $ | — | $ | — | $ | 481,593 | ||||||||||||||||
| Loans transferred from held-for-sale to held-for-investment | $ | 2,306 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,306 | ||||||||||||||||
| Write-downs to allowance for loan losses | $ | (14,620 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (14,620 | ) | ||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 212,485 | $ | 62,291 | $ | — | $ | — | $ | 34,966 | $ | — | $ | — | $ | 309,742 | ||||||||||||||||
| Net gains | $ | 1,129 | $ | 4,876 | $ | — | $ | — | $ | 552 | $ | — | $ | — | $ | 6,557 | ||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 201,359 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 201,359 | ||||||||||||||||
| Net gains | $ | 33 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 33 | ||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | ||||||||||||||||||||||||||
| Loans purchased | $ | 503,359 | $ | — | $ | 2,311 | $ | — | $ | 29,060 | $ | — | $ | — | $ | 534,730 | ||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 476,644 | $ | 52,217 | $ | 531 | $ | 1,609 | $ | 249 | $ | — | $ | 3,706 | $ | 534,956 | ||||||||||||||||
| Write-downs to allowance for loan losses | $ | (473 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (473 | ) | ||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 99,064 | $ | 52,217 | $ | 531 | $ | 1,609 | $ | 21,058 | $ | — | $ | 3,726 | $ | 178,205 | ||||||||||||||||
| Net gains | $ | 1,740 | $ | 6,207 | $ | 19 | $ | 94 | $ | 283 | $ | — | $ | — | $ | 8,343 | ||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||
| Amount | $ | 377,580 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 22,179 | $ | 399,759 | ||||||||||||||||
| Net gains (losses) | $ | 1,644 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,056 | ) | $ | 588 | |||||||||||||||
Valuation adjustments (2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (61 | ) | $ | (61 | ) | ||||||||||||||
| ($ in thousands) | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans sold: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | $ | 212,485 | $ | 62,291 | $ | — | $ | — | $ | 34,966 | $ | 309,742 | ||||||||||||||||||||||||||||||||||||||
| Net gains | $ | 1,129 | $ | 4,876 | $ | — | $ | — | $ | 552 | $ | 6,557 | ||||||||||||||||||||||||||||||||||||||
| Purchased loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | $ | 201,359 | $ | — | $ | — | $ | — | $ | — | $ | 201,359 | ||||||||||||||||||||||||||||||||||||||
| Net gains | $ | 33 | $ | — | $ | — | $ | — | $ | — | $ | 33 | ||||||||||||||||||||||||||||||||||||||
(1)Net gains on sales of purchased loans were insignificant or none.
Foreign Outstandings
The Company’s overseas offices, which include the branch in Hong Kong and the subsidiary bank in China, are subject to the general risks inherent in conducting business in foreign countries, such as regulations, or economic and political uncertainties. In addition, the Company’s financial assets held in the Hong Kong branch and the subsidiary bank in China may be affected by fluctuations in currency exchange rates or other factors. The Company’s country risk exposure is largely concentrated in China and Hong Kong. The following table presents the major financial assets held in the Company’s overseas offices as of December 31, 2020, 2019 and 2018:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | |||||||||||||||||||||||||||||||||
| Hong Kong branch: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 647,883 | 1 | % | $ | 511,639 | 1 | % | $ | 360,786 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (1) | $ | 66,170 | 0 | % | $ | 204,948 | 0 | % | $ | 221,932 | 1 | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 704,415 | 1 | % | $ | 573,305 | 1 | % | $ | 653,860 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,426,479 | 3 | % | $ | 1,361,652 | 3 | % | $ | 1,247,207 | 3 | % | ||||||||||||||||||||||||||
| Subsidiary bank in China: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 611,088 | 1 | % | $ | 548,930 | 1 | % | $ | 695,527 | 2 | % | ||||||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 74,079 | 0 | % | $ | 142,587 | 0 | % | $ | 221,000 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (3) | $ | 152,219 | 0 | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 796,153 | 2 | % | $ | 819,110 | 2 | % | $ | 777,412 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,634,896 | 3 | % | $ | 1,520,627 | 3 | % | $ | 1,700,357 | 4 | % | ||||||||||||||||||||||||||
(1)Primarily comprised of U.S. Treasury securities and foreign government bonds as of December 31, 2020, 2019 and 2018.
(2)Primarily comprised of C&I loans as of December 31, 2020, 2019 and 2018.
(3)Comprised of foreign government bonds as of December 31, 2020.
The following table presents the total revenue generated by the Company’s overseas offices in 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | |||||||||||||||||||||||||||||||||
| Hong Kong Branch: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 22,947 | 1 | % | $ | 33,791 | 2 | % | $ | 31,122 | 2 | % | ||||||||||||||||||||||||||
| Subsidiary Bank in China: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 20,178 | 1 | % | $ | 32,071 | 2 | % | $ | 34,143 | 2 | % | ||||||||||||||||||||||||||
58
Capital
The Company maintains a strong capital base to support its anticipated asset growth, operating needs and credit risks, and to ensure that the Company and the Bank are compliant with all regulatory capital guidelines. The Company engages in regular capital planning processes on at least an annual basis to optimize the use of available capital and to appropriately plan for future capital needs, allocating capital to existing and future business activities. Furthermore, the Company conducts capital stress tests as part of its capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.
In March 2020, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization was inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The Company determines the timing and amount of stock repurchases, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the remainder of 2020. As of December 31, 2020, the total remaining available capital authorized for repurchase was $354.0 million.
The Company’s stockholders’ equity was $5.27 billion as of December 31, 2020, an increase of $251.6 million or 5% from $5.02 billion as of December 31, 2019. The increase in the Company’s stockholders’ equity was primarily due to 2020 net income of $567.8 million, partially offset by cash dividends declared of $158.8 million and share repurchases of $146.0 million. For other factors that contributed to the changes in stockholders’ equity, refer to Item 8. Financial Statements and Supplementary Data — Consolidated Statement of Changes in Stockholders’ Equity in this Form 10-K.
Book value was $37.22 per common share as of December 31, 2020, an increase of 8% from $34.46 per common share as of December 31, 2019. The Company paid cash dividends of $1.100 per common share in 2020, compared with $1.055 per share in 2019. In January 2021, the Company’s Board of Directors declared first quarter 2021 cash dividends of $0.330 per common share, which represents a 20% increase, or 5.5 cents per share, from the previous quarterly cash dividend of $0.275 per common share. The dividend was paid on February 23, 2021 to stockholders of record as of February 9, 2021.
The Company’s overseas offices, which include the branch in Hong Kong and Other Sources of Funds
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | |||||||||||||||||||||||||||||||||
| Hong Kong branch: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 647,883 | 1 | % | $ | 511,639 | 1 | % | $ | 360,786 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (1) | $ | 66,170 | 0 | % | $ | 204,948 | 0 | % | $ | 221,932 | 1 | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 704,415 | 1 | % | $ | 573,305 | 1 | % | $ | 653,860 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,426,479 | 3 | % | $ | 1,361,652 | 3 | % | $ | 1,247,207 | 3 | % | ||||||||||||||||||||||||||
| Subsidiary bank in China: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 611,088 | 1 | % | $ | 548,930 | 1 | % | $ | 695,527 | 2 | % | ||||||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 74,079 | 0 | % | $ | 142,587 | 0 | % | $ | 221,000 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (3) | $ | 152,219 | 0 | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 796,153 | 2 | % | $ | 819,110 | 2 | % | $ | 777,412 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,634,896 | 3 | % | $ | 1,520,627 | 3 | % | $ | 1,700,357 | 4 | % | ||||||||||||||||||||||||||
(1)Primarily comprised of U.S. Treasury securities and foreign government bonds as of December 31, 2020, 2019 and 2018.
(2)Primarily comprised of C&I loans as of December 31, 2020, 2019 and 2018.
(3)Comprised of foreign government bonds as of December 31, 2020.
The following table presents the total revenue generated by the Company’s overseas offices in 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | |||||||||||||||||||||||||||||||||
| Hong Kong Branch: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 22,947 | 1 | % | $ | 33,791 | 2 | % | $ | 31,122 | 2 | % | ||||||||||||||||||||||||||
| Subsidiary Bank in China: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 20,178 | 1 | % | $ | 32,071 | 2 | % | $ | 34,143 | 2 | % | ||||||||||||||||||||||||||
58
| ($ in thousands) | December 31, | Change | |||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||
| Amount | % | Amount | % | $ | % | ||||||||||||||||
| Deposits | |||||||||||||||||||||
| Noninterest-bearing demand | $ | 11,080,036 | 30 | % | $ | 11,377,009 | 32 | % | $ | (296,973 | ) | (3 | )% | ||||||||
| Interest-bearing checking | 5,200,755 | 14 | % | 4,584,447 | 13 | % | 616,308 | 13 | % | ||||||||||||
| Money market | 8,711,964 | 23 | % | 8,262,677 | 23 | % | 449,287 | 5 | % | ||||||||||||
| Savings | 2,117,196 | 6 | % | 2,146,429 | 6 | % | (29,233 | ) | (1 | )% | |||||||||||
| Time deposits | 10,214,308 | 27 | % | 9,069,066 | 26 | % | 1,145,242 | 13 | % | ||||||||||||
| Total deposits | $ | 37,324,259 | 100 | % | $ | 35,439,628 | 100 | % | $ | 1,884,631 | 5 | % | |||||||||
| Other Funds | |||||||||||||||||||||
| Short-term borrowings | $ | 28,669 | $ | 57,638 | $ | (28,969 | ) | (50 | )% | ||||||||||||
| FHLB advances | 745,915 | 326,172 | 419,743 | 129 | % | ||||||||||||||||
| Repurchase agreements | 200,000 | 50,000 | 150,000 | 300 | % | ||||||||||||||||
| Long-term debt | 147,101 | 146,835 | 266 | 0 | % | ||||||||||||||||
| Total other funds | $ | 1,121,685 | $ | 580,645 | $ | 541,040 | 93 | % | |||||||||||||
| Total sources of funds | $ | 38,445,944 | $ | 36,020,273 | $ | 2,425,671 | 7 | % | |||||||||||||
The Company offersmaintains a wide varietystrong capital base to support its anticipated asset growth, operating needs and credit risks, and to ensure that the Company and the Bank are compliant with all regulatory capital guidelines. The Company engages in regular capital planning processes on at least an annual basis to optimize the use of deposit productsavailable capital and to both consumerappropriately plan for future capital needs, allocating capital to existing and commercial customers. future business activities. Furthermore, the Company conducts capital stress tests as part of its capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.
In March 2020, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization was inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The Company determines the timing and amount of stock repurchases, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the remainder of 2020. As of December 31, 2020, the total remaining available capital authorized for repurchase was $354.0 million.
The Company’s deposit strategy is to grow and retain relationship-based deposits, which provides a stable and low-cost source of funding and liquidity to the Company.
| ($ in thousands) | December 31, 2019 | |||
| 3 months or less | $ | 2,922,242 | ||
| Over 3 months through 6 months | 1,829,332 | |||
| Over 6 months through 12 months | 1,849,287 | |||
| Over 12 months | 413,421 | |||
| Total | $ | 7,014,282 | ||
| ($ in thousands) | 2019 | 2018 | ||||||
| Year-end balance | $ | 28,669 | $ | 57,638 | ||||
| Weighted-average rate on amount outstanding at year-end | 3.69 | % | 4.21 | % | ||||
| Maximum month-end balance | $ | 59,225 | $ | 58,523 | ||||
| Average amount outstanding | $ | 44,511 | $ | 31,612 | ||||
| Weighted-average rate | 3.90 | % | 4.28 | % | ||||
Foreign Outstandings
The Company’s overseas offices, which include the branch in Hong Kong and the subsidiary bank in China, are subject to the general risks inherent in conducting business in foreign countries, such as regulations, or economic and political uncertainties. In addition, the Company’s financial assets held in the Hong Kong branch and the subsidiary bank in China may be affected by fluctuations in currency exchange rates or other factors. The Company’s country risk exposure is largely concentrated in China and Hong Kong. The following table presents the major financial assets held in the Company’s overseas offices as of December 31, 2020, 2019 2018 and 2017:2018:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | |||||||||||||||||||||||||||||||||
| Hong Kong branch: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 647,883 | 1 | % | $ | 511,639 | 1 | % | $ | 360,786 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (1) | $ | 66,170 | 0 | % | $ | 204,948 | 0 | % | $ | 221,932 | 1 | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 704,415 | 1 | % | $ | 573,305 | 1 | % | $ | 653,860 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,426,479 | 3 | % | $ | 1,361,652 | 3 | % | $ | 1,247,207 | 3 | % | ||||||||||||||||||||||||||
| Subsidiary bank in China: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 611,088 | 1 | % | $ | 548,930 | 1 | % | $ | 695,527 | 2 | % | ||||||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 74,079 | 0 | % | $ | 142,587 | 0 | % | $ | 221,000 | 1 | % | ||||||||||||||||||||||||||
AFS debt securities (3) | $ | 152,219 | 0 | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||||
Loans held-for-investment (2) | $ | 796,153 | 2 | % | $ | 819,110 | 2 | % | $ | 777,412 | 2 | % | ||||||||||||||||||||||||||
| Total assets | $ | 1,634,896 | 3 | % | $ | 1,520,627 | 3 | % | $ | 1,700,357 | 4 | % | ||||||||||||||||||||||||||
| ($ in thousands) | December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||
| Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | ||||||||||||||||
| Hong Kong Branch: | |||||||||||||||||||||
| Cash and cash equivalents | $ | 511,639 | 1 | % | $ | 360,786 | 1 | % | $ | 151,631 | 0 | % | |||||||||
AFS investment securities (1) | $ | 204,948 | 0 | % | $ | 221,932 | 1 | % | $ | 242,107 | 1 | % | |||||||||
Loans held-for-investment (2)(3) | $ | 573,305 | 1 | % | $ | 653,860 | 2 | % | $ | 713,728 | 2 | % | |||||||||
| Total assets | $ | 1,361,652 | 3 | % | $ | 1,247,207 | 3 | % | $ | 1,104,497 | 3 | % | |||||||||
| Subsidiary Bank in China: | |||||||||||||||||||||
| Cash and cash equivalents | $ | 548,930 | 1 | % | $ | 695,527 | 2 | % | $ | 626,658 | 2 | % | |||||||||
| Interest-bearing deposits with banks | $ | 142,587 | 0 | % | $ | 221,000 | 1 | % | $ | 188,422 | 1 | % | |||||||||
Loans held-for-investment (3) | $ | 819,110 | 2 | % | $ | 777,412 | 2 | % | $ | 484,214 | 1 | % | |||||||||
| Total assets | $ | 1,520,627 | 3 | % | $ | 1,700,357 | 4 | % | $ | 1,303,199 | 4 | % | |||||||||
(2)Primarily comprised of C&I loans as of December 31, 2020, 2019 and 2018.
(3)Comprised of foreign government bonds as of December 31, 2020.
The following table presents the total revenue generated by the Company’s overseas offices in 2020, 2019 2018 and 2017:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | |||||||||||||||||||||||||||||||||
| Hong Kong Branch: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 22,947 | 1 | % | $ | 33,791 | 2 | % | $ | 31,122 | 2 | % | ||||||||||||||||||||||||||
| Subsidiary Bank in China: | ||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 20,178 | 1 | % | $ | 32,071 | 2 | % | $ | 34,143 | 2 | % | ||||||||||||||||||||||||||
58
| ($ in thousands) | Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||
| Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | ||||||||||||||||
| Hong Kong Branch: | |||||||||||||||||||||
| Total revenue | $ | 33,791 | 2 | % | $ | 31,122 | 2 | % | $ | 28,096 | 2 | % | |||||||||
| Subsidiary Bank in China: | |||||||||||||||||||||
| Total revenue | $ | 32,071 | 2 | % | $ | 34,143 | 2 | % | $ | 24,235 | 2 | % | |||||||||
Capital
The Company maintains an adequatea strong capital base to support its anticipated asset growth, operating needs and credit risks, and to ensure that the Company and the Bank are in compliancecompliant with all regulatory capital guidelines. The Company engages in regular capital planning processes on at least an annual basis to optimize the use of available capital and to appropriately plan for future capital needs, allocating capital to existing and future business activities. Furthermore, the Company conducts capital stress tests as part of its capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.
In March 2020, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization was inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The Company determines the timing and amount of stock repurchases, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the remainder of 2020. As of December 31, 2020, the total remaining available capital authorized for repurchase was $354.0 million.
The Company’s stockholders’ equity was $5.27 billion as of December 31, 2020, an increase of $251.6 million or 5% from $5.02 billion as of December 31, 2019, an increase of $593.6 million or 13% from $4.42 billion as of December 31, 2018. The Company’s primary source of capital is the retention of its operating earnings. Retained earnings were $3.69 billion as of December 31, 2019, an increase of $529.2 million or 17% from $3.16 billion as of December 31, 2018.2019. The increase in the Company’s stockholders’ equity was primarily reflected $674.0 million indue to 2020 net income of $567.8 million, partially offset by $155.3 million of cash dividends declared during 2019. In addition, the beginning balance of retained earnings increased $10.5$158.8 million asand share repurchases of January 1, 2019, because the Company recognized a cumulative adjustment related to the deferred gains on the sale and leaseback transactions, which had occurred prior to the date of adoption of ASU 2016-02, Leases (Topic 842).$146.0 million. For other factors that contributed to the changes in stockholders’ equity, refer to Item 8. Financial Statements and SupplementalSupplementary Data — Consolidated Statement of Changes in Stockholders’ Equity in this Form 10-K.
Book value was $37.22 per common share as of December 31, 2020, an increase of 8% from $34.46 per common share as of December 31, 2019, compared with $30.522019. The Company paid cash dividends of $1.100 per common share as of December 31, 2018. Our annual cash dividend on common stock wasin 2020, compared with $1.055 per share in 2019, compared with $0.86 per share in 2018, an increase of $0.195 or 23%.2019. In January 2020,2021, the Company’s Board of Directors declared first quarter 20202021 cash dividends of $0.330 per common share, which represents a 20% increase, or 5.5 cents per share, from the previous quarterly cash dividend of $0.275 per common share. The dividend was paid on February 14, 202023, 2021 to stockholders of record as of February 9, 2021.
Deposits and Other Sources of Funds
Deposits are the Company’s primary source of funding, the cost of which has a significant impact on the Company’s net interest income and net interest margin. Additional funding is provided by short- and long-term borrowings, and long-term debt. See Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity in this Form 10-Kfor a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of December 31, 2020 and 2019:
| ($ in thousands) | December 31, | Change | ||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | $ | % | |||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 16,298,301 | 36 | % | $ | 11,080,036 | 30 | % | $ | 5,218,265 | 47 | % | ||||||||||||||||||||||||||
| Interest-bearing checking | 6,142,193 | 14 | % | 5,200,755 | 14 | % | 941,438 | 18 | % | |||||||||||||||||||||||||||||
| Money market | 10,740,667 | 24 | % | 8,711,964 | 23 | % | 2,028,703 | 23 | % | |||||||||||||||||||||||||||||
| Savings | 2,681,242 | 6 | % | 2,117,196 | 6 | % | 564,046 | 27 | % | |||||||||||||||||||||||||||||
| Time deposits | 9,000,349 | 20 | % | 10,214,308 | 27 | % | (1,213,959) | (12) | % | |||||||||||||||||||||||||||||
| Total deposits | $ | 44,862,752 | 100 | % | $ | 37,324,259 | 100 | % | $ | 7,538,493 | 20 | % | ||||||||||||||||||||||||||
| Other Funds | ||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 21,009 | $ | 28,669 | $ | (7,660) | (27) | % | ||||||||||||||||||||||||||||||
| FHLB advances | 652,612 | 745,915 | (93,303) | (13) | % | |||||||||||||||||||||||||||||||||
| Repurchase agreements | 300,000 | 200,000 | 100,000 | 50 | % | |||||||||||||||||||||||||||||||||
| Long-term debt | 147,376 | 147,101 | 275 | 0 | % | |||||||||||||||||||||||||||||||||
| Total other funds | $ | 1,120,997 | $ | 1,121,685 | $ | (688) | 0 | % | ||||||||||||||||||||||||||||||
| Total sources of funds | $ | 45,983,749 | $ | 38,445,944 | $ | 7,537,805 | 20 | % | ||||||||||||||||||||||||||||||
59
Deposits
The Company offers a wide variety of deposit products to consumer and commercial customers. The Company’s deposit strategy is to grow and retain relationship-based deposits, which provide a stable and low-cost source of funding and liquidity to the Company.
Total deposits reached $44.86 billion as of December 31, 2020, an increase of $7.54 billion or 20% from $37.32 billion as of December 31, 2019. Deposit growth was well-diversified across our commercial sectors and branch network, including cross-border clients, partially offset by a reduction in higher-cost time deposits. The strongest growth was in noninterest-bearing demand deposits, which increased by $5.22 billion or 47% year-over-year. Noninterest-bearing demand deposits reached $16.30 billion, or 36% of total deposits, as of December 31, 2020, up from $11.08 billion, or 30% of total deposits, as of December 31, 2019. Additional information regarding the impact of deposits on net interest income, with a comparison of average deposit balances and rates, is provided in Item 7 — MD&A — Results of Operations — Net Interest Income in this Form 10-K.
Domestic time deposits of $100,000 or more totaled $7.17 billion, representing 16% of the total deposit portfolio as of December 31, 2020. The following table presents the maturity distribution of domestic time deposits of $100,000 or more:
| ($ in thousands) | December 31, 2020 | |||||||
| 3 months or less | $ | 4,111,699 | ||||||
| Over 3 months through 6 months | 1,219,791 | |||||||
| Over 6 months through 12 months | 1,684,566 | |||||||
| Over 12 months | 149,527 | |||||||
| Total | $ | 7,165,583 | ||||||
As of December 31, 2020, foreign time deposits of $100,000 or more consisted of $312.4 million of deposits held in the Company’s branch in Hong Kong and $522.7 million of deposits held in the Company’s subsidiary bank in China. This compares with $611.0 million of deposits held in the Company’s branch in Hong Kong and $595.1 million of deposits held in the Company’s subsidiary bank in China as of December 31, 2019.
Other Sources of Funding
Short-term borrowings consist of borrowings entered into by the Company’s subsidiary, East West Bank (China) Limited, which amounted to $21.0 million as of December 31, 2020, compared with $28.7 million as of December 31, 2019. As of December 31, 2020, short-term borrowings entered into by East West Bank (China) Limited had a fixed interest rate of 3.70% and mature in the first quarter of 2021.
The following table presents selected information for short-term borrowings as of the periods indicated:
| ($ in thousands) | 2020 | 2019 | ||||||||||||
| Year-end balance | $ | 21,009 | $ | 28,669 | ||||||||||
| Weighted-average rate on amount outstanding at year-end | 3.70 | % | 3.69 | % | ||||||||||
| Maximum month-end balance | $ | 68,843 | $ | 59,225 | ||||||||||
| Average amount outstanding | $ | 45,290 | $ | 44,511 | ||||||||||
| Weighted-average rate | 3.69 | % | 3.90 | % | ||||||||||
FHLB advances were $652.6 million as of December 31, 2020, a decrease of $93.3 million or 13% from $745.9 million as of December 31, 2019. As of December 31, 2020, FHLB advances had fixed and floating interest rates ranging from zero percent to 2.34% and remaining maturities between four months and 1.9 years. Of these, $405.0 million have a blended interest rate of 2.22% and mature in the second quarter of 2021.
60
Gross repurchase agreements totaled $300.0 million and $450.0 million as of December 31, 2020 and 2019, respectively. The decrease was due to the extinguishment of $150.0 million of repurchase agreements in the second quarter of 2020. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of December 31, 2020, the Company did not have gross resale agreements that were eligible for netting pursuant to ASC 210-20-45-11. In comparison, net repurchase agreements totaled $200.0 million as of December 31, 2019, after netting gross repurchase agreements of $250.0 million against gross resale agreements. As of December 31, 2020, gross repurchase agreements had interest rates ranging from 2.46% to 2.48%, with original terms between 4.0 years and 8.5 years and remaining maturities between 2.6 years and 2.7 years.
Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the assets are sold. As of December 31, 2020, the collateral for the repurchase agreements was comprised of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and U.S. Treasury securities. To ensure the market value of the underlying collateral remains sufficient, the Company monitors the fair value of collateral pledged relative to the principal amounts borrowed under repurchase agreements. The Company manages liquidity risks related to the repurchase agreements by sourcing funds from a diverse group of counterparties, and entering into repurchase agreements with longer durations, when appropriate. For additional details, see Note 3—Assets Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements in this Form 10-K.
The Company uses long-term debt to provide funding to acquire interest-earning assets, and to enhance liquidity and regulatory capital adequacy. Long-term debt totaled $147.4 million and $147.1 million as of December 31, 2020 and 2019, respectively. Long-term debt consists of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings, as well as with common stock issued by the six wholly owned subsidiaries of the Company in conjunction with these offerings. The junior subordinated debt had a weighted-average interest rate of 2.26% and 3.98% during 2020 and 2019, respectively, with remaining maturities ranging between 13.9 years and 16.7 years as of December 31, 2020. In October 2020, the Company paid off the $1.43 billion in borrowing from the Federal Reserve PPPLF. This debt was included in long-term debt on the Company’s Consolidated Balance Sheet as of June 30 and September 30, 2020.
Regulatory Capital and Ratios
The federal banking agencies have risk-based capital adequacy guidelines intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with a banking organization’s operations. See Item 1. Business — Supervision and Regulation — Regulatory Capital Requirements in this Form 10-K for additional details.
The Company adopted ASU 2016-13 on January 1, 2020. The Company elected the phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital for two years and phases the impact over three years. As a result, the effects of CECL on the Company’s and the Bank’s regulatory capital will be delayed through the year 2021, after which the effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. In April 2020, in recognition of CARES Act requirements, and to facilitate the use of the PPPLF, the U.S banking agencies issued an interim final rule that banking organizations may exclude from leverage and risk-based capital requirements any eligible assets sold or pledged to the Federal Reserve on a non-recourse basis as part of the PPPLF. In addition, under the CARES Act, loans originated by a banking organization under the PPP (whether or not sold or pledged in the PPPLF) will be risk-weighted at zero percent for regulatory capital purposes. Accordingly, the December 31, 2020 capital ratios exclude the impact of the increased allowance for loan losses due to CECL, and PPP loans are risk weighted at zero percent. In addition, the quarterly average PPP loan balances that were pledged as collateral to PPPLF was excluded from the Tier 1 leverage ratio.
61
The following table presents the Company’s and the Bank’s capital ratios as of December 31, 2020 and 2019 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
| Basel III Capital Rules | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | Minimum Regulatory Requirements | Fully Phased-in Minimum Regulatory Requirements (2) | Well- Capitalized Requirements | ||||||||||||||||||||||||||||||||||||||||
| Company | East West Bank | Company | East West Bank | |||||||||||||||||||||||||||||||||||||||||
| Risk-Based Capital Ratios: | ||||||||||||||||||||||||||||||||||||||||||||
| CET 1 capital | 12.7 | % | 12.1 | % | 12.9 | % | 12.9 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||||
| Tier 1 capital | 12.7 | % | 12.1 | % | 12.9 | % | 12.9 | % | 6.0 | % | 8.5 | % | 8.0 | % | ||||||||||||||||||||||||||||||
| Total capital | 14.3 | % | 13.4 | % | 14.4 | % | 13.9 | % | 8.0 | % | 10.5 | % | 10.0 | % | ||||||||||||||||||||||||||||||
Tier 1 leverage (1) | 9.4 | % | 9.0 | % | 10.3 | % | 10.3 | % | 4.0 | % | 4.0 | % | 5.0 | % | ||||||||||||||||||||||||||||||
(1)The Tier 1 leverage well-capitalized requirement applies only to the Bank since there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
(2)As of January 1, 2019, the 2.5% capital conservation buffer above the minimum capital ratios was required in order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers.
The Company is committed to maintaining strong capital at a level sufficientlevels to assure the Company’s investors, customers and regulators that the Company and the Bank are financially sound. As of both December 31, 20192020 and 2018,2019, both the Company and the Bank were considered “well-capitalized,” meetingcontinued to exceed all “well-capitalized” capital requirements on a fully phased-in basisand the required minimum capital requirements under the Basel III Capital Rules.
| Basel III Capital Rules | |||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | Minimum Regulatory Requirements | Well-Capitalized Requirements | Fully Phased- in Minimum Regulatory Requirements | |||||||||||||||||
| Company | East West Bank | Company | East West Bank | ||||||||||||||||||
| Risk-Based Capital Ratios: | |||||||||||||||||||||
| CET 1 capital | 12.9 | % | 12.9 | % | 12.2 | % | 12.1 | % | 4.5 | % | 6.5 | % | 7.0 | % | |||||||
| Tier 1 capital | 12.9 | % | 12.9 | % | 12.2 | % | 12.1 | % | 6.0 | % | 8.0 | % | 8.5 | % | |||||||
| Total capital | 14.4 | % | 13.9 | % | 13.7 | % | 13.1 | % | 8.0 | % | 10.0 | % | 10.5 | % | |||||||
Tier 1 leverage (1) | 10.3 | % | 10.3 | % | 9.9 | % | 9.8 | % | 4.0 | % | 5.0 | % | 4.0 | % | |||||||
Other Matters
LIBOR Transition
On July 27, 2017, the United Kingdom’s FCA, which regulates the LIBOR, announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. The ARRC has proposed the SOFR as its preferred alternative rate for LIBOR. On November 30, 2020, LIBOR’s administrator, the IBA, in coordination with U.K. and U.S. regulators, announced the IBA’s intention to cease publication of the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. Banks are encouraged to cease entering new contracts that use USD LIBOR as a reference rate as soon as practicable by December 31, 2021.
Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are currently indexed to LIBOR. A portion of the Company’s loans, derivatives, investmentdebt securities, resale agreements, FHLB advances, and deposits, as well as all the junior subordinated debt and repurchase agreements are indexed to LIBOR and mature after 2021. The volume of the Company’s products that are indexed to LIBOR is significant and, if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks.risks to the Company.
Due to the uncertainty surrounding the future of LIBOR, the transition is anticipated to span several reporting periods through the end of 2021. Certain actions already taken by2021 and potentially into 2023 with the newly released LIBOR cessation timing. The Company related to the transition of LIBOR include (1) establishinghas created a cross-functional team to identify, assess and monitor risks associated withmanage the transition of LIBOR and other benchmark rates, (2) developing an inventory of LIBOR indexed products, and (3) implementing more robust fallback contract language for new loans, which identifies LIBOR cessation trigger events, provides for an alternative index and permits an adjustment to the margin as applicable. The Company monitors this activity and continues to evaluate the related risks. The Company’s cross-functional team also manages communication of the Company’s transition plans with both internal and external stakeholders and ensuresto ensure that the Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruptiondisruptions during and after the LIBOR transition. The Company has completed a review of LIBOR contracts maturing after 2021 and has begun taking steps to convert these contracts to alternative rates. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see Item 1A. Risk Factors in this Form 10-K.10-K.
Off-Balance Sheet Arrangements and Contractual Obligations
In the course of the Company’s business, the Company may enter into or be a party to transactions that are not recorded on the Consolidated Balance Sheet and are considered to be off-balance sheet arrangements. Off-balance sheet arrangements are any contractual arrangements to which a nonconsolidated entity is a party and under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in a nonconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
Off-Balance Sheet Arrangements
Commitments to extend creditExtend Credit
As a financial service provider, the Company routinely enters into commitments to extend credit such as loan commitments, commercial letters of credit for foreign and domestic trade, standby letters of credit (“SBLCs”), and financial guarantees to meet the financing needs of our customers. Many of these commitments to extend credit may expire without being drawn upon. The credit policies used in underwriting loans to customers are also used to extend these commitments. Under some of these contractual agreements, the Company may also have liabilities contingent upon the occurrence of certain events. The Company’s liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities. Information about the Company’s loan commitments, commercial letters of credit and SBLCs is provided in Note 1512 — Commitments, Contingencies and Related Party Transactions to the Consolidated Financial Statements in this Form 10-K.
Guarantees
In the ordinary course of business, the Company enters into various guarantee agreements in which the Company sells or securitizes loans with recourse. Under these guarantee arrangements, the Company is contingently obligated to repurchase the recourse component of the loans when the loans default. Additional information regarding guarantees is provided in Note 1512 — Commitments, Contingencies and Related Party Transactions to the Consolidated Financial Statements in this Form 10-K.
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Contractual Obligations
The following table presents the Company’s significant fixed and determinable contractual obligations, along with the categories andof payment dates described below as of December 31, 2019:2020:
| ($ in thousands) | Payment Due by Period | |||||||||||||||||||||||||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | After 5 years | Indeterminate Maturity (1) | Total | |||||||||||||||||||||||||||||||||
| On-balance sheet obligations: | ||||||||||||||||||||||||||||||||||||||
| Deposits | $ | 8,608,547 | $ | 373,987 | $ | 17,800 | $ | 15 | $ | 35,862,403 | $ | 44,862,752 | ||||||||||||||||||||||||||
| FHLB advances | 405,000 | 247,612 | — | — | — | 652,612 | ||||||||||||||||||||||||||||||||
| Gross repurchase agreements | — | 300,000 | — | — | — | 300,000 | ||||||||||||||||||||||||||||||||
| Affordable housing partnership and other tax credit investment commitments | 125,142 | 51,674 | 2,496 | 3,414 | — | 182,726 | ||||||||||||||||||||||||||||||||
| Short-term borrowings | 21,009 | — | — | — | — | 21,009 | ||||||||||||||||||||||||||||||||
Long-term debt (2) | — | — | — | 147,376 | — | 147,376 | ||||||||||||||||||||||||||||||||
| Operating lease liabilities | 30,811 | 36,652 | 21,780 | 13,587 | — | 102,830 | ||||||||||||||||||||||||||||||||
| Finance lease liabilities | 975 | 1,000 | 161 | 2,227 | — | 4,363 | ||||||||||||||||||||||||||||||||
| Projected cash payments for post-retirement benefit plan | 349 | 729 | 774 | 6,710 | — | 8,562 | ||||||||||||||||||||||||||||||||
| Total on-balance sheet obligations | 9,191,833 | 1,011,654 | 43,011 | 173,329 | 35,862,403 | 46,282,230 | ||||||||||||||||||||||||||||||||
| Off-balance sheet obligations: | ||||||||||||||||||||||||||||||||||||||
Contractual interest payments (3) | 181,038 | 39,234 | 6,990 | 29,158 | — | 256,420 | ||||||||||||||||||||||||||||||||
| Total off-balance sheet obligations | 181,038 | 39,234 | 6,990 | 29,158 | — | 256,420 | ||||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 9,372,871 | $ | 1,050,888 | $ | 50,001 | $ | 202,487 | $ | 35,862,403 | $ | 46,538,650 | ||||||||||||||||||||||||||
(1)Includes deposits with no defined maturity, such as noninterest-bearing demand, interest-bearing checking, money-market and savings accounts.
(2)Represents junior subordinated debt, which is subject to call options where early redemption requires appropriate notice.
(3)Represents the future interest obligations related to interest-bearing time deposits, FHLB, gross repurchase agreements, short-term borrowings and long-term debt in the normal course of business. These interest obligations assume no early debt redemption. The Company estimated variable interest rate payments using December 31, 2020 rates, which the company held constant until maturity.
| ($ in thousands) | Payment Due by Period | |||||||||||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | After 5 years | Indeterminate Maturity (1) | Total | |||||||||||||||||||
| On-balance sheet obligations: | ||||||||||||||||||||||||
| Deposits | $ | 9,653,276 | $ | 488,295 | $ | 43,657 | $ | 29,080 | $ | 27,109,951 | $ | 37,324,259 | ||||||||||||
| FHLB advances | 100,000 | 645,915 | — | — | — | 745,915 | ||||||||||||||||||
| Gross repurchase agreements | — | 150,000 | 300,000 | — | — | 450,000 | ||||||||||||||||||
| Affordable housing partnership and other tax credit investment commitments | 121,875 | 45,498 | 23,898 | 2,538 | — | 193,809 | ||||||||||||||||||
| Short-term borrowings | 28,669 | — | — | — | — | 28,669 | ||||||||||||||||||
Long-term debt (2) | — | — | — | 147,101 | — | 147,101 | ||||||||||||||||||
| Operating lease liabilities | 29,747 | 44,509 | 19,725 | 14,102 | — | 108,083 | ||||||||||||||||||
| Finance lease liabilities | 930 | 1,548 | 397 | 2,294 | — | 5,169 | ||||||||||||||||||
| Projected cash payments for post-retirement benefit plan | 339 | 708 | 751 | 7,103 | — | 8,901 | ||||||||||||||||||
| Total on-balance sheet obligations | 9,934,836 | 1,376,473 | 388,428 | 202,218 | 27,109,951 | 39,011,906 | ||||||||||||||||||
| Off-balance sheet obligations: | ||||||||||||||||||||||||
Contractual interest payments (3) | 201,752 | 78,506 | 22,231 | 62,684 | — | 365,173 | ||||||||||||||||||
| Total off-balance sheet obligations | 201,752 | 78,506 | 22,231 | 62,684 | — | 365,173 | ||||||||||||||||||
| Total contractual obligations | $ | 10,136,588 | $ | 1,454,979 | $ | 410,659 | $ | 264,902 | $ | 27,109,951 | $ | 39,377,079 | ||||||||||||
Risk Management
Overview
In the course of conducting the Company’sits businesses, the Company is exposed to a variety of risks, some of which are inherent to the financial services industry and others of which are more specific to the Company’s businesses. The Company operates under a Board approvedBoard-approved ERM framework, which outlines itsthe company-wide approach to risk management and oversight, and describes the structures and practices employed to manage the current and emerging risks inherent to the Company. The Company’s ERM program incorporates risk management throughout the organization in identifying, managing, monitoring, and reporting risks. Our ERM programIt identifies EWBC’sthe Company’s major risk categories as credit risk; liquidity risk; capital risk, strategic risk, credit risk, liquidity risk,risk; market risk,risk; operational risk, reputational risk,risk; regulatory, compliance and legal risks; accounting and compliance risk. ERM is comprised of senior management of the Companytax risks, and headed by the Chief Risk Officer.strategic and reputational risks.
The Board of Directors monitors the ERM program to ensure independent review and oversight of the Company’s risk appetite and control environment. The Risk Oversight Committee provides focused oversight of the Company’s identified enterprise risk categories on behalf of the full Board of Directors. Management applies variousUnder the direction of the Risk Oversight Committee, management committees apply targeted strategies to reduce the risks to which the Company’s operations are exposed and the risks are overseen by the various management committees of which the Risk Oversight Committee is the focal point for the monitoring and review of enterprise risk.exposed.
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Credit Risk Management
Credit risk is the risk that a borrower or counterparty will fail to perform according to the terms and conditions of a loan or investment and expose the Company to loss. Credit risk exists with many of ourthe Company’s assets and exposures such as loans and certain derivatives. The majority of ourthe Company’s credit risk is associated with lending activities.
The Risk Oversight Committee has primary oversight responsibility of identifying enterprise risk categories including credit risk. The Risk Oversight Committee monitors management’s assessment of asset quality and credit risk trends, credit quality administration and underwriting standards,standards; as well as portfolio credit risk management strategies and processes, tosuch as diversification and liquidity; all of which enable management to control credit risk including diversification and liquidity.risk. At the management level, the Credit Risk Management Committee has primary oversight responsibility for credit risk. The Credit Risk Management Committee keeps senior management and the Board’s Risk Oversight Committee informed about enterprise-wide credit risk issues. The Senior Credit Supervision function manages credit policy and provides the resources to manage the line of business transactional credit risk, assuring that all exposure is risk ratedrisk-rated according to the requirements of the credit risk rating policy. The Senior Credit Supervision function evaluates and reports on the overall credit risk portfolioexposure to senior management and the Risk Oversight Committee. The Independent Asset Review function supports a strong credit risk management culture by providing independent and objective assessments of the qualityassessment of underwriting and documentation quality, reporting directly to the Board’s Risk Oversight Committee.
The Company assesses overall credit quality performance of the loan held-for-investment portfolio through an integrated analysis of specific performance ratios. This approach forms the basis of the discussion in the sections immediately following: Nonperforming Assets, TDRs and Allowance for Credit Losses.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, OREO, and other nonperforming assets. OREOOther nonperforming assets and other nonperforming assetsOREO are repossessed assets and properties, respectively, acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. Generally, loansLoans are generally placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. Collectability is generally assessed based on economic and business conditions, the borrower’s financial conditionscondition and the adequacy of collateral, if any. For additional details regarding the Company’s non-PCI nonaccrual loan policy, see Note 1 — Summary of Significant Accounting Policies — Loans Held-for-Investment to the Consolidated Financial Statements in this Form 10-K.
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The following table presents information regarding non-PCI nonperforming assets as of the periods indicated:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||
| Nonaccrual Loans | Non-PCI Nonaccrual Loans | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| C&I | $ | 133,939 | $ | 74,835 | $ | 43,840 | $ | 69,213 | $ | 81,256 | ||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||
| CRE | 46,546 | 16,441 | 24,218 | 26,986 | 26,907 | |||||||||||||||||||||||||||
| Multifamily residential | 3,668 | 819 | 1,260 | 1,717 | 2,984 | |||||||||||||||||||||||||||
| Construction and land | — | — | — | 3,973 | 5,326 | |||||||||||||||||||||||||||
| Total CRE | 50,214 | 17,260 | 25,478 | 32,676 | 35,217 | |||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||
| Single-family residential | 16,814 | 14,865 | 5,259 | 5,923 | 4,214 | |||||||||||||||||||||||||||
| HELOCs | 11,696 | 10,742 | 8,614 | 4,006 | 2,130 | |||||||||||||||||||||||||||
| Total residential mortgage | 28,510 | 25,607 | 13,873 | 9,929 | 6,344 | |||||||||||||||||||||||||||
| Other consumer | 2,491 | 2,517 | 2,502 | 2,491 | — | |||||||||||||||||||||||||||
| Total nonaccrual loans | 215,154 | 120,219 | 85,693 | 114,309 | 122,817 | |||||||||||||||||||||||||||
| OREO, net | 15,824 | 125 | 133 | 830 | 6,745 | |||||||||||||||||||||||||||
| Other nonperforming assets | 3,890 | 1,167 | 7,167 | — | — | |||||||||||||||||||||||||||
| Total nonperforming assets | $ | 234,868 | $ | 121,511 | $ | 92,993 | $ | 115,139 | $ | 129,562 | ||||||||||||||||||||||
| Nonperforming assets to total assets | 0.45 | % | 0.27 | % | 0.23 | % | 0.31 | % | 0.37 | % | ||||||||||||||||||||||
| Nonaccrual loans to loans held-for-investment | 0.56 | % | 0.35 | % | 0.26 | % | 0.39 | % | 0.48 | % | ||||||||||||||||||||||
| Allowance for loan losses to nonaccrual loans | 288.16 | % | 298.03 | % | 363.30 | % | 251.19 | % | 212.12 | % | ||||||||||||||||||||||
| Net charge-offs to average loans held-for-investment | 0.17 | % | 0.16 | % | 0.13 | % | 0.08 | % | 0.15 | % | ||||||||||||||||||||||
| TDRs included in nonperforming loans | $ | 71,924 | $ | 54,566 | $ | 30,315 | $ | 62,909 | $ | 38,983 | ||||||||||||||||||||||
| ($ in thousands) | December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Nonaccrual loans: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| C&I | $ | 74,835 | $ | 43,840 | $ | 69,213 | $ | 81,256 | $ | 64,883 | ||||||||||
| CRE: | ||||||||||||||||||||
| CRE | 16,441 | 24,218 | 26,986 | 26,907 | 29,345 | |||||||||||||||
| Multifamily residential | 819 | 1,260 | 1,717 | 2,984 | 16,268 | |||||||||||||||
| Construction and land | — | — | 3,973 | 5,326 | 700 | |||||||||||||||
| Total CRE | 17,260 | 25,478 | 32,676 | 35,217 | 46,313 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||
| Single-family residential | 14,865 | 5,259 | 5,923 | 4,214 | 8,759 | |||||||||||||||
| HELOCs | 10,742 | 8,614 | 4,006 | 2,130 | 1,743 | |||||||||||||||
| Total residential mortgage | 25,607 | 13,873 | 9,929 | 6,344 | 10,502 | |||||||||||||||
| Other consumer | 2,517 | 2,502 | 2,491 | — | — | |||||||||||||||
| Total nonaccrual loans | 120,219 | 85,693 | 114,309 | 122,817 | 121,698 | |||||||||||||||
| OREO, net | 125 | 133 | 830 | 6,745 | 7,034 | |||||||||||||||
| Other nonperforming assets | 1,167 | 7,167 | — | — | — | |||||||||||||||
| Total nonperforming assets | $ | 121,511 | $ | 92,993 | $ | 115,139 | $ | 129,562 | $ | 128,732 | ||||||||||
Non-PCI nonperforming assets to total assets (1) | 0.27 | % | 0.23 | % | 0.31 | % | 0.37 | % | 0.40 | % | ||||||||||
Non-PCI nonaccrual loans to loans held-for-investment (1) | 0.35 | % | 0.26 | % | 0.39 | % | 0.48 | % | 0.51 | % | ||||||||||
| Troubled debt restructurings (“TDR”) included in nonperforming loans | $ | 54,566 | $ | 30,315 | $ | 62,909 | $ | 38,983 | $ | 53,095 | ||||||||||
| Allowance for loan losses to non-PCI nonaccrual loans | 298.03 | % | 363.30 | % | 251.19 | % | 212.12 | % | 217.72 | % | ||||||||||
Period-over-period changes to nonaccrual loans represent loans that are placed on nonaccrual status in accordance with the Company’s accounting policy, offset by reductions forfrom loans that are repaid, paid down, charged off, sold, foreclosed, or no longer classified as nonaccrual as a result of continued performance and improvement in the borrowers’ financial conditionscondition and loan repayments.repayment capabilities. Nonaccrual loans were $120.2$215.2 million or 0.56% of loans held-for-investments, as of December 31, 2019, an increase of $34.52020, compared with $120.2 million or 40% from $85.7 million0.35% of loans held-for-investments, as of December 31, 2018. This increase in2019. Year-over-year, nonaccrual loans wasincreased by $94.9 million or 79%, primarily driven by three energyinflows of C&I oil & gas loans totaling $33.0 million from ourand CRE loans to nonaccrual status, partially offset by charge-offs and sales of C&I loan portfolio. These loans were primarily secured by collateral. Nonaccrual loans, as well as a percentagetransfer of loans held-for-investment increaseda CRE loan to 0.35% as of December 31, 2019 from 0.26% as of December 31, 2018.OREO. C&I nonaccrual loans were 62% and 51% of total nonaccrual loans as of both December 31, 20192020 and 2018, respectively. Credit risks related to the C&I nonaccrual loans were partially mitigated by the collateral in place.2019. As of December 31, 2019, $35.62020, $106.4 million, or 30% of the $120.2 million non-PCI nonaccrual loans consisted49% of nonaccrual loans that were less than 90 days delinquent. In comparison, $23.8$35.6 million, or 28% of the $85.7 million non-PCI nonaccrual loans consisted30% of nonaccrual loans that were less than 90 days delinquent as of December 31, 2018.
OREO was $15.8 million as of December 31, 2020, an increase of $15.7 million from $125 thousand as of December 31, 2019 due to the Company taking possession of one retail CRE property located in Southern California.
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The following table presents accruing loans past due by loan portfolio segments as of December 31, 2020 and 2019:
| ($ in thousands) | Total Accruing Past Due Loans (1) | Change | Percentage of Total Loans Outstanding | |||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 9,717 | $ | 48,155 | $ | (38,438) | (80) | % | 0.07 | % | 0.40 | % | ||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||
| CRE | 375 | 24,807 | (24,432) | (98) | % | 0.00 | % | 0.24 | % | |||||||||||||||||||||||||||||||||||
| Multifamily residential | 1,818 | 729 | 1,089 | 149 | % | 0.06 | % | 0.03 | % | |||||||||||||||||||||||||||||||||||
| Construction and land | 19,900 | — | 19,900 | 100 | % | 3.32 | % | — | % | |||||||||||||||||||||||||||||||||||
| Total CRE | 22,093 | 25,536 | (3,443) | (13) | % | 0.15 | % | 0.19 | % | |||||||||||||||||||||||||||||||||||
| Total commercial | 31,810 | 73,691 | (41,881) | (57) | % | 0.11 | % | 0.29 | % | |||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 12,494 | 20,517 | (8,023) | (39) | % | 0.15 | % | 0.29 | % | |||||||||||||||||||||||||||||||||||
| HELOCs | 6,052 | 7,064 | (1,012) | (14) | % | 0.38 | % | 0.48 | % | |||||||||||||||||||||||||||||||||||
| Total residential mortgage | 18,546 | 27,581 | (9,035) | (33) | % | 0.19 | % | 0.32 | % | |||||||||||||||||||||||||||||||||||
| Other consumer | 234 | 11 | 223 | NM | 0.14 | % | 0.00 | % | ||||||||||||||||||||||||||||||||||||
| Total consumer | 18,780 | 27,592 | (8,812) | (32) | % | 0.19 | % | 0.31 | % | |||||||||||||||||||||||||||||||||||
| Total | $ | 50,590 | $ | 101,283 | $ | (50,693) | (50) | % | 0.13 | % | 0.29 | % | ||||||||||||||||||||||||||||||||
NM — Not meaningful.
(1)There were no accruing loans past due 90 days or more as of both December 31, 2020 and 2019.
Troubled Debt Restructurings
TDRs are loans wherefor which contractual terms have been modified by the Company for economic or legal reasons related to a borrower’s financial difficulties, and grantsfor which a concession to the borrower was granted that the Company would not otherwise consider. For additional details regardingThe Company’s loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the Company’s TDR policy, see Note 1—Summary of Significant Accounting Policies— Troubled Debt Restructurings to the Consolidated Financial Statements in this Form 10-K.
borrower’s financial needs. The following table presents the performing and nonperforming TDRs by loan typeportfolio segments as of December 31, 20192020 and 2018:
| ($ in thousands) | December 31, | |||||||||||||||
| 2019 | 2018 | |||||||||||||||
Performing TDRs | Nonperforming TDRs | Performing TDRs | Nonperforming TDRs | |||||||||||||
| Commercial: | ||||||||||||||||
| C&I | $ | 39,208 | $ | 41,014 | $ | 13,248 | $ | 10,715 | ||||||||
| CRE: | ||||||||||||||||
| CRE | 5,177 | 11,503 | 6,134 | 17,272 | ||||||||||||
| Multifamily residential | 3,644 | 229 | 4,300 | 260 | ||||||||||||
| Construction and land | 19,691 | — | — | — | ||||||||||||
| Total CRE | 28,512 | 11,732 | 10,434 | 17,532 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgage: | ||||||||||||||||
| Single-family residential | 7,346 | 1,098 | 8,201 | 325 | ||||||||||||
| HELOCs | 2,832 | 722 | 1,342 | 1,743 | ||||||||||||
| Total residential mortgage | 10,178 | 1,820 | 9,543 | 2,068 | ||||||||||||
| Total TDRs | $ | 77,898 | $ | 54,566 | $ | 33,225 | $ | 30,315 | ||||||||
2019. AsThe allowance for loan losses for TDRs was $10.3 million as ofDecember 31, 2020 and $400 thousand as of December 31, 2019, performing2019.
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
| Performing TDRs | Nonperforming TDRs | Performing TDRs | Nonperforming TDRs | |||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 85,767 | $ | 68,451 | $ | 39,208 | $ | 41,014 | ||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||
| CRE | 24,851 | — | 5,177 | 11,503 | ||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 3,310 | 1,448 | 3,644 | 229 | ||||||||||||||||||||||||||||||||||||||||
| Construction and land | 19,900 | — | 19,691 | — | ||||||||||||||||||||||||||||||||||||||||
| Total CRE | 48,061 | 1,448 | 28,512 | 11,732 | ||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 6,748 | 1,169 | 7,346 | 1,098 | ||||||||||||||||||||||||||||||||||||||||
| HELOCs | 2,631 | 856 | 2,832 | 722 | ||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 9,379 | 2,025 | 10,178 | 1,820 | ||||||||||||||||||||||||||||||||||||||||
| Total TDRs | $ | 143,207 | $ | 71,924 | $ | 77,898 | $ | 54,566 | ||||||||||||||||||||||||||||||||||||
67
Performing TDRs were $77.9 million, an increase of $44.7 million or 134% from $33.2$143.2 million as of December 31, 2018.2020, an increase of $65.3 million or 84% from $77.9 million as of December 31, 2019. This increase mainly reflected performing$68.4 million in newly designated C&I constructionTDRs, primarily from general manufacturing & wholesale, and HELOC loans that wereoil & gas sectors, and $21.2 million in newly designated CRE TDRs. Over 85% of the performing TDRs were current as TDRsof both December 31, 2020 and the transfer of C&I, CRE and HELOC loans from nonperforming status, partially offset by paydowns and payoffs. 2019.
Nonperforming TDRs were $71.9 million as of December 31, 2020, an increase of $17.4 million or 32% from $54.6 million as of December 31, 2019, an2019. This increase primarily reflected additions to nonperforming TDR, from C&I oil & gas loans, partially offset by a sale of $24.3one C&I loan and a transfer of one CRE loan to OREO.
Existing TDRs that were subsequently modified in response to the COVID-19 pandemic continue to be classified as TDRs. As of December 31, 2020, there were four TDRs totaling $11.8 million or 80% from $30.3 millionthat were provided subsequent modifications related to the COVID-19 pandemic.
Loan Modifications Due to the COVID-19 Pandemic
Beginning in late March 2020, the Company granted various commercial and consumer loan accommodation programs, predominantly in the form of payment deferrals, to provide relief to borrowers experiencing financial hardship due to COVID-19 pandemic. Section 4013 of the CARES Act, as amended by the CAA, permits a financial institution to elect to temporarily suspend TDR accounting under ASC Subtopic 310-40 in certain circumstances. To be eligible under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2018. This increase reflected nonperforming C&I, single-family residential2019; and HELOC(3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the federal National Emergency or (b) January 1, 2022. The federal banking regulators, in consultation with the FASB, issued the Interagency Statement on April 7, 2020 confirming that, for loans thatnot subject to Section 4013 of the CARES Act, short-term modifications (i.e. six months or less) made on a good faith basis in response to the COVID-19 pandemic to borrowers who were newly designatedcurrent as of the implementation date of a loan modification, or modifications granted under government mandated modification programs, are not considered as TDRs partially offset by paydowns and payoffs of several nonperforming C&I and CRE loans, and the transfer of C&I, CRE and HELOC loans to performing status.
The delinquency aging of loans modified related to the COVID-19 pandemic is frozen at the time of the modification. As a result, the recognition of delinquent loans, nonaccrual status, and loan net charge-offs may be delayed for certain borrowers who are enrolled in these loan modification programs, which would have otherwise moved into past due or nonaccrual status. Interest income continues to be recognized over the accommodation period.
68
The following table presentsprovides a summary of the recorded investment balances for non-PCI impaired loansCOVID-19 pandemic-related loan modifications that remained under their modified terms as of December 31, 20192020. The amounts represent loan modifications that meet the criteria under Section 4013 of the CARES Act, as amended by the CAA, or Interagency Statement and 2018:therefore are not considered TDRs. The amounts exclude loan modifications related to the COVID-19 pandemic made on existing TDRs. A loan is counted once in the table regardless of the number of accommodations received.
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Loans | Outstanding Balance | % of Balance of Respective Loan Portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment deferral and forbearance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | 14 | $ | 36,266 | 0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 63 | 597,972 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 4 | 17,111 | 1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 3 | 66,629 | 11 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 70 | 681,712 | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 84 | 717,978 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 501 | 208,347 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 102 | 39,469 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 603 | 247,816 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 603 | 247,816 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 687 | $ | 965,794 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, | |||||||||||||
| 2019 | 2018 | |||||||||||||
| Amount | % | Amount | % | |||||||||||
| Commercial: | ||||||||||||||
| C&I | $ | 114,042 | 58 | % | $ | 57,088 | 48 | % | ||||||
| CRE: | ||||||||||||||
| CRE | 21,618 | 11 | % | 30,352 | 26 | % | ||||||||
| Multifamily residential | 4,464 | 2 | % | 5,560 | 5 | % | ||||||||
| Construction and land | 19,691 | 10 | % | — | — | % | ||||||||
| Total CRE | 45,773 | 23 | % | 35,912 | 31 | % | ||||||||
| Total commercial | 159,815 | 81 | % | 93,000 | 79 | % | ||||||||
| Consumer: | ||||||||||||||
| Residential mortgage: | ||||||||||||||
| Single-family residential | 22,211 | 11 | % | 13,460 | 11 | % | ||||||||
| HELOCs | 13,574 | 7 | % | 9,956 | 8 | % | ||||||||
| Total residential mortgage | 35,785 | 18 | % | 23,416 | 19 | % | ||||||||
| Other consumer | 2,517 | 1 | % | 2,502 | 2 | % | ||||||||
| Total consumer | 38,302 | 19 | % | 25,918 | 21 | % | ||||||||
| Total non-PCI impaired loans | $ | 198,117 | 100 | % | $ | 118,918 | 100 | % | ||||||
The above table excludes loan modifications related to the COVID-19 pandemic that did not meet the criteria provided under Section 4013 of the CARES Act, as amended by the CAA, or the Interagency Statement, and that were evaluated and deemed to not be classified as TDRs. The determination to not consider a modification a TDR was made on the premise that the amount of the delayed restructured payments was insignificant relative to the unpaid principal or collateral value of the loan, resulting in an insignificant shortfall in the contractual amount due from the borrower, or an insignificant delay in the timing of the restructured payment period relative to the payment frequency under the loan’s original contractual maturity or expected duration. The above table also excludes loan modifications related to the COVID-19 pandemic made on existing TDRs.
The COVID-19 pandemic-related loan modifications primarily consisted of payment deferrals three months or less in duration, in the form of either principal payment deferrals, where the borrower was still paying interest, or full principal and interest payment deferrals. Other forbearance programs consisted of interest rate concessions. The deferred payments for commercial loans are either repaid at contractual maturity, or spread over the remaining contractual term of the loan. The deferred payments for consumer loans are repaid under defined payment plans between six to 36 months after the deferral period ends, or the loan term is extended beyond the contractual maturity by the number of payments deferred.
As of December 31, 2019,2020, the allowance forCompany had $965.8 million of loans under payment deferral and forbearance programs, a decrease of $602.1 million or 38% from $1.57 billion as of September 30, 2020, and a decrease of $1.86 billion or 66% from $2.82 billion as of June 30, 2020. The CRE COVID-19 loan losses included $5.6 million for impaired loans with a total recorded investment balance of $68.4 million. In comparison, the allowance for loan losses included $4.0 million for impaired loans with a total recorded investment balance of $31.1 millionmodifications outstanding as of December 31, 2018.2020 were primarily concentrated in the hotel and retail CRE portfolios. Of the CRE COVID-19 loan modifications, 73% were making partial payments, generally as interest payments, while 27% were under full payment deferral. Modifications are considered to have exited active accommodation after the borrower exited the modification program or after the modification period expired. The loans with expired COVID-19 modifications were predominantly current as of December 31, 2020. The Company monitors the delinquency status of loans exiting relief programs on an ongoing basis. The impacts of the COVID-19 loan modifications were considered in determination of the allowance for credit loss.
69
Allowance for Credit Losses
The Company’s methodology for determining the allowance for loan losses includes an estimate of expected credit losses on a collective basis for loan groups with similar risk characteristics, and a specific allowance for loans that are individually evaluated. For collectively evaluated loans, the Consolidated Statement of Income.Company uses quantitative models to forecast expected credit losses and these models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions, if such forecasts are considered reasonable and supportable. The Company also considers qualitative factors in determining the allowance for loan losses. Qualitative adjustments are used to capture characteristics in the portfolio that impact expected credit losses, and which are not otherwise fully captured within the Company’s expected credit loss models.
In addition to the allowance for loan losses, the Company maintains an allowance for unfunded credit commitments. The Company has three general areas for which it provides the allowance for unfunded credit commitments: recourse obligations for loans sold, letters of credit, and unfunded lending commitments. The Company’s methodology for determining the allowance for unfunded lending commitments calculation uses the lifetime loss rates of the on-balance sheet commitment. Recourse obligations for loans sold and letters of credit use the weighted loss rates for the segment of the individual credit.
The Company employs a disciplined process and methodology to establish its allowance for loan losses each quarter. The process for estimating the allowance for loan losses takes into consideration many factors, including historical and forecasted loan loss trends, loan-level credit quality ratings and loan-specific risk characteristics. In addition to regular quarterly reviews of the adequacy of the allowance for loan losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio. Determining the appropriateness of the allowance for loan losses is complex and requires judgement by management about the effect of matters that are inherently uncertain.
The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent losses in the loan portfolio, including unfunded credit reserves. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio.facilities. While the Company believes that the allowance for loancredit losses iswas appropriate as of December 31, 2019,2020, future allowance levels may increase or decrease based on a variety of factors, including but not limited to, accounting standard and regulatory changes, loan growth, portfolio performance and general economic conditions. The Company adopted ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): MeasurementFor a description of Credit Losses on Financial Instrument on January 1, 2020. For additional information, see Note 1 — Summary of Significant Accounting Policies— Recent Accounting Pronouncements — Standards Adopted in 2020. The calculation ofthe policies, methodologies and judgements used to determine the allowance for credit losses, involves subjective and complex judgments. For additional details about the Company’s allowance for credit losses, including the methodologies used, see Item 7. MD&A — Critical Accounting Policies and Estimates, Note 1 — Summary of Significant Accounting Policies and Note 76 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-K.
70
The following table presents an allocation of the allowance for loan losses by loan portfolio segments as of the periods indicated:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance Allocation | % of Loan Type to Total Loans | Allowance Allocation | % of Loan Type to Total Loans | Allowance Allocation | % of Loan Type to Total Loans | Allowance Allocation | % of Loan Type to Total Loans | Allowance Allocation | % of Loan Type to Total Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 398,040 | 36 | % | $ | 238,376 | 35 | % | $ | 189,117 | 37 | % | $ | 163,058 | 37 | % | $ | 142,167 | 38 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 163,791 | 29 | % | 40,509 | 30 | % | 40,666 | 28 | % | 40,809 | 31 | % | 47,559 | 31 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 27,573 | 8 | % | 22,826 | 8 | % | 19,885 | 8 | % | 19,537 | 7 | % | 17,911 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 10,239 | 2 | % | 19,404 | 2 | % | 20,290 | 2 | % | 26,881 | 2 | % | 24,989 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 201,603 | 39 | % | 82,739 | 40 | % | 80,841 | 38 | % | 87,227 | 40 | % | 90,459 | 40 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Commercial | 599,643 | 75 | % | 321,115 | 75 | % | 269,958 | 75 | % | 250,285 | 77 | % | 232,626 | 78 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 15,520 | 21 | % | 28,527 | 20 | % | 31,340 | 19 | % | 26,362 | 16 | % | 19,795 | 14 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 2,690 | 4 | % | 5,265 | 4 | % | 5,774 | 5 | % | 7,354 | 6 | % | 7,506 | 7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 18,210 | 25 | % | 33,792 | 24 | % | 37,114 | 24 | % | 33,716 | 22 | % | 27,301 | 21 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 2,130 | 0 | % | 3,380 | 1 | % | 4,250 | 1 | % | 3,127 | 1 | % | 593 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Consumer | 20,340 | 25 | % | 37,172 | 25 | % | 41,364 | 25 | % | 36,843 | 23 | % | 27,894 | 22 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 619,983 | 100 | % | $ | 358,287 | 100 | % | $ | 311,322 | 100 | % | $ | 287,128 | 100 | % | $ | 260,520 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average loans held-for-investment | $ | 36,796,989 | $ | 33,372,890 | $ | 30,209,219 | $ | 27,237,981 | $ | 24,223,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held-for-investment | $ | 38,390,955 | $ | 34,778,539 | $ | 32,385,189 | $ | 28,975,718 | $ | 25,503,139 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses to loans held-for-investment | 1.61 | % | 1.03 | % | 0.96 | % | 0.99 | % | 1.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs to average loans held-for-investment | 0.17 | % | 0.16 | % | 0.13 | % | 0.08 | % | 0.15 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The allowance for loan losses was $620.0 million as of December 31, 2020, an increase of $261.7 million from $358.3 million as of December 31, 2019. This increase to allowance reflects a summarydeterioration in the macroeconomic conditions and outlook as a result of activitiesthe COVID-19 pandemic, and the adoption of CECL. The change is comprised of the following:
•a net $125.2 million increase due to the adoption of CECL on January 1, 2020,
•subsequent to January 1, 2020, a net $150.1 million addition in the allowance against commercial loans, predominantly in C&I and CRE income-producing, and
•a net $13.6 million reduction in the allowance against consumer loans, predominantly in single-family residential and other consumer.
71
The Company considers multiple economic scenarios to develop the estimate of the allowance for credit lossesloans. The scenarios consist of a base forecast representing management's view of the most likely outcome, combined with downside and upside scenarios reflecting possible worsening or improving economic conditions. The base forecast assumed near-term economic stress and the economy beginning to recover in 2021, based on anticipated economic stimulus from the government and the Federal Reserve maintaining its target fed funds range. The downside scenario assumed more sustained adverse economic impact resulting from the COVID-19 pandemic, as compared to the base forecast. The upside scenario assumed a more optimistic view for the periods indicated:economic recovery, as compared with the base forecast, including travel, business and other restrictions ending sooner, and improved consumer optimism based on more rapid distribution of COVID-19 vaccines. The Company applies management judgment to add qualitative factors for the impact of COVID-19 pandemic on industry and CRE sectors that are affected by the pandemic.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 311,322 | $ | 287,128 | $ | 260,520 | $ | 264,959 | $ | 261,679 | ||||||||||
| Provision for loan losses | 100,093 | 65,007 | 49,069 | 31,718 | 6,569 | |||||||||||||||
| Gross charge-offs: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| C&I | (73,985 | ) | (59,244 | ) | (38,118 | ) | (47,739 | ) | (20,423 | ) | ||||||||||
| CRE: | ||||||||||||||||||||
| CRE | (1,021 | ) | — | — | (464 | ) | (1,052 | ) | ||||||||||||
| Multifamily residential | — | — | (635 | ) | (29 | ) | (1,650 | ) | ||||||||||||
| Construction and land | — | — | (149 | ) | (117 | ) | (493 | ) | ||||||||||||
| Total CRE | (1,021 | ) | — | (784 | ) | (610 | ) | (3,195 | ) | |||||||||||
| Consumer: | ||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||
| Single-family residential | (11 | ) | (1 | ) | (1 | ) | (137 | ) | (36 | ) | ||||||||||
| HELOCs | — | — | (55 | ) | (9 | ) | (98 | ) | ||||||||||||
| Total residential mortgage | (11 | ) | (1 | ) | (56 | ) | (146 | ) | (134 | ) | ||||||||||
| Other consumer | (50 | ) | (188 | ) | (17 | ) | (13 | ) | (502 | ) | ||||||||||
| Total gross charge-offs | (75,067 | ) | (59,433 | ) | (38,975 | ) | (48,508 | ) | (24,254 | ) | ||||||||||
| Gross recoveries: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| C&I | 14,501 | 10,417 | 11,371 | 9,003 | 9,259 | |||||||||||||||
| CRE: | ||||||||||||||||||||
| CRE | 5,209 | 5,194 | 2,111 | 1,488 | 2,488 | |||||||||||||||
| Multifamily residential | 1,856 | 1,757 | 1,357 | 1,476 | 4,298 | |||||||||||||||
| Construction and land | 536 | 740 | 259 | 203 | 4,647 | |||||||||||||||
| Total CRE | 7,601 | 7,691 | 3,727 | 3,167 | 11,433 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||
| Single-family residential | 136 | 1,214 | 546 | 401 | 323 | |||||||||||||||
| HELOCs | 7 | 38 | 24 | 7 | 54 | |||||||||||||||
| Total residential mortgage | 143 | 1,252 | 570 | 408 | 377 | |||||||||||||||
| Other consumer | 19 | 3 | 152 | 323 | 373 | |||||||||||||||
| Total gross recoveries | 22,264 | 19,363 | 15,820 | 12,901 | 21,442 | |||||||||||||||
| Net charge-offs | (52,803 | ) | (40,070 | ) | (23,155 | ) | (35,607 | ) | (2,812 | ) | ||||||||||
| Foreign currency translation adjustments | (325 | ) | (743 | ) | 694 | (550 | ) | (477 | ) | |||||||||||
| Allowance for loan losses, end of period | 358,287 | 311,322 | 287,128 | 260,520 | 264,959 | |||||||||||||||
| Allowance for unfunded credit commitments, beginning of period | 12,566 | 13,318 | 16,121 | 20,360 | 12,712 | |||||||||||||||
| (Reversal of) provision for unfunded credit commitments | (1,408 | ) | (752 | ) | (2,803 | ) | (4,239 | ) | 7,648 | |||||||||||
| Allowance for unfunded credit commitments, end of period | 11,158 | 12,566 | 13,318 | 16,121 | 20,360 | |||||||||||||||
| Allowance for credit losses | $ | 369,445 | $ | 323,888 | $ | 300,446 | $ | 276,641 | $ | 285,319 | ||||||||||
| Average loans held-for-investment | $ | 33,372,890 | $ | 30,209,219 | $ | 27,237,981 | $ | 24,223,535 | $ | 22,140,443 | ||||||||||
| Loans held-for-investment | $ | 34,778,539 | $ | 32,385,189 | $ | 28,975,718 | $ | 25,503,139 | $ | 23,643,748 | ||||||||||
| Allowance for loan losses to loans held-for-investment | 1.03 | % | 0.96 | % | 0.99 | % | 1.02 | % | 1.12 | % | ||||||||||
| Net charge-offs to average loans held-for-investment | 0.16 | % | 0.13 | % | 0.08 | % | 0.15 | % | 0.01 | % | ||||||||||
As of December 31, 2019,2020, PPP loans outstanding were $1.57 billion. As these loans are 100% guaranteed by SBA, the Company expects these loans will have zero expected loss. Accordingly, as of December 31, 2020, these loans had no related allowance for loan losses.
2020 net charge-offs were $63.2 million or 0.17% of average loans-held-for-investment, compared with $52.8 million, or 0.16% of average loan held-for-investment, in 2019. The year-over-year change in net loan charge-offs was largely due to higher CRE charge-offs, compared with recoveries in 2019. The COVID-19 pandemic may continue to impact the credit quality of our loan portfolio. Although the potential impacts were considered in our allowance for loan losses, amountedpayment deferral activities instituted in response to $358.3 million or 1.03%the COVID-19 pandemic could delay the recognition of loans held-for-investment, compared with $311.3 million or 0.96% and $287.1 million or 0.99% of loans held-for-investment as of December 31, 2018 and 2017, respectively. some loan charge-offs.
The increasefollowing tables summarize activity in the allowance for loan losses was largely due tofor loans by loan portfolio growth, as well as downward migration insegments for the credit risk ratings of C&I loans.periods indicated:
| ($ in thousands) | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 238,376 | $ | 40,509 | $ | 22,826 | $ | 19,404 | $ | 28,527 | $ | 5,265 | $ | 3,380 | $ | 358,287 | ||||||||||||||||||||||||||||||||||||||||||||||
| Impact of ASU 2016-13 adoption | 74,237 | 72,169 | (8,112) | (9,889) | (3,670) | (1,798) | 2,221 | 125,158 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on loans | (a) | 145,212 | 55,864 | 10,879 | 644 | (9,922) | (605) | (3,381) | 198,691 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | (66,225) | (15,206) | — | — | — | (221) | (185) | (81,837) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross recoveries | 5,428 | 10,455 | 1,980 | 80 | 585 | 49 | 95 | 18,672 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (charge-offs) recoveries | (60,797) | (4,751) | 1,980 | 80 | 585 | (172) | (90) | (63,165) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 1,012 | — | — | — | — | — | — | 1,012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 398,040 | $ | 163,791 | $ | 27,573 | $ | 10,239 | $ | 15,520 | $ | 2,690 | $ | 2,130 | $ | 619,983 | ||||||||||||||||||||||||||||||||||||||||||||||
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| ($ in thousands) | Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 189,117 | $ | 40,666 | $ | 19,885 | $ | 20,290 | $ | 31,340 | $ | 5,774 | $ | 4,250 | $ | 311,322 | ||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on loans | (a) | 109,068 | (4,345) | 1,085 | (1,422) | (2,938) | (516) | (839) | 100,093 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | (73,985) | (1,021) | — | — | (11) | — | (50) | (75,067) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross recoveries | 14,501 | 5,209 | 1,856 | 536 | 136 | 7 | 19 | 22,264 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (charge-offs) recoveries | (59,484) | 4,188 | 1,856 | 536 | 125 | 7 | (31) | (52,803) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (325) | — | — | — | — | — | — | (325) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 238,376 | $ | 40,509 | $ | 22,826 | $ | 19,404 | $ | 28,527 | $ | 5,265 | $ | 3,380 | $ | 358,287 | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 163,058 | $ | 40,809 | $ | 19,537 | $ | 26,881 | $ | 26,362 | $ | 7,354 | $ | 3,127 | $ | 287,128 | ||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on loans | (a) | 75,629 | (5,337) | (1,409) | (7,331) | 3,765 | (1,618) | 1,308 | 65,007 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | (59,244) | — | — | — | (1) | — | (188) | (59,433) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross recoveries | 10,417 | 5,194 | 1,757 | 740 | 1,214 | 38 | 3 | 19,363 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (charge-offs) recoveries | (48,827) | 5,194 | 1,757 | 740 | 1,213 | 38 | (185) | (40,070) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (743) | — | — | — | — | — | — | (743) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 189,117 | $ | 40,666 | $ | 19,885 | $ | 20,290 | $ | 31,340 | $ | 5,774 | $ | 4,250 | $ | 311,322 | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 142,167 | $ | 47,559 | $ | 17,911 | $ | 24,989 | $ | 19,795 | $ | 7,506 | $ | 593 | $ | 260,520 | ||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on loans | (a) | 46,944 | (8,861) | 904 | 1,782 | 6,022 | (121) | 2,399 | 49,069 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | (38,118) | — | (635) | (149) | (1) | (55) | (17) | (38,975) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross recoveries | 11,371 | 2,111 | 1,357 | 259 | 546 | 24 | 152 | 15,820 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (charge-offs) recoveries | (26,747) | 2,111 | 722 | 110 | 545 | (31) | 135 | (23,155) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 694 | — | — | — | — | — | — | 694 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 163,058 | $ | 40,809 | $ | 19,537 | $ | 26,881 | $ | 26,362 | $ | 7,354 | $ | 3,127 | $ | 287,128 | ||||||||||||||||||||||||||||||||||||||||||||||
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| ($ in thousands) | Year Ended December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 134,606 | $ | 58,623 | $ | 19,630 | $ | 22,915 | $ | 19,665 | $ | 8,745 | $ | 775 | $ | 264,959 | ||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on loans | (a) | 46,847 | (12,088) | (3,166) | 1,988 | (134) | (1,237) | (492) | 31,718 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | (47,739) | (464) | (29) | (117) | (137) | (9) | (13) | (48,508) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross recoveries | 9,003 | 1,488 | 1,476 | 203 | 401 | 7 | 323 | 12,901 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (charge-offs) recoveries | (38,736) | 1,024 | 1,447 | 86 | 264 | (2) | 310 | (35,607) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (550) | — | — | — | — | — | — | (550) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 142,167 | $ | 47,559 | $ | 17,911 | $ | 24,989 | $ | 19,795 | $ | 7,506 | $ | 593 | $ | 260,520 | ||||||||||||||||||||||||||||||||||||||||||||||
The provision for credit losses includes provision for loan losses and unfunded credit reserves. A provision for credit losses is charged to income to bringfollowing table summarizes activity in the allowance for unfunded credit losses to a level deemed appropriate bycommitments for the Company based on the calculation methodology. periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| Unfunded credit facilities | ||||||||||||||||||||||||||||||||
| Allowance for unfunded credit commitments, beginning of period | $ | 11,158 | $ | 12,566 | $ | 13,318 | $ | 16,121 | $ | 20,360 | ||||||||||||||||||||||
| Impact of ASU 2016-13 adoption | 10,457 | — | — | — | — | |||||||||||||||||||||||||||
| Provision for (reversal of) credit losses on unfunded credit commitments | (b) | 11,962 | (1,408) | (752) | (2,803) | (4,239) | ||||||||||||||||||||||||||
| Allowance for unfunded credit commitments, end of period | $ | 33,577 | $ | 11,158 | $ | 12,566 | $ | 13,318 | $ | 16,121 | ||||||||||||||||||||||
| Provision for credit losses | (a) + (b) | $ | 210,653 | $ | 98,685 | $ | 64,255 | $ | 46,266 | $ | 27,479 | |||||||||||||||||||||
The provisionallowance for unfunded credit lossescommitments was $98.7$33.6 million for 2019,as of December 31, 2020, compared with $64.3$11.2 million and $46.3 million for 2018 and 2017, respectively. The increase in the provision for credit losses for 2019, compared to 2018 and 2017, was reflectiveas of the overall loan portfolio growth and increased charge-offs in C&I loans and a downward migration in the credit risk ratings of C&I loans duringDecember 31, 2019.
The Company believes the allowance for credit losses as of December 31, 2020 and 2019 2018 and 2017 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, on each respective date.adequate.
| ($ in thousands) | December 31, | ||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
Allowance Allocation | Loans as % of Total Loans | Allowance Allocation | Loans as % of Total Loans | Allowance Allocation | Loans as % of Total Loans | Allowance Allocation | Loans as % of Total Loans | Allowance Allocation | Loans as % of Total Loans | ||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| C&I | $ | 238,376 | 35 | % | $ | 189,117 | 37 | % | $ | 163,058 | 37 | % | $ | 142,167 | 38 | % | $ | 134,606 | 38 | % | |||||||||||||||
| CRE: | |||||||||||||||||||||||||||||||||||
| CRE | 40,509 | 30 | % | 40,666 | 28 | % | 40,809 | 31 | % | 47,559 | 31 | % | 58,623 | 32 | % | ||||||||||||||||||||
| Multifamily residential | 22,826 | 8 | % | 19,885 | 8 | % | 19,537 | 7 | % | 17,911 | 6 | % | 19,630 | 6 | % | ||||||||||||||||||||
| Construction and land | 19,404 | 2 | % | 20,290 | 2 | % | 26,881 | 2 | % | 24,989 | 3 | % | 22,915 | 3 | % | ||||||||||||||||||||
| Total CRE | 82,739 | 40 | % | 80,841 | 38 | % | 87,227 | 40 | % | 90,459 | 40 | % | 101,168 | 41 | % | ||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||
| Single-family residential | 28,527 | 20 | % | 31,340 | 19 | % | 26,362 | 16 | % | 19,795 | 14 | % | 19,665 | 13 | % | ||||||||||||||||||||
| HELOCs | 5,265 | 4 | % | 5,774 | 5 | % | 7,354 | 6 | % | 7,506 | 7 | % | 8,745 | 7 | % | ||||||||||||||||||||
| Total residential mortgage | 33,792 | 24 | % | 37,114 | 24 | % | 33,716 | 22 | % | 27,301 | 21 | % | 28,410 | 20 | % | ||||||||||||||||||||
| Other consumer | 3,380 | 1 | % | 4,250 | 1 | % | 3,127 | 1 | % | 593 | 1 | % | 775 | 1 | % | ||||||||||||||||||||
| Total | $ | 358,287 | 100 | % | $ | 311,322 | 100 | % | $ | 287,128 | 100 | % | $ | 260,520 | 100 | % | $ | 264,959 | 100 | % | |||||||||||||||
Liquidity Risk Management
Liquidity
Liquidity is a financial institution’s capacity to meet its deposit and other counterparties’ obligations as they come due, or to obtain adequate funding at a reasonable cost to meet those obligations. The objective of liquidity management is to manage the potential mismatch of asset and liability cash flows. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows, and collateral needs without adversely affecting daily operations or the financial condition of the institution. To achieve this objective, the Company analyzes its liquidity risk, maintains readily available liquid assets and utilizes diverse funding sources including its stable core deposit base.
The Board of Directors’ Risk Oversight Committee has primary oversight responsibility. At the management level, the Company’s Asset/Liability Committee (“ALCO”) setsestablishes the liquidity guidelines that govern the day-to-day active management of the Company’s liquidity position.position by requiring sufficient asset-based liquidity to cover potential funding requirements and avoid over-dependence on volatile, less reliable funding markets. These guidelines are established and monitored for both the Bank and for East West, the parent company, on a stand-alone basis to ensure that the Company is a source of strength for its subsidiaries. The ALCO regularly monitors the Company’s liquidity status and related management processes, and providesproviding regular reports to the Board of Directors. The Company’s liquidity management practices have been effective under normal operating and stressed market conditions such as the financial stress caused by the COVID-19 pandemic.
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Liquidity Risk — Liquidity Sources.Sources The Company’s primary source of funding is from its deposits generated by its banking business, which isare relatively stable and low-cost. Total deposits amounted to $44.86 billion as of December 31, 2020, compared with $37.32 billion as of December 31, 2019, compared with $35.44 billion as of December 31, 2018.2019. The Company’s loan-to-deposit ratio was 86% December 31, 2020, compared with 93% and 91% as of December 31, 2019 and 2018, respectively. 2019.
In addition to deposits, the Company has access to various sources of wholesale funding, and hasas well as borrowing capacity at the FHLB and FRBFRBSF to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute its business strategy. Economic conditions and the stability of capital markets impact the Company’s access to and the cost of wholesale financing. The Company’s access to capital markets is also affected by the ratings received from various credit rating agencies. See Item 7 — MD&A — Balance Sheet Analysis — Deposits and Other Sources of Funds in this Form 10-K for further detail related to the Company’s funding sources.
The Company’s liquid asset portfolio includesCompany maintains liquidity in the form of cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements, and unencumbered high-quality and liquid AFS investmentdebt securities. The following table presents the Company’s liquid asset portfolioassets as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Encumbered | Unencumbered | Total | Encumbered | Unencumbered | Total | |||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | 4,017,971 | $ | 4,017,971 | $ | — | $ | 3,261,149 | $ | 3,261,149 | ||||||||||||||||||||||||||
| Interest-bearing deposits with banks | — | 809,728 | 809,728 | — | 196,161 | 196,161 | ||||||||||||||||||||||||||||||||
| Short-term resale agreements | — | 900,000 | 900,000 | — | 400,000 | 400,000 | ||||||||||||||||||||||||||||||||
| U.S. Treasury, and U.S. government agency and U.S. government-sponsored enterprise debt securities | 91,637 | 773,443 | 865,080 | 142,203 | 615,464 | 757,667 | ||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | 494,132 | 2,320,532 | 2,814,664 | 334,194 | 1,273,174 | 1,607,368 | ||||||||||||||||||||||||||||||||
| Foreign government bonds | — | 182,531 | 182,531 | — | 354,172 | 354,172 | ||||||||||||||||||||||||||||||||
| Municipal securities | 1,033 | 395,040 | 396,073 | 1,040 | 101,262 | 102,302 | ||||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities, asset-backed securities and CLOs | 434 | 879,908 | 880,342 | 733 | 483,823 | 484,556 | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 1,249 | 404,719 | 405,968 | 1,262 | 9,887 | 11,149 | ||||||||||||||||||||||||||||||||
| Total | $ | 588,485 | $ | 10,683,872 | $ | 11,272,357 | $ | 479,432 | $ | 6,695,092 | $ | 7,174,524 | ||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
| Encumbered | Unencumbered | Total | Encumbered | Unencumbered | Total | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | 3,261,149 | $ | 3,261,149 | $ | — | $ | 3,001,377 | $ | 3,001,377 | ||||||||||||
| Interest-bearing deposits with banks | — | 196,161 | 196,161 | — | 371,000 | 371,000 | ||||||||||||||||||
| Short-term resale agreements | — | 400,000 | 400,000 | — | 375,000 | 375,000 | ||||||||||||||||||
| AFS investment securities | 479,432 | 2,837,782 | 3,317,214 | 435,833 | 2,306,014 | 2,741,847 | ||||||||||||||||||
| Total | $ | 479,432 | $ | 6,695,092 | $ | 7,174,524 | $ | 435,833 | $ | 6,053,391 | $ | 6,489,224 | ||||||||||||
Unencumbered liquid assets totaled $6.70 billion and $6.05$10.68 billion as of December 31, 2019 and 2018, respectively. Investment2020, compared with $6.70 billion as of December 31, 2019. AFS debt securities included as part of liquidity sources are primarily comprisedconsists of mortgage-backedhigh quality and liquid securities with relatively short durations to minimize overall interest rate and debt securities issued by U.S. government agency and U.S. government sponsored enterprises, foreign bonds and U.S. Treasury securities.liquidity risks. The Company believes these AFS investmentdebt securities provide quick sources of liquidity to obtain financing, regardless of market conditions, through sale or pledging.
As a means of augmenting the Company’sto generate incremental liquidity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and FRB,FRBSF, unsecured federal funds lines of credit with various correspondent banks, and several master repurchase agreements with major brokerage companies. The Company’sAs of December 31, 2020, the Company had total available borrowing capacity with the FHLB and FRB was $6.83 billion and $2.97 billion, respectively, as of December 31, 2019. Unencumbered loans and/or securities were pledged to the FHLB and FRB discount window as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRB and is subject to change at their discretion. The Bank’s unsecured federal funds lines of credit, subject to availability, totaled $600.0 million with correspondent banks as of December 31, 2019.$17.04 billion. The Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term needs over the next 12 months.
As of December 31, 2020, the Company had available borrowing capacity of $6.33 billion with the FHLB and $5.54 billion with the FRBSF. Unencumbered loans and/or securities were pledged to the FHLB and the FRBSF discount window as collateral. The Company has established operational procedures to enable borrowing against these assets, including regular monitoring of the total pool of loans and securities eligible as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRBSF and is subject to change at their discretion. The Bank’s unsecured federal funds lines of credit with correspondent banks, subject to availability, totaled $976.0 million as of December 31, 2020. Estimated borrowing capacity from unpledged AFS debt securities totaled $4.18 billion as of December 31, 2020.
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In connection with the Company’s participation in the PPP under the CARES Act, the Company has the ability to pledge loans originated under the SBA’s PPP program to the PPPLF, and receive term funding matching the balance and term of the pledged loans. In the second quarter of 2020, the Company drew down $1.44 billion from the Federal Reserve PPPLF and pledged the same amount in PPP loans as collateral. The Company paid off the outstanding amounts under the PPPLF in full during the fourth quarter of 2020. As of December 31, 2020, the Company did not have any outstanding balance under the PPPLF.
Liquidity Risk — Liquidity for East West.West In addition to bank level liquidity management, the Company manages liquidity at the parent company level for various operating needs including payment of dividends, repurchases of common stock, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries. East West’s primary source of liquidity is from cash dividends distributed by its subsidiary, East West Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends as discussed in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds in this Form 10-K. The Bank paid totalAs of December 31, 2020, East West held $439.1 million in cash and cash equivalents, after receiving $511.0 million in dividends from the Bank. In comparison, as of December 31, 2019, East West held $166.1 million in cash and cash equivalents, after receiving $190.0 million and $160.0 millionin dividends from the Bank. Each year, the dividends from the Bank to East West in 2019 and 2018, respectively.are sufficient to meet the projected cash obligations of the parent company for the coming year.
Liquidity Risk — Liquidity Stress Testing.Testing Liquidity stress testing is performed at the Company level, as well as at the foreign subsidiary and foreign branch levels. Stress testingtests and scenario analysisanalyses are intended to quantify the potential impact of a liquidity event on the financial and liquidity position of the entity. These scenariosScenario analyses include assumptions about significant changes in key funding sources, market triggers, and potential uses of funding and economic conditions in certain countries. In addition, Company specific events are incorporated into the stress testing. Liquidity stress tests are conducted to ascertain potential mismatches between liquidity sources and uses over a variety of time horizons, both immediate and longer term, and over a variety of stressed conditions. Given the range of potential stresses, the Company maintains a series of contingency funding plans on a consolidated basis and for individual entities.
Liquidity Risk — COVID-19 Pandemic In response to the ongoing developments related to the COVID-19 pandemic, the Company continues to closely monitor the impact of the pandemic on its business. The uncertainty surrounding the COVID-19 pandemic, and its impact on the financial services industry, could potentially impact the liquidity of the Company. The prolonged strained economic, capital, credit and/or financial market conditions may expose the Company to liquidity risk. However, the Company believes that market conditions have shown signs of improvement after the Federal Reserve stepped in with a broad array of actions to stabilize financial markets and to lower borrowing costs. In December 2020, the CAA was signed into law which issued new relief provisions, extended certain provisions of the CARES Act, and provided additional stimulus funding. Additional government stimulus assistance may be passed in 2021. The combination of the CAA and any additional stimulus legislation in 2021 may further enhance economic recovery.
As of December 31, 2019,2020, the Company was not aware of any trends, events or uncertainties that would or were reasonably likely to, have a material effect on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expenditures in the foreseeable future.future and believes it has adequate liquidity resources to conduct operations and meet other needs in the ordinary course of business. Given the uncertainty and the rapidly changing market and economic conditions related to the COVID-19 pandemic, the Company will continue to actively evaluate the nature and extent of impact on its business and financial position.
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Consolidated Cash Flows Analysis
The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the periods indicated, whichindicated. While this information may be helpful to highlight business strategies and macro trends. Incertain macroeconomic trends, the cash flow analysis may not be as relevant when analyzing changes in the Company’s net earnings and assets. The Company believes that in addition to this traditional cash flow analysis, the discussion related to liquidity in Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity may provide a more useful context in evaluating the Company’s liquidity position and related activity.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net cash provided by operating activities | $ | 693,325 | $ | 735,829 | $ | 883,172 | ||||||||||||||
| Net cash used in investing activities | (6,848,716) | (2,571,176) | (3,832,412) | |||||||||||||||||
| Net cash provided by financing activities | 6,908,793 | 2,124,962 | 3,800,808 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,420 | (29,843) | (24,783) | |||||||||||||||||
| Net increase in cash and cash equivalents | 756,822 | 259,772 | 826,785 | |||||||||||||||||
| Cash and cash equivalents, beginning of year | 3,261,149 | 3,001,377 | 2,174,592 | |||||||||||||||||
| Cash and cash equivalents, end of year | $ | 4,017,971 | $ | 3,261,149 | $ | 3,001,377 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net cash provided by operating activities | $ | 735,829 | $ | 883,172 | $ | 703,275 | ||||||
| Net cash used in investing activities | (2,571,176 | ) | (3,832,412 | ) | (2,506,824 | ) | ||||||
| Net cash provided by financing activities | 2,124,962 | 3,800,808 | 2,068,460 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (29,843 | ) | (24,783 | ) | 31,178 | |||||||
| Net increase in cash and cash equivalents | 259,772 | 826,785 | 296,089 | |||||||||
| Cash and cash equivalents, beginning of year | 3,001,377 | 2,174,592 | 1,878,503 | |||||||||
| Cash and cash equivalents, end of year | $ | 3,261,149 | $ | 3,001,377 | $ | 2,174,592 | ||||||
Operating Activities —— Net cash provided by operating activities was $693.3 million, $735.8 million and $883.2 million in 2020, 2019 and $703.3 million in 2019, 2018, and 2017, respectively. During 2020, 2019 2018 and 2017,2018, net cash provided by operating activities mainly reflected inflows of net income, in the amounts of $567.8 million, $674.0 million and $703.7 million and $505.6 million from net income, respectively.for each of the respective years. During 2019,2020, net operating cash inflows also benefited from noncash adjustments of $285.0 million to reconcile net income to net operating cash, as well as net changes in accrued expenses and other liabilities of $170.4 million, partially offset by net changes in accrued interest receivable and other assets of $339.9 million. The net changes in accrued interest receivable and other assets of $339.9 million during 2020 were primarily due to changes in derivative asset fair values. In comparison, during 2019, net operating cash inflows benefited from noncash adjustments of $221.6 million in non-cash adjustments to reconcile net income to net operating cash, partially offset by $170.8 million of net changes in accrued interest receivable and other assets. In comparison, netassets of $170.8 million. Net operating cash inflows for 2018 benefited from $150.4 million in non-cashnoncash adjustments to reconcile net income to net operating cash, as well as $88.1 million of net changes in accrued expenses and other liabilities of $88.1 million, partially offset by $60.8 million of net changes in accrued interest receivable and other assets. Net operating cash inflows for 2017 benefited from $149.2 million in non-cash adjustments to reconcile net income to net operating cash, as well as $45.4 millionassets of net changes in accrued interest receivable and other assets.$60.8 million.
Investing Activities — Net cash used in investing activities was $6.85 billion, $2.57 billion and $3.83 billion in 2020, 2019 and $2.51 billion in 2019, 2018, and 2017, respectively. During 2020, net cash used in investing activities primarily reflected cash outflows of $3.62 billion from loans held-for-investment, $2.16 billion from AFS debt securities, $577.6 million from interest-bearing deposits with banks, $350.0 million from resale agreements, and $154.9 million from investments in qualified affordable housing partnerships, tax credit and other investments. In comparison, during 2019, net cash used in investing activities primarily reflected cash outflows of $2.42 billion from loans held-for-investment, $521.2 million from AFS debt securities, and $146.9 million from loans held-for-investment, AFS investment securities, and investments in qualified affordable housing partnerships, tax credit and other investments, respectively.investments. These investing cash outflows were partially offset by cash inflows of $325.0 million from resale agreements and $193.5 million from resale agreements and interest-bearing deposits with banks, respectively. In comparison, duringbanks. During 2018, net cash used in investing activities primarily reflected $3.43 billion increase in net loans held-for-investment, a $503.7 million payment for the sale of the Bank’s eight DCB branches to Flagstar Bank, and $132.6 million in net fundingsfunding of investments in qualified affordable housing partnerships, tax credit and other investments, partially offset by $217.7 million of net cash inflows from AFS investmentdebt securities. During 2017, net cash used in investing activities primarily reflected cash outflows of $3.48 billion and $173.6 million from net fundings of loans held-for-investment and investments in qualified affordable housing partnerships, tax credit and other investments, respectively, partially offset by net cash inflows of $650.0 million and $417.8 million from resale agreements and AFS investment securities, respectively, and $116.0 million in cash received from the sale of a commercial property.
Financing Activities — Net cash provided by financing activities was $6.91 billion, $2.12 billion $3.80 billion and $2.07$3.80 billion in 2020, 2019 and 2018, respectively. During 2020, net cash provided by financing activities primarily reflected net increases of $7.48 billion in deposits, and 2017, respectively. Net$1.44 billion in PPPLF advances, partially offset by $1.44 billion repayment of PPPLF advances, $158.7 million net repayment in repurchase agreements, $158.2 million in cash dividends paid, $146.0 million in shares repurchased, and $95.0 million net repayment in FHLB advances. In comparison, net cash inflows in 2019 primarily reflected net increases of $1.90 billion in deposits and $418.0 million in FHLB advances, partially offset by $155.1 million in cash dividends paid. In comparison, netNet cash inflows in 2018 and 2017 primarily reflected $3.90 billion and $2.27 billion net increases in deposits respectively,of $3.90 billion, partially offset by $126.0 million and $116.8 million, respectively, in cash dividends paid.paid of $126.0 million.
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Market Risk Management
Market risk is the risk that the Company’s financial condition may change resulting from adverse movements in market rates or prices including:including interest rates, foreign exchange rates, interest rate contracts, investment securities prices, credit spreads, and related risk resulting from mismatches in rate sensitive assets and liabilities. In the event of market stress, the risk could have a material impact on our results of operations and financial condition.
The Board’s Risk Oversight Committee has primary oversight responsibility. At the management level, the ALCO establishes and monitors compliance with the policies and risk limits pertaining to market risk management activities. Corporate Treasury supports the ALCO in measuring, monitoring and managing interest rate risk as well as all other market risks.
Interest Rate Risk Management
Interest rate risk results primarily from the Company’s traditional banking activities of gathering deposits and extending loans, andloans; it is the primary market risk for the Company. Economic and financial conditions, movements in interest rates, and consumer preferences impact the level of noninterest-bearing funding sources at the Company, andas well as affect the difference between the interest the Company earns on interest-earning assets and pays on interest-bearing liabilities. In addition, changes in interest rates can influence the rate of principal prepayments on loans and the speed of deposit withdrawals. Due to the pricing term mismatches and the embedded options inherent in certain products, changes in market interest rates not only affect expected near-term earnings, but also the economic value of these interest-earning assets and interest-bearing liabilities. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant to the Company and no separate quantitative information concerning these risks is presented herein.
With oversight by the Company’s Board of Directors, the ALCO coordinates the overall management of the Company’s interest rate risk. The ALCO meets regularly and is responsible for reviewing the Company’s open market positions and establishing policies to monitor and limit exposure to market risk. Management of interest rate risk is carried out primarily through strategies involving the Company’s investmentdebt securities portfolio, loan portfolio, available funding channels and capital market activities. In addition, the Company’s policies permit the use of derivative instruments to assist in managing interest rate risk. Refer to Item 7. MD&A — Risk Management — Market Risk Management — Derivatives in this Form 10-K for additional information.
The interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analyses under multiple interest rate scenarios. The model incorporates the Company’s cash instruments, loans, investmentdebt securities, resale agreements, deposits, borrowings and repurchase agreements, as well as financial instruments from the Company’s foreign operations. The Company incorporatesuses both a static balance sheet and a forward growth balance sheet in order to perform these analyses. The simulated interest rate scenarios include a non-parallel shift in the yield curve (“rate shock”) and a gradual non-parallel shift in the yield curve (“rate ramp”). In addition, the Company also performs simulations using alternative interest rate scenarios, including various permutations of the yield curve flattening, steepening or inverting. Results of these various simulations are used to formulate and gauge strategies to achieve a desired risk profile within the Company’s capital and liquidity guidelines.
The net interest income simulation model is based on the actual maturity and re-pricingrepricing characteristics of the Company’s interest-rate sensitive assets, liabilities and related derivative contracts. It also incorporates various assumptions, which management believes to be reasonable but may have a significant impact on results. These assumptions include, but are not limited to, the timing and magnitude of changes in interest rates, the yield curve evolution and shape, the correlation between various interest rate indices, financial instrument future repricing characteristics and spread relative to benchmark rates, and the effect of interest rate floors and caps. The modeled results are highly sensitive to deposit decay and deposit beta assumptions, which are derived from a regression analysis of the Company’s historical deposit data. Deposit beta commonly refers to the correlation of the changechanges in interest rates paid on deposits to changes in benchmark market interest rates. The model is also sensitive to the loan and investment prepayment assumptions, based on an independent model and the Company’s historical prepayment data, which consider anticipated prepayments under different interest rate environments.
Simulation results are highly dependent on input assumptions. To the extent actual behavior is different from the assumptions in the models, there could be a material change in interest rate sensitivity. The assumptions applied in the model are documented and supported for reasonableness, and periodically back-tested to assess their effectiveness. The Company makes appropriate calibrations to the model as needed, continually refining the model, methodology and results. Changes to key model assumptions are reviewed by the ALCO. Scenario results do not reflect strategies that management could employ to limit the impact of changing interest rate expectations.
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Twelve-Month Net Interest Income Simulation
Net Interest Incomeinterest income simulation is a modeling technique that looks at interest rate risk through earnings. It projects the changes in interest rate sensitive asset and liability cash flows, expressed in terms of Net Interest Income,net interest income, over a specified time horizon for defined interest rates scenarios. Net Interest Incomeinterest income simulations generate insight into the impact of changes in market rates changes on earnings and guide risk management decisions. The Company assesses interest rate risk by comparing net interest income using different interest rate scenarios.
The federal funds rate range was between 0.00% and 0.25% as of December 31, 2020 and between 1.50% and 1.75% as of December 31, 2019. After lowering the range to between 0.00% and 0.25% in March 2020, the Federal Open Market Committee (“FOMC”) pledged to maintain monetary support for the economy. Moreover, in December 2020, acknowledging the uncertain and likely lengthy path to a full post-pandemic economic recovery, the majority of FOMC members projected that the federal funds rate range will likely remain unchanged through 2023.The FOMC statement indicated that the federal funds target rate will remain unchanged until maximum employment has been reached and inflation rises to and remains at 2% for some time.
The following table presents the Company’s net interest income sensitivity as of December 31, 2019 and 2018 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:
Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | |||||
| December 31, | ||||||
| 2019 | 2018 | |||||
| +200 | 13.2 | % | 16.6 | % | ||
| +100 | 6.7 | % | 8.4 | % | ||
| -100 | (5.5 | )% | (8.3 | )% | ||
| -200 | (8.7 | )% | (16.7 | )% | ||
| Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | |||||||||||||
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| +200 | 12.6 | % | 13.2 | % | ||||||||||
| +100 | 5.6 | % | 6.7 | % | ||||||||||
| -100 | NM | (5.5) | % | |||||||||||
| -200 | NM | (8.7) | % | |||||||||||
NM — Not meaningful.
(1)The percentage change represents net interest income over 12 months in a stable interest rate scenarios. This reflects a greater rate of upward repricingenvironment versus net interest income in the Company’s deposit portfolio, offsetting simulated increases in interest income from higher interest rates on assets. In both simulated downward interestvarious rate scenarios, sensitivity decreased mainly due to the impact of the changes in the yield curve between December 31, 2019 and December 31, 2018.scenarios.
The Company’s net interest income profile as of December 31, 20192020 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and to decrease if interest rates decline. The potential impact of rate decreases is somewhat muted due to the current low rate environment with the federal funds rate floored and the federal funds rate range between 0.00% and 0.25%. The Company is naturally asset sensitive due to the large share of variable rate loans in its loan portfolio, which are primarily linked to Prime and LIBOR indices. The Company’s interest income is vulnerable to changes in short-term interest rates.However, given the current low level of interest rates, the potential for further rate decreases is limited which reduces the Bank’s exposure to risks associated with falling rates. The Company’s deposit portfolio is primarily comprised of non-maturity deposits, which are not directly tied to short-term interest rate indices, but are, nevertheless, sensitive to changes in short-term interest rates.
The federal funds target rateCompany’s estimated twelve-month net interest income sensitivity as of December 31, 2020 was between 1.50% and 1.75%lower than the sensitivity as of December 31, 2019 and between 2.25% and 2.50%under both higher rate scenarios. This reflects reduced upward repricing in the Company’s rate sensitive assets due to a higher proportion of floating rate loans at rate floors under a near-zero interest rate environment, as compared with the proportion at rate floors as of December 31, 2018. In its statement released on December 11, 2019, the Federal Open Market Committee decided to maintain the target range for the federal funds rate to a range of between 1.50% to 1.75% and signaled it would stay on hold through 2020 amid muted inflation.2019.
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While an instantaneous and sustained non-parallel shift in market interest rates was used in the simulation model described in the preceding paragraphs, the Company believes that any shift in interest rates would likely be more gradual and would therefore have a more modest impact. The rate ramp table below shows the net income volatility under a gradual non-parallel shift upward and downward of the yield curve upward and downward, in even quarterly increments over the first twelve12 months, followed by rates held constant thereafter:
| Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | |||||||||||||
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| +200 Rate Ramp | 4.9 | % | 6.0 | % | ||||||||||
| +100 Rate Ramp | 2.2 | % | 3.0 | % | ||||||||||
| -100 Rate Ramp | NM | (2.6) | % | |||||||||||
| -200 Rate Ramp | NM | (5.1) | % | |||||||||||
| Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | |||||
| December 31, | ||||||
| 2019 | 2018 | |||||
| +200 Rate Ramp | 6.0 | % | 6.3 | % | ||
| +100 Rate Ramp | 3.0 | % | 3.0 | % | ||
| -100 Rate Ramp | (2.6 | )% | (3.0 | )% | ||
| -200 Rate Ramp | (5.1 | )% | (6.3 | )% | ||
(1)The percentage change represents net interest income under a gradual non-parallel shift in even quarterly increments over 12 months.
The Company believes that the rate ramp table, shown above, when evaluated together with the results of the rate shock simulation, presents a bettermore meaningful indication of the potential impact of rising interest rates to the Company’s twelve-month net interest income in a rising and falling rate scenario. Between December 31, 2019 and 2018,income. During 2020, the Company’s modeled asset sensitivity slightly decreased under a ramp simulation. This reflects model refinements to better incorporatesimulation for the current yield curve in the analysis, as well as the gradual spreading ofhigher interest rate changes over 12 months, rather than at the end of each quarter.scenarios.
Economic Value of Equity at Risk.
Economic value of equity (“EVE”) is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows. This calculation is used for asset/liability management and measures changes in the economic value of the bank. The fair market values of a bank's assets and liabilities are directly linked to interest rates. In some ways, theThe economic value approach provides a comparatively broader scope than the net income volatility approach since it captures all anticipated cash flows.
EVE simulation reflects the effect of interest rate shifts on the value of the Company and is used to assess the degree of interest rate risk exposure. In contrast to the earnings perspective, the economic perspective identifies riskrisks arising from repricing or maturity gaps forover the life of the balance sheet. Changes in economic value indicate anticipated changes in the value of the bank’s future cash flows. Thus, the economic perspective can provide a leading indicator of the bank’s future earnings and capital values. The economic valuationvalue method also reflects those sensitivitiessensitivity across the full maturity spectrum of the bank’s assets and liabilities.
The following table presents the Company’s EVE sensitivity as of December 31, 2019 and 2018 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in an upward direction as of December 31, 2020 and in both directions:directions as of December 31, 2019:
| Change in Interest Rates (Basis Points) | EVE Volatility (1) | |||||||||||||
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| +200 | 9.6 | % | 7.0 | % | ||||||||||
| +100 | 4.8 | % | 3.6 | % | ||||||||||
| -100 | NM | (1.4) | % | |||||||||||
| -200 | NM | (3.5) | % | |||||||||||
Change in Interest Rates (Basis Points) | EVE Volatility (1) | |||||
| December 31, | ||||||
| 2019 | 2018 | |||||
| +200 | 7.0 | % | 6.3 | % | ||
| +100 | 3.6 | % | 1.2 | % | ||
| -100 | (1.4 | )% | (3.1 | )% | ||
| -200 | (3.5 | )% | (11.9 | )% | ||
(1)The percentage change represents net portfolio value of the Company in a stable interest rate environment versus net portfolio value in the various rate scenarios.
The Company’s EVE sensitivity for the upward interest rate scenarios increased as of December 31, 2019 increased while the sensitivity for the downward interest rate scenarios as of December 31, 2019 decreased, as2020, compared with the results as of December 31, 2018.2019. The changes in EVE sensitivity during this period were primarily due to changes in the shapelevel and levelshape of the yield curve.curve, and an increased proportion of low cost and noninterest-bearing deposits in total deposits.
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The Company’s EVE profile as of December 31, 20192020 reflects an asset sensitive EVE position.position under the higher interest rate scenarios. Given the uncertainty of the magnitude, timing and direction of future interest rate movements, and the shape of the yield curve, actual results may vary from those predicted by the Company’s model.
Derivatives
It is the Company’s policy not to speculate on the future direction of interest rates, foreign currency exchange rates and commodity prices. However, the Company will from time to time,periodically enter into derivative transactions in order to reduce its exposure to market risks, primarily interest rate risk and foreign currency risk. The Company believes that these derivative transactions, when properly structured and managed, may provide a hedge against inherent risk in certain assets and liabilities and against risk in specific transactions. Hedging transactions may be implemented using a variety of derivative instruments such as swaps, forwards and options. Prior to entering into any hedging activities, the Company analyzes the costs and benefits of the hedge in comparison to alternative strategies. In addition, the Company enters into derivative transactions in order to assist customers with their risk management objectives, primarily to manage exposuressuch as managing exposure to fluctuations in interest rates, foreign currencies and commodity prices. To economically hedge against the derivative contracts entered into with the Company’s customers, the Company enters into mirrored derivative contracts with third-party financial institutions. The exposures from derivative transactions are collateralized by cash and/or eligible securities based on limits as set forth in the respective agreements entered between the Company and thecounterparty financial institutions.
The Company is subject to credit risk associated with the counterparties to the derivative contracts. This counterparty credit risk is a multidimensionalmulti-dimensional form of risk, affected by both the exposure and credit quality of the counterparty, both of which are sensitive to market-induced changes. The Company’s Credit Risk Management Committee provides oversight of credit risks and the Company has guidelines in place to manage counterparty concentration, tenor limits and collateral. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, by entering into legally enforceable master netting arrangements, and by requiring collateral arrangements, where possible. The Company may also transfer counterparty credit risk relatedrisk-related to interest rate swaps to institutional third parties through the use of credit risk participation agreements (“RPAs”).agreements. Certain derivative contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk. The Company incorporates credit value adjustments and other market standard methodologies to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives.
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The following table summarizes certain information concerning derivative financial instruments utilized by the Company in its management of interest rate risk and foreign currency risk as of December 31, 2020 and 2019:
| December 31, | ||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | ||||||||||||||||||||||||
Interest Rate Contracts(1) | Foreign Exchange Contracts | Interest Rate Contracts(2) | Foreign Exchange Contracts | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | Cash Flow Hedges | Net Investment Hedges | Fair Value Hedges | Net Investment Hedges | ||||||||||||||||||||||
| Notional amounts: | $ | 275,000 | $ | 84,269 | $ | 31,026 | $ | 86,167 | ||||||||||||||||||
| Fair value: | ||||||||||||||||||||||||||
| Recognized as an asset | — | — | — | — | ||||||||||||||||||||||
| Recognized as a liability | 1,864 | 235 | 3,198 | 1,586 | ||||||||||||||||||||||
| Net fair value | $ | (1,864) | $ | (235) | $ | (3,198) | $ | (1,586) | ||||||||||||||||||
| Weighted average interest rates: | ||||||||||||||||||||||||||
| Pay fixed (receive floating) | 0.483% (3-month USD-LIBOR) | NM | NM | NM | ||||||||||||||||||||||
| Weighted average remaining term to maturity (in months): | 25.8 | 2.6 | 165.1 | 2.7 | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | Interest Rate Contracts | Foreign Exchange Contracts | Interest Rate Contracts | Foreign Exchange Contracts | ||||||||||||||||||||||
| Notional amounts: | $ | 18,155,678 | $ | 3,108,488 | $ | 15,489,692 | $ | 4,839,661 | ||||||||||||||||||
| Fair value: | ||||||||||||||||||||||||||
| Recognized as an asset | 489,132 | 30,300 | 192,883 | 54,637 | ||||||||||||||||||||||
| Recognized as a liability | 315,834 | 22,524 | 124,119 | 47,024 | ||||||||||||||||||||||
| Net fair value | $ | 173,298 | $ | 7,776 | $ | 68,764 | $ | 7,613 | ||||||||||||||||||
NM — Not meaningful.
(1)Fair Value Hedges As of December 31, 2020, there were no interest rate contracts designated as fair value hedges. The interest rate contracts designated as fair value hedges as of December 31, 2019 were dedesignated when the certificates of deposits were called during 2020.
(2)— As of December 31, 2019, there were no interest rate contracts designated as cash flow hedges.
Derivatives Designated as Hedging Instruments — Interest rate and foreign exchange derivative contracts are utilized in our asset and liability management activities and serve as an efficient tool to manage the Company’s interest rate risk and foreign exchange risk. We use derivatives to hedge the risk of variable cash flows that the Company had two cancellableis exposed to from its variable interest rate swap contracts with original terms of 20 years. These swap contracts involve the exchange of variable rate payments over the life of theborrowings, including repurchase agreements without the exchange of the underlying notional amounts. The changes in fair value of the hedged brokered certificates of deposit are expected to be effectively offset by the changes in fair value of the swaps throughout the terms of these contracts.
The fluctuation in foreign currency translation of the hedged exposure is expected to be offset by changes in the fair value of the forwards. As of December 31, 2020, the outstanding foreign currency forwards effectively hedged approximately 50% of the RMB exposure in East West Bank (China) Limited.
Derivatives Not Designated as Hedging Instruments Interest Rate Contracts— The Company offers variousenters into interest rate, derivativeforeign exchange and energy commodity contracts to support the business requirements of its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions. The Company may enter into derivative contracts that are either exchange-traded, centrally cleared through a clearinghouse or over-the counter.
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The Company offers various interest rate derivative contracts to its customers. For the interest rate contracts entered into with its customers, the Company managed its interest rate risk by entering into offsetting interest rate contracts with third-party financial institutions including with central clearing organizations. Certain derivative contracts entered with central clearing organizations are settled-to-market daily to the extent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. Derivative contracts allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are not linked to specific Company assets or liabilities on the Consolidated Balance Sheet, or to forecasted transactions in a hedging relationship, and are therefore are economic hedges. The contracts are marked to marketmarked-to-market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.
Additional information on the Company’s derivatives is presented in Note 1 — Summary of Significant Accounting Policies,Policies— Derivatives, Note 32 — Fair Value Measurement and Fair Value of Financial Instruments and Note 65 — Derivatives to the Consolidated Financial Statements in this Form 10-K.
Impact of Inflation
The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and in the effect that general inflation may have on both short-term and long-term interest rates. Since almost all the assets and liabilities of a financial institution are monetary in nature, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. AlthoughWhile inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services.
Critical Accounting Policies and Estimates
Certain accounting policies are considered to have a critical effect on the Company’s Consolidated Financial Statements in the Company’s judgment.Statements. Critical accounting policies are defined as those that require the most complex or subjective judgments and are reflective of significant uncertainties, and whose actual results could differ from the Company’s estimates. Future changes in the key variables could change future valuations and impact the results of operations. The following is a discussion of the critical accounting policies including significantare critical to the Company’s Consolidated Financial Statements as they require management to make subjective and complex judgments about matters that are inherently uncertain where actual results could differ materially from the Company’s estimates. In each area, the Company has identified the most important variables in the estimation process. The Company has used the best information available to make the estimations necessary for the related assets and liabilities.
Fair Value of Financial Instruments
In determining the fair value of financial instruments, the Company uses market prices of the same or similar instruments whenever such prices are available. The Company does not use prices involving distressed sellers in determining fair value. Changes in the market conditions such as reduced liquidity in the capital markets or changes in secondary market activities, may increase variability or reduce the availability of market priceprices used to determine fair value. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flows analysis. These modeling techniques incorporate management’s assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique and the risk of nonperformance. The use of methodologies or assumptions different than those used by the Company could result in different estimates of fair value of financial instruments.
Significant judgment is also required to determine the fair value hierarchy for certain financial instruments. When fair values are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement, the financial assets and liabilities are classified as Level 3 under the fair value hierarchy. Total recurring Level 3 assets were $421$273 thousand and $673$421 thousand as of December 31, 20192020 and 2018,2019, respectively, and there were no recurring Level 3 liabilities as of December 31, 20192020 and 2018.2019. For a complete discussion on the Company’s fair value hierarchy of financial instruments, fair value measurement techniques and assumptions, and the impact on the Consolidated Financial Statements, see Note 32 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.
Allowance for Loan Losses and Unfunded Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. The Company’s lifetime expected credit losses are determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios, and are net of expected recoveries on loans that were previously charged off. Management believes
The Company’s allowance for loan losses and the newlyallowance for unfunded credit commitments are calculated with the objective of maintaining a reserve sufficient to absorb losses inherent in our credit portfolio. Management’s determination of the appropriateness of the allowance is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates as further discussed below.
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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, HELOCs, and other consumer loans. When similar risk characteristics exist, the Company measures the expected loan losses on a collective pool basis. Lifetime loss rate models have been adopted methodologiesfor the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool. Models consisting of quantitative and qualitative components are appropriate givendesigned for each pool to develop the Company’s sizeexpected credit loss estimate. Quantitative methods consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The Company incorporates forward-looking information using macroeconomic scenarios applied over the forecasted life of the loans. These macroeconomic scenarios, which are applied over a reasonable and levelsupportable forecast period, may consist of complexity.a base forecast representing management’s review of the most likely outcome, combined with downside and upside scenarios reflecting possible worsening or improving economic conditions. Additionally, the Company utilizes qualitative factors and environmental factors that are not already included in the quantitative models. The Company reviews the existing qualitative factors for appropriateness and examines the portfolio for any new qualitative factors that may be topical or appropriate. As the economy and risks in the loan portfolio change, management recommends adjustments to these factors as appropriate.
When loans do not share risk characteristics, the Company evaluates the expected credit losses on an individual basis 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. The following 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.
The allowance for unfunded credit commitments includes reserves provided for unfunded loan commitments, letters of credit, SBLCs and recourse obligations for loans sold. 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 evaluation of allowance is inherently subjective, as it requires numerous estimates and judgments that are susceptible to revision as more information becomes available. To the extent actual results differ from estimates or management’s judgments, the allowance for credit losses may be greater or less than future charge-offs. As the Company adds new products, increases the complexity of the loan portfolio and expands the geographic coverage, the Company expects to continue to enhance its methodologies to keep pace with the changing credit environment and the size and complexity of the loan portfolio and unfunded credit commitments. Changes in any of the factors cited above could have a significant impact on the allowance for credit loss calculation. For additional information on allowance for credit losses, see Note 1 -— Summary of Significant Accounting Policies and Note 76 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-K.
Goodwill Impairment
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Significant judgment isjudgments are applied and assumptions are made when estimating the fair value of the reporting units. Estimates of fair value are dependent upon various factors including estimates of the profitability of the Company’s reporting units, long term growth rates and the estimated market cost of equity. Imprecision in estimating these factors can affect the estimated fair value of the reporting units. Certain events or circumstances could have a negative effect on the estimated fair value of the reporting units, including declines in business performance, increases in credit losses, as well as deterioration in economic or market conditions and adverse regulatory or legislative changes, which could result in a material impairment charge to earnings in a future period.
In light of the fourth quarterCOVID-19 pandemic impact and market volatility, an interim goodwill impairment analysis was conducted as of 2019,March 31, 2020. In addition, the Company performed its annual goodwill impairment test on all reporting units andas of December 31, 2020. There was no goodwill impairment was recognizedfor its business segments as a result of the test. For additional information on goodwill, see Note 9 — GoodwillMarch 31, 2020 and Other Intangible Assets to the Consolidated Financial Statements in this Form 10-K.December 31, 2020.
Income Taxes
The Company is subject to income tax laws of the various tax jurisdictions in which it conducts business, including the U.S., its states and the municipalities, and the tax jurisdictions in Hong Kong and China. The Company estimates income tax expense based on amounts expected to be owed to these various tax jurisdictions. The estimated income tax expense or benefit is reported on the Consolidated Statement of Income.
Accrued taxes represent the net estimated amount due to or to be receiveddue from various tax jurisdictions and are reported in Accrued expenses and other liabilities or Other assets on the Consolidated Balance Sheets. In estimating accrued taxes, the Company assesses the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent, and other pertinent information. The income tax laws are complex and subject to different interpretations by the Company and the relevant government taxing authorities. Significant judgment is required in determining the tax accruals and in evaluating the tax positions, including evaluating uncertain tax positions. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities, and newly enacted statutory, judicial, and regulatory guidance that could impact the relative merits and risks of tax positions. These changes, when they occur, impact tax expense and can materially affect theour operating results.results and financial condition. The Company reviews its tax positions on a quarterly basis and makes adjustments to accrued taxes as new information becomes available.
Deferred tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise due to temporary differences between the financial accounting basis and the income tax basis of assets and liabilities, as well as from NOL and tax credit carryforwards. The Company regularly evaluates the realizability of deferred tax assets. The available evidence used in connection with the evaluations includes taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items.
A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. It reduces the deferred tax assets to the amount that is more-likely-than-not to be realized. The Company has concluded that it is more-likely-than-not that all of the benefit of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state NOLs. Accordingly, a valuation allowance has been recorded for these amounts.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an income tax return. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. The Company establishes a liability for potential taxes, interest and penalties related to uncertain tax positions based on facts and circumstances, including the interpretation of existing law, new judicial or regulatory guidance, and the status of tax audits. The Company believes that adequate provisions have been recorded for all income tax uncertainties consistent with ASC 740, Income Taxes as of December 31, 20192020. See Note 1411 — Income Taxes to the Consolidated Financial Statements in this Form 10-K for additional information on income taxes.
Recently Issued Accounting Standards
For detailed discussion and disclosure on new accounting pronouncements adopted and recent accounting standards, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-K.
Reconciliation of GAAP andto Non-GAAP Financial Measures
To supplement the Company’s Consolidated Financial Statements presented in accordance with GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.requirements. The Company believes these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding its performance, and allow comparability to prior periods. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.
During 2020, the Company recorded $10.7 million in recoveries, of which $1.1 million was recorded as an impairment recovery, and $5.1 million in uncertain tax position related to the Company’s investment in DC Solar. In addition, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million in 2020. During 2019, the Company recorded a $7.0 million pre-tax impairment charge, reversed $30.1 million of certain previously claimed tax credits and subsequently recorded arecovered $1.6 million pre-tax impairment recovery related to DC Solar. During 2018, the Company sold its eight DCB branches and recognized a pre-tax gain on sale of $31.5 million. During 2017, the Company consummated a sale and leaseback transaction on a commercial property and recognized a pre-tax gain on sale of $71.7 million, sold its EWIS insurance brokerage business and recognized a pre-tax gain on sale of $3.8 million, and recorded additional income tax expense of $41.7 million related to the passing of the Tax Act.
The following tables present the reconciliation of GAAP to non-GAAP financial measures in 2020, 2019 2018 and 2017:2018:
| ($ and shares in thousands, except per share data) | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Net income | (a) | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||||||||||||||||
Add: Impairment charge related to DC Solar (1) | — | 6,978 | — | ||||||||||||||||||||||||||||||||
Less: Recoveries related to DC Solar (1) | (10,739) | (1,583) | — | ||||||||||||||||||||||||||||||||
| Less: Gain on sale of business | — | — | (31,470) | ||||||||||||||||||||||||||||||||
Tax effect of adjustments (2) | 3,047 | (1,595) | 9,303 | ||||||||||||||||||||||||||||||||
| Add: Reversal of certain previously claimed tax credits related to DC Solar | — | 30,104 | — | ||||||||||||||||||||||||||||||||
| Add: Uncertain tax position recorded in income tax expense related to DC Solar | 5,127 | — | — | ||||||||||||||||||||||||||||||||
| Non-GAAP net income | (b) | $ | 565,232 | $ | 707,939 | $ | 681,534 | ||||||||||||||||||||||||||||
| Diluted weighted-average number of shares outstanding | 142,991 | 146,179 | 146,169 | ||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 3.97 | $ | 4.61 | $ | 4.81 | |||||||||||||||||||||||||||||
| Diluted EPS impact of impairment charge related to DC Solar, net of tax | — | 0.03 | — | ||||||||||||||||||||||||||||||||
| Diluted EPS impact of recoveries related to DC Solar, net of tax | (0.06) | (0.01) | — | ||||||||||||||||||||||||||||||||
| Diluted EPS impact of reversal of certain previously claimed tax credits related to DC Solar | — | 0.21 | — | ||||||||||||||||||||||||||||||||
| Diluted EPS impact of uncertain tax position recorded in income tax expense related to DC Solar | 0.04 | — | — | ||||||||||||||||||||||||||||||||
| Diluted EPS impact of gain on sale of business, net of tax | — | — | (0.15) | ||||||||||||||||||||||||||||||||
| Non-GAAP diluted EPS | $ | 3.95 | $ | 4.84 | $ | 4.66 | |||||||||||||||||||||||||||||
| Average total assets | (c) | $ | 48,937,793 | $ | 42,484,885 | $ | 38,542,569 | ||||||||||||||||||||||||||||
| Average stockholders’ equity | (d) | $ | 5,082,186 | $ | 4,760,845 | $ | 4,130,822 | ||||||||||||||||||||||||||||
| ROA | (a)/(c) | 1.16 | % | 1.59 | % | 1.83 | % | ||||||||||||||||||||||||||||
| Non-GAAP ROA | (b)/(c) | 1.16 | % | 1.67 | % | 1.77 | % | ||||||||||||||||||||||||||||
| ROE | (a)/(d) | 11.17 | % | 14.16 | % | 17.04 | % | ||||||||||||||||||||||||||||
| Non-GAAP ROE | (b)/(d) | 11.12 | % | 14.87 | % | 16.50 | % | ||||||||||||||||||||||||||||
(1)Included in Amortization of tax credit and other investments on the Consolidated Statement of Income.
(2)Applied statutory tax rates of 28.37% for 2020 and 29.56%.for both 2019 and 2018.
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| ($ and shares in thousands, except per share data) | Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | |||||||||||
| Net income | (a) | $ | 674,035 | $ | 703,701 | $ | 505,624 | ||||||
Add: Impairment charge related to DC Solar (1) | 6,978 | — | — | ||||||||||
| Less: Gain on sale of the commercial property | — | — | (71,654 | ) | |||||||||
Gain on sale of business | — | (31,470 | ) | (3,807 | ) | ||||||||
Impairment recovery related to DC Solar (1) | (1,583 | ) | — | — | |||||||||
Tax effect of adjustments (2) | (1,595 | ) | 9,303 | 31,729 | |||||||||
| Add: Reversal of certain previously claimed tax credits related to DC Solar | 30,104 | — | — | ||||||||||
| Impact of the Tax Act | — | — | 41,689 | ||||||||||
| Non-GAAP net income | (b) | $ | 707,939 | $ | 681,534 | $ | 503,581 | ||||||
| Diluted weighted-average number of shares outstanding | 146,179 | 146,169 | 145,913 | ||||||||||
| Diluted EPS | $ | 4.61 | $ | 4.81 | $ | 3.47 | |||||||
| Diluted EPS impact of impairment charge related to DC Solar, net of tax | 0.03 | — | — | ||||||||||
| Diluted EPS impact of gain on sale of the commercial property, net of tax | — | — | (0.28 | ) | |||||||||
| Diluted EPS impact of gain on sale of business, net of tax | — | (0.15 | ) | (0.02 | ) | ||||||||
| Diluted EPS impact of impairment recovery related to DC Solar, net of tax | (0.01 | ) | — | — | |||||||||
| Diluted EPS impact of reversal of certain previously claimed tax credits related to DC Solar | 0.21 | — | — | ||||||||||
| Diluted EPS impact of the Tax Act | — | — | 0.29 | ||||||||||
| Non-GAAP diluted EPS | $ | 4.84 | $ | 4.66 | $ | 3.46 | |||||||
| Average total assets | (c) | $ | 42,484,885 | $ | 38,542,569 | $ | 35,787,613 | ||||||
| Average stockholders’ equity | (d) | $ | 4,760,845 | $ | 4,130,822 | $ | 3,687,213 | ||||||
| ROA | (a)/(c) | 1.59 | % | 1.83 | % | 1.41 | % | ||||||
| Non-GAAP ROA | (b)/(c) | 1.67 | % | 1.77 | % | 1.41 | % | ||||||
| ROE | (a)/(d) | 14.16 | % | 17.04 | % | 13.71 | % | ||||||
| Non-GAAP ROE | (b)/(d) | 14.87 | % | 16.50 | % | 13.66 | % | ||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Net interest income before provision for credit losses | (a) | $ | 1,377,193 | $ | 1,467,813 | $ | 1,386,508 | |||||||||||||||||||||||||||||||
Total noninterest income (1) | 235,547 | 222,245 | 217,433 | |||||||||||||||||||||||||||||||||||
| Total revenue | (b) | $ | 1,612,740 | $ | 1,690,058 | $ | 1,603,941 | |||||||||||||||||||||||||||||||
Total noninterest income (1) | $ | 235,547 | $ | 222,245 | $ | 217,433 | ||||||||||||||||||||||||||||||||
| Less: Gain on sale of business | — | — | (31,470) | |||||||||||||||||||||||||||||||||||
| Non-GAAP noninterest income | (c) | $ | 235,547 | $ | 222,245 | $ | 185,963 | |||||||||||||||||||||||||||||||
| Non-GAAP revenue | (a)+(c)=(d) | $ | 1,612,740 | $ | 1,690,058 | $ | 1,572,471 | |||||||||||||||||||||||||||||||
Total noninterest expense (1) | (e) | $ | 716,322 | $ | 747,456 | $ | 720,990 | |||||||||||||||||||||||||||||||
Less: Amortization of tax credit and other investments (1) | (70,082) | (98,383) | (96,152) | |||||||||||||||||||||||||||||||||||
| Amortization of core deposit intangibles | (3,634) | (4,518) | (5,492) | |||||||||||||||||||||||||||||||||||
| Repurchase agreements’ extinguishment cost | (8,740) | — | — | |||||||||||||||||||||||||||||||||||
| Non-GAAP noninterest expense | (f) | $ | 633,866 | $ | 644,555 | $ | 619,346 | |||||||||||||||||||||||||||||||
| Efficiency ratio | (e)/(b) | 44.42 | % | 44.23 | % | 44.95 | % | |||||||||||||||||||||||||||||||
| Non-GAAP efficiency ratio | (f)/(d) | 39.30 | % | 38.14 | % | 39.39 | % | |||||||||||||||||||||||||||||||
(1)In the fourth quarter of 2020, the Company reclassified certain income/losses from equity-method investments from Amortization of tax credit and other investments to Other investment income, with no effect on net income. Prior-period amounts have been revised to conform with the current presentation.
(1)Includes core deposit intangibles and mortgage servicing assets. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ($ in thousands) | Year Ended December 31, | |||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Income tax expense | (a) | $ | 169,882 | $ | 114,995 | $ | 229,476 | |||||||
| Less: Reversal of certain previously claimed tax credits related to DC Solar | (b) | (30,104 | ) | — | — | |||||||||
| Impact of the Tax Act | (c) | — | — | (41,689 | ) | |||||||||
| Non-GAAP income tax expense | (d) | $ | 139,778 | $ | 114,995 | $ | 187,787 | |||||||
| Income before income taxes | (e) | $ | 843,917 | $ | 818,696 | $ | 735,100 | |||||||
| Effective tax rate | (a)/(e) | 20.1 | % | 14.0 | % | 31.2 | % | |||||||
| Less: Reversal of certain previously claimed tax credits related to DC Solar | (b)/(e) | (3.5 | )% | — | % | — | % | |||||||
| Impact of the Tax Act | (c)/(e) | — | % | — | % | (5.7 | )% | |||||||
| Non-GAAP effective tax rate | (d)/(e) | 16.6 | % | 14.0 | % | 25.5 | % | |||||||
| ($ in thousands) | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | |||||||||||||||||||||||||||||
| Add: Amortization of core deposit intangibles | 3,634 | 4,518 | 5,492 | ||||||||||||||||||||||||||||||||
| Amortization of mortgage servicing assets | 1,920 | 2,738 | 1,814 | ||||||||||||||||||||||||||||||||
Tax effect of adjustments (1) | (1,575) | (2,145) | (2,160) | ||||||||||||||||||||||||||||||||
| Non-GAAP tangible net income | (a) | $ | 571,776 | $ | 679,146 | $ | 708,847 | ||||||||||||||||||||||||||||
| Average stockholders’ equity | $ | 5,082,186 | $ | 4,760,845 | $ | 4,130,822 | |||||||||||||||||||||||||||||
| Less: Average goodwill | (465,697) | (465,663) | (466,346) | ||||||||||||||||||||||||||||||||
Average other intangible asset (2) | (13,769) | (19,340) | (25,337) | ||||||||||||||||||||||||||||||||
| Average non-GAAP tangible equity | (b) | $ | 4,602,720 | $ | 4,275,842 | $ | 3,639,139 | ||||||||||||||||||||||||||||
| Return on average non-GAAP tangible equity | (a)/(b) | 12.42 | % | 15.88 | % | 19.48 | % | ||||||||||||||||||||||||||||
(2)Includes core deposit intangibles and mortgage servicing assets.
| ($ in thousands) | Year Ended December 31, | |||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Net interest income before provision for credit losses | (a) | $ | 1,467,813 | $ | 1,386,508 | $ | 1,185,069 | |||||||
| Total noninterest income | 209,377 | 210,909 | 257,748 | |||||||||||
| Total revenue | (b) | $ | 1,677,190 | $ | 1,597,417 | $ | 1,442,817 | |||||||
| Total noninterest income | $ | 209,377 | $ | 210,909 | $ | 257,748 | ||||||||
| Less: Gain on sale of the commercial property | — | — | (71,654 | ) | ||||||||||
| Gain on sale of business | — | (31,470 | ) | (3,807 | ) | |||||||||
| Non-GAAP noninterest income | (c) | $ | 209,377 | $ | 179,439 | $ | 182,287 | |||||||
| Non-GAAP revenue | (a)+(c)=(d) | $ | 1,677,190 | $ | 1,565,947 | $ | 1,367,356 | |||||||
| Total noninterest expense | (e) | $ | 734,588 | $ | 714,466 | $ | 661,451 | |||||||
| Less: Amortization of tax credit and other investments | (85,515 | ) | (89,628 | ) | (87,950 | ) | ||||||||
| Amortization of core deposit intangibles | (4,518 | ) | (5,492 | ) | (6,935 | ) | ||||||||
| Non-GAAP noninterest expense | (f) | $ | 644,555 | $ | 619,346 | $ | 566,566 | |||||||
| Efficiency ratio | (e)/(b) | 43.80 | % | 44.73 | % | 45.84 | % | |||||||
| Non-GAAP efficiency ratio | (f)/(d) | 38.43 | % | 39.55 | % | 41.44 | % | |||||||
| ($ and shares in thousands, except per share data) | December 31, | |||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Stockholders’ equity | (a) | $ | 5,017,617 | $ | 4,423,974 | $ | 3,841,951 | |||||||
| Less: Goodwill | (465,697 | ) | (465,547 | ) | (469,433 | ) | ||||||||
Other intangible assets (1) | (16,079 | ) | (22,365 | ) | (28,825 | ) | ||||||||
| Non-GAAP tangible common equity | (b) | $ | 4,535,841 | $ | 3,936,062 | $ | 3,343,693 | |||||||
| Number of common shares, at period-end | (c) | 145,625 | 144,961 | 144,543 | ||||||||||
| Non-GAAP tangible common equity per share | (b)/(c) | $ | 31.15 | $ | 27.15 | $ | 23.13 | |||||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risk in the Company’s portfolio, see Item 7. MD&A — Risk Management — Market Risk Management and Note 65 — Derivatives to the Consolidated Financial Statements in this Form 10-K.
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EAST WEST BANCORP, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
East West Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of East West Bancorp, Inc. and subsidiaries (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 202026, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 6 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionopinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for loan losses related to non-impairedfor loans collectively evaluated for impairment.on a collective pool basis
As discussed in Notes 1 and 76 to the consolidated financial statements, the Company’sCompany adopted ASU No. 2016-13, Financial Instruments — Credit Losses (ASC Topic 326) as of January 1, 2020. As of January 1, 2020, the allowance for loan losses related to non-impaired(ALL) was $483 million, which includes the ALL for commercial loans collectivelyand residential mortgage loans evaluated for impairment (general reserve) was $353 million ofon a total allowance for loan losses of $358 million ascollective pool basis (the January 1, 2020 collective ALL). As of December 31, 2019.2020, the ALL was $620 million, which includes the ALL for commercial loans evaluated on a collective pool basis (the December 31, 2020 commercial collective ALL). The ALL is 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, adjusted for estimated prepayments. The Company measured the expected credit losses on a collective pool basis when similar risk characteristics existed. The January 1, 2020 collective ALL and the December 31, 2020 commercial collective ALL included quantitative and qualitative components (together, the collective ALL). The Company developed and documented the collective ALL methodology to determineat the general reserve isportfolio segment level. The collective ALL methodology used various models and estimation techniques based on a classified asset migration model (the model) that uses both quantitative factors and qualitative considerations. The model examines pools of loans having similar characteristics, including loan grades for heterogeneous loans, and estimates their probable losses. Quantitative factors includethe Company’s historical loss experience, delinquencycurrent borrower characteristics, which included internal risk ratings, current conditions, and net charge-off trends,reasonable and other factors. Additionally,supportable macroeconomic forecasts. The commercial loan portfolio is comprised of commercial and industrial (C&I) and commercial real estate (CRE), which also included multifamily residential, and construction and land loans. The residential mortgage portfolio is comprised of single-family residential and home equity line of credit (HELOC) loans. The Company’s C&I lifetime loss rate model estimated credit losses by estimating a loss rate expected over the methodology utilizes qualitativelife of a loan which is applied to the amortized cost basis, excluding accrued interest receivables, to determine expected credit losses. The Company’s CRE and environmental factors as adjusting mechanismsresidential mortgage projected probability of defaults (PDs) and loss given defaults (LGDs) are applied to supplementthe estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss. The Company incorporated forward-looking information using macroeconomic scenarios, which included variables that are considered key drivers of increases and decreases in credit losses. A probability-weighted multiple scenario forecast over a reasonable and supportable forecast period is incorporated into both the quantitative models. The Company’s C&I lifetime loss rate model reverts to the historical resultsaverage loss rate, expressed through the loan-level lifetime loss rate, after the reasonable and supportable forecast period. The Company’s CRE and residential mortgage models consider the contractual life of the model.loans and the forecast of future economic conditions return to long-run historical economic trends within the reasonable and supportable period. In order to estimate the life of a loan under both quantitative models, the contractual term of the loan is adjusted for estimated prepayments based on historical prepayment experience. The Company also considered qualitative factors in determining the collective ALL. Qualitative adjustments were used to capture characteristics in the portfolio that impact expected credit losses which were not fully captured within the Company’s quantitative expected credit loss models.
We identified the assessment of the general reserveJanuary 1, 2020 collective ALL and the December 31, 2020 commercial collective ALL as a critical audit matter as it involved significant measurement uncertainty, requiredmatter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment and industry knowledge and experience.was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment involvedencompassed the evaluation of the collective ALL methodology, including an evaluation of the methodologyconceptual soundness and model,performance of the methods and models used to estimate (1) the key inputsquantitative component and its significant data elements and assumptions, which included (1) how loans with similar characteristics are pooled, (2) loan grades for heterogeneous loans, (3) loss rates based on historicalportfolio segments, historic loss experience, reasonable and (4)supportable forecast period, internal risk ratings, probability-weighted macroeconomic forecast scenarios, contractual term of the loan adjusted for estimated prepayments, and (2) the qualitative and environmental factors.component. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address thethis critical audit matter included the following.matter. We testedevaluated the design implementation, and tested the operating effectiveness of certain internal controls overrelated to the development and approvalCompany’s measurement of the general reservecollective ALL estimates, including controls over the:
•development of the collective ALL methodology including
•development of the quantitative models
•performance monitoring of the quantitative models for the December 31, 2020 commercial collective ALL
•identification and determination of the key inputssignificant data elements and assumptions used in the quantitative models
•development of the qualitative component
•analysis of the collective ALL results, trends, and ratios.
92
We evaluated the Company’s process to develop the collective ALL estimates by testing the models, significant data elements and assumptions that the Company used, and considered the relevance and reliability of such models, data, factors, and assumptions. We testedperformed ratio and trend analysis over key ratios and peer comparison information relevant to the process for estimating the general reserve, including the key inputs and assumptions. Wecollective ALL. In addition, we involved credit risk professionals with specialized industryskills and knowledge, and experience, who assisted inin:
•evaluating the evaluation of (1) the general reserveCompany’s collective ALL methodology for compliance with U.S. generally accepted accounting principles (2) how
•evaluating judgments made by the Company relative to the development, conceptual soundness and performance testing of the quantitative models, which are based on historical loss experience by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•evaluating the judgments made by the Company in selecting the macroeconomic forecast scenarios, including the reasonable and supportable period and the related probability-weighted macroeconomic forecast scenarios assessing the macroeconomic forecast scenarios through comparison to publicly available forecasts
•determining whether the loan portfolio is pooled based on loans with similar risk characteristics are pooled, (3) loan gradesby comparing to the Company’s business environment and relevant industry practices
•evaluating risk ratings for a selection of heterogeneouscollectively evaluated loans (4)
•evaluating the developmentconceptual soundness of the loss rates, which are based on the historical loss experience, and (5) the framework used to develop the resulting qualitative factors.factors and the effect of those factors on the collective ALL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
•cumulative results of audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in accounting estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 2009.
Los Angeles, California
February 27, 202026, 2021
93
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 536,221 | $ | 516,291 | ||||
| Interest-bearing cash with banks | 2,724,928 | 2,485,086 | ||||||
| Cash and cash equivalents | 3,261,149 | 3,001,377 | ||||||
| Interest-bearing deposits with banks | 196,161 | 371,000 | ||||||
| Securities purchased under resale agreements (“resale agreements”) | 860,000 | 1,035,000 | ||||||
| Securities: | ||||||||
| Available-for-sale (''AFS'') investment securities, at fair value (includes assets pledged as collateral of $479,432 in 2019 and $435,833 in 2018) | 3,317,214 | 2,741,847 | ||||||
| Restricted equity securities, at cost | 78,580 | 74,069 | ||||||
| Loans held-for-sale | 434 | 275 | ||||||
| Loans held-for-investment (net of allowance for loan losses of $358,287 in 2019 and $311,322 in 2018; includes assets pledged as collateral of $22,431,092 in 2019 and $20,590,035 in 2018) | 34,420,252 | 32,073,867 | ||||||
| Investments in qualified affordable housing partnerships, net | 207,037 | 184,873 | ||||||
| Investments in tax credit and other investments, net | 254,140 | 231,635 | ||||||
| Premises and equipment (net of accumulated depreciation of $116,790 in 2019 and $118,547 in 2018) | 118,364 | 119,180 | ||||||
| Goodwill | 465,697 | 465,547 | ||||||
| Operating lease right-of-use assets | 99,973 | — | ||||||
| Other assets | 917,095 | 743,686 | ||||||
| TOTAL | $ | 44,196,096 | $ | 41,042,356 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 11,080,036 | $ | 11,377,009 | ||||
| Interest-bearing | 26,244,223 | 24,062,619 | ||||||
| Total deposits | 37,324,259 | 35,439,628 | ||||||
| Short-term borrowings | 28,669 | 57,638 | ||||||
| Federal Home Loan Bank (“FHLB”) advances | 745,915 | 326,172 | ||||||
| Securities sold under repurchase agreements (“repurchase agreements”) | 200,000 | 50,000 | ||||||
| Long-term debt and finance lease liabilities | 152,270 | 146,835 | ||||||
| Operating lease liabilities | 108,083 | — | ||||||
| Accrued expenses and other liabilities | 619,283 | 598,109 | ||||||
| Total liabilities | 39,178,479 | 36,618,382 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 15) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized; 166,621,959 and 165,867,587 shares issued in 2019 and 2018, respectively | 167 | 166 | ||||||
| Additional paid-in capital | 1,826,345 | 1,789,811 | ||||||
| Retained earnings | 3,689,377 | 3,160,132 | ||||||
| Treasury stock, at cost — 20,996,574 shares in 2019 and 20,906,224 shares in 2018 | (479,864 | ) | (467,961 | ) | ||||
| Accumulated other comprehensive loss (“AOCI”), net of tax | (18,408 | ) | (58,174 | ) | ||||
| Total stockholders’ equity | 5,017,617 | 4,423,974 | ||||||
| TOTAL | $ | 44,196,096 | $ | 41,042,356 | ||||
| December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Cash and due from banks | $ | 592,117 | $ | 536,221 | ||||||||||
| Interest-bearing cash with banks | 3,425,854 | 2,724,928 | ||||||||||||
| Cash and cash equivalents | 4,017,971 | 3,261,149 | ||||||||||||
| Interest-bearing deposits with banks | 809,728 | 196,161 | ||||||||||||
| Assets purchased under resale agreements (“resale agreements”) | 1,460,000 | 860,000 | ||||||||||||
| Securities: | ||||||||||||||
| Available-for-sale (“AFS”) debt securities, at fair value (amortized cost of $5,470,523 in 2020 and $3,320,648 in 2019; includes assets pledged as collateral of $588,484 in 2020 and $479,432 in 2019) | 5,544,658 | 3,317,214 | ||||||||||||
| Restricted equity securities, at cost | 83,046 | 78,580 | ||||||||||||
| Loans held-for-sale | 1,788 | 434 | ||||||||||||
Loans held-for-investment (net of allowance for loan losses of $619,983 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $23,263,517 in 2020 and $22,431,092 in 2019) | 37,770,972 | 34,420,252 | ||||||||||||
| Investments in qualified affordable housing partnerships, net | 213,555 | 207,037 | ||||||||||||
| Investments in tax credit and other investments, net | 266,525 | 254,140 | ||||||||||||
| Premises and equipment (net of accumulated depreciation of $127,884 in 2020 and $116,790 in 2019) | 103,251 | 118,364 | ||||||||||||
| Goodwill | 465,697 | 465,697 | ||||||||||||
| Operating lease right-of-use assets | 95,460 | 99,973 | ||||||||||||
| Other assets | 1,324,262 | 917,095 | ||||||||||||
| TOTAL | $ | 52,156,913 | $ | 44,196,096 | ||||||||||
| LIABILITIES | ||||||||||||||
| Deposits: | ||||||||||||||
| Noninterest-bearing | $ | 16,298,301 | $ | 11,080,036 | ||||||||||
| Interest-bearing | 28,564,451 | 26,244,223 | ||||||||||||
| Total deposits | 44,862,752 | 37,324,259 | ||||||||||||
| Short-term borrowings | 21,009 | 28,669 | ||||||||||||
| Federal Home Loan Bank (“FHLB”) advances | 652,612 | 745,915 | ||||||||||||
| Assets sold under repurchase agreements (“repurchase agreements”) | 300,000 | 200,000 | ||||||||||||
| Long-term debt and finance lease liabilities | 151,739 | 152,270 | ||||||||||||
| Operating lease liabilities | 102,830 | 108,083 | ||||||||||||
| Accrued expenses and other liabilities | 796,796 | 619,283 | ||||||||||||
| Total liabilities | 46,887,738 | 39,178,479 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES (Note 12) | 0 | 0 | ||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized; 167,240,600 and 166,621,959 shares issued in 2020 and 2019, respectively | 167 | 167 | ||||||||||||
| Additional paid-in capital | 1,858,352 | 1,826,345 | ||||||||||||
| Retained earnings | 4,000,414 | 3,689,377 | ||||||||||||
| Treasury stock, at cost 25,675,371 shares in 2020 and 20,996,574 shares in 2019 | (634,083) | (479,864) | ||||||||||||
| Accumulated other comprehensive income (loss) (“AOCI”), net of tax | 44,325 | (18,408) | ||||||||||||
| Total stockholders’ equity | 5,269,175 | 5,017,617 | ||||||||||||
| TOTAL | $ | 52,156,913 | $ | 44,196,096 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| INTEREST AND DIVIDEND INCOME | INTEREST AND DIVIDEND INCOME | |||||||||||||||||||||||||||||||
| Loans receivable, including fees | $ | 1,717,415 | $ | 1,503,514 | $ | 1,198,440 | Loans receivable, including fees | $ | 1,464,382 | $ | 1,717,415 | $ | 1,503,514 | |||||||||||||||||||
| Investment securities | 67,838 | 60,911 | 58,670 | |||||||||||||||||||||||||||||
| AFS debt securities | AFS debt securities | 82,553 | 67,838 | 60,911 | ||||||||||||||||||||||||||||
| Resale agreements | 27,819 | 29,328 | 32,095 | Resale agreements | 21,389 | 28,061 | 29,432 | |||||||||||||||||||||||||
| Restricted equity securities | 2,468 | 3,146 | 2,524 | Restricted equity securities | 1,543 | 2,468 | 3,146 | |||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | 66,760 | 54,804 | 33,390 | Interest-bearing cash and deposits with banks | 25,175 | 66,518 | 54,700 | |||||||||||||||||||||||||
| Total interest and dividend income | 1,882,300 | 1,651,703 | 1,325,119 | Total interest and dividend income | 1,595,042 | 1,882,300 | 1,651,703 | |||||||||||||||||||||||||
| INTEREST EXPENSE | INTEREST EXPENSE | |||||||||||||||||||||||||||||||
| Deposits | 375,802 | 234,752 | 116,391 | Deposits | 184,742 | 375,802 | 234,752 | |||||||||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 1,763 | 1,398 | 1,003 | |||||||||||||||||||||||||||||
| Short-term borrowings | Short-term borrowings | 1,504 | 1,763 | 1,398 | ||||||||||||||||||||||||||||
| FHLB advances | 16,697 | 10,447 | 7,751 | FHLB advances | 13,792 | 16,697 | 10,447 | |||||||||||||||||||||||||
| Repurchase agreements | 13,582 | 12,110 | 9,476 | Repurchase agreements | 11,766 | 13,582 | 12,110 | |||||||||||||||||||||||||
| Long-term debt and finance lease liabilities | 6,643 | 6,488 | 5,429 | Long-term debt and finance lease liabilities | 6,045 | 6,643 | 6,488 | |||||||||||||||||||||||||
| Total interest expense | 414,487 | 265,195 | 140,050 | Total interest expense | 217,849 | 414,487 | 265,195 | |||||||||||||||||||||||||
| Net interest income before provision for credit losses | 1,467,813 | 1,386,508 | 1,185,069 | Net interest income before provision for credit losses | 1,377,193 | 1,467,813 | 1,386,508 | |||||||||||||||||||||||||
| Provision for credit losses | 98,685 | 64,255 | 46,266 | Provision for credit losses | 210,653 | 98,685 | 64,255 | |||||||||||||||||||||||||
| Net interest income after provision for credit losses | 1,369,128 | 1,322,253 | 1,138,803 | Net interest income after provision for credit losses | 1,166,540 | 1,369,128 | 1,322,253 | |||||||||||||||||||||||||
| NONINTEREST INCOME | NONINTEREST INCOME | |||||||||||||||||||||||||||||||
| Lending fees | 63,670 | 59,758 | 58,395 | Lending fees | 74,842 | 63,670 | 59,758 | |||||||||||||||||||||||||
| Deposit account fees | 38,648 | 39,176 | 40,299 | Deposit account fees | 48,148 | 38,648 | 39,176 | |||||||||||||||||||||||||
| Interest rate contracts and other derivative income | Interest rate contracts and other derivative income | 31,685 | 39,865 | 18,980 | ||||||||||||||||||||||||||||
| Foreign exchange income | 26,398 | 21,259 | 9,908 | Foreign exchange income | 22,370 | 26,398 | 21,259 | |||||||||||||||||||||||||
| Wealth management fees | 16,668 | 13,785 | 13,974 | Wealth management fees | 17,494 | 16,547 | 13,624 | |||||||||||||||||||||||||
| Interest rate contracts and other derivative income | 39,865 | 18,980 | 17,671 | |||||||||||||||||||||||||||||
| Net gains on sales of loans | 4,035 | 6,590 | 8,870 | Net gains on sales of loans | 4,501 | 4,035 | 6,590 | |||||||||||||||||||||||||
| Net gains on sales of AFS investment securities | 3,930 | 2,535 | 8,037 | |||||||||||||||||||||||||||||
| Net gains on sales of fixed assets | 114 | 6,683 | 77,388 | |||||||||||||||||||||||||||||
| Net gains on sales of AFS debt securities | Net gains on sales of AFS debt securities | 12,299 | 3,930 | 2,535 | ||||||||||||||||||||||||||||
| Net gain on sale of business | — | 31,470 | 3,807 | Net gain on sale of business | 0 | 0 | 31,470 | |||||||||||||||||||||||||
| Other investment income | 5,249 | 1,207 | 3,903 | Other investment income | 10,641 | 18,117 | 7,731 | |||||||||||||||||||||||||
| Other income | 10,800 | 9,466 | 15,496 | Other income | 13,567 | 11,035 | 16,310 | |||||||||||||||||||||||||
| Total noninterest income | 209,377 | 210,909 | 257,748 | Total noninterest income | 235,547 | 222,245 | 217,433 | |||||||||||||||||||||||||
| NONINTEREST EXPENSE | NONINTEREST EXPENSE | |||||||||||||||||||||||||||||||
| Compensation and employee benefits | 401,700 | 379,622 | 335,291 | Compensation and employee benefits | 404,071 | 401,700 | 379,622 | |||||||||||||||||||||||||
| Occupancy and equipment expense | 69,730 | 68,896 | 64,921 | Occupancy and equipment expense | 66,489 | 69,730 | 68,896 | |||||||||||||||||||||||||
| Deposit insurance premiums and regulatory assessments | 12,928 | 21,211 | 23,735 | Deposit insurance premiums and regulatory assessments | 15,128 | 12,928 | 21,211 | |||||||||||||||||||||||||
| Deposit account expense | Deposit account expense | 13,530 | 14,175 | 11,244 | ||||||||||||||||||||||||||||
| Data processing | Data processing | 16,603 | 13,533 | 13,177 | ||||||||||||||||||||||||||||
| Computer software expense | Computer software expense | 29,033 | 26,471 | 22,286 | ||||||||||||||||||||||||||||
| Consulting expense | Consulting expense | 5,391 | 9,846 | 11,579 | ||||||||||||||||||||||||||||
| Legal expense | 8,441 | 8,781 | 11,444 | Legal expense | 7,766 | 8,441 | 8,781 | |||||||||||||||||||||||||
| Data processing | 13,533 | 13,177 | 12,093 | |||||||||||||||||||||||||||||
| Consulting expense | 9,846 | 11,579 | 14,922 | |||||||||||||||||||||||||||||
| Deposit related expense | 14,175 | 11,244 | 9,938 | |||||||||||||||||||||||||||||
| Computer software expense | 26,471 | 22,286 | 18,183 | |||||||||||||||||||||||||||||
| Other operating expense | 92,249 | 88,042 | 82,974 | Other operating expense | 79,489 | 92,249 | 88,042 | |||||||||||||||||||||||||
| Amortization of tax credit and other investments | 85,515 | 89,628 | 87,950 | Amortization of tax credit and other investments | 70,082 | 98,383 | 96,152 | |||||||||||||||||||||||||
| Repurchase agreements’ extinguishment cost | Repurchase agreements’ extinguishment cost | 8,740 | 0 | 0 | ||||||||||||||||||||||||||||
| Total noninterest expense | 734,588 | 714,466 | 661,451 | Total noninterest expense | 716,322 | 747,456 | 720,990 | |||||||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | 843,917 | 818,696 | 735,100 | INCOME BEFORE INCOME TAXES | 685,765 | 843,917 | 818,696 | |||||||||||||||||||||||||
| INCOME TAX EXPENSE | 169,882 | 114,995 | 229,476 | INCOME TAX EXPENSE | 117,968 | 169,882 | 114,995 | |||||||||||||||||||||||||
| NET INCOME | $ | 674,035 | $ | 703,701 | $ | 505,624 | NET INCOME | $ | 567,797 | $ | 674,035 | $ | 703,701 | |||||||||||||||||||
| EARNINGS PER SHARE (“EPS”) | EARNINGS PER SHARE (“EPS”) | |||||||||||||||||||||||||||||||
| BASIC | $ | 4.63 | $ | 4.86 | $ | 3.50 | BASIC | $ | 3.99 | $ | 4.63 | $ | 4.86 | |||||||||||||||||||
| DILUTED | $ | 4.61 | $ | 4.81 | $ | 3.47 | DILUTED | $ | 3.97 | $ | 4.61 | $ | 4.81 | |||||||||||||||||||
| WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | |||||||||||||||||||||||||||||||
| BASIC | 145,497 | 144,862 | 144,444 | BASIC | 142,336 | 145,497 | 144,862 | |||||||||||||||||||||||||
| DILUTED | 146,179 | 146,169 | 145,913 | DILUTED | 142,991 | 146,179 | 146,169 | |||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Net changes in unrealized gains (losses) on AFS debt securities | 54,666 | 43,402 | (8,652) | |||||||||||||||||
| Net changes in unrealized losses on cash flow hedges | (1,230) | 0 | 0 | |||||||||||||||||
| Foreign currency translation adjustments | 9,297 | (3,636) | (5,732) | |||||||||||||||||
| Other comprehensive income (loss) | 62,733 | 39,766 | (14,384) | |||||||||||||||||
| COMPREHENSIVE INCOME | $ | 630,530 | $ | 713,801 | $ | 689,317 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 674,035 | $ | 703,701 | $ | 505,624 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Net changes in unrealized gains (losses) on AFS investment securities | 43,402 | (8,652 | ) | (2,126 | ) | |||||||
| Foreign currency translation adjustments | (3,636 | ) | (5,732 | ) | 12,753 | |||||||
| Other comprehensive income (loss) | 39,766 | (14,384 | ) | 10,627 | ||||||||
| COMPREHENSIVE INCOME | $ | 713,801 | $ | 689,317 | $ | 516,251 | ||||||
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)shares and per share data)
| Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2017 | 144,543,060 | $ | 1,755,495 | $ | 2,576,302 | $ | (452,327) | $ | (37,519) | $ | 3,841,951 | |||||||||||||||||||||||||||||||||||||||||||||
Cumulative-effect of change in accounting principle related to marketable equity securities (1) | — | — | (545) | — | 385 | (160) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2) | — | — | 6,656 | — | (6,656) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 703,701 | — | — | 703,701 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (14,384) | (14,384) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 418,303 | 34,482 | — | (15,634) | — | 18,848 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock ($0.860 per share) | — | — | (125,982) | — | — | (125,982) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2018 | 144,961,363 | $ | 1,789,977 | $ | 3,160,132 | $ | (467,961) | $ | (58,174) | $ | 4,423,974 | |||||||||||||||||||||||||||||||||||||||||||||
Cumulative-effect of change in accounting principle related to leases (3) | — | — | 10,510 | — | — | 10,510 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 674,035 | — | — | 674,035 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 39,766 | 39,766 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants exercised | 180,226 | 1,711 | — | 2,732 | — | 4,443 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 483,796 | 34,824 | — | (14,635) | — | 20,189 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock ($1.055 per share) | — | — | (155,300) | — | — | (155,300) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2019 | 145,625,385 | $ | 1,826,512 | $ | 3,689,377 | $ | (479,864) | $ | (18,408) | $ | 5,017,617 | |||||||||||||||||||||||||||||||||||||||||||||
Cumulative-effect of change in accounting principle related to credit losses (4) | — | — | (97,967) | — | — | (97,967) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 567,797 | — | — | 567,797 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 62,733 | 62,733 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 411,526 | 32,007 | — | (8,253) | — | 23,754 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the Stock Repurchase Program | (4,471,682) | — | — | (145,966) | — | (145,966) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock ($1.100 per share) | — | — | (158,793) | — | — | (158,793) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2020 | 141,565,229 | $ | 1,858,519 | $ | 4,000,414 | $ | (634,083) | $ | 44,325 | $ | 5,269,175 | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | |||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2016 | 144,167,451 | $ | 1,727,598 | $ | 2,187,676 | $ | (439,387 | ) | $ | (48,146 | ) | $ | 3,427,741 | ||||||||||
| Net income | — | — | 505,624 | — | — | 505,624 | |||||||||||||||||
| Other comprehensive income | — | — | — | — | 10,627 | 10,627 | |||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 375,609 | 27,897 | — | (12,940 | ) | — | 14,957 | ||||||||||||||||
| Cash dividends on common stock ($0.80 per share) | — | — | (116,998 | ) | — | — | (116,998 | ) | |||||||||||||||
| BALANCE, DECEMBER 31, 2017 | 144,543,060 | $ | 1,755,495 | $ | 2,576,302 | $ | (452,327 | ) | $ | (37,519 | ) | $ | 3,841,951 | ||||||||||
Cumulative effect of change in accounting principle related to marketable equity securities (1) | — | — | (545 | ) | — | 385 | (160 | ) | |||||||||||||||
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2) | — | — | 6,656 | — | (6,656 | ) | — | ||||||||||||||||
| Net income | — | — | 703,701 | — | — | 703,701 | |||||||||||||||||
| Other comprehensive loss | — | — | — | — | (14,384 | ) | (14,384 | ) | |||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 418,303 | 34,482 | — | (15,634 | ) | — | 18,848 | ||||||||||||||||
| Cash dividends on common stock ($0.86 per share) | — | — | (125,982 | ) | — | — | (125,982 | ) | |||||||||||||||
| BALANCE, DECEMBER 31, 2018 | 144,961,363 | $ | 1,789,977 | $ | 3,160,132 | $ | (467,961 | ) | $ | (58,174 | ) | $ | 4,423,974 | ||||||||||
Cumulative effect of change in accounting principle related to leases (3) | — | — | 10,510 | — | — | 10,510 | |||||||||||||||||
| Net income | — | — | 674,035 | — | — | 674,035 | |||||||||||||||||
| Other comprehensive income | — | — | — | — | 39,766 | 39,766 | |||||||||||||||||
| Warrants exercised | 180,226 | 1,711 | — | 2,732 | — | 4,443 | |||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 483,796 | 34,824 | — | (14,635 | ) | — | 20,189 | ||||||||||||||||
| Cash dividends on common stock ($1.055 per share) | — | — | (155,300 | ) | — | — | (155,300 | ) | |||||||||||||||
| BALANCE, DECEMBER 31, 2019 | 145,625,385 | $ | 1,826,512 | $ | 3,689,377 | $ | (479,864 | ) | $ | (18,408 | ) | $ | 5,017,617 | ||||||||||
(2)Represents amounts reclassified from AOCI to retained earnings due to the early adoption of ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income on January 1, 2018. (3)Represents the impact of the adoption of ASU 2016-02, Leases (Topic 842) and subsequent related ASUson January 1, 2019. (4)Represents the impact of the adoption of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) on January 1, 2020. Refer to Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Annual Report on Form 10-K (“this Form 10-K”) for additional information. |
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| ($ in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||||||||||||||||
| Net income | $ | 674,035 | $ | 703,701 | $ | 505,624 | Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | |||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||||||
| Provision for credit losses | Provision for credit losses | 210,653 | 98,685 | 64,255 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 144,178 | 139,499 | 149,822 | Depreciation and amortization | 119,908 | 144,178 | 139,499 | |||||||||||||||||||||||||
| Accretion of discount and amortization of premiums, net | (22,379 | ) | (20,572 | ) | (7,260 | ) | Accretion of discount and amortization of premiums, net | (16,456) | (22,379) | (20,572) | ||||||||||||||||||||||
| Stock compensation costs | 30,761 | 30,937 | 24,657 | Stock compensation costs | 29,237 | 30,761 | 30,937 | |||||||||||||||||||||||||
| Deferred income tax (benefit) expense | (21,604 | ) | (16,470 | ) | 33,856 | |||||||||||||||||||||||||||
| Provision for credit losses | 98,685 | 64,255 | 46,266 | |||||||||||||||||||||||||||||
| Deferred income tax benefit | Deferred income tax benefit | (41,515) | (21,604) | (16,470) | ||||||||||||||||||||||||||||
| Net gains on sales of loans | (4,035 | ) | (6,590 | ) | (8,870 | ) | Net gains on sales of loans | (4,501) | (4,035) | (6,590) | ||||||||||||||||||||||
| Net gains on sales of AFS investment securities | (3,930 | ) | (2,535 | ) | (8,037 | ) | ||||||||||||||||||||||||||
| Net gains on sales of fixed assets | (114 | ) | (6,683 | ) | (77,388 | ) | ||||||||||||||||||||||||||
| Gains on sales of AFS debt securities | Gains on sales of AFS debt securities | (12,299) | (3,930) | (2,535) | ||||||||||||||||||||||||||||
| Net gain on sale of business | — | (31,470 | ) | (3,807 | ) | Net gain on sale of business | 0 | 0 | (31,470) | |||||||||||||||||||||||
| Loans held-for-sale: | Loans held-for-sale: | |||||||||||||||||||||||||||||||
| Originations and purchases | (10,569 | ) | (20,176 | ) | (20,521 | ) | Originations and purchases | (81,662) | (10,569) | (20,176) | ||||||||||||||||||||||
| Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 10,436 | 20,068 | 21,363 | Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 80,659 | 10,436 | 20,068 | |||||||||||||||||||||||||
| Proceeds from distributions received from equity method investees | 3,470 | 3,761 | 3,582 | Proceeds from distributions received from equity method investees | 8,786 | 3,470 | 3,761 | |||||||||||||||||||||||||
| Net change in accrued interest receivable and other assets | (170,819 | ) | (60,791 | ) | 45,354 | Net change in accrued interest receivable and other assets | (339,868) | (170,819) | (60,791) | |||||||||||||||||||||||
| Net change in accrued expenses and other liabilities | 7,012 | 88,070 | (1,965 | ) | Net change in accrued expenses and other liabilities | 170,403 | 7,012 | 88,070 | ||||||||||||||||||||||||
| Other net operating activities | 702 | (1,832 | ) | 599 | Other net operating activities | 2,183 | 588 | (8,515) | ||||||||||||||||||||||||
| Total adjustments | 61,794 | 179,471 | 197,651 | Total adjustments | 125,528 | 61,794 | 179,471 | |||||||||||||||||||||||||
| Net cash provided by operating activities | 735,829 | 883,172 | 703,275 | Net cash provided by operating activities | 693,325 | 735,829 | 883,172 | |||||||||||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||||||||||||||||
| Net (increase) decrease in: | Net (increase) decrease in: | |||||||||||||||||||||||||||||||
| Investments in qualified affordable housing partnerships, tax credit and other investments | (146,902 | ) | (132,605 | ) | (173,630 | ) | Investments in qualified affordable housing partnerships, tax credit and other investments | (154,887) | (146,902) | (132,605) | ||||||||||||||||||||||
| Interest-bearing deposits with banks | 193,455 | 4,212 | (63,096 | ) | Interest-bearing deposits with banks | (577,607) | 193,455 | 4,212 | ||||||||||||||||||||||||
| Resale agreements: | Resale agreements: | |||||||||||||||||||||||||||||||
| Proceeds from paydowns and maturities | 650,000 | 175,000 | 1,250,000 | Proceeds from paydowns and maturities | 450,000 | 650,000 | 175,000 | |||||||||||||||||||||||||
| Purchases | (325,000 | ) | (160,000 | ) | (600,000 | ) | Purchases | (800,000) | (325,000) | (160,000) | ||||||||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||||||||||||
| AFS debt securities: | AFS debt securities: | |||||||||||||||||||||||||||||||
| Proceeds from sales | 627,110 | 364,270 | 832,844 | Proceeds from sales | 525,433 | 627,110 | 364,270 | |||||||||||||||||||||||||
| Proceeds from repayments, maturities and redemptions | 1,155,002 | 742,132 | 413,593 | Proceeds from repayments, maturities and redemptions | 2,070,131 | 1,155,002 | 742,132 | |||||||||||||||||||||||||
| Purchases | (2,303,317 | ) | (888,673 | ) | (828,604 | ) | Purchases | (4,758,254) | (2,303,317) | (888,673) | ||||||||||||||||||||||
| Loans held-for-investment: | Loans held-for-investment: | |||||||||||||||||||||||||||||||
| Proceeds from sales of loans originally classified as held-for-investment | 288,823 | 483,948 | 566,688 | Proceeds from sales of loans originally classified as held-for-investment | 331,864 | 288,823 | 483,948 | |||||||||||||||||||||||||
| Purchases | (524,142 | ) | (597,112 | ) | (534,816 | ) | Purchases | (389,863) | (524,142) | (597,112) | ||||||||||||||||||||||
| Other changes in loans held-for-investment, net | (2,184,915 | ) | (3,313,382 | ) | (3,514,786 | ) | Other changes in loans held-for-investment, net | (3,557,369) | (2,184,915) | (3,313,382) | ||||||||||||||||||||||
| Premises and equipment: | Premises and equipment: | |||||||||||||||||||||||||||||||
| Proceeds from sales | 403 | 1,638 | 119,749 | Proceeds from sales | 5,154 | 403 | 1,638 | |||||||||||||||||||||||||
| Purchases | (9,859 | ) | (13,787 | ) | (13,754 | ) | Purchases | (2,656) | (9,859) | (13,787) | ||||||||||||||||||||||
| Sales of businesses, net of cash transferred: | ||||||||||||||||||||||||||||||||
| Proceeds | — | — | 3,633 | |||||||||||||||||||||||||||||
| Payments | — | (503,687 | ) | — | ||||||||||||||||||||||||||||
| Proceeds from sales of other real estate owned (“OREO”) | 1,224 | 4,484 | 6,999 | |||||||||||||||||||||||||||||
| Proceeds from distributions received from equity method investees | 9,502 | 5,185 | 8,387 | |||||||||||||||||||||||||||||
| Payment received from the sales of businesses, net of cash transferred | Payment received from the sales of businesses, net of cash transferred | 0 | 0 | (503,687) | ||||||||||||||||||||||||||||
| Distributions received from equity method investees | Distributions received from equity method investees | 15,901 | 9,502 | 5,185 | ||||||||||||||||||||||||||||
| Other net investing activities | (2,560 | ) | (4,035 | ) | 19,969 | Other net investing activities | (6,563) | (1,336) | 449 | |||||||||||||||||||||||
| Net cash used in investing activities | (2,571,176 | ) | (3,832,412 | ) | (2,506,824 | ) | Net cash used in investing activities | (6,848,716) | (2,571,176) | (3,832,412) | ||||||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||||||||||||||
| Net increase in deposits | 1,902,741 | 3,903,192 | 2,272,500 | |||||||||||||||||||||||||||||
| Net (decrease) increase in short-term borrowings | (28,535 | ) | 61,392 | (61,560 | ) | |||||||||||||||||||||||||||
| FHLB advances | ||||||||||||||||||||||||||||||||
| Proceeds | 1,500,000 | — | — | |||||||||||||||||||||||||||||
| Repayment | (1,082,001 | ) | — | — | ||||||||||||||||||||||||||||
| Repayment of long-term debt and lease liabilities | (884 | ) | (25,000 | ) | (15,000 | ) | ||||||||||||||||||||||||||
| Common stock: | ||||||||||||||||||||||||||||||||
| Proceeds from issuance pursuant to various stock compensation plans and agreements | 3,383 | 2,846 | 2,280 | |||||||||||||||||||||||||||||
| Stocks tendered for payment of withholding taxes | (14,635 | ) | (15,634 | ) | (12,940 | ) | ||||||||||||||||||||||||||
| Cash dividends paid | (155,107 | ) | (125,988 | ) | (116,820 | ) | ||||||||||||||||||||||||||
| Net cash provided by financing activities | 2,124,962 | 3,800,808 | 2,068,460 | |||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (29,843 | ) | (24,783 | ) | 31,178 | |||||||||||||||||||||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 259,772 | 826,785 | 296,089 | |||||||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,001,377 | 2,174,592 | 1,878,503 | |||||||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 3,261,149 | $ | 3,001,377 | $ | 2,174,592 | ||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Continued)
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||
| Net increase in deposits | 7,482,730 | 1,902,741 | 3,903,192 | |||||||||||||||||
| Net (decrease) increase in short-term borrowings | (9,016) | (28,535) | 61,392 | |||||||||||||||||
| FHLB advances: | ||||||||||||||||||||
| Proceeds | 10,300 | 1,500,000 | 0 | |||||||||||||||||
| Repayments | (105,300) | (1,082,001) | 0 | |||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| Proceeds | 48,063 | 0 | 0 | |||||||||||||||||
| Repayment | (198,063) | 0 | 0 | |||||||||||||||||
| Extinguishment cost | (8,740) | 0 | 0 | |||||||||||||||||
| Long-term debt and lease liabilities: | ||||||||||||||||||||
| Proceeds from long-term debt | 1,437,269 | 0 | 0 | |||||||||||||||||
| Repayments of long-term debt and lease liabilities | (1,438,335) | (884) | (25,000) | |||||||||||||||||
| Common stock: | ||||||||||||||||||||
| Proceeds from issuance pursuant to various stock compensation plans and agreements | 2,326 | 3,383 | 2,846 | |||||||||||||||||
| Stock tendered for payment of withholding taxes | (8,253) | (14,635) | (15,634) | |||||||||||||||||
| Repurchase of common stock pursuant to the Stock Repurchase Program | (145,966) | 0 | 0 | |||||||||||||||||
| Cash dividends paid | (158,222) | (155,107) | (125,988) | |||||||||||||||||
| Other net financing activities | 0 | 0 | 0 | |||||||||||||||||
| Net cash provided by financing activities | 6,908,793 | 2,124,962 | 3,800,808 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,420 | (29,843) | (24,783) | |||||||||||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 756,822 | 259,772 | 826,785 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,261,149 | 3,001,377 | 2,174,592 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 4,017,971 | $ | 3,261,149 | $ | 3,001,377 | ||||||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||||||
| Interest | $ | 233,139 | $ | 418,840 | $ | 253,026 | ||||||||||||||
| Income taxes, net | $ | 116,412 | $ | 158,296 | $ | 85,872 | ||||||||||||||
| Noncash investing and financing activities: | ||||||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 329,069 | $ | 285,637 | $ | 481,593 | ||||||||||||||
| Loans transferred from held-for-sale to held-for-investment | $ | 0 | $ | 0 | $ | 2,306 | ||||||||||||||
| Loans transferred to other real estate owned (“OREO”) | $ | 19,504 | $ | 2,013 | $ | 1,206 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| ($ in thosands) | 2019 | 2018 | 2017 | |||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 418,840 | $ | 253,026 | $ | 138,766 | ||||||
| Income taxes, net | $ | 158,296 | $ | 85,872 | $ | 98,126 | ||||||
| Noncash investing and financing activities: | ||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 285,637 | $ | 481,593 | $ | 613,088 | ||||||
| Loans transferred from held-for-sale to held-for-investment | $ | — | $ | 2,306 | $ | — | ||||||
| Deposits transferred to branch liability held-for-sale | $ | — | $ | — | $ | 605,111 | ||||||
| Investment security transferred from held-to-maturity to AFS | $ | — | $ | — | $ | 115,615 | ||||||
| Premises and equipment transferred to branch assets held-for-sale | $ | — | $ | — | $ | 8,043 | ||||||
| Loans transferred to OREO | $ | 2,013 | $ | 1,206 | $ | 777 | ||||||
See accompanying Notes to Consolidated Financial Statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Organization
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 Bank is the Company’s principal asset. As of December 31, 2019,2020, the Company operates in more than 125120 locations in the United States (“U.S.”) and Greater China. In the U.S., the Bank’s corporate headquarters and main administrative offices are located in California, and its branches are located in California, Texas, New York, Washington, Georgia, Massachusetts and Nevada. In Greater China, East West’s presence includes full service branches in Hong Kong, Shanghai, Shantou and Shenzhen, and representative offices in Beijing, Chongqing, Guangzhou and Xiamen. In 2017,The Bank has 4 wholly owned subsidiaries, one of which includes a banking subsidiary based in China — East West Bank (China) Limited.
On March 17, 2018, the Bank completed the sale of its 8 Desert Community Bank branches located in the High Desert area of Southern California to Flagstar Bank, a wholly owned subsidiary of Flagstar Bancorp, Inc. The transaction resulted in a net cash payment of $499.9 million by the Company soldto Flagstar Bank and a pre-tax gain of $31.5 million for the insurance brokerage business of East West Insurance Services, Inc. (“EWIS”), which remains a subsidiary of East West and continues to maintain its insurance broker license. year ended December 31, 2018.
In 2019, the Company acquired East West acquired Enstream Capital Markets, LLC, a private broker dealerbroker-dealer and also established East West Investment Management LLC, a registered investment adviser. Both Enstream Capital Markets, LLC (subsequently renamed as East West Markets, LLC)LLC and East West Investment Management LLC are wholly-ownedwholly owned subsidiaries of East West.
Significant Accounting Policies
Basis of Presentation — The accounting and reporting policies of the Company conform with the U.S. Generally Accepted Accounting Principles (“GAAP”), applicable guidelines prescribed by regulatory authorities and general practices in the banking industry. The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial Statements, income and expenses during the reporting period, and the related disclosures. Actual results could differ materially from those estimates. Certain items on the Consolidated Financial Statements and notes for the prior years have been reclassified to conform to the 20192020 presentation.
Principles of Consolidation — The Consolidated Financial Statements in this Form 10-K include the accounts of East West and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. East West also has 6 wholly-ownedwholly 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.
Cash and Cash Equivalents — Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal Reserve Bank of San Francisco (“FRB”FRBSF”) and other financial institutions, and federal funds sold with original maturities up to three months.
Interest-bearing Deposits with Banks — Interest-bearing deposits with banks include cash placed with other banks with original maturities greater than three months and less than one year.
Assets Purchased under Resale Agreements and Assets Sold under Repurchase Agreements —— Resale agreements are recorded as receivables based on the values at which the securities or loans are acquired. The market values of the underlying securities collateralizing the resale agreements, including accrued interest, are monitored. Additional collateral may be requested from the counterparties or excess collateral may be returned to the counterparties by the Company under the contractual terms of the arrangements, when deemed appropriate. Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the securities are sold. The Company may havemonitors the values of the underlying assets collateralizing the resale and repurchase agreements, including accrued interests, and obtains or posts additional collaterals in order to provide additionalmaintain the appropriate collateral to the counterparties, or the counterparties may return excess collateral to the Company,requirements for the repurchase agreements when deemed appropriate. Thetransactions. In addition, the Company has elected to offset resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and when the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements.
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Securities — The Company’s securities include various debt securities, marketable equity securities and restricted equity securities. Debt securities are recorded on the Consolidated Balance Sheet as of their trade dates. The Company classifies its debt securities as trading securities, AFS or held-to-maturity investmentdebt securities based on management’s intention on the date of the purchase.
Debt securities are purchased for liquidity and investment purpose, as part of asset-liability management and other strategic activities. Debt securities for which the Company does not have the positive intention and ability to hold to maturity are classified as AFS. AFS anddebt securities are reported at fair value with unrealized gains and losses, net of applicable income taxes, included in AOCI.AOCI, and net of the allowance for credit losses. We recognize realized gains and losses on the sale of AFS debt securities in earnings, using the specific identification method. For each reporting period, debt securities classified as either AFS or held-to-maturity investment securities that are in an unrealized loss position are analyzed as part of the Company’s ongoing other-than-temporary impairment (“OTTI”) assessment. The initial indicator of OTTI is a decline in fair value below the amortized cost of the debt security. In determining whether OTTI has occurred, the Company considers the severity and duration of the decline in fair value, the length of time expected for recovery, the financial condition of the issuer, changes in the debt securities’ ratings and other qualitative factors, as well as whether the Company either plans to sell the 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. When the Company does not intend to sell the impaired 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 an OTTI of the impaired debt security is recognized as OTTI loss on the Consolidated Statement of Income and the non-credit component is recognized in other comprehensive income. This applies for both AFS and held-to-maturity investment securities. 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 recovery of its amortized cost basis, the full amount of the impairment loss (equal to the difference between the debt security’s amortized cost basis and its fair value at the balance sheet date) is recognized as OTTI loss on the Consolidated Statement of Income. Following the recognition of OTTI, the debt security’s new amortized cost basis is the previous basis minus the OTTI amount recognized in earnings.
Marketable equity securities that have readily determinable fair values are recorded at fair value with unrealized gains and losses, due to changes in fair value, reflected in earnings. Marketable equity securities include mutual fund investments, which are included in Investments in tax credit and other investments, net on the Consolidated Balance Sheet. Nonmarketable
Non-marketable equity securities that do not have readily determinable fair values excludeare accounted for under one of the following accounting methods:
•Equity Method — When we have the ability to exert significant influence over the investee.
•Cost Method — The cost method is applied to investments such as FRBSF and FHLB stock. These investments are held at their cost minus impairment. If impaired, the carrying value is written down to the fair value of the security.
•Measurement Alternative — This method is applied to all remaining non-marketable equity securities. These securities are carried at cost adjusted for which we hold a controlling interestimpairment, if any, plus or minus observable price changes in orderly transactions of an identical or similar security of the investee. Nonmarketablesame issuer.
Non-marketable equity securities include tax credit investments that are included in Investments in tax credit and other investments, net, and Other assets on the Consolidated Balance Sheet. These securities are accounted for under one of the following accounting methods:
Our review for impairment for equity method, cost method and measurement alternative securities typically includes an analysis of the facts and circumstances of each security, the intent or requirement to sell the security, the expectations of cash flows, capital needs and the viability of its business model. For equity method and cost method investments, we reduce the asset’s carrying value when we consider declines in value to be OTTI.other-than-temporary impairment (“OTTI”). For securities accounted for under the measurement alternative, we reduce the asset value when the fair value is less than the carrying value, without the consideration of recovery. For additional information on the Company’s OTTI evaluation, see Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements.
Restricted equity securities include FRBFRBSF and FHLB stock. The FRBFRBSF stock is required by law to be held as a condition of membership in the Federal Reserve System. The FHLB stock is required to obtain advances from the FHLB. They are carried at cost as they do not have a readily determinable fair value.
Loans Held-for-Sale — Loans are initially classified as loans held-for-sale when they are individually identified as being available for immediate sale and management has committed to a formal plan to sell them. Loans held-for-sale are carried at lower of cost or fair value. Subject to periodic review under the Company’s evaluation process, including asset/liability and credit risk management, the Company may transfer certain loans from held-for-investment to held-for-sale measured at lower of cost or fair value. Any write-downs in the carrying amount of the loan at the date of transfer isare recorded as a charge-offcharge-offs to allowance for loan losses. Loan origination fees on loans held-for-sale, net of certain costs in processing and closing the loans, are deferred until the time of sale and are included in the periodic determination of the lower of cost or fair value adjustments and/or the gain or loss recognized at the time of sale. A valuation allowance is established if the fair value of such loans is lower than their cost, with a corresponding charge to noninterest income. If the loan or a portion of the loan cannot be sold, it is subsequently transferred back to the loans held-for-investment portfolio from the loans held-for-sale portfolio at the lower of cost or fair value on the transfer date.
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Loans Held-for-Investment — At the time of commitment to originate or purchase a loan, the loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future”.future.” Loans held-for-investment are stated at their outstanding principal, reduced by an allowance for loan losses and net of deferred loan fees or costs, or unearned fees on originated loans, net of unamortized premiums or unaccreted discounts on purchased loans. Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income as an adjustment to yield over the loan term using the effective interest method or straight-line method. Discounts/premiums on purchased loans are accreted/amortized to interest income using the effective interest method or straight-line method over the remaining period to the contractual maturity. Interest on loans is calculated using the simple-interest method on daily balances of the principal amounts outstanding. Generally, loans are placed on nonaccrual status when they become 90 days past due or more. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes uncertain, regardless of the length of past due status. Once a loan is placed on nonaccrual status, interest accrual is discontinued and all unpaid accrued interest is reversed against interest income. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.
Troubled Debt Restructurings — A loan is generally classified as a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The concessions may be granted in various forms, including a below-market change in the stated interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date with a stated interest rate lower than the current market rate or note splits referred to as A/B note restructurings. Loans with contractual terms that have been modified as a TDR and are current at the time of restructuring may remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, these loans are placed on nonaccrual status and are reported as nonperforming, until the borrower demonstrates a sustained period of performance, generally six months, and the ability to repay the loan according to the contractual terms. If accruing TDRs cease to perform in accordance with their modified contractual terms, they are placed on nonaccrual status and reported as nonperforming TDRs. TDRs are included in the impaired loan quarterly allowance for credit losses valuation allowance process. Refer to Impaired LoansAllowance for Loan Losses below for a complete discussion.
Paycheck Protection Program — From April to August 2020, the Company accepted Paycheck Protection Program (“PPP”) applications and originated loans to qualified small businesses under the PPP established by the CARES Act. The CAA extends the PPP to March 31, 2021. PPP loans are included in the commercial and industrial (“C&I”) portfolio, carrying an interest rate of 1%, and are 100% guaranteed by the Small Business Administration (“SBA”). No allowance for loan losses was recorded for these loans as of December 31, 2020. As of December 31, 2020, the Company had approximately 6,200 SBA 7(a) approved PPP loans with an outstanding loan balance of $1.57 billion. The substantial majority of the Company’s PPP loans have a term of two years. The SBA paid the Company fees for processing PPP loans and such fees are accounted for loan origination fees, where net deferred fees are recognized over the estimated life of the loan as a yield adjustment on the loans. Under the terms of the PPP, if certain conditions are satisfied, such loans are eligible to be forgiven 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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Allowance for Loan Losses — The Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020, which introduced a new current expected credit losses (“CECL”) model. The allowance for loan losses is established as management’s estimate of expected credit losses inherent in the Company’s lending activities; it is increased by the provision for credit losses and decreased by net charge-offs. The allowance for loan losses is evaluated quarterly by management based on regular reviews of the collectability of the Company’s loans. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level — Impairedthecommercial loan portfolio is comprised of C&I, commercial real estate (“CRE”), multifamily residential, and construction and land loans; and the consumer loan portfolio is comprised of single-family residential, home equity lines of credit (“HELOCs”), and other consumer loans.
The allowance for loan losses represents the portion of a loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life, adjusted for prepayments. 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 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 loans are identified and evaluateddo not share similar risk characteristics, the Company evaluates the loan for impairmentexpected credit losses on an individual basis. The Company’s impairedIndividually assessed loans include predominantlynonaccrual and TDR loans. The Company evaluates loans held-for-investmentfor expected credit losses on nonaccrual status or modified as a TDR designated either as performing or nonperforming, excluding purchased credit-impaired (“PCI”) loans. A loan is considered impaired when,an individual basis 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. The following 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, it is the Company’s policy to promptly charge off the estimated credit losses.
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.
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.
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Allowance for Credit Losses on Available-for-Sale Debt Securities — For each reporting period, every AFS debt security that is in an unrealized loss position is 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 of the AFS debt security, excluding accrued interest. 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 security’s 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.
Other-Than-Temporary Impairment Assessment on AFS Debt Securities Prior to the Adoption of the CECL Guidance, Applicable for the Years Ended December 31, 2019 and 2018 —For each reporting period, debt securities classified as either AFS or held-to-maturity debt securities that were in an unrealized loss position were analyzed as part of the Company’s ongoing OTTI assessment. The initial indicator of OTTI was a decline in fair value below the amortized cost of the debt security. In determining whether OTTI had occurred, the Company considered the severity and duration of the decline in fair value, the length of time expected for recovery, the financial condition of the issuer, changes in the debt securities’ ratings and other qualitative factors, as well as whether the Company either planned to sell the debt security or it was more-likely-than-not that it would be required to sell the debt security before recovery of the amortized cost. When the Company did not intend to sell the impaired debt security and it was more-likely-than-not that the Company would not be required to sell the impaired debt security prior to recovery of its amortized cost basis, the credit component of an OTTI of the impaired debt security was recognized as OTTI loss on the Consolidated Statement of Income and the non-credit component was recognized in other comprehensive income. This applied for both AFS and held-to-maturity debt securities. If the Company intended to sell the impaired debt security or it was more-likely-than-not that the Company would be required to sell the impaired debt security prior to recovery of its amortized cost basis, the full amount of the impairment loss (equal to the difference between the debt security’s amortized cost basis and its fair value at the balance sheet date) was recognized as OTTI loss on the Consolidated Statement of Income. Following the recognition of OTTI, the debt security’s new amortized cost basis was the previous basis minus the OTTI amount recognized in earnings.
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 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.
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Allowance for Purchased Credit Deteriorated Assets — ASU 2016-13 replaces the concept of purchased credit impaired (“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 non-credit 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.
Allowance for Credit Losses Prior to the Adoption of the CECL Guidance, Applicable for the Years Ended December 31, 2019 and 2018 — Prior to CECL adoption, the allowance of credit losses represented the Company’s estimate of probable credit losses inherent in the lending activities, and consisted of general and specific reserves. Impaired loans were subject to specific reserves. Non-impaired loans were evaluated as part of the general reserve. General reserves were calculated by utilizing both quantitative and qualitative factors. There were different qualitative risks for the loans in each portfolio segment. Predominant risk characteristics of the CRE, multifamily, single-family residential loans and HELOC loans considered the collateral and geographic locations of the properties collateralizing the loans. Predominant risk characteristics of the C&I loans included cash flows, debt service and collateral of the borrowers and guarantors, as well as the economic and market conditions.
Impaired Loans Prior to the Adoption of the CECL Guidance, Applicable for the Years Ended December 31, 2019 and 2018 — Impaired loans were identified and evaluated for impairment on an individual basis. A loan was considered impaired when, based on current information and events, it was probable that the Company would not be able to collect all scheduled payments of principal or interest due in accordance with the original contractual terms of the loan agreement. Factors considered by management in determining and measuring loan impairment includeincluded payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of and the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Impaired loans arewere measured based on the present value of expected future cash flows discounted at a designated discount rate or, as appropriate, at the loan’s observable market price or the fair value of the collateral, if the loan iswas collateral dependent, less cost to sell. When the value of an impaired loan is less than the recorded investment and the loan is classified as nonperforming and uncollectible, the deficiency is charged off against the allowance for loan losses. If the loan is a performing TDR, the deficiency is included in the specific reserves of the allowance for loan losses, as appropriate. Payments received on impaired loans classified as nonperforming are not recognized in interest income, but are applied as a reduction to the principal outstanding.
Purchased Credit-Impaired Loans — Prior to the Adoption of the CECL Guidance, Applicable for the Years Ended December 31, 2019 and 2018— Acquired loans arewere recorded at fair value as of acquisition date in accordance with ASC 805, Business Combinations. A purchased loan iswas deemed to be credit impaired when there iswas evidence of credit deterioration since its origination and it iswas probable at the acquisition date that the Company would be unable to collect all contractually required payments and iswas accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under ASC 310-30, loans arewere recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses iswas not carried over or recorded as of the acquisition date.
Variable Interest and Voting Interest Entities — The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”). We first determine whether or not we have variable interests in the entity, which are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. If it is determined that we do not have a variable interest in the entity, no further analysis is required and the entity is not consolidated. A VIE is an entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. The Company consolidates a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. For entities that do not meet the definition of a VIE, the entity is considered a voting interest entity. We consolidate these entities if we can exert control over the financial and operating policies of an investee, which can occur if we have a 50% or more voting interest in the entity.
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Investments in Qualified Affordable Housing Partnerships, Net, Tax Credit and Other Investments, Net — The Company records the investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.
The Company records investments in tax credit and other investments, net, using either the equity method or cost method of accounting. The tax credits are recognized on the Consolidated Financial Statements to the extent they are utilized on the Company’s income tax returns in the year the credit arises under the flow-through method of accounting. The investments are reviewed for impairment on an annual basis or on an interim basis, if an event occurs that would trigger potential impairment.
Premises and Equipment, Net — The Company’s premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed based on the straight-line method over the estimated useful lives of the various classes of assets. The ranges of estimated useful lives for the principal classes of assets are as follows:
| Premises and Equipment | Useful Lives | |||||||
| Buildings | 25 years | |||||||
| Furniture, fixtures and equipment, building improvements | 3 to 7 years | |||||||
| Leasehold improvements | Term of lease or useful life, whichever is shorter | |||||||
The Company reviews its long-lived assets for impairment annually, or when events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. An asset is considered impaired when the fair value, which is the expected undiscounted cash flows over the remaining useful life, is less than the net book value. The excess of the net book value over its fair value is charged as impairment loss to noninterest expense.
Goodwill and Other Intangible Assets — Goodwill represents the excess of the purchase price over the fair value of net assets acquired in an acquisition. Goodwill is not amortized, but is tested for impairment on an annual basis as of December 31, or more frequently as events occur or circumstances change that would more-likely-than-not reduceindicate a potential impairment at the reporting unit level. The Company assesses goodwill for impairment at each operating segment level. The Company organizes its operations into 3 reporting segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. For information on how the reporting units are identified and the components are aggregated, see Note 18 — Business Segments to the Consolidated Financial Statements in this Form 10-K. The Company has the option to perform a qualitative assessment of goodwill or elect to bypass the qualitative test and proceed directly to a quantitative test. If the Company performs a qualitative assessment of goodwill to test for impairment and concludes it is more likely than not that a reporting unit’s fair value is greater than its carrying value, quantitative tests are not required. If the qualitative analysis indicates that it is more likely than not that a reporting unit’s fair value is less than its carrying fair value, the Company is required to perform a quantitative assessment to determine if there is goodwill impairment. Factors considered in the qualitative assessments include but are not limited to macroeconomic conditions, industry and market considerations, financial performance of the respective operating segment and other reporting unit specific considerations. The Company uses a combined income and market approach in its quantitative valuation methodologies. A quantitative valuation involves determining the fair value of aeach reporting unit belowand comparing the fair value to its corresponding carrying value. Goodwill impairment loss is recorded as a charge to noninterest expenses and an adjustment to the carrying value of goodwill. Subsequent reversals of goodwill impairment are not allowed.
Other intangible assets are primarily comprised of core deposit intangibles.intangibles and are included in Other assets on the Consolidated Balance Sheet. Core deposit intangibles which represent the intangible value of depositor relationships resulting from deposit liabilitiesdeposits assumed in various acquisitions,acquisitions. Core deposit intangibles are amortized over the projected useful lives of the deposits, which is typically 8between eight to 15 years. Core deposit intangibles are tested forThe impairment on an annual basis,test is performed annually, or more frequently as events occur or currentchanges in circumstances and conditions warrant.indicate that the intangible asset’s carrying values may not be recoverable. Impairment on goodwill and core deposit intangibles is recognized by writing down the asset as a charge to noninterest expense to the extent that the carrying value exceeds the estimated fair value.
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Derivatives — As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate and foreign currency risks, and to assist customers with their risk management objectives. Derivatives utilized by the Company include primarily swaps, forwards and option contracts. Derivative instruments are included in Other assets or Accrued expenses and other liabilities on the Consolidated Balance Sheet at fair value. The related cash flows are recognized on the Cash flows from operating activities section on the Consolidated Statement of Cash Flows. The Company uses its accounting hedges based on the exposure being hedged as either fair value hedges, cash flow hedges or hedges of the net investments in certain foreign operations. For fair value hedges of interest rate risk, changes in fair value of derivatives are reported inwithin Interest expense on the Consolidated Statement of Income. Changes in fair value of derivatives designated as hedges of the net investments in foreign operations are recorded as a component of AOCI. For cash flow hedges of floating-rate interest payments, the change in the fair value of hedges is recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impact earnings. Reclassified gains and losses of cash flow hedges are recorded in the same line item as the hedged interest payment within Interest expense on the Consolidated Statements of Income.
All derivatives designated as fair value hedges and hedges of the net investments in certain foreign operations are linked to specific hedged items or to groups of specific assets and liabilities on the Consolidated Balance Sheet. Cash flow hedges are linked to the forecasted transactions related to a recognized asset or liability. To qualify as an accounting hedge under the hedge accounting rules (versus an economic hedge where hedge accounting is not sought), a derivative must be highly effective in offsetting the risk designated as being hedged. The Company formally documents its hedging relationships at inception, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. Subsequent to inception, on a quarterly basis, the Company assesses whether the derivatives used in hedging transactions are highly effective in offsetting changes in the fair value of the hedged items.items or the cash flows of attributable hedged risks. Retrospective effectiveness is also assessed, as well as the continued expectation that the hedge will remain effective prospectively.
The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in fair value; (ii) a derivative expires, or is sold, terminated or exercised, or (iii) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a fair value hedge is discontinued, the derivative will continue to be recorded on the Consolidated Balance Sheet at fair value with changes in fair value recognized on the Consolidated Statement of Income. When the hedged net investment is either sold or substantially liquidated, changes in the fair value of the derivatives are reclassified out of AOCI into Foreign exchange income on the Consolidated Statement of Income. If a cash flow hedge is discontinued, the derivative net gain or loss will remain in AOCI and reclassified in to earnings in the periods in which the hedged forecasted cash flow affects earnings.
The Company also offers various interest rate, foreign currency, and energy commodity derivative products to customers. These transactions are not linked to specific assets or liabilities on the Consolidated Balance Sheet or to forecasted transactions in a hedging relationship and, therefore, do not qualify for hedge accounting. These contracts are recorded at fair value with changes in fair value recorded on the Consolidated Statement of Income.
As part of the Company’s loan origination process, from time to time, the Company obtains equity warrants to purchase preferred and/or common stock of public or private companies it provides loans to. These equity warrants are accounted for as derivatives and recorded at fair value included in Other assets on the Consolidated Balance Sheet with changes in fair value recorded on the Consolidated Statement of Income.
The Company is exposed to counterparty credit risk, which is the risk that counterparties to the derivative contracts do not perform as expected. Valuation of derivative assets and liabilities reflect the value of the instrument inclusive of the non-performancenonperformance risk. The Company uses master netting arrangements to mitigate counterparty credit risk in derivative transactions. To the extent the derivatives are subject to master netting arrangements, the Company takes into account the impact of master netting arrangements that allow the Company to settle all derivative contracts executed with the same counterparty on a net basis, and to offset the net derivative position with the related cash collateral and securities. The Company elected to offset derivative transactions with the same counterparty on the Consolidated Balance Sheet when a derivative transaction has a legally enforceable master netting arrangement and when it is eligible for netting under ASC 210-20-45-1, Balance Sheet Offsetting: Netting Derivative Positions on Balance Sheet. Derivative balances and related cash collateral are presented net on the Consolidated Balance Sheet. In addition, the Company applied the Settlement to Market treatment for the cash collateralizing our interest rate and commodity contracts with certain centrally cleared counterparties. As a result, derivative balances with these counterparties are considered settled by the collateral.
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Fair Value — 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 and, in many cases, requires management to make a number of significant judgments. Fair value measurements are based on the exit price notion and are determined by maximizing the use of observable inputs. However, for certain instruments, we must utilize unobservable inputs in determining fair value due to the lack of observable inputs in the market, which requires greater judgment in the measurement of fair value. Based on the inputs used in the valuation techniques, the Company classifies its assets and liabilities measured and disclosed at fair value in accordance with a three-level hierarchy (i.e., Level 1, Level 2 and Level 3) established under ASC 820, Fair Value Measurements. The Company records certain financial instruments, such as AFS investmentdebt securities, and derivative assets and liabilities, at fair value on a recurring basis. Certain financial instruments, such as impaired loans and loans held-for-sale, are not carried at fair value each period but may require nonrecurring fair value adjustments due to lower-of-cost-or-market accounting or write-downs of individual assets. For additional information on fair value, see Note 32 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.
Stock-Based Compensation — The Company issues stock-based awards to eligible employees, officers and directors, and accounts for the related costs in accordance with the provisions of ASC 505, Equity and ASC 718, Compensation — Stock Compensation. Stock-based compensation cost is measured at the grant date based on the fair value of the awards and expensed over the employee’s requisite service period.
The Company grants restricted stock units (“RSUs”), which include service conditions for vesting. Additionally, some of the Company’s RSUs contain performance goals and market conditions that are required to be met in order for the awards to vest. RSUs may vest ratably over three years or cliff vest after three or five years of continued employment from the date of the grant. RSUs are authorized to settle predominantly in shares of the Company’s common stock. Compensation cost for those awards is based on quoted market price of the Company’s common stock at the grant date. Certain RSUs will be settled in cash, which subjects these RSUs to variable accounting whereby the compensation cost is adjusted to fair value based on changes in the Company’s stock price up to the settlement date. Compensation cost is amortized on a straight-line basis over the requisite service period for the entire award, which is generally the maximum vesting period of the award. Effective January 1, 2017, the Company prospectively adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. As a result of its adoption, all excessExcess tax benefits and deficiencies on share-based payment awards are recognized within Income tax expense on the Consolidated Statement of Income. Before 2017, the tax benefits were recorded as increases to Additional paid-in capital on the Consolidated Balance Sheet.
For time-based RSUs, the grant-date fair value is measured at the fair value of the Company’s common stock as if the RSUs are vested and issued on the date of grant. For performance-based RSUs, the grant-date fair value considers both performance and market conditions. As stock-based compensation expense is estimated based on awards ultimately expected to vest, it is reduced by the expense related to awards expected to be forfeited. Forfeitures are estimated at the time of grant and are updated quarterly. If the estimated forfeitures are revised, a cumulative effect of changes in estimated forfeitures for the current and prior periods is recognized in compensation expense in the period of change. For performance-based RSUs, the compensation expense fluctuates based on the estimated outcome of meeting the performance conditions. The Company evaluates the probable outcome of the performance conditions quarterly and makes cumulative adjustments for current and prior periods in compensation expense in the period of change. Market conditions subsequent to the grant date have no impact on the amount of compensation expense the Company will recognize over the life of the award. Refer to Note 1613 — Stock Compensation Plans to the Consolidated Financial Statements in this Form 10-K for additional information.
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Revenue from Contracts with Customers —The Company recognizes two primary types of revenue on its Consolidated Statement of Income: net interest income and noninterest income. The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective method on January 1, 2018. The adoption of ASU 2014-09 did not have a material impact on the Consolidated Financial Statements. The majority of our revenue streams are out-of-scope of ASU 2014-09, since our primary revenue streams are accounted for in accordance with the financial instrument standards. Remaining in-scope noninterest income revenue streams include service charges and fees related to deposit accounts and card income, as well as wealth management fees. These revenue streams as described below comprised 29%, 26% and 25% of total noninterest income for the years ended December 31, 2020, 2019 and 2018, respectively.
•Deposit Service Charges and Related Fee Income — The Company offers a range of deposit products to individuals and businesses, which includes savings, money market, checking and time deposit accounts. The deposit account services include ongoing account maintenance, as well as certain optional services such as various in-branch services, automated teller machine/debit card usage, wire transfer services or check orders. In addition, treasury management and business account analysis services are offered to commercial deposit customers. The monthly account fees may vary with the amount of average monthly deposit balances maintained, or the Company may charge a fixed monthly account maintenance fee if certain average balances are not maintained. In addition, each time a deposit customer selects an optional service, the Company may earn transaction fees, generally recognized by the Company at the point when the transaction occurs. For business analysis accounts, commercial deposit customers receive an earnings credit based on their account balance, which can be used to offset the cost of banking and treasury management services. Business analysis accounts that are assessed fees in excess of earnings credits received are typically charged at the end of each month, after all transactions are known and the credits are calculated. Deposit service charge and related fee income are recognized in the all segments.
•Card Income — Card income consists of merchant referral fees and interchange income. For merchant referral fees, the Company provides marketing and referral services to acquiring banks for merchant card processing services and earns variable referral fees based on transaction activities. The Company satisfies its performance obligation over time as the Company identifies, solicits and refers business customers who are provided such services. The Company receives monthly fees net of consideration it pays to the acquiring bank performing the merchant card processing services. The Company recognizes revenue on a monthly basis when the uncertainty associated with the variable referral fees is resolved after the Company receives monthly statements from the acquiring bank. For interchange income, the Company, as a card issuer, has a stand ready performance obligation to authorize, clear and settle card transactions. The Company earns or pays interchange fees, which are percentage-based on each transaction, and based on rates published by the corresponding payment network for transactions processed using their network. The Company measures its progress toward the satisfaction of its performance obligation over time as services are rendered, and the Company provides continuous access to this service and settles transactions as its customer or the payment network requires. Interchange income is presented net of direct costs paid to the customer and entities in their distribution chain, which are transaction-based expenses such as rewards program expenses and certain network costs. Revenue is recognized when the net profit is determined by the payment networks at the end of each day. Card income is recognized in consumer and business banking, and commercial banking segments.
•Wealth Management Fees —The Company provides investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies and risk management strategies. The fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker-dealer the Company engages. Wealth management fees is recognized in consumer and business banking, and commercial banking segments.
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Income Taxes — The Company files consolidated federal income tax returns, foreign tax returns, and various combined and separate company state tax returns. The calculation of the Company's income tax provision and related tax accruals requires the use of estimates and judgments. AccruedIncome tax expense comprises of two components: current and deferred. Current tax expense represents taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions. Income tax liabilities (assets)(receivables) represent the estimated amounts due to (received from) the various taxing jurisdictions where the Company has established a businesstax presence. Deferred tax expense results from changes in deferred tax assets and liabilities between period, and is determined using the balance sheet method. Under the balance sheet method, the net deferred tax assets and liabilities are recognized forasset or liability is based on the expected future tax consequenceseffects of existing temporarythe differences between the financial reportingbook and tax reporting basis of assets and liabilities using enactedliabilities. Deferred tax lawsassets are also recognized for tax attributes such as net operating loss carryforwards and rates and tax credit carryforwards. To the extent a deferred tax asset is no longer expected more-likely-than-not to be realized, a valuation allowance is established. Deferred tax assets net of deferred tax liabilities are included in Other assets on the Consolidated Balance Sheet. See Note 1411 — Income Taxes to the Consolidated Financial Statements in this Form 10-K for a discussion of management’s assessment of evidence considered by the Company in establishing a valuation allowance.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an income tax return. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. The Company establishes a liability for potential taxes, interest and penalties related to uncertain tax positions based on facts and circumstances, including the interpretation of existing law, new judicial or regulatory guidance, and the status of tax audits.
Earnings Per Share — Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period, plus any incremental dilutive common share equivalents calculated for warrants and RSUs outstanding using the treasury stock method.
Foreign Currency Translation — The Company’s foreign subsidiary in China, East West Bank (China) Limited’s functional currency is in Chinese Renminbi (“RMB”). As a result, assets and liabilities of East West Bank (China) Limited are translated, for consolidation purpose, from its functional currency into U.S. Dollardollar (“USD”) using period-end spot foreign exchange rates. Revenues and expenses of East West Bank (China) Limited are translated, for the purpose of consolidation, from its functional currency into USD at the transaction date foreign exchange rates. The effects of those translation adjustments are reported in the Foreign currency translation adjustments account within Other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income, net of any related hedged effects. For transactions that are denominated in a currency other than the functional currency, including transactions denominated in the local currencies of foreign operations that use the USD as their functional currency, the effects of changes in exchange rates are primarily reported in Foreign exchange income on the Consolidated Statement of Income.
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New Accounting Pronouncements Adopted in 20192020
| Standard | Required Date of Adoption | Description | Effects on Financial Statements | ||||||||
| Standards Adopted in 2020 | |||||||||||
ASU 2016-13, Financial Instruments — Credit Losses | January 1, 2020 Early adoption is permitted on January 1, 2019. | The ASU introduces a new | 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 The Company has elected | ||||||||
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 | The Company adopted this guidance on January 1, 2020. The | |||||||||
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, 2020 | The 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. | ||||||||
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Recent Accounting Pronouncement
| Standard | Required Date of Adoption | Description | Effect 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 an 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 adopted this guidance on a prospective basis in January 2021. At the time of adoption, the guidance did not have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to track the exposure as of each reporting period and to assess the impact as the reference rate transition occurs through the cessation of LIBOR. | ||||||||
ASU 2021-01, Reference Rate Reform (Topic 848): Scope | Effective immediately as of January 7, 2021 through December 31, 2022 for all entities. | In January 2021, the FASB issued ASU 2021-01, which expanded the scope of Topic 848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. The amendments of this guidance may be elected retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date that includes January 7, 2021. | The Company adopted this guidance on a prospective basis in January 2021. At the time of adoption, the guidance did not have a material impact on the Company’s Consolidated Financial Statements. | ||||||||
Note 2 — Dispositions
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 prices derived from 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.
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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 InvestmentDebt Securities — When available, the Company uses quoted market prices to determine the fair value of AFS investmentdebt securities, which are classified as Level 1. Level 1 AFS investmentdebt securities are comprised of U.S. Treasury securities. The fair value of other AFS investmentdebt 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. Since theseThese 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.
Equity Securities — Equity securities were comprisedconsisted of mutual funds as of both December 31, 20192020 and 2018.2019. The Company uses Net Asset Valuenet 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.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 December 31, 20192020 and 2018,2019, 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 arewere not significant to the overall valuation of its derivative portfolios. As a result, theThe Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.
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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. The CompanyAs of December 31, 2020 and 2019, the Bank held foreign currency non-deliverable forward contracts as of December 31, 2019 and held foreign swap contracts as of December 31, 2018 to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-USD functional currency subsidiary in China. These foreign currency non-deliverable forward and swap contracts were designated as net investment hedges. The fair value of foreign currency contracts is valueddetermined 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 observableobservable;. Accordingly,accordingly, RPAs fall within Level 2.
Equity Contracts — As part of the loan origination process, from time to time, the Company periodically obtains equity warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans to.loans. As of December 31, 20192020 and 2018,2019, 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 equity 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. 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. 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’ equity warrants. Given that the Company holds long positions in all equity warrants, an increase in volatility assumption would generally result in an increase in fair value measurement.value. A higher liquidity discount would result in a decrease in fair value measurement.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’sBlack-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.
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The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2020 and 2019:
| ($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 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 | $ | 50,761 | $ | 0 | $ | 0 | $ | 50,761 | ||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | — | 814,319 | 0 | 814,319 | ||||||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 0 | 1,153,770 | 0 | 1,153,770 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 0 | 1,660,894 | 0 | 1,660,894 | ||||||||||||||||||||||
| Municipal securities | 0 | 396,073 | 0 | 396,073 | ||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 0 | 239,842 | 0 | 239,842 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 0 | 289,775 | 0 | 289,775 | ||||||||||||||||||||||
| Corporate debt securities | 0 | 405,968 | 0 | 405,968 | ||||||||||||||||||||||
| Foreign government bonds | 0 | 182,531 | 0 | 182,531 | ||||||||||||||||||||||
| Asset-backed securities | 0 | 63,231 | 0 | 63,231 | ||||||||||||||||||||||
| Collateralized loan obligations (“CLOs”) | 0 | 287,494 | 0 | 287,494 | ||||||||||||||||||||||
| Total AFS debt securities | $ | 50,761 | $ | 5,493,897 | $ | 0 | $ | 5,544,658 | ||||||||||||||||||
| Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 22,548 | $ | 8,724 | $ | 0 | $ | 31,272 | ||||||||||||||||||
| Total investments in tax credit and other investments | $ | 22,548 | $ | 8,724 | $ | 0 | $ | 31,272 | ||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||
| Interest rate contracts | $ | 0 | $ | 489,132 | $ | 0 | $ | 489,132 | ||||||||||||||||||
| Foreign exchange contracts | 0 | 30,300 | 0 | 30,300 | ||||||||||||||||||||||
| Credit contracts | 0 | 13 | 0 | 13 | ||||||||||||||||||||||
| Equity contracts | 0 | 585 | 273 | 858 | ||||||||||||||||||||||
| Commodity contracts | 0 | 82,451 | 0 | 82,451 | ||||||||||||||||||||||
| Gross derivative assets | $ | 0 | $ | 602,481 | $ | 273 | $ | 602,754 | ||||||||||||||||||
Netting adjustments (2) | $ | 0 | $ | (101,512) | $ | 0 | $ | (101,512) | ||||||||||||||||||
| Net derivative assets | $ | 0 | $ | 500,969 | $ | 273 | $ | 501,242 | ||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||
| Interest rate contracts | $ | 0 | $ | 317,698 | $ | 0 | $ | 317,698 | ||||||||||||||||||
| Foreign exchange contracts | 0 | 22,759 | 0 | 22,759 | ||||||||||||||||||||||
| Credit contracts | 0 | 206 | 0 | 206 | ||||||||||||||||||||||
| Commodity contracts | 0 | 84,165 | 0 | 84,165 | ||||||||||||||||||||||
| Gross derivative liabilities | $ | 0 | $ | 424,828 | $ | 0 | $ | 424,828 | ||||||||||||||||||
Netting adjustments (2) | $ | 0 | $ | (184,697) | $ | 0 | $ | (184,697) | ||||||||||||||||||
| Net derivative liabilities | $ | 0 | $ | 240,131 | $ | 0 | $ | 240,131 | ||||||||||||||||||
(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 5 — Derivatives to the Consolidated Financial Statements in this Form 10-K for additional information.
115
| ($ 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 | $ | 0 | $ | 0 | $ | 176,422 | ||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 0 | 581,245 | 0 | 581,245 | ||||||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 0 | 603,471 | 0 | 603,471 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 0 | 1,003,897 | 0 | 1,003,897 | ||||||||||||||||||||||
| Municipal securities | 0 | 102,302 | 0 | 102,302 | ||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 0 | 88,550 | 0 | 88,550 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 0 | 46,548 | 0 | 46,548 | ||||||||||||||||||||||
| Corporate debt securities | 0 | 11,149 | 0 | 11,149 | ||||||||||||||||||||||
| Foreign government bonds | 0 | 354,172 | 0 | 354,172 | ||||||||||||||||||||||
| Asset-backed securities | 0 | 64,752 | 0 | 64,752 | ||||||||||||||||||||||
| CLOs | 0 | 284,706 | 0 | 284,706 | ||||||||||||||||||||||
| Total AFS debt securities | $ | 176,422 | $ | 3,140,792 | $ | 0 | $ | 3,317,214 | ||||||||||||||||||
| Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 21,746 | $ | 9,927 | $ | 0 | $ | 31,673 | ||||||||||||||||||
| Total investments in tax credit and other investments | $ | 21,746 | $ | 9,927 | $ | 0 | $ | 31,673 | ||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||
| Interest rate contracts | $ | 0 | $ | 192,883 | $ | 0 | $ | 192,883 | ||||||||||||||||||
| Foreign exchange contracts | 0 | 54,637 | 0 | 54,637 | ||||||||||||||||||||||
| Credit contracts | 0 | 2 | 0 | 2 | ||||||||||||||||||||||
| Equity contracts | 0 | 993 | 421 | 1,414 | ||||||||||||||||||||||
| Commodity contracts | 0 | 81,380 | 0 | 81,380 | ||||||||||||||||||||||
| Gross derivative assets | $ | 0 | $ | 329,895 | $ | 421 | $ | 330,316 | ||||||||||||||||||
Netting adjustments (2) | $ | 0 | $ | (125,319) | $ | 0 | $ | (125,319) | ||||||||||||||||||
| Net derivative assets | $ | 0 | $ | 204,576 | $ | 421 | $ | 204,997 | ||||||||||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||
| Interest rate contracts | $ | 0 | $ | 127,317 | $ | 0 | $ | 127,317 | ||||||||||||||||||
| Foreign exchange contracts | 0 | 48,610 | 0 | 48,610 | ||||||||||||||||||||||
| Credit contracts | 0 | 84 | 0 | 84 | ||||||||||||||||||||||
| Commodity contracts | 0 | 80,517 | 0 | 80,517 | ||||||||||||||||||||||
| Gross derivative liabilities | $ | 0 | $ | 256,528 | $ | 0 | $ | 256,528 | ||||||||||||||||||
Netting adjustments (2) | $ | 0 | $ | (159,799) | $ | 0 | $ | (159,799) | ||||||||||||||||||
| Net derivative liabilities | $ | 0 | $ | 96,729 | $ | 0 | $ | 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 5—Derivatives to the Consolidated Financial Statements in this Form 10-K for additional information.
116
For the years ended December 31, 2020, 2019 and 2018:
| ($ 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 investment 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 | ||||||||||||
| Collateralized loan obligations (“CLOs”) | — | 284,706 | — | 284,706 | ||||||||||||
| Total AFS investment 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 | — | 2 | — | 2 | ||||||||||||
| 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 | ||||||||
| ($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2018 | |||||||||||||||
| 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 investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 564,815 | $ | — | $ | — | $ | 564,815 | ||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | — | 217,173 | — | 217,173 | ||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | — | 408,603 | — | 408,603 | ||||||||||||
| Residential mortgage-backed securities | — | 946,693 | — | 946,693 | ||||||||||||
| Municipal securities | — | 82,020 | — | 82,020 | ||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | — | 26,052 | — | 26,052 | ||||||||||||
| Residential mortgage-backed securities | — | 9,931 | — | 9,931 | ||||||||||||
| Corporate debt securities | — | 10,869 | — | 10,869 | ||||||||||||
| Foreign bonds | — | 463,048 | — | 463,048 | ||||||||||||
| Asset-backed securities | — | 12,643 | — | 12,643 | ||||||||||||
| Total AFS investment securities | $ | 564,815 | $ | 2,177,032 | $ | — | $ | 2,741,847 | ||||||||
| Investments in tax credit and other investments: | ||||||||||||||||
Equity securities (1) | $ | 20,678 | $ | 10,531 | $ | — | $ | 31,209 | ||||||||
| Total investments in tax credit and other investments | $ | 20,678 | $ | 10,531 | $ | — | $ | 31,209 | ||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate contracts | $ | — | $ | 69,818 | $ | — | $ | 69,818 | ||||||||
| Foreign exchange contracts | — | 21,624 | — | 21,624 | ||||||||||||
| Credit contracts | — | 1 | — | 1 | ||||||||||||
| Equity contracts | — | 1,278 | 673 | 1,951 | ||||||||||||
| Commodity contracts | — | 14,422 | — | 14,422 | ||||||||||||
| Gross derivative assets | $ | — | $ | 107,143 | $ | 673 | $ | 107,816 | ||||||||
Netting adjustments (2) | $ | — | $ | (45,146 | ) | $ | — | $ | (45,146 | ) | ||||||
| Net derivative assets | $ | — | $ | 61,997 | $ | 673 | $ | 62,670 | ||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate contracts | $ | — | $ | 75,133 | $ | — | $ | 75,133 | ||||||||
| Foreign exchange contracts | — | 19,940 | — | 19,940 | ||||||||||||
| Credit contracts | — | 164 | — | 164 | ||||||||||||
| Commodity contracts | — | 23,068 | — | 23,068 | ||||||||||||
| Gross derivative liabilities | $ | — | $ | 118,305 | $ | — | $ | 118,305 | ||||||||
Netting adjustments (2) | $ | — | $ | (38,402 | ) | $ | — | $ | (38,402 | ) | ||||||
| Net derivative liabilities | $ | — | $ | 79,903 | $ | — | $ | 79,903 | ||||||||
2018, Level 3 fair value measurements that were measured on a recurring basis consist of equity warrants issued by private companies as of and for the years ended December 31, 2019, 2018 and 2017.companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the years ended December 31, 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Contracts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 421 | $ | 673 | $ | 679 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total gains included in earnings (1) | 8,225 | 563 | 162 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | 0 | 114 | 65 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | 0 | (929) | (233) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers out of Level 3 (2) | (8,373) | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 273 | $ | 421 | $ | 673 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Includes unrealized gains (losses) of $8.2 million, $(292) thousand and $225 thousand for the years ended December 31, 2020, 2019 and 2018, respectively. The realized/unrealized gains (losses) of equity contracts are included in Lending fees on the Consolidated Statement of Income.
(2)During the year ended December 31, 2020, the Company transferred $8.4 million of equity contracts measured on a recurring basis out of Level 3 into Level 2 after the corresponding issuer of the equity warrant, which was previously a private company, completed its initial public offering and 2017:became a public company.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||
Equity Warrants | Equity Warrants | Other Securities | Equity Warrants | |||||||||||||
| Beginning balance | $ | 673 | $ | 679 | $ | — | $ | — | ||||||||
| Transfer of investment security from held-to-maturity to AFS | — | — | 115,615 | — | ||||||||||||
Total gains included in earnings (1) | 563 | 162 | 1,156 | — | ||||||||||||
| Issuances | 114 | 65 | — | 679 | ||||||||||||
| Sales | — | — | (116,771 | ) | — | |||||||||||
| Settlements | (929 | ) | (233 | ) | — | — | ||||||||||
| Ending balance | $ | 421 | $ | 673 | $ | — | $ | 679 | ||||||||
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of December 31, 2020 and 2019, and 2018.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) | |||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||||||||
| Equity contracts | $ | 273 | Black-Scholes option pricing model | Equity volatility | 46% — 61% | 53% | ||||||||||||||||||||||||||
| Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||||||||
| Equity contracts | $ | 421 | Black-Scholes option pricing model | Equity volatility | 39% — 44% | 42% | ||||||||||||||||||||||||||
| Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||
| December 31, 2019 | ||||||||||||
| Derivative assets: | ||||||||||||
| Equity warrants | $ | 421 | Black-Scholes option pricing model | Equity volatility | 39% — 44% | 42% | ||||||
| Liquidity discount | 47% | 47% | ||||||||||
| December 31, 2018 | ||||||||||||
| Derivative assets: | ||||||||||||
| Equity warrants | $ | 673 | Black-Scholes option pricing model | Equity volatility | 49% — 52% | 51% | ||||||
| Liquidity discount | 47% | 47% | ||||||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain non-PCIindividually evaluated loans held-for-investment, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and loans held-for-sale.other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain non-PCIindividually evaluated loans held-for-investment 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.
•Discounted cash flowsflow valuation techniques that consist of developing an expected stream of cash flows over the life of the loans, and then valuing the loans atcalculating the present value of the loans by discounting the expected cash flows at a designated discount rate.
117
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of the Company’sits monitoring process, the Company conducts ongoing due diligence on the Company’sits investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the being placed in serviceplaced-in-service date. After these investments are either acquired or placed into service, periodic monitoring is performed, which includes the quarterly review of the financial statements of the tax credit investment entity, and the annual review of the financial statements of the guarantor (if any), as well as the review of the annual tax returns of the tax credit investment entity;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 tax credit investments may not be realizable. These circumstances can include, but are not limited to the following factors:
•The current fair value of the tax credit investment based upon the expected future cash flows is less than the carrying amount;amount of the investment;
•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.
118
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 December 31, 20192020 and 2018:2019:
| ($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 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 | |||||||||||||||||||||||
| Loans held-for-investment: | ||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||
| C&I | $ | 0 | $ | 0 | $ | 143,331 | $ | 143,331 | ||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||
| CRE | 0 | 0 | 42,894 | 42,894 | ||||||||||||||||||||||
| Total commercial | 0 | 0 | 186,225 | 186,225 | ||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||
| HELOCs | 0 | 0 | 1,146 | 1,146 | ||||||||||||||||||||||
| Other consumer | 0 | 0 | 2,491 | 2,491 | ||||||||||||||||||||||
| Total consumer | 0 | 0 | 3,637 | 3,637 | ||||||||||||||||||||||
| Total loans held-for-investment | $ | 0 | $ | 0 | $ | 189,862 | $ | 189,862 | ||||||||||||||||||
| Investments in tax credit and other investments, net | $ | 0 | $ | 0 | $ | 3,140 | $ | 3,140 | ||||||||||||||||||
OREO (1) | $ | 0 | $ | 0 | $ | 15,824 | $ | 15,824 | ||||||||||||||||||
| ($ 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 | |||||||||||||||||||||||
| Loans held-for-investment: | ||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||
| C&I | $ | 0 | $ | 0 | $ | 47,554 | $ | 47,554 | ||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||
| CRE | 0 | 0 | 753 | 753 | ||||||||||||||||||||||
| Total commercial | 0 | 0 | 48,307 | 48,307 | ||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||
| HELOCs | 0 | 0 | 1,372 | 1,372 | ||||||||||||||||||||||
| Total consumer | 0 | 0 | 1,372 | 1,372 | ||||||||||||||||||||||
| Total loans held-for-investment | $ | 0 | $ | 0 | $ | 49,679 | $ | 49,679 | ||||||||||||||||||
| Investments in tax credit and other investments, net | $ | 0 | $ | 0 | $ | 3,076 | $ | 3,076 | ||||||||||||||||||
OREO (1) | $ | 0 | $ | 0 | $ | 125 | $ | 125 | ||||||||||||||||||
| Other nonperforming assets | $ | 0 | $ | 0 | $ | 1,167 | $ | 1,167 | ||||||||||||||||||
(1)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.
119
| ($ 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 (1) | $ | — | $ | — | $ | 125 | $ | 125 | ||||||||
| Investments in tax credit and other investments, net | $ | — | $ | — | $ | 3,076 | $ | 3,076 | ||||||||
| ($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2018 | |||||||||||||||
| 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 | $ | — | $ | — | $ | 26,873 | $ | 26,873 | ||||||||
| CRE: | ||||||||||||||||
| CRE | — | — | 3,434 | 3,434 | ||||||||||||
| Total commercial | — | — | 30,307 | 30,307 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgage: | ||||||||||||||||
| Single-family residential | — | — | 2,551 | 2,551 | ||||||||||||
| Total consumer | — | — | 2,551 | 2,551 | ||||||||||||
| Total non-PCI impaired loans | $ | — | $ | — | $ | 32,858 | $ | 32,858 | ||||||||
The following table presents the increase (decrease) in fair value of assets for which a nonrecurring fair value adjustment has been recognized for the years ended December 31, 2020, 2019 2018 and 2017, related to assets that were still held as of those dates:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Loans held-for-investment: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| C&I | $ | (48,154) | $ | (35,365) | $ | (9,341) | ||||||||||||||
| CRE: | ||||||||||||||||||||
| CRE | (11,289) | 9 | 270 | |||||||||||||||||
| Total commercial | (59,443) | (35,356) | (9,071) | |||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||
| Single-family residential | 0 | 0 | 15 | |||||||||||||||||
| HELOCs | (175) | (2) | 0 | |||||||||||||||||
| Other consumer | 2,491 | 0 | 0 | |||||||||||||||||
| Total consumer | $ | 2,316 | $ | (2) | $ | 15 | ||||||||||||||
| Total loans held-for-investment | $ | (57,127) | $ | (35,358) | $ | (9,056) | ||||||||||||||
| Investments in tax credit and other investments, net | $ | (3,868) | $ | (13,023) | $ | 0 | ||||||||||||||
| OREO | $ | (3,680) | $ | (8) | $ | 0 | ||||||||||||||
| Other nonperforming assets | $ | 0 | $ | (3,000) | $ | 0 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Non-PCI impaired loans: | ||||||||||||
| Commercial: | ||||||||||||
| C&I | $ | (35,365 | ) | $ | (9,341 | ) | $ | (19,703 | ) | |||
| CRE: | ||||||||||||
| CRE | 9 | 270 | (272 | ) | ||||||||
| Construction and land | — | — | (147 | ) | ||||||||
| Total CRE | 9 | 270 | (419 | ) | ||||||||
| Total commercial | (35,356 | ) | (9,071 | ) | (20,122 | ) | ||||||
| Consumer: | ||||||||||||
| Residential mortgage: | ||||||||||||
| Single-family residential | — | 15 | (11 | ) | ||||||||
| HELOCs | (2 | ) | — | — | ||||||||
| Total residential mortgage | (2 | ) | 15 | (11 | ) | |||||||
| Other consumer | — | — | (2,491 | ) | ||||||||
| Total consumer | $ | (2 | ) | $ | 15 | $ | (2,502 | ) | ||||
| Total non-PCI impaired loans | $ | (35,358 | ) | $ | (9,056 | ) | $ | (22,624 | ) | |||
| OREO | $ | (8 | ) | $ | — | $ | (1 | ) | ||||
| Investments in tax credit and other investments, net | $ | (13,023 | ) | $ | — | $ | — | |||||
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 December 31, 20192020 and 2018:2019:
| ($ in thousands) | ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Techniques | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | ||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Loans held-for-investment | Loans held-for-investment | $ | 104,783 | Discounted cash flows | Discount | 3% — 15% | 11% | |||||||||||||||||||||||||||||||||||||
| $ | 22,207 | Fair value of collateral | Discount | 10% — 26% | 15% | |||||||||||||||||||||||||||||||||||||||
| $ | 15,879 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||||||||||||||
| $ | 46,993 | Fair value of property | Selling cost | 7% — 26% | 10% | |||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique(s) | Unobservable Input(s) | Range of Input(s) | Weighted- Average (1) | |||||||||||||||||||||||||||||||||||||||
| Investments in tax credit and other investments, net | Investments in tax credit and other investments, net | $ | 3,140 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | |||||||||||||||||||||||||||||||||||||
| OREO | OREO | $ | 15,824 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
| Non-PCI impaired loans | $ | 27,841 | Discounted cash flows | Discount | 4% — 15% | 14% | ||||||||||||||||||||||||||||||||||||||
| Loans held-for-investment | Loans held-for-investment | $ | 27,841 | Discounted cash flows | Discount | 4% — 15% | 14% | |||||||||||||||||||||||||||||||||||||
| $ | 1,014 | Fair value of collateral | Discount | 8% — 20% | 19% | $ | 1,014 | Fair value of collateral | Discount | 8% — 20% | 19% | |||||||||||||||||||||||||||||||||
| $ | 20,824 | Fair value of collateral | Contract value | NM | NM | $ | 20,824 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||||||||
| Investments in tax credit and other investments, net | Investments in tax credit and other investments, net | $ | 3,076 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | |||||||||||||||||||||||||||||||||||||
| OREO | $ | 125 | Fair value of property | Selling cost | 8% | 8% | OREO | $ | 125 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||||||
| Investments in tax credit and other investments, net | $ | 3,076 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||||||||||||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
| Non-PCI impaired loans | $ | 16,921 | Discounted cash flows | Discount | 4% — 7% | 6% | ||||||||||||||||||||||||||||||||||||||
| Other nonperforming assets | Other nonperforming assets | $ | 1,167 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||||||||||||
| $ | 2,751 | Fair value of collateral | Discount | 15% — 50% | 21% | |||||||||||||||||||||||||||||||||||||||
| $ | 11,499 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||||||||||||||
| $ | 1,687 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||||||||||||||
NM — Not meaningful.meaningful.
(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of December 31, 2020 and 2019.
120
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of December 31, 20192020 and 2018,2019, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet.
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 4,017,971 | $ | 4,017,971 | $ | 0 | $ | 0 | $ | 4,017,971 | ||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 809,728 | $ | 0 | $ | 809,728 | $ | 0 | $ | 809,728 | ||||||||||||||||||||||
Resale agreements (1) | $ | 1,460,000 | $ | 0 | $ | 1,464,635 | $ | 0 | $ | 1,464,635 | ||||||||||||||||||||||
| Restricted equity securities, at cost | $ | 83,046 | $ | 0 | $ | 83,046 | $ | 0 | $ | 83,046 | ||||||||||||||||||||||
| Loans held-for-sale | $ | 1,788 | $ | 0 | $ | 1,788 | $ | 0 | $ | 1,788 | ||||||||||||||||||||||
| Loans held-for-investment, net | $ | 37,770,972 | $ | 0 | $ | 0 | $ | 37,803,940 | $ | 37,803,940 | ||||||||||||||||||||||
| Mortgage servicing rights | $ | 5,522 | $ | 0 | $ | 0 | $ | 8,435 | $ | 8,435 | ||||||||||||||||||||||
| Accrued interest receivable | $ | 150,140 | $ | 0 | $ | 150,140 | $ | 0 | $ | 150,140 | ||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 35,862,403 | $ | 0 | $ | 35,862,403 | $ | 0 | $ | 35,862,403 | ||||||||||||||||||||||
| Time deposits | $ | 9,000,349 | $ | 0 | $ | 9,016,884 | $ | 0 | $ | 9,016,884 | ||||||||||||||||||||||
| Short-term borrowings | $ | 21,009 | $ | 0 | $ | 21,009 | $ | 0 | $ | 21,009 | ||||||||||||||||||||||
| FHLB advances | $ | 652,612 | $ | 0 | $ | 659,631 | $ | 0 | $ | 659,631 | ||||||||||||||||||||||
Repurchase agreements (1) | $ | 300,000 | $ | 0 | $ | 317,850 | $ | 0 | $ | 317,850 | ||||||||||||||||||||||
| Long-term debt | $ | 147,376 | $ | 0 | $ | 150,131 | $ | 0 | $ | 150,131 | ||||||||||||||||||||||
| Accrued interest payable | $ | 11,956 | $ | 0 | $ | 11,956 | $ | 0 | $ | 11,956 | ||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||||||||
| Financial assets: | Financial assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3,261,149 | $ | 3,261,149 | $ | — | $ | — | $ | 3,261,149 | Cash and cash equivalents | $ | 3,261,149 | $ | 3,261,149 | $ | 0 | $ | 0 | $ | 3,261,149 | |||||||||||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 196,161 | $ | — | $ | 196,161 | $ | — | $ | 196,161 | Interest-bearing deposits with banks | $ | 196,161 | $ | 0 | $ | 196,161 | $ | 0 | $ | 196,161 | |||||||||||||||||||||||||||||||
Resale agreements (1) | $ | 860,000 | $ | — | $ | 856,025 | $ | — | $ | 856,025 | Resale agreements (1) | $ | 860,000 | $ | 0 | $ | 856,025 | $ | 0 | $ | 856,025 | |||||||||||||||||||||||||||||||
| Restricted equity securities, at cost | $ | 78,580 | $ | — | $ | 78,580 | $ | — | $ | 78,580 | Restricted equity securities, at cost | $ | 78,580 | $ | 0 | $ | 78,580 | $ | 0 | $ | 78,580 | |||||||||||||||||||||||||||||||
| Loans held-for-sale | $ | 434 | $ | — | $ | 434 | $ | — | $ | 434 | Loans held-for-sale | $ | 434 | $ | 0 | $ | 434 | $ | 0 | $ | 434 | |||||||||||||||||||||||||||||||
| Loans held-for-investment, net | $ | 34,420,252 | $ | — | $ | — | $ | 35,021,300 | $ | 35,021,300 | Loans held-for-investment, net | $ | 34,420,252 | $ | 0 | $ | 0 | $ | 35,021,300 | $ | 35,021,300 | |||||||||||||||||||||||||||||||
| Mortgage servicing rights | $ | 6,068 | $ | — | $ | — | $ | 8,199 | $ | 8,199 | Mortgage servicing rights | $ | 6,068 | $ | 0 | $ | 0 | $ | 8,199 | $ | 8,199 | |||||||||||||||||||||||||||||||
| Accrued interest receivable | $ | 144,599 | $ | — | $ | 144,599 | $ | — | $ | 144,599 | Accrued interest receivable | $ | 144,599 | $ | 0 | $ | 144,599 | $ | 0 | $ | 144,599 | |||||||||||||||||||||||||||||||
| Financial liabilities: | Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 27,109,951 | $ | — | $ | 27,109,951 | $ | — | $ | 27,109,951 | Demand, checking, savings and money market deposits | $ | 27,109,951 | $ | 0 | $ | 27,109,951 | $ | 0 | $ | 27,109,951 | |||||||||||||||||||||||||||||||
| Time deposits | $ | 10,214,308 | $ | — | $ | 10,208,895 | $ | — | $ | 10,208,895 | Time deposits | $ | 10,214,308 | $ | 0 | $ | 10,208,895 | $ | 0 | $ | 10,208,895 | |||||||||||||||||||||||||||||||
| Short-term borrowings | $ | 28,669 | $ | — | $ | 28,669 | $ | — | $ | 28,669 | Short-term borrowings | $ | 28,669 | $ | 0 | $ | 28,669 | $ | 0 | $ | 28,669 | |||||||||||||||||||||||||||||||
| FHLB advances | $ | 745,915 | $ | — | $ | 755,371 | $ | — | $ | 755,371 | FHLB advances | $ | 745,915 | $ | 0 | $ | 755,371 | $ | 0 | $ | 755,371 | |||||||||||||||||||||||||||||||
Repurchase agreements (1) | $ | 200,000 | $ | — | $ | 232,597 | $ | — | $ | 232,597 | Repurchase agreements (1) | $ | 200,000 | $ | 0 | $ | 232,597 | $ | 0 | $ | 232,597 | |||||||||||||||||||||||||||||||
| Long-term debt | $ | 147,101 | $ | — | $ | 152,641 | $ | — | $ | 152,641 | Long-term debt | $ | 147,101 | $ | 0 | $ | 152,641 | $ | 0 | $ | 152,641 | |||||||||||||||||||||||||||||||
| Accrued interest payable | $ | 27,246 | $ | — | $ | 27,246 | $ | — | $ | 27,246 | Accrued interest payable | $ | 27,246 | $ | 0 | $ | 27,246 | $ | 0 | $ | 27,246 | |||||||||||||||||||||||||||||||
(1)Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of December 31, 2020, NaN of the $300.0 million of gross repurchase agreements were eligible for netting against gross resale agreements. Out of $450.0 million of gross repurchase agreements, $250.0 million were eligible for netting against gross resale agreements as of December 31, 2019.
121
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 3,001,377 | $ | 3,001,377 | $ | — | $ | — | $ | 3,001,377 | ||||||||||
| Interest-bearing deposits with banks | $ | 371,000 | $ | — | $ | 371,000 | $ | — | $ | 371,000 | ||||||||||
Resale agreements (1) | $ | 1,035,000 | $ | — | $ | 1,016,724 | $ | — | $ | 1,016,724 | ||||||||||
| Restricted equity securities, at cost | $ | 74,069 | $ | — | $ | 74,069 | $ | — | $ | 74,069 | ||||||||||
| Loans held-for-sale | $ | 275 | $ | — | $ | 275 | $ | — | $ | 275 | ||||||||||
| Loans held-for-investment, net | $ | 32,073,867 | $ | — | $ | — | $ | 32,273,157 | $ | 32,273,157 | ||||||||||
| Mortgage servicing rights | $ | 7,836 | $ | — | $ | — | $ | 11,427 | $ | 11,427 | ||||||||||
| Accrued interest receivable | $ | 146,262 | $ | — | $ | 146,262 | $ | — | $ | 146,262 | ||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 26,370,562 | $ | — | $ | 26,370,562 | $ | — | $ | 26,370,562 | ||||||||||
| Time deposits | $ | 9,069,066 | $ | — | $ | 9,084,597 | $ | — | $ | 9,084,597 | ||||||||||
| Short-term borrowings | $ | 57,638 | $ | — | $ | 57,638 | $ | — | $ | 57,638 | ||||||||||
| FHLB advances | $ | 326,172 | $ | — | $ | 334,793 | $ | — | $ | 334,793 | ||||||||||
Repurchase agreements (1) | $ | 50,000 | $ | — | $ | 87,668 | $ | — | $ | 87,668 | ||||||||||
| Long-term debt | $ | 146,835 | $ | — | $ | 152,556 | $ | — | $ | 152,556 | ||||||||||
| Accrued interest payable | $ | 22,893 | $ | — | $ | 22,893 | $ | — | $ | 22,893 | ||||||||||
Note 43 — SecuritiesAssets Purchased under Resale Agreements and Sold under Repurchase Agreements
In resale agreements, the Company is exposed to credit risk for both counterparties and the underlying collateral. The company manages credit exposure from certain transactions by entering into master netting agreements and collateral arrangements with counterparties. The relevant agreements allow for the efficient closeout of the transaction, liquidation and set-off of collateral against the net amount owed by the counterparty following a default. It is also the Company’s policy to take possession, where possible, of the assets underlying resale agreements. As a result of the Company’s credit risk mitigation practices with respect to resale agreements as described above, the Company did not hold any reserves for credit impairment with respect to these agreements as of December 31, 2020 and 2019.
Securities Purchased under Resale Agreements — Total securities purchased under resale agreements were $1.11$1.16 billion and $1.44$1.11 billion as of December 31, 20192020 and 2018,2019, respectively. The weighted-average yields were 2.65%1.94%, 2.63%2.66% and 2.19%2.63% for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively.
Loans purchased under Resale Agreements — During the fourth quarter of 2020, the Company participated in $300.0 million in resale agreements collateralized with loans with multiple counterparties. The weighted-average yield was 2.27% for the year ended December 31, 2020.
Assets Sold under Repurchase Agreements — As of December 31, 2019,2020, the collateral for the repurchase agreements waswere comprised of U.S. Treasury securities, and U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, and U.S. Treasury securities. Gross repurchase agreements were $300.0 million and $450.0 million as of both December 31, 2020 and 2019, and 2018.respectively. The weighted-average interest rates were 4.74%3.25%, 4.46%4.74% and 3.48%4.46% for the years ended December 31, 2020, 2019 and 2018, respectively. During the second quarter of 2020, the Company recorded $8.7 million of charges related to the extinguishment of $150.0 million of repurchase agreements. In comparison, there were 0 extinguishment charges recorded in 2019 and 2017, respectively.2018. As of December 31, 2019, $150.0 million2020, all repurchase agreements will mature in 2022 and $300.0 million will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that, provide the Company, in the event of default by the counterparty, provide the Company the right to liquidate securitiesassets held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securitiesassets that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securitiesassets that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, butand is usually delivered to and held by the third-party trustees. The collateral amounts received/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||
| Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
| Collateral Received | ||||||||||||||||||||||||||||||||
| Resale agreements | $ | 1,460,000 | $ | 0 | $ | 1,460,000 | $ | (1,458,700) | (1) | $ | 1,300 | |||||||||||||||||||||
| Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
| Collateral Pledged | ||||||||||||||||||||||||||||||||
| Repurchase agreements | $ | 300,000 | $ | 0 | $ | 300,000 | $ | (300,000) | (2) | $ | 0 | |||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||
| Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
| Collateral Received | ||||||||||||||||||||
| Resale agreements | $ | 1,110,000 | $ | (250,000 | ) | $ | 860,000 | $ | (856,058 | ) | (1) | $ | 3,942 | |||||||
| Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
| Collateral Pledged | ||||||||||||||||||||
| Repurchase agreements | $ | 450,000 | $ | (250,000 | ) | $ | 200,000 | $ | (200,000 | ) | (2) | $ | — | |||||||
122
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||
| Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
| Collateral Received | ||||||||||||||||||||
| Resale agreements | $ | 1,435,000 | $ | (400,000 | ) | $ | 1,035,000 | $ | (1,025,066 | ) | (1) | $ | 9,934 | |||||||
| Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
| Collateral Pledged | ||||||||||||||||||||
| Repurchase agreements | $ | 450,000 | $ | (400,000 | ) | $ | 50,000 | $ | (50,000 | ) | (2) | $ | — | |||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
| Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
| Collateral Received | ||||||||||||||||||||||||||||||||
| Resale agreements | $ | 1,110,000 | $ | (250,000) | $ | 860,000 | $ | (856,058) | (1) | $ | 3,942 | |||||||||||||||||||||
| Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
| Collateral Pledged | ||||||||||||||||||||||||||||||||
| Repurchase agreements | $ | 450,000 | $ | (250,000) | $ | 200,000 | $ | (200,000) | (2) | $ | 0 | |||||||||||||||||||||
(1)Represents the fair value of assets the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(2)Represents the fair value of assets the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives. Refer to Note 65 — Derivatives to the Consolidated Financial Statements in this Form 10-K for additional information.
Note 54 — Securities
The following tables present the amortized cost, gross unrealized gains and losses, and fair value by major categories of AFS investmentdebt securities as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 50,310 | $ | 451 | $ | 0 | $ | 50,761 | ||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities | 806,814 | 8,765 | (1,260) | 814,319 | ||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 1,125,174 | 34,306 | (5,710) | 1,153,770 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 1,634,553 | 27,952 | (1,611) | 1,660,894 | ||||||||||||||||||||||
| Municipal securities | 382,573 | 13,588 | (88) | 396,073 | ||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 234,965 | 6,107 | (1,230) | 239,842 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 288,520 | 1,761 | (506) | 289,775 | ||||||||||||||||||||||
| Corporate debt securities | 406,323 | 3,493 | (3,848) | 405,968 | ||||||||||||||||||||||
| Foreign government bonds | 183,828 | 163 | (1,460) | 182,531 | ||||||||||||||||||||||
| Asset-backed securities | 63,463 | 10 | (242) | 63,231 | ||||||||||||||||||||||
| CLOs | 294,000 | 0 | (6,506) | 287,494 | ||||||||||||||||||||||
| Total AFS debt securities | $ | 5,470,523 | $ | 96,596 | $ | (22,461) | $ | 5,544,658 | ||||||||||||||||||
123
| ($ in thousands) | December 31, 2019 | ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||||||||||||||||||||||
| AFS debt securities: | AFS debt securities: | |||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 177,215 | $ | — | $ | (793 | ) | $ | 176,422 | U.S. Treasury securities | $ | 177,215 | $ | 0 | $ | (793) | $ | 176,422 | ||||||||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 584,275 | 1,377 | (4,407 | ) | 581,245 | |||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities | U.S. government agency and U.S. government-sponsored enterprise debt securities | 584,275 | 1,377 | (4,407) | 581,245 | |||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | |||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 599,814 | 8,551 | (4,894 | ) | 603,471 | Commercial mortgage-backed securities | 599,814 | 8,551 | (4,894) | 603,471 | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 998,447 | 6,927 | (1,477 | ) | 1,003,897 | Residential mortgage-backed securities | 998,447 | 6,927 | (1,477) | 1,003,897 | ||||||||||||||||||||||||||||||||
| Municipal securities | 101,621 | 790 | (109 | ) | 102,302 | Municipal securities | 101,621 | 790 | (109) | 102,302 | ||||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities: | Non-agency mortgage-backed securities: | |||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 86,609 | 1,947 | (6 | ) | 88,550 | Commercial mortgage-backed securities | 86,609 | 1,947 | (6) | 88,550 | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 46,830 | 3 | (285 | ) | 46,548 | Residential mortgage-backed securities | 46,830 | 3 | (285) | 46,548 | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 11,250 | 12 | (113 | ) | 11,149 | Corporate debt securities | 11,250 | 12 | (113) | 11,149 | ||||||||||||||||||||||||||||||||
| Foreign bonds | 354,481 | 198 | (507 | ) | 354,172 | |||||||||||||||||||||||||||||||||||||
| Foreign government bonds | Foreign government bonds | 354,481 | 198 | (507) | 354,172 | |||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 66,106 | — | (1,354 | ) | 64,752 | Asset-backed securities | 66,106 | 0 | (1,354) | 64,752 | ||||||||||||||||||||||||||||||||
| CLOs | 294,000 | — | (9,294 | ) | 284,706 | CLOs | 294,000 | 0 | (9,294) | 284,706 | ||||||||||||||||||||||||||||||||
| Total AFS investment securities | $ | 3,320,648 | $ | 19,805 | $ | (23,239 | ) | $ | 3,317,214 | |||||||||||||||||||||||||||||||||
| Total AFS debt securities | Total AFS debt securities | $ | 3,320,648 | $ | 19,805 | $ | (23,239) | $ | 3,317,214 | |||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2018 | |||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| AFS investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 577,561 | $ | 153 | $ | (12,899 | ) | $ | 564,815 | |||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 219,485 | 382 | (2,694 | ) | 217,173 | |||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 420,486 | 811 | (12,694 | ) | 408,603 | |||||||||||
| Residential mortgage-backed securities | 957,219 | 4,026 | (14,552 | ) | 946,693 | |||||||||||
| Municipal securities | 82,965 | 87 | (1,032 | ) | 82,020 | |||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 25,826 | 226 | — | 26,052 | ||||||||||||
| Residential mortgage-backed securities | 10,109 | 7 | (185 | ) | 9,931 | |||||||||||
| Corporate debt securities | 11,250 | — | (381 | ) | 10,869 | |||||||||||
| Foreign bonds | 489,378 | — | (26,330 | ) | 463,048 | |||||||||||
| Asset-backed securities | 12,621 | 22 | — | 12,643 | ||||||||||||
| Total AFS investment securities | $ | 2,806,900 | $ | 5,714 | $ | (70,767 | ) | $ | 2,741,847 | |||||||
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS investmentdebt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position, as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities | $ | 352,521 | $ | (1,260) | $ | 0 | $ | 0 | $ | 352,521 | $ | (1,260) | ||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 292,596 | (5,656) | 3,543 | (54) | 296,139 | (5,710) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 342,561 | (1,611) | 0 | 0 | 342,561 | (1,611) | ||||||||||||||||||||||||||||||||
| Municipal securities | 24,529 | (88) | 0 | 0 | 24,529 | (88) | ||||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 58,738 | (1,230) | 7,920 | 0 | 66,658 | (1,230) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 90,156 | (506) | 0 | 0 | 90,156 | (506) | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 251,674 | (3,645) | 9,798 | (203) | 261,472 | (3,848) | ||||||||||||||||||||||||||||||||
| Foreign government bonds | 106,828 | (1,460) | 0 | 0 | 106,828 | (1,460) | ||||||||||||||||||||||||||||||||
| Asset-backed securities | 0 | 0 | 34,104 | (242) | 34,104 | (242) | ||||||||||||||||||||||||||||||||
| CLOs | 0 | 0 | 287,494 | (6,506) | 287,494 | (6,506) | ||||||||||||||||||||||||||||||||
| Total AFS debt securities | $ | 1,519,603 | $ | (15,456) | $ | 342,859 | $ | (7,005) | $ | 1,862,462 | $ | (22,461) | ||||||||||||||||||||||||||
124
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | — | $ | — | $ | 176,422 | $ | (793 | ) | $ | 176,422 | $ | (793 | ) | ||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 310,349 | (4,407 | ) | — | — | 310,349 | (4,407 | ) | ||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
| Commercial mortgage-backed securities | 204,675 | (2,346 | ) | 108,314 | (2,548 | ) | 312,989 | (4,894 | ) | |||||||||||||||
| Residential mortgage-backed securities | 325,354 | (1,234 | ) | 34,337 | (243 | ) | 359,691 | (1,477 | ) | |||||||||||||||
| Municipal securities | 31,130 | (109 | ) | — | — | 31,130 | (109 | ) | ||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||
| Commercial mortgage-backed securities | 7,914 | (6 | ) | — | — | 7,914 | (6 | ) | ||||||||||||||||
| Residential mortgage-backed securities | 42,894 | (285 | ) | — | — | 42,894 | (285 | ) | ||||||||||||||||
| Corporate debt securities | — | — | 9,888 | (113 | ) | 9,888 | (113 | ) | ||||||||||||||||
| Foreign bonds | 129,074 | (407 | ) | 9,900 | (100 | ) | 138,974 | (507 | ) | |||||||||||||||
| Asset-backed securities | 52,565 | (902 | ) | 12,187 | (452 | ) | 64,752 | (1,354 | ) | |||||||||||||||
| CLOs | 284,706 | (9,294 | ) | — | — | 284,706 | (9,294 | ) | ||||||||||||||||
| Total AFS investment securities | $ | 1,388,661 | $ | (18,990 | ) | $ | 351,048 | $ | (4,249 | ) | $ | 1,739,709 | $ | (23,239 | ) | |||||||||
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| AFS investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | — | $ | — | $ | 516,520 | $ | (12,899 | ) | $ | 516,520 | $ | (12,899 | ) | ||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 22,755 | (238 | ) | 159,814 | (2,456 | ) | 182,569 | (2,694 | ) | |||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
| Commercial mortgage-backed securities | 26,886 | (245 | ) | 274,666 | (12,449 | ) | 301,552 | (12,694 | ) | |||||||||||||||
| Residential mortgage-backed securities | 75,675 | (491 | ) | 653,660 | (14,061 | ) | 729,335 | (14,552 | ) | |||||||||||||||
| Municipal securities | 9,458 | (104 | ) | 30,295 | (928 | ) | 39,753 | (1,032 | ) | |||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||
| Residential mortgage-backed securities | 3,067 | (19 | ) | 3,949 | (166 | ) | 7,016 | (185 | ) | |||||||||||||||
| Corporate debt securities | 10,869 | (381 | ) | — | — | 10,869 | (381 | ) | ||||||||||||||||
| Foreign bonds | 14,418 | (40 | ) | 448,630 | (26,290 | ) | 463,048 | (26,330 | ) | |||||||||||||||
| Total AFS investment securities | $ | 163,128 | $ | (1,518 | ) | $ | 2,087,534 | $ | (69,249 | ) | $ | 2,250,662 | $ | (70,767 | ) | |||||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 0 | $ | 0 | $ | 176,422 | $ | (793) | $ | 176,422 | $ | (793) | ||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise debt securities | 310,349 | (4,407) | 0 | 0 | 310,349 | (4,407) | ||||||||||||||||||||||||||||||||
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 204,675 | (2,346) | 108,314 | (2,548) | 312,989 | (4,894) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 325,354 | (1,234) | 34,337 | (243) | 359,691 | (1,477) | ||||||||||||||||||||||||||||||||
| Municipal securities | 31,130 | (109) | 0 | 0 | 31,130 | (109) | ||||||||||||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 7,914 | (6) | 0 | 0 | 7,914 | (6) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 42,894 | (285) | 0 | 0 | 42,894 | (285) | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 0 | 0 | 9,888 | (113) | 9,888 | (113) | ||||||||||||||||||||||||||||||||
| Foreign government bonds | 129,074 | (407) | 9,900 | (100) | 138,974 | (507) | ||||||||||||||||||||||||||||||||
| Asset-backed securities | 52,565 | (902) | 12,187 | (452) | 64,752 | (1,354) | ||||||||||||||||||||||||||||||||
| CLOs | 284,706 | (9,294) | 0 | 0 | 284,706 | (9,294) | ||||||||||||||||||||||||||||||||
| Total AFS debt securities | $ | 1,388,661 | $ | (18,990) | $ | 351,048 | $ | (4,249) | $ | 1,739,709 | $ | (23,239) | ||||||||||||||||||||||||||
As of December 31, 2020, the Company had 104 AFS debt securities in a gross unrealized loss position with 0 credit impairment. The AFS debt securities that made up the gross unrealized loss as of December 31, 2020 were comprised primarily of 46 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, 3 CLOs, and 17 corporate debt securities. In comparison, as of December 31, 2019, the Company had 101 AFS debt securities in a gross unrealized loss position with 0 credit impairment. The AFS debt securities that made up the gross unrealized loss as of December 31, 2019 were comprised primarily of 3 CLOs, 57 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 14 U.S. government agency and U.S. government-sponsored enterprise debt securities.
Allowance for Credit Losses
Each reporting period, the Company assesses individual securitieseach AFS debt security that areis in an unrealized loss position for OTTI.to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for OTTI,impairment related to credit losses, seeNote 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in this Form 10-K. Prior to January 1, 2020, the Company assessed individual securities that were in an unrealized loss position for OTTI.
The gross unrealized losses presented in the above tables were primarily attributable to the movement in the yield curve movements and widened spreads. Securities that were in additionunrealized loss positions as of December 31, 2020 were mainly comprised of the following:
•U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities — The market value decline as of December 31, 2020 was primarily due to widened liquidityinterest rate movement. Since these securities are guaranteed or sponsored by agencies of the U.S. government, and the credit profiles are strong (rated Aaa, AA+ and AAA by Moody’s Investors Service (“Moody’s”), Standard & Poor's (“S&P”) and Fitch Ratings (“Fitch”), respectively), the Company expects to receive all contractual interest payments on time, and believes the risk of credit losses on these securities is remote.
•CLOs — The market value decline as of December 31, 2020 was largely due to the widening in spreads. The credit profiles of the securities are strong (rated A or higher by S&P) and the contractual payments from these bonds are expected to be received on time. Accordingly, the Company believes that the risk of credit losses on these securities is remote.
125
•Corporate debt securities — The market value decline as of December 31, 2020 was primarily due to interest rate movement and the widening in spreads. Since credit profiles of the securities are strong (rated BBB- or higher by Moody’s, S&P, Kroll Bond Rating Agency and Fitch, respectively), and the contractual payments from these bonds are expected to be received on time, the Company believes that the risk of credit losses on these securities is remote.
Overall, the Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if near-term credit performance could possibly be under the impact of the COVID-19 pandemic.
As of December 31, 2020, the Company had the intent to hold the AFS debt securities with unrealized losses through the anticipated recovery period and it was more-likely-than-not that the Company will not have to sell these securities before recovery of their amortized cost. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates because of changes in market interest rates. The Company believes that the gross unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, the Company expects to recover the entire amortized cost basis of these securities. The Company has the intent to hold these securities through the anticipated recovery period and it is not more-likely-than-not that the Company will have to sell these securities before recovery of their amortized cost. As of December 31, 2019, the Company had 101 AFS investment securities in a gross unrealized loss position with noAccordingly, there was 0 allowance for credit impairment, primarily consisting of 3 CLOs, 57 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and 14 U.S. government agency and U.S. government sponsored enterprise debt securities. In comparison,losses as of December 31, 2018, the Company had 184 AFS investment2020 against these securities, in a gross unrealized loss position with no credit impairment, primarily consisting of 108 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 16 foreign bonds and 19 U.S. Treasury securities. There werethere was 0 OTTIprovision for credit losses recognized for the year ended December 31, 2020. For the years ended December 31, 2019 and 2018, and 2017.there was 0 OTTI credit loss recognized.
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and losses, and tax expense related to the sales of AFS investmentdebt securities for the years ended December 31, 2020, 2019 2018 and 2017:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Gross realized gains | $ | 12,299 | $ | 3,930 | $ | 2,535 | ||||||||||||||
| Related tax expense | $ | 3,636 | $ | 1,162 | $ | 749 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Proceeds from sales | $ | 627,110 | $ | 364,270 | $ | 832,844 | ||||||
| Gross realized gains | $ | 3,930 | $ | 2,535 | $ | 8,037 | ||||||
| Related tax expense | $ | 1,162 | $ | 749 | $ | 3,380 | ||||||
Contractual Maturities of InvestmentAvailable-for-Sale Debt Securities
The following table presents the contractual maturities of AFS investmentdebt securities as of December 31, 2019:
| ($ in thousands) | Amortized Cost | Fair Value | ||||||
| Due within one year | $ | 721,607 | $ | 719,179 | ||||
| Due after one year through five years | 395,468 | 392,891 | ||||||
| Due after five years through ten years | 143,029 | 145,901 | ||||||
| Due after ten years | 2,060,544 | 2,059,243 | ||||||
| Total AFS investment securities | $ | 3,320,648 | $ | 3,317,214 | ||||
| ($ in thousands) | Amortized Cost | Fair Value | ||||||||||||
| Due within one year | $ | 893,162 | $ | 892,648 | ||||||||||
| Due after one year through five years | 639,543 | 646,245 | ||||||||||||
| Due after five years through ten years | 483,606 | 499,880 | ||||||||||||
| Due after ten years | 3,454,212 | 3,505,885 | ||||||||||||
| Total AFS debt securities | $ | 5,470,523 | $ | 5,544,658 | ||||||||||
As of December 31, 2020 and 2019, and 2018, AFS investmentdebt securities with fair value of $479.4$588.5 million and $435.8$479.4 million, respectively, were primarily pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Restricted Equity Securities
The following table presents the restricted equity securities included in Other Assets on the Consolidated Balance Sheet as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| FRBSF stock | $ | 59,249 | $ | 58,330 | ||||||||||
| FHLB stock | 23,797 | 20,250 | ||||||||||||
| Total restricted equity securities | $ | 83,046 | $ | 78,580 | ||||||||||
| ($ in thousands) | December 31, | |||||||
| 2019 | 2018 | |||||||
| FRB stock | $ | 58,330 | $ | 56,819 | ||||
| FHLB stock | 20,250 | 17,250 | ||||||
| Total restricted equity securities | $ | 78,580 | $ | 74,069 | ||||
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Note 65 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily interest rate risk andor foreign currency risk, andas well as to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates aredo not significant tosignificantly affect earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities, as well as the Company’sBank’s investment in its China subsidiary, East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements in this Form 10-K.
The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of December 31, 20192020 and 2018.2019. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of December 31, 20192020 and 2018.2019. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
| ($ in thousands) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
| Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 0 | $ | 0 | $ | 0 | $ | 31,026 | $ | 0 | $ | 3,198 | ||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | 275,000 | 0 | 1,864 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
| Net investment hedges: | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 84,269 | 0 | 235 | 86,167 | 0 | 1,586 | ||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 359,269 | $ | 0 | $ | 2,099 | $ | 117,193 | $ | 0 | $ | 4,784 | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 18,155,678 | $ | 489,132 | $ | 315,834 | $ | 15,489,692 | $ | 192,883 | $ | 124,119 | ||||||||||||||||||||||||||
| Foreign exchange contracts | 3,108,488 | 30,300 | 22,524 | 4,839,661 | 54,637 | 47,024 | ||||||||||||||||||||||||||||||||
| Credit contracts | 76,992 | 13 | 206 | 210,678 | 2 | 84 | ||||||||||||||||||||||||||||||||
| Equity contracts | 0 | (1) | 858 | 0 | 0 | (1) | 1,414 | 0 | ||||||||||||||||||||||||||||||
| Commodity contracts | 0 | (2) | 82,451 | 84,165 | 0 | (2) | 81,380 | 80,517 | ||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | 21,341,158 | $ | 602,754 | $ | 422,729 | $ | 20,540,031 | $ | 330,316 | $ | 251,744 | ||||||||||||||||||||||||||
| Gross derivative assets/liabilities | $ | 602,754 | $ | 424,828 | $ | 330,316 | $ | 256,528 | ||||||||||||||||||||||||||||||
| Less: Master netting agreements | (93,063) | (93,063) | (121,561) | (121,561) | ||||||||||||||||||||||||||||||||||
| Less: Cash collateral received/paid | (8,449) | (91,634) | (3,758) | (38,238) | ||||||||||||||||||||||||||||||||||
| Net derivative assets/liabilities | $ | 501,242 | $ | 240,131 | $ | 204,997 | $ | 96,729 | ||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||
| Fair value hedges: | ||||||||||||||||||||||||
| Interest rate contracts | $ | 31,026 | $ | — | $ | 3,198 | $ | 35,811 | $ | — | $ | 5,866 | ||||||||||||
| Net investment hedges: | ||||||||||||||||||||||||
| Foreign exchange contracts | 86,167 | — | 1,586 | 90,245 | — | 611 | ||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 117,193 | $ | — | $ | 4,784 | $ | 126,056 | $ | — | $ | 6,477 | ||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
| Interest rate contracts | $ | 15,489,692 | $ | 192,883 | $ | 124,119 | $ | 11,695,499 | $ | 69,818 | $ | 69,267 | ||||||||||||
| Foreign exchange contracts | 4,839,661 | 54,637 | 47,024 | 3,407,522 | 21,624 | 19,329 | ||||||||||||||||||
| Credit contracts | 210,678 | 2 | 84 | 119,320 | 1 | 164 | ||||||||||||||||||
| Equity contracts | — | (1) | 1,414 | — | — | (1) | 1,951 | — | ||||||||||||||||
| Commodity contracts | — | (2) | 81,380 | 80,517 | — | (2) | 14,422 | 23,068 | ||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | 20,540,031 | $ | 330,316 | $ | 251,744 | $ | 15,222,341 | $ | 107,816 | $ | 111,828 | ||||||||||||
| Gross derivative assets/liabilities | $ | 330,316 | $ | 256,528 | $ | 107,816 | $ | 118,305 | ||||||||||||||||
| Less: Master netting agreements | (121,561 | ) | (121,561 | ) | (31,569 | ) | (31,569 | ) | ||||||||||||||||
| Less: Cash collateral received/paid | (3,758 | ) | (38,238 | ) | (13,577 | ) | (6,833 | ) | ||||||||||||||||
| Net derivative assets/liabilities | $ | 204,997 | $ | 96,729 | $ | 62,670 | $ | 79,903 | ||||||||||||||||
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 6,321 thousand barrels of crude oil and 109,635 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of December 31, 2020. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 7,811 thousand barrels of crude oil and 63,773 thousand MMBTUs of natural gas as of December 31, 2019. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.
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Derivatives Designated as Hedging Instruments
Fair Value Hedges — The Company is exposedentered into interest rate swaps designated as fair value hedges to hedge changes in the fair value of certain certificates of deposit due to changes in the benchmark interest rates. The Company entered into interest rate swaps, which were designated as fair value hedges.rate. The interest rate swaps involveinvolved the exchange of variable ratevariable-rate payments over the life of the agreements without the exchange ofexchanging the underlying notional amounts. During 2020, both the hedging interest rate swaps and hedged certificates of deposit were called.
The following table presents the net gains (losses) recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the years ended December 31, 2020, 2019 2018 and 2017:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Gains (losses) recorded in interest expense: | ||||||||||||||||||||
| Recognized on interest rate swaps | $ | 3,146 | $ | 2,655 | $ | (93) | ||||||||||||||
| Recognized on certificates of deposit | $ | (1,605) | $ | (2,536) | $ | 278 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Gains (losses) recorded in interest expense: | ||||||||||||
| Recognized on interest rate swaps | $ | 2,655 | $ | (93 | ) | $ | (2,734 | ) | ||||
| Recognized on certificates of deposit | $ | (2,536 | ) | $ | 278 | $ | 2,271 | |||||
As of December 31, 2020, there was no fair value hedge or hedged certificates of deposit outstanding. The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of December 31, 2020 and 2019:
| ($ in thousands) | Carrying Value (1) | Cumulative Fair Value Adjustment (2) | ||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Certificates of deposit | $ | 0 | $ | (29,080) | $ | 0 | $ | 1,604 | ||||||||||||||||||
(1)Represents the full carrying amount of the hedged certificates of deposit.
(2)For liabilities, (increase) decrease to carrying value.
Cash Flow Hedges— The Company entered into interest rate swaps that were designated and qualified as cash flow hedges in the second quarter of 2020 to hedge the variability in interest payments on certain floating-rate borrowings. For cash flow hedges, the entire change in the fair value of the hedging instruments is recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impact earnings. Reclassified gains and losses on interest rate swaps are recorded in the same line item as the interest payments of the hedged long-term borrowings within Interest expense in the Consolidated Statements of Income. As of December 31, 2020, the notional amount of the interest rate swaps that were designated as cash flow hedges was $275.0 million. Considering the interest rates, yield curve and notional amounts as of December 31, 2020, the Company expects to reclassify an estimated $599 thousand of after-tax net losses on derivative instruments designated as cash flow hedges from AOCI into earnings during the next 12 months.
The following table presents the pre-tax changes in AOCI from cash flow hedges for the years ended December 31, 2020, 2019 and 2018:2018. The after-tax impact of cash flow hedges on AOCI is shown in Note 14 — Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements in the Form-10-K.
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Losses recognized in AOCI | $ | (1,604) | $ | 0 | $ | 0 | ||||||||||||||
| Gains reclassified from AOCI to Interest expense | $ | 113 | $ | 0 | $ | 0 | ||||||||||||||
| ($ in thousands) | Carrying Value (1) | Cumulative Fair Value Adjustment (2) | ||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Certificates of deposit | $ | (29,080 | ) | $ | (26,877 | ) | $ | 1,604 | $ | 4,141 | ||||||
Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge a portion of itsthe Bank’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’sBank’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the RMB. The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The notional and fair value amounts of the net investment hedges, made up of foreign exchange forwards,forward contracts were $86.2$84.3 million and $1.6 million$235 thousand liability, respectively, as of December 31, 2019.2020. In comparison, the notional and fair value amounts of the net investment hedges, made up of foreign exchange swaps,forward contracts were $90.2$86.2 million and a $611 thousand$1.6 million liability, respectively, as of December 31, 2018.2019.
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The following table presents the after-tax (losses) gains recordedrecognized in AOCI on net investment hedges for the years ended December 31, 2020, 2019 2018 and 2017:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| (Losses) gains recognized in AOCI | $ | (4,801) | $ | (471) | $ | 6,072 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (Losses) gains recognized in AOCI | $ | (471 | ) | $ | 6,072 | $ | (648 | ) | ||||
(Losses) recognized in Foreign exchange income(1) | $ | — | $ | — | $ | (1,953 | ) | |||||
Derivatives Not Designated as Hedging Instruments
Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations. Beginning in
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of December 31, 2020 and 2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Written options | $ | 957,393 | $ | 0 | $ | 115 | Purchased options | $ | 957,393 | $ | 101 | $ | 15 | |||||||||||||||||||||||||||||||
| Sold collars and corridors | 518,477 | 7,673 | 0 | Collars and corridors | 518,477 | 0 | 7,717 | |||||||||||||||||||||||||||||||||||||
| Swaps | 7,586,414 | 479,634 | 1,364 | Swaps | 7,617,524 | 1,724 | 306,623 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 9,062,284 | $ | 487,307 | $ | 1,479 | Total | $ | 9,093,394 | $ | 1,825 | $ | 314,355 | |||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Written options | $ | 1,003,558 | $ | 0 | $ | 66 | Purchased options | $ | 1,003,558 | $ | 67 | $ | 0 | |||||||||||||||||||||||||||||||
| Sold collars and corridors | 490,852 | 1,971 | 16 | Collars and corridors | 490,852 | 17 | 1,996 | |||||||||||||||||||||||||||||||||||||
| Swaps | 6,247,667 | 187,294 | 6,237 | Swaps | 6,253,205 | 3,534 | 115,804 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 7,742,077 | $ | 189,265 | $ | 6,319 | Total | $ | 7,747,615 | $ | 3,618 | $ | 117,800 | |||||||||||||||||||||||||||||||
In January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlements of derivatives, and not as collateral against derivatives. Included in the total notional amount of $9.09 billion of interest rate contracts entered into with financial counterparties as of December 31, 2020, was a notional amount of $2.98 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $1.3 million and liability fair values of $187.4 million, as of December 31, 2020. In comparison, included in the total notional amount of $7.75 billion of interest ratesrate contracts entered into with financial counterparties as of December 31, 2019, was a notional amount of $2.53 billion of interest ratesrate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $2.9 million and liability fair values of $75.1 million, as of December 31, 2019. In comparison, included in the total notional amount of $5.85 billion of interest rates contracts entered into with financial counterparties as of December 31, 2018, was a notional amount of $1.66 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $16.4 million and liability fair values of $16.0 million, as of December 31, 2018.
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||
| Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
| Written options | $ | 1,003,558 | $ | — | $ | 66 | Purchased options | $ | 1,003,558 | $ | 67 | $ | — | |||||||||||||
| Sold collars and corridors | 490,852 | 1,971 | 16 | Collars and corridors | 490,852 | 17 | 1,996 | |||||||||||||||||||
| Swaps | 6,247,667 | 187,294 | 6,237 | Swaps | 6,253,205 | 3,534 | 115,804 | |||||||||||||||||||
| Total | $ | 7,742,077 | $ | 189,265 | $ | 6,319 | Total | $ | 7,747,615 | $ | 3,618 | $ | 117,800 | |||||||||||||
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||||||||
| Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
| Written options | $ | 931,601 | $ | — | $ | 492 | Purchased options | $ | 931,601 | $ | 503 | $ | — | |||||||||||||
| Sold collars and corridors | 429,879 | 1,121 | 305 | Collars and corridors | 429,879 | 308 | 1,140 | |||||||||||||||||||
| Swaps | 4,482,881 | 41,457 | 41,545 | Swaps | 4,489,658 | 26,429 | 25,785 | |||||||||||||||||||
| Total | $ | 5,844,361 | $ | 42,578 | $ | 42,342 | Total | $ | 5,851,138 | $ | 27,240 | $ | 26,925 | |||||||||||||
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. For a portion of the foreign exchange contracts entered into with its customers, theThe Company either enteredenters into offsetting foreign exchange contracts with third-party financial institutions or acquires collateral on a portfolio basis primarily in the form of cash to manage its foreign exchange exposure with its customers, or entered into bilateral collateral and master netting agreements with certain customer counterparties to manager its credit exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily for foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts had original maturities of one year or less as of both December 31, 20192020 and 2018.2019.
129
The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | Financial Counterparty | |||||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | ($ in thousands) | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||||||
| Forwards and spot | $ | 1,522,888 | $ | 17,575 | $ | 17,928 | Forwards and spot | $ | 145,197 | $ | 1,230 | $ | 273 | |||||||||||||||||||||||||||||||
| Swaps | 13,590 | 872 | 91 | Swaps | 1,191,355 | 10,049 | 3,658 | |||||||||||||||||||||||||||||||||||||
| Written options | 117,729 | 0 | 574 | Purchased options | 117,729 | 574 | 0 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,654,207 | $ | 18,447 | $ | 18,593 | Total | $ | 1,454,281 | $ | 11,853 | $ | 3,931 | |||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | Financial Counterparty | Customer Counterparty | Financial Counterparty | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | ($ in thousands) | Assets | Liabilities | Assets | Liabilities | ($ in thousands) | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forwards and spot | $ | 3,581,036 | $ | 45,911 | $ | 40,591 | Forwards and spot | $ | 207,492 | $ | 1,400 | $ | 507 | Forwards and spot | $ | 3,581,036 | $ | 45,911 | $ | 40,591 | Forwards and spot | $ | 207,492 | $ | 1,400 | $ | 507 | |||||||||||||||||||||||||||||||||||||||||||
| Swaps | 6,889 | 16 | 84 | Swaps | 702,391 | 6,156 | 4,712 | Swaps | 6,889 | 16 | 84 | Swaps | 702,391 | 6,156 | 4,712 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Written options | 87,036 | 127 | — | Purchased options | 87,036 | — | 127 | Written options | 87,036 | 127 | 0 | Purchased options | 87,036 | 0 | 127 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collars | 2,244 | — | 14 | Collars | 165,537 | 1,027 | 989 | Collars | 2,244 | 0 | 14 | Collars | 165,537 | 1,027 | 989 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,677,205 | $ | 46,054 | $ | 40,689 | Total | $ | 1,162,456 | $ | 8,583 | $ | 6,335 | Total | $ | 3,677,205 | $ | 46,054 | $ | 40,689 | Total | $ | 1,162,456 | $ | 8,583 | $ | 6,335 | |||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2018 | |||||||||||||||||||||||||
| Customer Counterparty | Financial Counterparty | |||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||
| Assets | Liabilities | ($ in thousands) | Assets | Liabilities | ||||||||||||||||||||||
| Forwards and spot | $ | 2,023,425 | $ | 11,719 | $ | 13,079 | Forwards and spot | $ | 506,342 | $ | 3,407 | $ | 2,285 | |||||||||||||
| Swaps | 21,108 | 348 | 243 | Swaps | 687,845 | 5,764 | 3,336 | |||||||||||||||||||
| Written options | 537 | 16 | — | Purchased options | 537 | — | 16 | |||||||||||||||||||
| Collars | 83,864 | — | 370 | Collars | 83,864 | 370 | — | |||||||||||||||||||
| Total | $ | 2,128,934 | $ | 12,083 | $ | 13,692 | Total | $ | 1,278,588 | $ | 9,541 | $ | 5,637 | |||||||||||||
Credit Contracts — The Company may periodically enter into RPA contracts with institutional counterparties to manage the credit exposure on interest rate contracts associated with syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties.RPAs. Under the RPA,RPAs, the Company will receive or make a payment if a borrower defaults on the related interest rate contract. The Company manages its creditCredit risk on RPAs is managed by monitoring the creditworthinesscredit worthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The referenced entities of the RPAs were investment grade as of both December 31, 20192020 and 2018.2019. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of December 31, 20192020 and 2018:2019:
| ($ in thousands) | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||
| RPAs - protection sold | $ | 66,278 | $ | 0 | $ | 206 | $ | 199,964 | $ | 0 | $ | 84 | ||||||||||||||||||||||||||
| RPAs - protection purchased | 10,714 | 13 | 0 | 10,714 | 2 | 0 | ||||||||||||||||||||||||||||||||
| Total RPAs | $ | 76,992 | $ | 13 | $ | 206 | $ | 210,678 | $ | 2 | $ | 84 | ||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
| RPAs - protection sold | $ | 199,964 | $ | — | $ | 84 | $ | 108,606 | $ | — | $ | 164 | ||||||||||||
| RPAs - protection purchased | 10,714 | 2 | — | 10,714 | 1 | — | ||||||||||||||||||
| Total RPAs | $ | 210,678 | $ | 2 | $ | 84 | $ | 119,320 | $ | 1 | $ | 164 | ||||||||||||