Prompt Corrective Action
The Federal Deposit Insurance Act,FDIA, as amended, (“FDIA”), 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,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,”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 will beis classified in the following categories based on the capital measures indicated:
| PCA Category | Risk-Based Capital Ratios | |||||||||||||||||||||||||
| Total Capital | Tier 1 Capital | CET1 Capital | 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% | |||||||||||||||||||||||||
| PCA Category | Total Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | CET1 Risk-Based Ratio | Tier 1 Leverage Ratio | ||||
| Well capitalized | 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% | |||||||
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 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”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,” requirements to reduce total assets, and/or cessation of receipt of deposits from correspondent banks.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, however 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 for Banks with Assets
In May 2018, the enactment of $10 Billion to $50 Billion
The EGRRCPA also lifted the asset size threshold and provided relief for banks with assets between $50 billion companies”). Additionaland $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 isat 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 for banking organizations with total consolidated assets ofsupervisory stress testing at bank holding companies from $50 billion or more. $10 - $50 billion companies, includingto $100 billion. Although the Company and the Bank are not required to conduct annual company-run stress tests, under rules issued by the Federal Reserve Bank. Thiswe continue to conduct annual capital and quarterly liquidity stress test assesses the potential impact of different scenarios on the consolidated earnings, balance sheet and capital of a bank holding company or bank over a designated planning horizon of nine quarters, taking into account the organization’s current condition, risks, exposures, strategies and activities. Each banking organization’s Board of Directors and senior management are required to review and approve the policies and procedures of their stress testing processes as frequently as economic conditions or the condition of the organization may warrant, and at least annually. They are also required to consider the results of the stress test in the normal course of business, including the banking organization’s capital planning, assessment of capital adequacy and maintenance of capital consistent with its risks, and risk management practices. The results of the stress tests are provided to the applicable Federal Reserve banking agency. The final rule requires public disclosure of a summary of the severely adverse stress testing results for the $10 - $50 billion companies. The Bank has developed a process to comply with the stress testing requirements, which involves senior management and the Board of Directors. The Bank is required to submit the results of the annual company-run stress tests to the Federal Reserve Bank by the close of business July 31 of each calendar year, using data as of December 31 of the preceding year and publish a summary of the results of the company-run stress tests between October 15 and October 31. The Company reported the results of its 2017 annual stress tests to the Federal Reserve Bank on July 27, 2017 and published a summary of the results on its website on October 23, 2017.tests.
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Consumer Financial Protection Bureau Supervision
The Dodd-Frank Act centralized responsibility for consumer financial protection by givingestablished the CFPB, which has the authority for implementing, examiningto implement, examine and enforcingenforce compliance with federal consumer financial laws. Depositorylaws 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 and certain non-banks in the markets forwith respect to these consumer financial services (as determined by the CFPB) are subject to direct supervision by the CFPB, including any applicable examination,laws, and may also take enforcement and reporting requirements theaction. The CFPB may establish. The CFPB is focused on: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, and 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; andmarkets.
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 customersconsumers when taking deposits, making loans, collecting payments on loans and providing other services. In addition, the Department of Justice enforces the Servicemembers Civil Relief Act, which provides certain protections for military service members and their families, who have utilized a financial product or service, including a limitation on the ability to retake collateral in the event of default and a statutory interest rate cap for certain debts. 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 borrowing sources. The Bank is also a member bank and stockholder of the Federal Reserve. 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. AsOn 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 December 31, 2017, the Federal Reserve Bank was in compliance with these requirements.of San Francisco (“FRBSF”).
Dividends and Other Transfers of Funds
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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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 regulation, supervision, and examination by the Federal Reserve under the BHC Act. The Bank is regulated, supervised, and examined by the Federal Reserve, the 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 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 Exchange Act, as amended, both as administered by the SEC. Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “EWBC” and subject to Nasdaq 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 financial holding company status, East West is subject to regulation, supervision, and examinations by the Federal Reserve under the BHC Act. The BHC Act provides a federal framework for the regulation and supervision of all bank holding companies and 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, 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 by imposing interest ceilings and reserve requirements on such debt and requiring a bank holding company to obtain prior approval to purchase or redeem its 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. DFPI approval may also be required for certain acquisitions and 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 to engage 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 Treasury, determines to be financial in nature or incidental to such financial activity. 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 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, 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, Act, as implementedand its deposits are insured by the FDIC. The Bank’s operations in the U.S. are primarily regulated and supervised by the Federal Reserve’s Regulation W,Reserve and the DFPI, and its activities outside the U.S. are regulated and supervised by both its U.S. regulators and the applicable regulatory authority in the host country in which each overseas 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. Bank is subjectregulatory agencies also have extensive discretion to impose various restrictions that strictly limit the ability ofon management or operations and to issue policies and guidance in connection with their supervisory and enforcement activities and examination policies. California law permits state-chartered commercial banks to engage in transactionsany activity permissible for national banks, unless such activity is expressly prohibited by state law. The Bank may also form subsidiaries to engage in the many activities commonly conducted by national banks in operating 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 “well capitalized” and “well managed” and has a CRA rating of at least “satisfactory.”
Regulation of 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. East West Bank’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.
Regulatory Capital Requirements
The federal banking agencies have imposed risk-based capital adequacy requirements intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with their affiliates, including their parentoperations. In July 2013, the federal banking agencies adopted final rules (the “Basel III Capital Rules”) establishing a comprehensive capital framework for U.S. banking organizations that became effective for the Company and the Bank beginning January 1, 2015. The Basel III Capital Rules define the components of regulatory capital, include a required ratio of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets and restrict the type of instruments that may be recognized in Tier 1 and 2 capital (including by phasing out trust preferred securities from Tier 1 capital for bank holding companies. Regulations promulgated bycompanies). The Basel III Capital Rules also prescribe a standardized approach for risk weighting assets and include a number of risk weighting categories that affect the Federal Reserve limitdenominator in banking institutions’ regulatory capital ratios.
Under the types and amounts of these transactions that may take place and generally require those transactionsBasel III Capital Rules, to be on an arm's-length basis. In general, these regulations require that “covered transactions” between a subsidiary bankconsidered adequately capitalized, standardized approach banking organizations, such as the Company and any one affiliate (e.g., its parent company or the non-bank subsidiaries of the bank holding company) are limited to 10% of the bank subsidiary's capital and surplus and, with respect to such bank subsidiary and all such affiliates, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, these restrictions, contained in the Federal Reserve’s Regulation W, prevent East West and other affiliates from borrowing from, or entering 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. Federal law also limits a bank'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 mademaintain 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 of Tier 1 capital to average total consolidated assets. The Basel III Capital Rules also include a “capital conservation buffer” of 2.5% that fully phased in on termsJanuary 1, 2019, on top of each of the minimum risk-based capital ratios. Banking institutions with a risk-based capital ratio that are substantiallymeets or exceeds the same as,minimum requirement but does not meet the capital conservation buffer will face constraints on dividends, equity repurchases 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 arediscretionary bonus payments based in part, on the amount of the bank's capital. The Dodd-Frank Act treats derivative transactions resulting in credit exposure to an affiliate as covered transactions. It expands the transactions for which collateral is required to be maintained, and for all such transactions, it requires collateral to be maintained at all times. 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 andshortfall. To avoid these constraints, a banking entity that serves as an investment manager, investment adviser, organizerorganization must meet or exceed the following risk-based capital ratios (after any distribution): (i) CET1 capital to risk-weighted assets of 7.0%, (ii) Tier 1 capital to risk-weighted assets of 8.5%, and offeror, or sponsor with respect(iii) total risk-based capital to that covered fund, regardlessrisk-weighted assets of whether10.5%.
As of December 31, 2020, the banking entity has an ownership interest in the fund.
The Bank is also subject to additional capital requirements under the Prompt Corrective Action (“AML”PCA”) program reasonably designed to prevent and detect money laundering and terrorist financing and to comply with the recordkeeping and reporting requirementsregulations that implement Section 38 of the BSA, includingFederal Deposit Insurance Act (“FDIA”), as discussed below under the requirementPrompt Corrective Action section.
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Recent Regulatory Capital-Related Developments
From time to report suspicious activities. There is an expectation bytime, the Bank’s regulators that there will be an effective governance structure forregulatory agencies propose changes and amendments to, and issue interpretations of, risk-based capital requirements and related reporting instructions. Such proposals and interpretations could, if implemented in the program which includes effective oversight byfuture, affect our Board of Directorsregulatory capital requirements and management. The program must include, at a minimum, a designated compliance officer, written policies, procedures and internal controls, training of appropriate personnel, and independent testing of the program and risk-based customer due diligence procedures. The United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) andreported capital ratios.
In July 2019, the federal banking agencies continueissued a final rule (the “Capital Simplifications Rule”) to issue regulationsreduce regulatory compliance burden by simplifying certain risk-based and leverage capital requirements of the Basel III Capital Rules for non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets and with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank. The Capital Simplifications Rule became effective for the Company and the Bank on April 1, 2020. Application of the Capital Simplifications Rule to our consolidated balance sheet did not have a significant impact on the capital ratios of the Company and the Bank.
In light of the recent disruptions in economic conditions caused by COVID-19 pandemic, the federal banking agencies have also revised the definition of eligible retained income to be the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This revision reduces the likelihood that a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario where its capital ratios fall below an applicable minimum risk-based capital ratio requirement plus capital conservation buffer, and instead makes the application of these limitations more gradual. The revision became effective on March 20, 2020.
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 regulatory capital purposes and PPP loans pledged as collateral to PPPLF may be excluded from the denominator of the Tier 1 leverage ratio. In addition, the 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”), enacted 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 Significant 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 weighting normally associated with a TDR classification.
In December 2018, the regulatory agencies approved a final rule to address changes to credit loss accounting, including with respect to the application and requirementsbanking organizations’ implementation of the BSA and their expectationsAccounting Standards Update (“ASU”) 2016-13 Financial Instruments — Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which introduced the current expected credit losses (“CECL”) methodology. 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. On March 31, 2020, the federal banking agencies issued an interim final rule that provided banking organizations that adopted CECL during 2020, the option to delay for effective AML programs. Banking regulators also examine banks for compliance with regulations administeredtwo years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the Office of Foreign Assets Control (“OFAC”) for economic sanctions against targeted foreign countries, nationals and others. Failure of a financial institution to maintain and implement adequate BSA/AML and OFAC programs, or to comply with allaggregate amount of the relevant laws or regulations, could have serious legal and reputational consequences forcapital benefit provided during the institution.
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Prompt Corrective Action
The same uncertainty existsFDIA, 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,” “adequately 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. Under the federal banking agencies’ regulations authorized or required underimplementing the Dodd-Frank Act that have not yet been proposed or finalized. MembersPCA provisions of the current U.S.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 Capital | 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 government administration haveregulator 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 thatby 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 Dodd-Frank Act will be evaluatedpurpose of applying PCA regulations and that somethe 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 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 depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately 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, however 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 ofin the Dodd-Frank Act and rules promulgated thereunder,other statutes administered by the Federal Reserve. Amongst other things, the EGRRCPA provided regulatory relief, including those provisions establishingfrom 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 may focus its supervisory, examination, and enforcement efforts on, among other things:
•risks to consumers and compliance with federal consumer financial laws when evaluating 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 rulesloss of certain contractual rights. The Company and regulations proposedthe Bank are also subject to federal and enactedstate 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 CFPB,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 (“FRBSF”).
Dividends and Other Transfers of Funds
The principal source of liquidity 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 regime, the Federal Reserve or FDIC may be revised, repealed,prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “significantly undercapitalized” or, amended.in some circumstances, “undercapitalized.” It is unclearthe Federal Reserve’s policy that a bank holding company should generally pay dividends on common stock only if this evaluationthe company’s net income available to common stockholders over the past four quarters, net of distributions, would be sufficient to fully fund the rulesdividends, and regulations will resultif the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality and overall financial condition. It is also the Federal Reserve’s policy that a bank holding company 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 material changes to the current lawslight of their organizations’ financial condition and rules, or thosecompliance with regulatory capital requirements, and has discouraged payment ratios that are in process, applicable to financial institutions like usat maximum allowable levels, unless both asset quality and financial services or products like ours. It also is not clear what the impact from any such changes, whether positive or negative, would be on our business or the markets and industries in which we compete and any such changes could have a material adverse impact on our business and prospects. There can be no assurance that these or future reforms will not significantly impact our businesses, results of operations and financial condition.capital are very strong.
Available Information
The Company’s annual reportswebsite is www.eastwestbank.com. The Company’s Annual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, proxy statements, current reportsCurrent 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 http://www.sec.gov. Also,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 regulation, supervision, and examination by the Federal Reserve under the BHC Act. The Bank is regulated, supervised, and examined by the Federal Reserve, the 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 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 Exchange Act, as amended, both as administered by the SEC. Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “EWBC” and subject to Nasdaq 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 financial holding company status, East West is subject to regulation, supervision, and examinations by the Federal Reserve under the BHC Act. The BHC Act provides a federal framework for the regulation and supervision of all bank holding companies and 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, 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 by imposing interest ceilings and reserve requirements on such debt and requiring a bank holding company to obtain prior approval to purchase or redeem its 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 reportsapprovals. DFPI approval may also be required for certain acquisitions and 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 to engage 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 Treasury, determines to be financial in nature or incidental to such financial activity. 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 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, 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 its deposits are insured by the FDIC. The Bank’s operations in the U.S. are primarily regulated and supervised by the Federal Reserve and the DFPI, and its activities outside the U.S. are regulated and supervised by both its U.S. regulators and the applicable regulatory authority in the host country in which each overseas 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. Bank regulatory agencies also have 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-chartered commercial banks to engage in any activity permissible for national banks, unless such activity is expressly prohibited by state law. The Bank may also form subsidiaries to engage in the many activities commonly conducted by national banks in operating 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 “well capitalized” and “well managed” and has a CRA rating of at least “satisfactory.”
Regulation of 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. East West Bank’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.
Regulatory Capital Requirements
The federal banking agencies have imposed risk-based capital adequacy requirements 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 comprehensive capital framework for U.S. banking organizations that became effective for the Company and the Bank beginning January 1, 2015. The Basel III Capital Rules define the components of regulatory capital, include a required ratio of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets and restrict the type of instruments that may be recognized in Tier 1 and 2 capital (including by phasing out trust preferred securities from Tier 1 capital for bank holding companies). The Basel III Capital Rules also prescribe a standardized approach for risk weighting assets and include a number of risk weighting 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 of Tier 1 capital to average total consolidated assets. The Basel III Capital Rules also include a “capital conservation buffer” of 2.5% that fully phased in on January 1, 2019, on top of each of the minimum risk-based capital ratios. Banking institutions with a risk-based capital ratio that meets or exceeds the minimum requirement but does 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 meet or exceed the following risk-based capital ratios (after any distribution): (i) CET1 capital to risk-weighted assets of 7.0%, (ii) Tier 1 capital to risk-weighted assets of 8.5%, and (iii) total risk-based capital to risk-weighted assets of 10.5%.
As of December 31, 2020, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy requirements of the federal banking agencies, including the capital conservation buffer, and the Company and the Bank were classified as “well capitalized.” For additional discussion and disclosure see Item 7. MD&A — Regulatory Capital and Ratios and Note 17 — Regulatory Requirements and Matters to the Consolidated Financial Statements in this Form 10-K.
The Bank is also subject to additional capital requirements under the Prompt Corrective Action (“PCA”) regulations that 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 requirements and related reporting instructions. Such proposals and interpretations could, if implemented in the future, affect our regulatory capital requirements and reported capital ratios.
In July 2019, the federal banking agencies issued a final rule (the “Capital Simplifications Rule”) to reduce regulatory compliance burden by simplifying certain risk-based and leverage capital requirements of the Basel III Capital Rules for non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets and with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank. The Capital Simplifications Rule became effective for the Company and the Bank on April 1, 2020. Application of the Capital Simplifications Rule to our consolidated balance sheet did not have a significant impact on the capital ratios of the Company and the Bank.
In light of the recent disruptions in economic conditions caused by COVID-19 pandemic, the federal banking agencies have also revised the definition of eligible retained income to be the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This revision reduces the likelihood that a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario where its capital ratios fall below an applicable minimum risk-based capital ratio requirement plus capital conservation buffer, and instead makes the application of these limitations more gradual. The revision became effective on March 20, 2020.
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 regulatory capital purposes and PPP loans pledged as collateral to PPPLF may be excluded from the denominator of the Tier 1 leverage ratio. In addition, the 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”), enacted 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 Significant 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 weighting normally associated with a 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 Accounting Standards Update (“ASU”) 2016-13 Financial Instruments — Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which introduced the current expected credit losses (“CECL”) methodology. 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. On March 31, 2020, the federal banking agencies issued an interim final rule that provided banking organizations that adopted CECL during 2020, the option to delay for two years the estimated impact of CECL on regulatory capital, followed 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’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.
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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,” “adequately 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. Under the federal 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 Capital | 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 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 depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately 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, however 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 may focus its supervisory, examination, and enforcement efforts on, among other things:
•risks to consumers and compliance with federal consumer financial laws when evaluating 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 be foundsubject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines or criminal penalties, punitive damages or restitution to consumers, and copiedthe loss of certain contractual rights. The Company and the Bank 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 SEC’s Public Reference RoomFederal 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 (“FRBSF”).
Dividends and Other Transfers of Funds
The principal source of liquidity 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 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 “significantly undercapitalized” or, in some circumstances, “undercapitalized.” It is the Federal Reserve’s policy that a bank holding company should generally pay dividends on common stock only if the company’s net income available to common stockholders over the past four quarters, net of distributions, would be sufficient to fully fund the dividends, and if the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality and overall financial condition. It is also the Federal Reserve’s policy that a bank holding company 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 100 F Street, NE, Washington, DC 20549,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-length basis. In general, these regulations require that “covered transactions,” which include bank’s extensions of credit to or purchase of assets from an affiliate, be limited to 10% of the bank’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. In addition, a bank generally may not extend credit to an affiliate unless the extension of credit is secured by callingspecified amounts of collateral. The Dodd-Frank Act expanded the SEC at 1-800-SEC-0330.
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, 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’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’s capital.
Community Reinvestment Act
Under the CRA, an insured depository institution has a continuing and affirmative obligation to help serve the credit needs of its communities, including low- and moderate-income borrowers and neighborhoods. The Federal Reserve periodically evaluates a state member bank’s performance under applicable performance criteria and assign a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Federal Reserve 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 acquire 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, for each account ownership category. The DIF is funded mainly through quarterly insurance assessments on insured banks based on their assessment base. The Dodd-Frank Act revised the FDIC’s fund management authority by establishing a minimum Designated Reserve Ratio of 1.35 percent of total estimated insured deposits and redefining the assessment base to be calculated as average consolidated total assets minus average tangible equity. The Bank’s DIF quarterly assessment is calculated by multiplying its assessment base by the applicable assessment rate. The assessment rate is calculated 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.
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 increased deposit insurance assessments based on its participation in the PPP, PPPLF or MMLF programs. This final rule became effective on April 1, 2020, which applied the changes to deposit insurance assessments starting in the second quarter of 2020.
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
The Bank Secrecy Act (“BSA”), USA PATRIOT Act of 2001 (“PATRIOT Act”), federal laws and regulations impose obligations on U.S. financial institutions to implement and maintain appropriate policies, procedures and controls, which are reasonably designed to prevent, detect and report instances of money laundering, the financing of terrorism and to comply with the recordkeeping and reporting requirements. 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. We regularly evaluate and continue to enhance our systems and procedures to comply with the PATRIOT Act and other anti-money laundering (“AML”) initiatives. Failure of a financial institution to maintain and implement adequate BSA/AML 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
Federal statutes and regulations require banking organizations to take certain actions to protect nonpublic consumer financial information. The Bank has prepared a privacy policy that it must disclose to consumers annually. In some cases, the Bank must obtain a consumer’s consent before sharing information with an unaffiliated third party, and the Bank must allow a consumer to opt out of the Bank’s sharing of information with its affiliates for marketing and certain other purposes. Additional conditions affect the Bank’s information exchanges with credit reporting agencies. The Bank's privacy practices and the effectiveness of its systems to protect consumer privacy are subjects covered in the Federal Reserve’s periodic compliance examinations.
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 or the California Financial Information Privacy Act. The California Attorney General has adopted regulations to implement the CCPA.
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The Federal Reserve pays close attention to the cybersecurity practices of state member banks and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council (“FFIEC”), has issued a number of policy statements and other guidance for banks in light of the growing threat posed by cybersecurity 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. 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
New statutes, regulations and policies that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions and public companies operating in the U.S. are regularly adopted. Such changes to applicable status, regulations and policies may change the Company’s operating environment in substantial and unpredictable ways, increase the Company’s cost of conducting business, impede the efficiency of the internal business processes, and restrict or expand the activities in which the Company may engage. Accordingly, such changes may have a significant influence on our operations and activities, financial condition, results of operations, growth plans or future prospects and the overall growth and distribution of loans, investments and deposits. We cannot predict whether or in what form any statute, regulation or policy will be proposed or adopted or the extent to which our businesses may be affected by any new statute or 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 followingCompany’s enterprise risk management (“ERM”) program incorporates risk management throughout the organization in identifying, managing, monitoring, and reporting risks. Our ERM program identifies the Company’s major risk categories as risks related to the COVID-19 pandemic; geopolitical uncertainties; financial risks; capital and liquidity risks; credit risk; operational risk; regulatory, compliance and legal risks; accounting and tax risks; and strategic and reputational risks. The ERM is comprised of senior management of the Company and chaired by the Chief Risk Officer.
The discussion sets forth what management currently believes could be the most significantbelow addresses material factors, of which we are currently aware, that could affecthave a material and adverse effect on our businesses, results of operations and financial condition. AdditionalMany 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 affect our businesses,cause actual results of operationsto differ materially. These risks and financial condition are discussed in the Forward-Looking Statements. Other factors not discussed below or elsewhere in this Annual Report on Form 10-K could also adversely affect the Company’s businesses, results of operations and financial condition. Therefore, the risk factors belowuncertainties should not be considered a complete discussion of all of 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.
The effects of the COVID-19 pandemic have impacted, and Legal Risksmay 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.
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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 operations. EWBC is subjectfinancial condition. If unemployment continues to extensive regulation under federalrise and state laws,our customers experience credit deterioration, including inability to pay loans as well as supervisionthey 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 examination byprovision for credit losses could continue to increase. Further, the DBO, FDIC, Federal Reserve, FHLB, SEC, CFPB, U.S.disruptions related to the COVID-19 pandemic may decrease our borrowers’ confidence with respect to purchasing real estate or homes and State Attorneys General,adversely affect the demand for the Company’s loans and other government bodies. Congressproducts and federal agencies have significantly increased their focus onservices, the regulationvaluation of our loans, securities, derivatives portfolios, goodwill and intangibles, the financial services industry. Among other things,carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations.
In addition, the Dodd-Frank Act, enacted in July 2010, instituted major changesunprecedented developments relating to the banking andCOVID-19 pandemic have contributed to heightened volatility in financial institutions regulatory regimes, many parts of which are now in effect. The Federal Reserve has adopted regulations implementing the Basel III framework on bank capital adequacy, stress testing, and market liquidity riskmarkets in the U.S. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. In addition, our overseas operationsworldwide. The continuation of prolonged adverse economic conditions primarily in China, Hong Kong and Taiwan are subject to extensive regulation under the laws of those jurisdictions as well as supervision and examination by financial regulators for those jurisdictions, which have also increased their focus on the regulation of the financial services industry. 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 EWBC in substantial and unpredictable ways. In addition, such changes could also subject us to additional costs and may limit the types of financial services and products we offer. Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by state, federal and non-U.S. agencies, the loss of FDIC insurance, the revocation of our banking charter, civil or criminal monetary penaltiesU.S. and/or reputational damage, which couldGreater China can be expected to have a material adverse impacteffects on the Company’s businesses, results of operations and financial condition. The effects of any such legislative changes and regulatory actions on EWBC cannot be reliably determined at this time. See Item 1. Business — Supervision and Regulation for more information about the regulations to which we are subject.
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 Boardpandemic, the impact of Governorsthose 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 Federal Reserve for state licensed member banks. Under parallel authorityU.S. federal government actions to mitigate the effects of the bank regulators, the federal bank regulatorsCOVID-19 pandemic, and certain state regulators have authority to bring enforcement actions related to BSA compliance whichour participation in those efforts, may include compliance undertakings, written agreements, cease and desist orders, and/or civil monetary penalties. FinCEN may also impose civil monetary penalties based on BSA violations that are deemed willful. In addition, willful violations of the BSA also could result in criminal fines, penalties or forfeitures. The banking regulators also examine for compliance with the rules enforced by the OFAC. Banks are under enhanced scrutiny for both BSA and OFAC compliance. Consequently, if our policies, procedures and internal controls are deemed deficient, we could face monetary penalties as well as serious reputational consequences that could materially and adversely affect our businesses, results of operations and financial condition.
The Bank is subjectU.S. federal government has taken significant action to supervision pursuantaddress 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 a written agreement withaddress 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 Bankand U.S. Department of San FranciscoTreasury to establish the Main Street Lending Program (“FRB”MSLP”), relief with respect to TDRs, mortgage forbearance, and a memorandumextended unemployment benefits. In response to the continued market disruption and economic impact of understanding (“MOU”)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 DBO regarding BSAterms of the PPP, these loans carry an interest rate of 1% and AMLare 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 which agreementscosts 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 conditions which ledfederal 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 agreementsactivities, 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 businesses, results of operations and 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 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, 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 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 in the Company’s credit exposure which may, in turn, adversely impact the Company’s 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 additionalcredit losses, delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on the Company’s 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 being taken against 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 Bank,value of the AFS debt securities portfolio that the Company holds may be adversely affected by 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, results of operations and financial condition. There have been ongoing discussions 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, 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 costsresults 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 Bank’ssuccess of our international operations and could have a material adverse effect on our overall business, results of operations. The Bank entered into a Written Agreement, dated November 9, 2015operations 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 FRB (the “Written Agreement”),U.S. Foreign Corrupt Practices Act, anti-corruption laws, and a related MOUother U.S. and foreign laws and regulations. Failure to comply with the DBO, relating to certain deficiencies identifiedsuch laws and regulations could, among other things, result in the Bank’s BSA/AML compliance program,enforcement actions and fines against us, as described in further detail in Item 7. MD&A — Regulatory Matters. If additional compliance issues are identified or if the regulators conclude that the Bank has not satisfactorily complied with the Written Agreement or MOU, the FRB or DBO could take further action with respect to the Bank, and ifwell as limitations on our conduct, any such further actions were taken, such actionof which could have a material adverse effect on our businesses, results of operations and financial condition. The operating
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 conditionsacts of nature and geopolitical events involving political unrest, terrorism or military conflicts could adversely affect the Company’s business operations and those of the Written Agreement could leadCompany’s customers and cause substantial damage and loss to an increased risk of beingreal 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 additional regulatory actionsnumerous 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 FRBvalue of loan collateral, and DBO or other government agencies, as well as additional actions resulting from future regular annual soundnessresult in an increase in the amount of nonperforming assets, net charge-offs, and compliance examinations by federal and state regulators. To date,provision for credit losses, which could adversely affect the Company has added significant resources to comply with the Written Agreement and MOU, and to address any additional findings or recommendations by our regulators.
Risks Related to Financial Matters
Aportion 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 be further diminished, and the Company would be more likely to suffer losses on defaulted loans. Furthermore, commercial 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 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 (“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 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, wethe SOFR methodology has not been tested for an extended period of time, which may suffer reputational harmlimit market acceptance of the use of SOFR. The ARRC and other entities intend for the transition to be economically neutral. During 2020, the ARRC has issued updated hardwired fallback language for bilateral business loans and syndicated loans, and a recommended spread methodology for non-consumer cash products, as well as guidance on several matters related to the transition. On October 23, 2020, the International Swaps and Derivatives 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 incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes effective on January 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 October 23, 2020 and became effective on the same date as the Supplement, January 25, 2021. The ARRC supports 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 reference rate as soon as practicable and in any event by December 31, 2021. The Company created a cross-functional team to manage the communication of the Company’s transition plans with both internal and external stakeholders and to ensure that the Company 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, the transition is anticipated to span several reporting periods through the end of 2021 and 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 increased systems 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 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 lawsuitsdisagreements 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 claims. Moreover, itadversely 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 results of 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 bealso 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 predictpredict. Consequently, the outcomeimpact of a lawsuit or legal proceeding, which may present additional uncertainty tothese changes on our business prospects. Also, what constitutes unfair, deceptive and abusive acts or practices mayresults 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 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 shaped by opinions from courts, administrative proceedingsable 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 agency guidance.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 guidelines, qualitative judgments by regulators about components, risk weightings and other factors. New regulatory capital and liquidity requirements may limit or otherwise restrict how we utilize ourrules, including the Basel III Capital Rules, which establish the minimum capital including common stock dividends and stock repurchases,adequacy requirements and may require us to increase our regulatory capital or liquidity targets, increase regulatory capital ratios, or liquidity. Significant parts of the capital requirements applicable to the Company and the Bank under the Basel III Capital Rules adopted by the Federal Reserve are effective, although certain provisions of the rules are phased-in over a period of years, with the rules generally fully phased-in as of January 1, 2019. As such,change how we are required to adopt more stringent capital adequacy standards than we have in the past. In addition, wecalculate regulatory capital. We may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, as a result of stress testing and enhance capital planning based on the hypothetical future adverse economic scenarios. We expect to meetAs of December 31, 2020, we met the requirements of the Basel III Capital Rules, including the capital conservation buffer fully phased-in as of January 1, 2019.buffer. Compliance with these capital requirements including leverage ratios, may limit capital-intensive operations that require intensive use of capital.and increase operational costs, and we may be limited or prohibited from distributing dividends or repurchasing 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 profitsincome for that year and its retained net profitsearnings 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 timely.in a timely fashion.
Risks Related to effectively manage foreign currency translation risk. Fluctuations in foreign currency exchange rates could have a material adverse effect on the Company’s businesses, results of operations and financial condition.Credit Matters
The Company’s allowance for credit losses level may not be adequate to cover actual losses. In accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”),GAAP, we maintain an allowance for loan losses to provide for loan defaults and non-performance, andnonperformance, and an allowance for unfunded credit reservescommitments 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 loancredit losses may not be adequate to cover probable loanabsorb actual credit losses, and future provisions for loancredit 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 financial condition. 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 reserves.commitments. The level of the allowance for unfunded credit reservescommitments 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 reservescommitments will be adequate to provide for the actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit reservescommitments 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 engaged inaffected by the same or similar economic conditions in the markets in which we operate or elsewhere, which could result in materially higher credit losses. Deterioration in economic conditions, housing conditions, or real estate values in those markets could result in materially higher credit losses. TheFor 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 businesses,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 these 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, disease pandemics, 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 oursour systems or of a third partyparty’s systems could adversely affect our ability to conduct our businesses,business, manage our exposure to risk or expand our businesses,businesses. This could also result in the disclosure or 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 causeresult 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 to maintainin maintaining our clients’ confidence in the Company’s online services. In addition, our businesses arebusiness 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 telecommunicationstelecommunication 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. Although the Company has developednetworks; notwithstanding our defensive systems and processes that are designed to prevent security breaches and periodically test the Company’s security. The Company employs a combination of preventative and detective controls such as firewalls, intrusion detection systems, data loss prevention, anti-malware, endpoint detection and response solutions to safeguard against cyber-attacks. There is no assurance that all of our security failuremeasures 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 adverselyresult 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, result in violations of applicable privacy and other laws, costly litigation and loss of customer relationships 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 the unavailability ofmarket-wide liquidity throughout the marketproblems and may expose the Company to credit risk in the event of default of its counterparty or client.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, disclosurereporting 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 employees and 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’s financial performance and profitability also depend on the Company’s ability to compete with financial services companies and other companies that offer banking services.Company operates in a highly competitive environment. The Company conducts the majority of its operations in California. The banking and financial services businesses in California are highly competitive, and increased competition in the Company’s primary market area may adversely impact the level of loans and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors. TheseOur competitors include nationalcommercial banks, other regional banks and community banks. The Company also faces competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other regional, national, and global financial intermediaries. In particular,institutions. Some of the Company’smajor competitors include majormultinational 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 foron loans and deposits, efforts to obtain loan and deposit customerscustomer services, and a range inof price and quality of products and services, provided, including new technology-driven products and services. If the Company is unableFailure to attract and retain banking customers may adversely impact the Company may be unable to continue itsCompany’s loan growth and level of deposits.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 expansionexpanding 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/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 Matters
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 supervision and examination by the DFPI, FDIC, Federal Reserve, SEC, CFPB, and other government 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.
Given that banks operate in an extensively regulated environment under federal and state law, good standing with our regulators is of fundamental importance to the continuation and growth of our businesses. In the performance of their supervisory and enforcement duties, U.S. federal and state regulators, and non-U.S. regulators have significant discretion and power to initiate enforcement actions for violations of laws and regulations, and unsafe and unsound practices. Further, regulators and bank supervisors continue to exercise qualitative supervision of our industry and specific business operations and related matters. Violations of laws and regulations or deemed deficiencies in risk management or other qualitative practices also may be incorporated into the Company’s bank supervisory ratings. A downgrade in these ratings, or other enforcement actions or supervisory criticisms could limit the Company’s ability to pursue acquisitions or conduct other expansionary activities and require new or additional regulatory approvals before engaging in certain other business activities, as well as result in civil monetary penalties, other sanctions, and damage to our reputation, all of which could adversely affect our business, financial condition, results of operations and future prospects.
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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, 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 adjust to our businesses 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 PATRIOT Act, 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 BSA laws and regulations. Financial Crimes Enforcement Network is authorized to implement, administer, and enforce compliance with the BSA and associated 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 federal and state banking regulators, as well as the U.S. Department of Justice, 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 AML or OFAC-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 of these violations could have a material adverse effect on our 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, results of operations, and 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, the FASB or the SECthese accounting standards may change the financial accounting and reporting standards that govern the preparation ofsuch 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 also amend or even 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 applyadopt a new or revised standard retroactively, potentially resulting in the Company restatingrestatements to a prior period’s financial statements.
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 U.S. 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. Several of our accountingAccounting policies related to these estimates and assumptions are critical because they require management to make subjective and complex judgments about matters that are inherently uncertainuncertain. If these estimates and because it is likely that materially different amounts wouldassumptions are incorrect, we may be reported under different conditions or by using different assumptions.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.Statements in this Form 10-K.
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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 projectsinvestments 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, willmay fail to meet certain government compliance requirements and willmay not be able to be realized. The possible inability to realize these tax credits and other tax benefits couldmay 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.
General Risk Factors
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, even if an acquisition might be in the best interest of the stockholders.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 and preferred stockwhich 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 trading price of the Company’s common stock may fluctuate as a result ofin response to a number of factors, manysome of which are outside the Company’s control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of the Company’s common stock. Among the factors that could affect the Company’s stock price are: 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 forin 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;Company.
Industry factors, general economic and
If the Company’s goodwill werewas 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, in an eight-story office building.building that it owns. The Company operates over 130in 116 locations worldwide including its headquarters, main administrative offices, branchesin the U.S. and representative offices.eight 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 Taipei and Xiamen.
As of December 31, 2017,2020, the Bank owns approximately 154,000 square feet of property at 19 U.S. locations and leases approximately 783,000 square feet in the properties at 32 of itsremaining U.S. locations. All international and other domestic branch and office locations are leased, with lease expirationExpiration dates rangingfor these leases range from 20182021 to 2032,2036, exclusive of renewal options. The Bank leases all of its branches and offices in Greater China, totaling approximately 58,000 square feet. Expiration dates for these leases range from 2021 to 2026. All properties occupied by the Bank are used across all business segments and for corporate purposes. See Note 19 — Business Segments to the Consolidated Financial Statements for details on each segment. The Bank also owns leasehold improvements, equipment, furniture, and fixtures at its offices, all of which are used in its business activities.
ITEM 3. LEGAL PROCEEDINGS
See Note 1312 — 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.” The following tables set forth the high and low closing sales prices per share of the Company’s common stock as reported on the NASDAQ, as well as the quarterly dividends the Company declared, for the periods indicated:
| 2017 | ||||||
| High | Low | Cash Dividends | ||||
| First quarter | $56.53 | $49.11 | $0.20 | |||
| Second quarter | $59.31 | $49.43 | $0.20 | |||
| Third quarter | $60.06 | $53.03 | $0.20 | |||
| Fourth quarter | $62.18 | $56.66 | $0.20 | |||
| 2016 | ||||||
| High | Low | Cash Dividends | ||||
| First quarter | $41.07 | $27.25 | $0.20 | |||
| Second quarter | $40.00 | $31.34 | $0.20 | |||
| Third quarter | $37.59 | $31.34 | $0.20 | |||
| Fourth quarter | $51.73 | $36.31 | $0.20 | |||
As of January 31, 2018, 144,544,0222021, 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 751 stockholdersin record names of record and by approximately 61,500 additional stockholders whosebrokers or other nominees.
Holders of the Company’s common stock was held for them in street name or nominee accounts.
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding securities authorized for issuance under the Company’s equity compensation plans, see Note 13 — Stock Compensation Plans to the Consolidated Financial Statements and Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of Part III presented 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 (“KBW”) NASDAQNasdaq Regional Banking Index (“KRX”) over the five-year period through December 31, 2017.2020. 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, 2012,2015, $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��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 incorporates itto be incorporated by reference into a filing under the Securities Act or the Exchange Act.
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| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| Index | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||||||||||||
| East West Bancorp, Inc. | $100.00 | $166.05 | $187.52 | $205.26 | $256.46 | $311.21 | East West Bancorp, Inc. | $100.00 | $124.90 | $151.60 | $110.20 | $126.10 | $135.50 | |||||||||||||||||||||||||||||||||||||
| KRX | $100.00 | $146.85 | $150.41 | $159.31 | $221.46 | $225.34 | KRX | $100.00 | $139.00 | $141.50 | $116.70 | $144.50 | $131.90 | |||||||||||||||||||||||||||||||||||||
| S&P 500 Index | $100.00 | $132.39 | $150.51 | $152.59 | $170.84 | $208.14 | S&P 500 Index | $100.00 | $112.00 | $136.40 | $130.40 | $171.50 | $203.00 | |||||||||||||||||||||||||||||||||||||
| Source: KBW | ||||||||||||||||||||||||||||||||||||||||||||||||||
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 20172019 and 2016. 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.2018.
ITEM 6. SELECTED FINANCIAL DATA
EAST WEST BANCORP, INC.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
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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”“Company,” “we” or “EWBC”), and its various 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 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 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. The Bank operates both in the United States (“U.S.”) and Greater China. As of December 31, 2017, East West had $37.2 billion in assets and approximately 3,000 full-time equivalent employees.
Corporate Strategy
We are committed to seek attractive opportunitiesenhancing long-term shareholder value by executing on the fundamentals of growing loans, deposits and revenue, improving profitability, and investing for growth in pursuing its cross-borderthe future while managing risks, expenses and capital. Our business banking strategy.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. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services.
Coronavirus Disease 2019 Global Pandemic
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Regulatory Developments Relating to the year endedCOVID-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, 20172020. 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 successfully completedsubmitted 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 eighth consecutive year of record earnings, reflecting strong revenue growth, in excess of expense growth.business continuity plans to help protect its employees and support its customers. The Company’s focus on creating sustainable, expandable and profitable customer relationships has provided consistent financial results and delivered strong returnsCompany is managing its response to the COVID-19 pandemic according to its stockholders.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 is committedcontinues to investingmake 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 technologythe 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 human capitalmay continue to drive business growth, continuously strengthening infrastructurecause our customers to ensure prudent risk management and enhance operational excellence.
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 loans held-for-investment asthe 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 December 31, 2016.
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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 data) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Summary of operations: | ||||||||||||||||||||
| Interest and dividend income | $ | 1,325,119 | $ | 1,137,481 | $ | 1,053,815 | $ | 1,153,698 | $ | 1,068,685 | ||||||||||
| Interest expense | 140,050 | 104,843 | 103,376 | 112,820 | 112,492 | |||||||||||||||
| Net interest income before provision for credit losses | 1,185,069 | 1,032,638 | 950,439 | 1,040,878 | 956,193 | |||||||||||||||
| Provision for credit losses | 46,266 | 27,479 | 14,217 | 49,158 | 22,364 | |||||||||||||||
| Net interest income after provision for credit losses | 1,138,803 | 1,005,159 | 936,222 | 991,720 | 933,829 | |||||||||||||||
Noninterest income (loss) (1) | 258,406 | 182,918 | 183,383 | (11,714 | ) | (92,468 | ) | |||||||||||||
| Noninterest expense | 662,109 | 615,889 | 540,884 | 532,983 | 394,215 | |||||||||||||||
| Income before income taxes | 735,100 | 572,188 | 578,721 | 447,023 | 447,146 | |||||||||||||||
Income tax expense (2) | 229,476 | 140,511 | 194,044 | 101,145 | 153,822 | |||||||||||||||
| Net income | 505,624 | 431,677 | 384,677 | 345,878 | 293,324 | |||||||||||||||
| Preferred stock dividends | — | — | — | — | 3,428 | |||||||||||||||
| Net income available to common stockholders | $ | 505,624 | $ | 431,677 | $ | 384,677 | $ | 345,878 | $ | 289,896 | ||||||||||
| Per common share: | ||||||||||||||||||||
| Basic earnings | $ | 3.50 | $ | 3.00 | $ | 2.67 | $ | 2.42 | $ | 2.10 | ||||||||||
| Diluted earnings | $ | 3.47 | $ | 2.97 | $ | 2.66 | $ | 2.41 | $ | 2.09 | ||||||||||
| Dividends declared | $ | 0.80 | $ | 0.80 | $ | 0.80 | $ | 0.72 | $ | 0.60 | ||||||||||
| Book value | $ | 26.58 | $ | 23.78 | $ | 21.70 | $ | 19.89 | $ | 17.19 | ||||||||||
| Weighted-average number of shares outstanding: | ||||||||||||||||||||
| Basic | 144,444 | 144,087 | 143,818 | 142,952 | 137,342 | |||||||||||||||
| Diluted | 145,913 | 145,172 | 144,512 | 143,563 | 139,574 | |||||||||||||||
| Common shares outstanding at period-end | 144,543 | 144,167 | 143,909 | 143,582 | 137,631 | |||||||||||||||
| At year end: | ||||||||||||||||||||
| Total assets | $ | 37,150,249 | $ | 34,788,840 | $ | 32,350,922 | $ | 28,743,592 | $ | 24,732,216 | ||||||||||
| Loans held-for-investment, net | $ | 28,688,590 | $ | 25,242,619 | $ | 23,378,789 | $ | 21,468,270 | $ | 17,600,613 | ||||||||||
| Available-for-sale investment securities | $ | 3,016,752 | $ | 3,335,795 | $ | 3,773,226 | $ | 2,626,617 | $ | 2,733,797 | ||||||||||
| Total deposits, excluding held-for-sale deposits | $ | 31,615,063 | $ | 29,890,983 | $ | 27,475,981 | $ | 24,008,774 | $ | 20,412,918 | ||||||||||
| Long-term debt | $ | 171,577 | $ | 186,327 | $ | 206,084 | $ | 225,848 | $ | 226,868 | ||||||||||
| Federal Home Loan Bank (“FHLB”) advances | $ | 323,891 | $ | 321,643 | $ | 1,019,424 | $ | 317,241 | $ | 315,092 | ||||||||||
| Stockholders’ equity | $ | 3,841,951 | $ | 3,427,741 | $ | 3,122,950 | $ | 2,856,111 | $ | 2,366,373 | ||||||||||
| Financial ratios: | ||||||||||||||||||||
| Return on average assets | 1.41 | % | 1.30 | % | 1.27 | % | 1.25 | % | 1.24 | % | ||||||||||
| Return on average equity | 13.71 | % | 13.06 | % | 12.74 | % | 12.72 | % | 12.50 | % | ||||||||||
| Total average equity to total average assets | 10.30 | % | 9.97 | % | 9.95 | % | 9.83 | % | 9.95 | % | ||||||||||
| Common dividend payout ratio | 23.14 | % | 27.01 | % | 30.21 | % | 30.07 | % | 28.74 | % | ||||||||||
| Net interest margin | 3.48 | % | 3.30 | % | 3.35 | % | 4.03 | % | 4.38 | % | ||||||||||
| Loans-to-deposits ratio, excluding held-for-sale | 90.74 | % | 84.45 | % | 85.09 | % | 89.42 | % | 86.22 | % | ||||||||||
Capital ratios of EWBC (3): | ||||||||||||||||||||
| CET1 capital | 11.4 | % | 10.9 | % | 10.5 | % | N/A | N/A | ||||||||||||
| Tier 1 capital | 11.4 | % | 10.9 | % | 10.7 | % | 11.0 | % | 11.9 | % | ||||||||||
| Tier 1 leverage capital | 9.2 | % | 8.7 | % | 8.5 | % | 8.4 | % | 8.6 | % | ||||||||||
| Total capital | 12.9 | % | 12.4 | % | 12.2 | % | 12.6 | % | 13.5 | % | ||||||||||
| ($ in thousands, except per share data) | Year Ended December 31, | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 % Change | 2016 vs. 2015 % Change | ||||||||||||||
| Interest and dividend income | $ | 1,325,119 | $ | 1,137,481 | $ | 1,053,815 | 16 | % | 8 | % | ||||||||
| Interest expense | 140,050 | 104,843 | 103,376 | 34 | % | 1 | % | |||||||||||
| Net interest income before provision for credit losses | 1,185,069 | 1,032,638 | 950,439 | 15 | % | 9 | % | |||||||||||
| Noninterest income | 258,406 | 182,918 | 183,383 | 41 | % | 0 | % | |||||||||||
| Revenue | 1,443,475 | 1,215,556 | 1,133,822 | 19 | % | 7 | % | |||||||||||
| Provision for credit losses | 46,266 | 27,479 | 14,217 | 68 | % | 93 | % | |||||||||||
| Noninterest expense | 662,109 | 615,889 | 540,884 | 8 | % | 14 | % | |||||||||||
| Income tax expense | 229,476 | 140,511 | 194,044 | 63 | % | (28 | )% | |||||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | 17 | % | 12 | % | ||||||||
| Diluted EPS | $ | 3.47 | $ | 2.97 | $ | 2.66 | 17 | % | 12 | % | ||||||||
Noteworthy items about the Company’s performance for 2020 included:
•Earnings: 2020 net income increased $73.9 million to $505.6was $567.8 million, or $3.47$3.97 per diluted share, compared with 2019 net income of $674.0 million, or $4.61 per diluted share, a decrease of $106.2 million or 16%. The decrease primarily came from a higher provision for the year ended December 31, 2017, compared to the same period in 2016. The higher results for 2017 compared to 2016 were primarily driven by highercredit losses and lower net interest income and noninterest income, partially offset by an increasea decrease in noninterest expense and a higher effectiveincome tax rate in 2017. Netexpense.
•Adjusted Earnings: 2020 non-GAAP net income increased $47.0 million to $431.7was $565.2 million, or $2.97$3.95 per diluted share, a decrease of 20% from 2019 non-GAAP net income of $707.9 million, or $4.84 per diluted share. Non-GAAP adjustments in 2020 and 2019 exclude the impacts of the impairment, recoveries and income tax items related to the Company’s investment in DC Solar. For 2020, DC Solar-related adjustments consisted of $10.7 million in recoveries, $3.0 million of income tax expense related to the recoveries, and $5.1 million of income tax expense booked for an uncertain tax position. For 2019, DC Solar-related adjustments consisted of $7.0 million in impairment charge, $1.6 million in recovery, $1.6 million of income tax expense related to the impairment and recovery, and $30.1 million of income tax expense booked for the year ended December 31, 2016 comparedreversal of certain previously claimed tax credits. For additional detail, refer to the same periodreconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in 2015. The higher results for 2016 compared to 2015 were driven by an increase in net interest income and a lower effective tax rate, partially offset by an increase in noninterest expense.this Form 10-K.
•Revenue:Revenue, or the sum of net interest income before provision for credit losses and noninterest income, increased $227.9 million to $1.44was $1.61 billion during the year ended December 31, 2017, compared to the same period in 2016. The increase in revenue for 20172020, compared with 2016$1.69 billion in 2019, a decrease of $77.3 million or 5%. This decrease was predominatelyprimarily due to an increase inlower net interest income, reflecting growth in the loan portfolio and the positive impact of short-term interest rate increases in 2017, andpartially offset by an increase in noninterest income.
•Net Interest Income and Net Interest Margin: 2020 net interest income primarily duewas $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 gains recognized from the sale of the commercial property. Revenuetarget federal funds rate in March 2020.
•Provision for the year ended December 31, 2016credit losses: 2020 provision for credit losses was $1.22 billion,$210.7 million, an increase of $81.7$112.0 million from $1.13 billionor 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 same periodreversal 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 2015.2020 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 mainly due$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 higher interest income fromstockholders during 2020 and 2019, respectively. On March 3, 2020, the Company’s Board of Directors authorized a strong loan growth.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 net interest income, noninterest income, noninterest expense and income taxes.Operations
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between interest income earned on loans, investment securities, resale agreements and other interest-earning assets less interest expense paid on deposits, securities sold under repurchase agreements (“repurchase agreements”), borrowings and other interest-bearing liabilities. Net interest margin is calculated by dividingthe ratio of net interest income byto average interest-earning assets. Net interest income and net interest margin are affectedimpacted 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 the year ended December 31, 20172020 was $1.19$1.38 billion, an increasea decrease of $152.4$90.6 million or 15%6%, compared to the same periodwith $1.47 billion in 2016.2019. The notable increasedecrease in net interest income for 2020 was due to lower interest-earning asset yields, reflecting significantly lower benchmark interest rates in 20172020, partially offset by a lower cost of funds. Net interest margin for 2020 was 2.98%, a decrease of 66 basis points from 3.64% in 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. This was primarily due to strong loan growth, and higher yields from interest-earning assets, partially offset by a higher cost of funds. The higher cost of funds was primarily due to a 14 basis point increase in the cost of interest-bearing deposits from 0.44% for the year ended December 31, 2016 to 0.58% for the year ended December 31, 2017. Net interest income for the year ended December 31, 2016 was $1.03 billion, an increase of $82.2 million or 9% compared to $950.4 million for the same period in 2015. The increase in net interest income was primarily due to strong loan growth during 2016.
The yield on average interest-earning assets increased $2.91 billionfor 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 64% of loans held-for-investment were variable-rate or 10% to $31.30 billion from $28.39 billion for the samehybrid loans in their adjustable rate period in 2015. The increase was primarily due to a $1.99 billion or 9% increase in average loans to $24.26 billion for the year endedas of December 31, 2016, compared to $22.28 billion for the same period in 2015.2020 and 2019, respectively.
Deposits are an important source of fundingfunds and affectimpact both net interest income and net interest margin. Deposits are comprisedAverage total deposits were $40.76 billion in 2020, an increase of $4.71 billion or 13% from $36.05 billion in 2019. Average noninterest-bearing demand deposits were $13.82 billion in 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 interest-bearing checking, money market, savings and time deposits. Average deposits increased $2.31 billion or 8% to $30.81 billion for the year ended December 31, 2017, compared to $28.50 billion for the same period in 2016. In comparison, average deposits increased $2.74 billion or 11% to $28.50 billion for the year ended December 31, 2016, compared to $25.76 billion for the same period in 2015. The average noninterest-bearing demand deposits to total average deposits ratio increased to 34% forof average total deposits in 2020, compared with 29% in 2019.
The average cost of funds in 2020 was 0.51%, a decrease of 61 basis points from 1.12% in 2019. The decrease in the year ended December 31, 2017, from 33% and 31% foraverage cost of funds primarily reflected a 150 basis points reduction to the same periodstarget federal funds rate in 2016 and 2015, respectively. Cost of deposits was 0.38%, 0.30% and 0.29% for the years ended December 31, 2017, 2016 and 2015, respectively. CostMarch 2020. The average cost of interest-bearing deposits was 0.58%, 0.44% and 0.41% for the years ended December 31, 2017, 2016 and 2015, respectively. The average loansdecreased 78 basis points to average deposits ratio increased to 88% for the year ended December 31, 20170.69% in 2020, from 85% and 86% for the same periods1.47% in 2016 and 2015, respectively.
2019. Other than deposits, other sources of funding included in the calculation of the average cost of funds primarily includeconsist of long-term debt, FHLB advances, long-term debtrepurchase agreements, and repurchase agreements. Cost of funds was 0.44% for the year ended December 31, 2017, compared to 0.36% and 0.39% for the same periods in 2016 and 2015, respectively.short-term borrowings.
The Company utilizes various tools to manage interest rate risk. Refer to the “Interest“Interest Rate Risk Management”Management” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)&A — Asset Liability andRisk Management — Market Risk Management for details.
38
The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component in 2020, 2019 and 2018:
| ($ 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 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 years ended December 31, 2017, 2016amortization of premiums on debt securities of $33.9 million, $10.9 million and 2015:$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 $39.2 million for 2020, 2019 and 2018, respectively.
(6)Average balance of deposits for 2018 includes average deposits held-for-sale related to the sale of DCB branches.
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| ($ in thousands) | Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
| 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 | $ | 2,242,256 | $ | 33,390 | 1.49 | % | $ | 1,893,064 | $ | 14,731 | 0.78 | % | $ | 1,851,604 | $ | 17,939 | 0.97 | % | |||||||||||||||
Resale agreements (1) | 1,438,767 | 32,095 | 2.23 | % | 1,708,470 | 30,547 | 1.79 | % | 1,337,274 | 19,799 | 1.48 | % | |||||||||||||||||||||
Investment securities (2)(3) | 3,026,693 | 58,670 | 1.94 | % | 3,355,086 | 53,399 | 1.59 | % | 2,847,655 | 41,375 | 1.45 | % | |||||||||||||||||||||
Loans (4)(5) | 27,252,756 | 1,198,440 | 4.40 | % | 24,264,895 | 1,035,377 | 4.27 | % | 22,276,589 | 968,625 | 4.35 | % | |||||||||||||||||||||
| Restricted equity securities | 73,593 | 2,524 | 3.43 | % | 75,260 | 3,427 | 4.55 | % | 77,460 | 6,077 | 7.85 | % | |||||||||||||||||||||
| Total interest-earning assets | $ | 34,034,065 | $ | 1,325,119 | 3.89 | % | $ | 31,296,775 | $ | 1,137,481 | 3.63 | % | $ | 28,390,582 | $ | 1,053,815 | 3.71 | % | |||||||||||||||
| Noninterest-earning assets: | |||||||||||||||||||||||||||||||||
| Cash and due from banks | 395,092 | 365,104 | 342,606 | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (272,765 | ) | (262,804 | ) | (263,143 | ) | |||||||||||||||||||||||||||
| Other assets | 1,631,221 | 1,770,298 | 1,858,412 | ||||||||||||||||||||||||||||||
| Total assets | $ | 35,787,613 | $ | 33,169,373 | $ | 30,328,457 | |||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||
Checking deposits (6) | $ | 3,951,930 | $ | 18,305 | 0.46 | % | $ | 3,495,094 | $ | 12,640 | 0.36 | % | $ | 2,795,379 | $ | 8,453 | 0.30 | % | |||||||||||||||
Money market deposits (6) | 8,026,347 | 44,181 | 0.55 | % | 7,679,695 | 27,094 | 0.35 | % | 6,763,979 | 18,988 | 0.28 | % | |||||||||||||||||||||
Saving deposits (6) | 2,369,398 | 6,431 | 0.27 | % | 2,104,060 | 4,719 | 0.22 | % | 1,785,085 | 3,468 | 0.19 | % | |||||||||||||||||||||
Time deposits (6) | 5,838,382 | 47,474 | 0.81 | % | 5,852,042 | 39,771 | 0.68 | % | 6,482,697 | 42,596 | 0.66 | % | |||||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 34,546 | 1,003 | 2.90 | % | 25,591 | 713 | 2.79 | % | 4,797 | 58 | 1.21 | % | |||||||||||||||||||||
| FHLB advances | 391,480 | 7,751 | 1.98 | % | 380,868 | 5,585 | 1.47 | % | 327,080 | 4,270 | 1.31 | % | |||||||||||||||||||||
Repurchase agreements (1) | 140,000 | 9,476 | 6.77 | % | 211,475 | 9,304 | 4.40 | % | 404,096 | 20,907 | 5.17 | % | |||||||||||||||||||||
| Long-term debt | 178,882 | 5,429 | 3.03 | % | 198,589 | 5,017 | 2.53 | % | 218,353 | 4,636 | 2.12 | % | |||||||||||||||||||||
| Total interest-bearing liabilities | $ | 20,930,965 | $ | 140,050 | 0.67 | % | $ | 19,947,414 | $ | 104,843 | 0.53 | % | $ | 18,781,466 | $ | 103,376 | 0.55 | % | |||||||||||||||
| Noninterest-bearing liabilities and stockholders’ equity: | |||||||||||||||||||||||||||||||||
Demand deposits (6) | 10,627,718 | 9,371,481 | 7,928,460 | ||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 541,717 | 544,549 | 599,436 | ||||||||||||||||||||||||||||||
| Stockholders’ equity | 3,687,213 | 3,305,929 | 3,019,095 | ||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 35,787,613 | $ | 33,169,373 | $ | 30,328,457 | |||||||||||||||||||||||||||
| Interest rate spread | 3.22 | % | 3.10 | % | 3.16 | % | |||||||||||||||||||||||||||
| Net interest income and net interest margin | $ | 1,185,069 | 3.48 | % | $ | 1,032,638 | 3.30 | % | $ | 950,439 | 3.35 | % | |||||||||||||||||||||
The following table summarizes the extent to which changes in (1) interest ratesrates; and changes in(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 the changechanges attributable to variations in volume and the change attributable to variations in 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 used 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, | |||||||||||||||||||||||
| 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||||
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 | $ | 18,659 | $ | 3,134 | $ | 15,525 | $ | (3,208 | ) | $ | 394 | $ | (3,602 | ) | ||||||||||
| Resale agreements | 1,548 | (5,287 | ) | 6,835 | 10,748 | 6,149 | 4,599 | |||||||||||||||||
| Investment securities | 5,271 | (5,580 | ) | 10,851 | 12,024 | 7,831 | 4,193 | |||||||||||||||||
| Loans | 163,063 | 130,282 | 32,781 | 66,752 | 85,120 | (18,368 | ) | |||||||||||||||||
| Restricted equity securities | (903 | ) | (74 | ) | (829 | ) | (2,650 | ) | (168 | ) | (2,482 | ) | ||||||||||||
| Total interest and dividend income | $ | 187,638 | $ | 122,475 | $ | 65,163 | $ | 83,666 | $ | 99,326 | $ | (15,660 | ) | |||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Checking deposits | $ | 5,665 | $ | 1,800 | $ | 3,865 | $ | 4,187 | $ | 2,348 | $ | 1,839 | ||||||||||||
| Money market deposits | 17,087 | 1,274 | 15,813 | 8,106 | 2,798 | 5,308 | ||||||||||||||||||
| Saving deposits | 1,712 | 642 | 1,070 | 1,251 | 671 | 580 | ||||||||||||||||||
| Time deposits | 7,703 | (93 | ) | 7,796 | (2,825 | ) | (4,249 | ) | 1,424 | |||||||||||||||
| Federal funds purchased and other short-term borrowings | 290 | 259 | 31 | 655 | 503 | 152 | ||||||||||||||||||
| FHLB advances | 2,166 | 160 | 2,006 | 1,315 | 752 | 563 | ||||||||||||||||||
| Repurchase agreements | 172 | (3,796 | ) | 3,968 | (11,603 | ) | (8,831 | ) | (2,772 | ) | ||||||||||||||
| Long-term debt | 412 | (531 | ) | 943 | 381 | (445 | ) | 826 | ||||||||||||||||
| Total interest expense | $ | 35,207 | $ | (285 | ) | $ | 35,492 | $ | 1,467 | $ | (6,453 | ) | $ | 7,920 | ||||||||||
| Change in net interest income | $ | 152,431 | $ | 122,760 | $ | 29,671 | $ | 82,199 | $ | 105,779 | $ | (23,580 | ) | |||||||||||
Noninterest Income
The following table presents the components of noninterest income for the periods indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 % Change | 2016 vs. 2015 % Change | ||||||||||||||
| Branch fees | $ | 42,490 | $ | 41,178 | $ | 39,495 | 3 | % | 4 | % | ||||||||
| Letters of credit fees and foreign exchange income | 42,779 | 45,760 | 38,985 | (7 | )% | 17 | % | |||||||||||
| Ancillary loan fees and other income | 23,333 | 19,352 | 15,029 | 21 | % | 29 | % | |||||||||||
| Wealth management fees | 14,632 | 13,240 | 18,268 | 11 | % | (28 | )% | |||||||||||
| Derivative fees and other income | 17,671 | 16,781 | 16,493 | 5 | % | 2 | % | |||||||||||
| Net gains on sales of loans | 8,870 | 6,085 | 24,873 | 46 | % | (76 | )% | |||||||||||
| Net gains on sales of available-for-sale investment securities | 8,037 | 10,362 | 40,367 | (22 | )% | (74 | )% | |||||||||||
| Net gains on sales of fixed assets | 77,388 | 3,178 | 3,567 | 2,335 | % | (11 | )% | |||||||||||
| Net gains on sale of business | 3,807 | — | — | 100 | % | — | % | |||||||||||
| Changes in FDIC indemnification asset and receivable/payable | — | — | (37,980 | ) | — | % | NM | |||||||||||
| Other fees and operating income | 19,399 | 26,982 | 24,286 | (28 | )% | 11 | % | |||||||||||
| Total noninterest income | $ | 258,406 | $ | 182,918 | $ | 183,383 | 41 | % | 0 | % | ||||||||
| ($ 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 | ||||||||||||||||||||||
40
Lending fees were $74.8 million compared to $10.4 million and $40.4 million for the same periods in 2016 and 2015, respectively. Net gains on the sales2020, an increase of available-for-sale investment securities for the year ended December 31, 2016 decreased by $30.0$11.1 million or 74%18%, compared to the same periodwith $63.7 million in 2015. The larger net gains on sale of available-for-sale investment securities recognized during the year ended December 31, 2015, compared to the years ended December 31, 2017 and 20162019. This increase was primarily due to $21.7valuation gains on warrants received as part of lending relationships and the subsequent exercise of warrants during the fourth quarter of 2020.
Deposit account fees were $48.1 million in 2020, an increase of gains realized from$9.5 million or 25%, compared with $38.6 million in 2019. This increase was primarily due to an increase in customer-driven transactions.
Interest rate contracts and other derivative income was $31.7 million in 2020, a decrease of $8.2 million or 21%, compared with $39.9 million in 2019. This decrease was primarily due to the saleimpact of non-investment grade corporate debt securities.negative credit valuation adjustments, which reflected higher loss probabilities for borrowers impacted by the COVID-19 pandemic, as well as a decline in customer interest rate 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 year ended December 31, 2017 totaled $8.9 million, compared to $6.1 millionequity method, and $24.9 million for the same periodsdecreased distributions from investments in 2016 and 2015, respectively. The net gains included valuation adjustments of $61 thousand, $5.6 million and $3.0 million to carry loans held-for-sale at lower of cost or fair value for the years ended December 31, 2017, 2016 and 2015, respectively. See Item 7. MD&A — Balance Sheet Analysis — Total Loan Portfolio for details.qualified affordable housing partnerships.
Noninterest Expense
| ($ 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)Refer to Item 7. MD&A — Reconciliation of $46.2GAAP 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 $716.3 million, a decrease of $31.2 million or 8%4%, compared to the same periodwith $747.5 million in 2016. The increase2019. This decrease was primarily due to increases in compensation and employee benefits, and legal expense, partially offset by a decrease in consulting expense. Noninterest expense totaled $615.9 million for the year ended December 31, 2016, an increase of $75.0 million or 14%, compared to $540.9 million for the same period in 2015. The increase was primarily due to increasesdecreases in amortization of tax credit and other investments, and compensation and employee benefits,other operating expense, partially offset by the fact that there were no repurchase agreements’ extinguishment costs incurred for the year ended December 31, 2016 and a decrease in legal expense.cost.
| Year Ended December 31, | ||||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | 2017 vs. 2016 % Change | 2016 vs. 2015 % Change | |||||||||||||
| Compensation and employee benefits | $ | 335,291 | $ | 300,115 | $ | 262,193 | 12 | % | 14 | % | ||||||||
| Occupancy and equipment expense | 64,921 | 61,453 | 61,292 | 6 | % | 0 | % | |||||||||||
| Deposit insurance premiums and regulatory assessments | 23,735 | 23,279 | 18,772 | 2 | % | 24 | % | |||||||||||
| Legal expense | 11,444 | 2,841 | 16,373 | 303 | % | (83 | )% | |||||||||||
| Data processing | 12,093 | 11,683 | 10,185 | 4 | % | 15 | % | |||||||||||
| Consulting expense | 14,922 | 22,742 | 17,234 | (34 | )% | 32 | % | |||||||||||
| Deposit related expense | 9,938 | 10,394 | 10,379 | (4 | )% | 0 | % | |||||||||||
| Computer software expense | 18,183 | 12,914 | 8,660 | 41 | % | 49 | % | |||||||||||
| Other operating expense | 76,697 | 78,936 | 68,624 | (3 | )% | 15 | % | |||||||||||
| Amortization of tax credit and other investments | 87,950 | 83,446 | 36,120 | 5 | % | 131 | % | |||||||||||
| Amortization of core deposit intangibles | 6,935 | 8,086 | 9,234 | (14 | )% | (12 | )% | |||||||||||
| Repurchase agreements’ extinguishment costs | — | — | 21,818 | — | % | NM | ||||||||||||
| Total noninterest expense | $ | 662,109 | $ | 615,889 | $ | 540,884 | 8 | % | 14 | % | ||||||||
Amortization of tax credit and other investments increased $4.5was $70.1 million in 2020, a decrease of $28.3 million or 5% to $88.029%, compared with $98.4 million for the year ended December 31, 2017, comparedin 2019. This year-over-year change was primarily due to the same periodrecognition pattern of production and renewable energy tax credit investments placed in 2016,service; $10.7 million of recoveries recorded in the fourth quarter of 2020 related to DC Solar tax credit investments, and $47.3lower 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, there were $7.6 million of OTTI charges related to five historic tax credit investments and a CRA investment, as well as $5.4 million of net OTTI charges related to DC Solar tax credit investments.
41
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 131% to $83.414%, 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 $8.7 million. No such expense was incurred in 2019.
Efficiency ratio, calculated as noninterest expense divided by total revenue, was 44.42% and 44.23% in 2020 and 2019, respectively. Non-GAAP efficiency ratio, adjusted for the year ended December 31, 2016, compared to the same period in 2015. The increases in amortization of tax credit and other investments, the amortization of core deposit intangibles, and repurchase agreements’ extinguishment cost (where applicable), was 39.30% in both 20172020, an increase of 116 basis points from 38.14% in 2019. For additional detail, see the reconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.
Income Taxes
| ($ 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 | % | ||||||||||||||
2020 income tax expense was $118.0 million, and 2016 were primarily due to additional renewable energythe effective tax rate was 17.2%, compared with 2019 income tax expense of $169.9 million, and historic rehabilitationan effective tax credit investments that were placed into service during the same periods.
| Year Ended December 31, | ||||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | 2017 vs. 2016 % Change | 2016 vs. 2015 % Change | |||||||||||||
| Income before income taxes | $ | 735,100 | $ | 572,188 | $ | 578,721 | 28 | % | (1 | )% | ||||||||
| Income tax expense | $ | 229,476 | $ | 140,511 | $ | 194,044 | 63 | % | (28 | )% | ||||||||
| Effective tax rate | 31.2 | % | 24.6 | % | 33.5 | % | 27 | % | (27 | )% | ||||||||
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 by $32.3increased $57.3 million or 25%53.8% to $97.4$163.8 million as of December 31, 2017,2020, compared to $129.7with $106.5 million as of December 31, 2016, largely as2019. This increase was mainly due to an increase in allowance for credit losses due to the result of the remeasurement of netCompany’s CECL adoption, partially offset by an increase in deferred tax assets pursuant to the Tax Act as discussed above.liabilities arising from net unrealized loss on securities. For additional details on the components of net deferred tax assets, see Note 1211 — Income Taxes to the Consolidated Financial Statements.Statements in this Form 10-K.
42
Impact of Investment in DC Solar Tax Credit Funds
The Company believesinvested 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 otherinvestments, 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 the Federal Bureau of Investigation special agent stated that adequate provisionsDC 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 madereceived 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 2019, the Company fully wrote off the remainder of its tax credit investments related to DC Solar, recorded a $7.0 million OTTI charge and 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. There were no balances in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of December 31, 2020 and 2019. More discussion on the Company’s impairment evaluation and monitoring process of tax credit investments is provided in Note 2 — 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 alltax 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.
In 2019, the Company, in coordination with other fund investors, engaged an unaffiliated third-party inventory firm to investigate the actual number of mobile solar generators in existence. Based on the inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. In 2019, the Company reversed $33.6 million out of $53.9 million in previously claimed tax credits, and $3.5 million out of $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax uncertainties consistentexpense. Based on management’s best judgments regarding the future settlement of the related tax positions with ASC 740-10, Income Taxes.the IRS, the Company recorded $5.1 million in uncertain tax position related to its investments in DC Solar in 2020. The Company’s investigation related to this matter is ongoing. For additional information on the risks surrounding the Company’s investments in tax-advantaged projects, see Item 1A. Risk Factors in this Form 10-K.
Operating Segment Results
The Company definesorganizes its operating segments based on its core strategy, and has identifiedoperations into three reportable operating segments: (1) RetailConsumer 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. 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 18 — Business Segments to the Consolidated Financial Statements in this Form 10-K.
43
Segment net interest income represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, focuses primarily on deposit operationsadjusted for funding charges or credits through the Bank’s branch network. The Commercial Banking segment primarily generates commercial loans and deposits through domestic commercial lending offices in the U.S. and foreign offices in China and Hong Kong. Furthermore, the Commercial Banking segment offers a wide variety of international finance, trade finance, and cash management services and products. The remaining centralized functions, including the 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.
The following tables present the selectedresults by operating segment 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 | |||||||||||||||||||||||||||||||||||||||||
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 small- and medium-sized 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 years ended December 31, 2017, 2016Consumer and 2015:
| ($ in thousands) | Year Ended December 31, 2017 | |||||||||||||||
Retail Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income (loss) | $ | 590,821 | $ | 553,817 | $ | 40,431 | $ | 1,185,069 | ||||||||
| Noninterest income | $ | 55,093 | $ | 110,104 | $ | 93,209 | $ | 258,406 | ||||||||
| Noninterest expense | $ | 320,287 | $ | 193,176 | $ | 148,646 | $ | 662,109 | ||||||||
| Segment income (loss) before income taxes | $ | 323,815 | $ | 426,291 | $ | (15,006 | ) | $ | 735,100 | |||||||
| Segment income after income taxes | $ | 190,404 | $ | 251,834 | $ | 63,386 | $ | 505,624 | ||||||||
| ($ in thousands) | Year Ended December 31, 2016 | |||||||||||||||
Retail Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income | $ | 459,442 | $ | 530,908 | $ | 42,288 | $ | 1,032,638 | ||||||||
| Noninterest income | $ | 51,435 | $ | 96,010 | $ | 35,473 | $ | 182,918 | ||||||||
Noninterest expense (1) | $ | 306,570 | $ | 172,259 | $ | 137,060 | $ | 615,889 | ||||||||
Segment income (loss) before income taxes (1) | $ | 208,663 | $ | 422,824 | $ | (59,299 | ) | $ | 572,188 | |||||||
Segment income after income taxes (1) | $ | 122,256 | $ | 248,474 | $ | 60,947 | $ | 431,677 | ||||||||
| ($ in thousands) | Year Ended December 31, 2015 | |||||||||||||||
Retail Banking | Commercial Banking | Other | Total | |||||||||||||
| Net interest income | $ | 453,015 | $ | 509,591 | $ | (12,167 | ) | $ | 950,439 | |||||||
| Noninterest income | $ | 46,265 | $ | 71,867 | $ | 65,251 | $ | 183,383 | ||||||||
Noninterest expense (1) | $ | 276,144 | $ | 159,987 | $ | 104,753 | $ | 540,884 | ||||||||
Segment income (loss) before income taxes (1) | $ | 228,971 | $ | 401,419 | $ | (51,669 | ) | $ | 578,721 | |||||||
Segment income after income taxes (1) | $ | 134,383 | $ | 236,459 | $ | 13,835 | $ | 384,677 | ||||||||
| ($ 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 decreased $96.2 million, or 55%34%, to $187.9 million in Retail Banking segment income before income taxes for the year ended December 31, 2017 was2020 compared with 2019, primarily driven by an increase indue to lower net interest income partially offset by an increase in noninterest expense.before provision for credit losses.
Net interest income before provision for this segment increased $131.4credit losses decreased $165.7 million, or 29%24%, to $590.8$530.8 million in 2020, primarily reflecting a lower credit assigned to deposits under the FTP system in a near-zero interest environment. Noninterest income increased $9.2 million, or 16%, to $67.1 million in 2020, primarily driven by higher deposit account fees due to higher customer-driven transactions.
The provision for credit losses decreased $10.3 million, to $3.9 million in 2020, primarily driven by the year ended December 31, 2017, comparedmethodology change to $459.4credit loss estimates under CECL. The loan portfolio in the Consumer and Business Banking segment is predominantly made up of residential mortgage loans, with a long history of low loan losses.
44
Noninterest expense decreased $11.3 million, for the same periodor 3%, to $331.8 million in 2016. The increase in net interest income was2020, primarily due to the growth in core deposits for the segment, and the higher interest income credits received by this segment under the Bank’s internal funds transfer pricing system due to interest rate increases.
Commercial Banking
The Commercial Banking segment reported segment income before income taxesprimarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of $426.3 millioncredit, 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 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 for the year ended December 31, 2017, compared to $422.8 million for the same period in 2016. The increase of $3.5periods indicated:
| ($ 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 decreased $47.5 million, or 1%15%, to $266.3 million in segment income before income taxes2020 compared with 2019, reflecting a higher provision for this segment was attributable to increases incredit losses, partially offset by higher net interest income and noninterest income, partially offset by increases in noninterest expense.before provision for credit losses.
Net interest income before provision for this segmentcredit losses increased $22.9$54.9 million, or 4%8%, to $553.8$706.3 million in 2020, primarily driven by lower FTP charges assessed for the year ended December 31, 2017, compared to $530.9 million for the same period in 2016. The increase in net interest income for the year ended December 31, 2017 was due to growth in commercial loans, and commercial core deposits, from which the segment receives interest income credit under the Bank’s internal funds transfer pricing system.
The provision for the year ended December 31, 2016, comparedcredit losses increased $122.3 million, to $509.6$206.8 million for the same period in 20152020, primarily due to the loan growth. Noninterest income for this segment increased $24.1 million or 34%, to $96.0 million for the year ended December 31, 2016, compared to $71.9 million for the same period in 2015. The increase was attributable to a decreasedeteriorating macroeconomic conditions and outlook in the reductionfirst half of 2020, as a result of the COVID-19 pandemic. The loan portfolio in the Commercial Banking segment primarily consists of commercial and CRE loans, the loss estimates for which are highly sensitive to changes in FDIC indemnification asset and receivable/payable, and increases in ancillary loan fees, letters of credit fees and foreign exchange income, partially offset by decreases in net gains on sales of loans and derivative fees and other income. the macroeconomic conditions.
Noninterest expense for this segment increased $12.3$3.9 million or 8%, to $172.3 million for the year ended December 31, 2016, compared to $160.0 million for the same period in 2015. The increase in noninterest expense was2020, primarily due to increases in compensation and employee benefits expense.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 loss before income taxes of $15.0 million for the year ended December 31, 2017, compared to $59.3 million for the same period in 2016. The $44.3periods indicated:
| ($ 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 increased $37.5 million, or 75% reduction49%, to $113.5 million in segment loss before income taxes for this segment for the year ended December 31, 2017 was2020 compared with 2019, primarily driven by an increase inlower noninterest expense and higher net interest income which was primarily attributable to the net gain on sale of a commercial property in California, partially offset by an increase in noninterest expense.before provision for credit losses.
Net interest income before provision for this segment decreased $1.9credit losses increased $20.2 million, or 4%17%, to $40.4$140.1 million for the year ended December 31, 2017, compared to $42.3 million for the same period in 2016. The Other segment includes the activities of the treasury function, which is responsible for the liquidity and interest rate risk management of the Company, and supports the Retail Banking and Commercial Banking segments through internal funds transfer pricing credits and charges, which are included in net interest income. The decrease in net2020, primarily driven by lower deposit costs, partially offset by lower interest income for the year ended December 31, 2017 was primarily due to an increase in net interest expense from deposits due to higher interest rates.
on investments. Noninterest income for this segment increased $57.7 million or 163% to $93.2 million for the year ended December 31, 2017, compared to $35.5 million recorded for the same period in 2016. The increase in noninterest income for the year ended December 31, 2017 was primarily due to the $71.7 million net gain on sale of a commercial property in California, as discussed in Item 7. MD&A — Results of Operations — Noninterest income.remained relatively flat year-over-year.
Noninterest expense for this segment increased $11.5decreased $23.7 million, or 8%17%, to $148.6$117.6 million for the year ended December 31, 2017, compared to $137.1 million for the same period in 2016. This increase was primarily attributable to increases in compensation and employee benefits expense and2020, reflecting lower amortization of tax credit and other investments.
46
Balance Sheet Analysis
The following istable presents a discussion of the significant changes between December 31, 20172020 and December 31, 2016:2019:
Selected Consolidated Balance Sheet Data
| ($ 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 | |||||||||||||
| 2017 | 2016 | $ | % | ||||||||||||
| ASSETS | |||||||||||||||
| Cash and cash equivalents | $ | 2,174,592 | $ | 1,878,503 | $ | 296,089 | 16 | % | |||||||
| Interest-bearing deposits with banks | 398,422 | 323,148 | 75,274 | 23 | % | ||||||||||
| Resale agreements | 1,050,000 | 2,000,000 | (950,000 | ) | (48 | )% | |||||||||
| Available-for-sale investment securities, at fair value | 3,016,752 | 3,335,795 | (319,043 | ) | (10 | )% | |||||||||
| Held-to-maturity investment security, at cost | — | 143,971 | (143,971 | ) | (100 | )% | |||||||||
| Restricted equity securities, at cost | 73,521 | 72,775 | 746 | 1 | % | ||||||||||
| Loans held-for-sale | 85 | 23,076 | (22,991 | ) | (100 | )% | |||||||||
| Loans held-for-investment (net of allowance for loan losses of $287,128 in 2017 and $260,520 in 2016) | 28,688,590 | 25,242,619 | 3,445,971 | 14 | % | ||||||||||
| Investments in qualified affordable housing partnerships, net | 162,824 | 183,917 | (21,093 | ) | (11 | )% | |||||||||
| Investments in tax credit and other investments, net | 224,551 | 173,280 | 51,271 | 30 | % | ||||||||||
| Premises and equipment | 121,209 | 159,923 | (38,714 | ) | (24 | )% | |||||||||
| Goodwill | 469,433 | 469,433 | — | — | % | ||||||||||
| Branch assets held-for-sale | 91,318 | — | 91,318 | 100 | % | ||||||||||
| Other assets | 678,952 | 782,400 | (103,448 | ) | (13 | )% | |||||||||
| TOTAL | $ | 37,150,249 | $ | 34,788,840 | $ | 2,361,409 | 7 | % | |||||||
| LIABILITIES | |||||||||||||||
| Deposits | $ | 31,615,063 | $ | 29,890,983 | $ | 1,724,080 | 6 | % | |||||||
| Branch liability held-for-sale | 605,111 | — | 605,111 | 100 | % | ||||||||||
| Short-term borrowings | — | 60,050 | (60,050 | ) | (100 | )% | |||||||||
| FHLB advances | 323,891 | 321,643 | 2,248 | 1 | % | ||||||||||
| Repurchase agreements | 50,000 | 350,000 | (300,000 | ) | (86 | )% | |||||||||
| Long-term debt | 171,577 | 186,327 | (14,750 | ) | (8 | )% | |||||||||
| Accrued expenses and other liabilities | 542,656 | 552,096 | (9,440 | ) | (2 | )% | |||||||||
| Total liabilities | 33,308,298 | 31,361,099 | 1,947,199 | 6 | % | ||||||||||
| STOCKHOLDERS’ EQUITY | 3,841,951 | 3,427,741 | 414,210 | 12 | % | ||||||||||
| TOTAL | $ | 37,150,249 | $ | 34,788,840 | $ | 2,361,409 | 7 | % | |||||||
As of December 31, 2020, total assets were $52.16 billion, an increase of $7.96 billion or 18% from $44.20 billion as of December 31, 2019, primarily due to loan growth, and an increase in purchases of AFS debt securities.The loan growth came from C&I lending, driven by originations of PPP loans, single-family residential and CRE.
As of December 31, 2017,2020, total assetsliabilities were $37.15$46.89 billion, an increase of $2.36$7.71 billion or 7%20% from $39.18 billion as of December 31, 2016. The predominant area of asset2019, primarily due to deposit growth, was in loans, which was driven by strong increases across a majority of the Company’s commercial and consumer loan categories, as well as higher cash and cash equivalents resulting from deposit growth and active liquidity management. These increases were partially offset by decreases in resale agreements, investment securities and other assets.noninterest-bearing deposits.
As of December 31, 2017,2020, total liabilities were $33.31stockholders’ equity was $5.27 billion, an increase of $1.95$251.6 million or 5% from $5.02 billion or 6% fromas of December 31, 2016,2019, primarily due to increases$567.8 million in deposits, reflecting the continued strong growth from existing and new customers. This increase was partially offset by a decrease in repurchase agreements primarily due to an increase in resale agreements that were eligible for netting against repurchase agreements under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements.
The Company aims to maintain an investmentmaintains a portfolio that consists of high quality and liquid debt securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s available-for-sale investmentdebt securities provide:
47
•the ability to execute interest rate risk management strategies duein response to changes in economic or market conditions which influence loan origination, prepayment speeds, or deposit balancesconditions; and mix; and
Available-for-Sale InvestmentDebt Securities
The following table presents the amortized cost anddistribution of the Company’s AFS debt securities portfolio by fair value and percentage of available-for-sale investment securities by major categoriesfair value as of December 31, 2020 and 2019, and by credit ratings as of December 31, 2020:
| ($ 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 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)There were no securities of a single non-governmental agency issuer that exceeded 10% of stockholder’s equity as of both December 31, 2020 and December 31, 2019.
(2)Primarily based upon the dates indicated: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.
| ($ in thousands) | December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | 651,395 | $ | 640,280 | $ | 730,287 | $ | 720,479 | $ | 1,002,874 | $ | 998,515 | ||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 206,815 | 203,392 | 277,891 | 274,866 | 771,288 | 768,849 | ||||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities | 1,528,217 | 1,509,228 | 1,539,044 | 1,525,546 | 1,350,673 | 1,349,058 | ||||||||||||||||||
| Municipal securities | 99,636 | 99,982 | 148,302 | 147,654 | 173,785 | 175,649 | ||||||||||||||||||
| Non-agency residential mortgage-backed securities | 9,136 | 9,117 | 11,592 | 11,477 | 62,133 | 62,393 | ||||||||||||||||||
| Corporate debt securities | 37,585 | 37,003 | 232,381 | 231,550 | 292,341 | 289,074 | ||||||||||||||||||
Foreign bonds (1) | 505,396 | 486,408 | 405,443 | 383,894 | 90,586 | 89,795 | ||||||||||||||||||
| Other securities | 31,887 | 31,342 | 40,501 | 40,329 | 40,149 | 39,893 | ||||||||||||||||||
| Total available-for-sale investment securities | $ | 3,070,067 | $ | 3,016,752 | $ | 3,385,441 | $ | 3,335,795 | $ | 3,783,829 | $ | 3,773,226 | ||||||||||||
The fair value of available-for-sale investmentAFS debt securities totaled $3.02$5.54 billion as of December 31, 2017, compared to $3.342020, an increase of $2.23 billion or 67% from $3.32 billion as of December 31, 2016.2019. The decrease of $319.0 million or 10% was primarily attributable to the sales, repayments, maturities and redemptions oflargest net change came from U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, U.S. Treasury securities andwhich increased $1.21 billion, followed by corporate debt securities, partially offset by purchases of U.S. government agencywhich increased $394.8 million, and U.S. government sponsored enterprisenon-agency mortgage-backed securities, U.S. Treasury securities and foreign bonds.which increased $394.5 million.
The Company’s available-for-saledebt 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, primarily due to an increase in the target duration of securities purchases to achieve enhancement in portfolio yield. As of December 31, 2020, 88% of the carrying value of the Company’s debt securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized credit rating 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, or Baa3 or higher by Moody’s, are considered investment grade.
The Company’s AFS debt securities are carried at fair value with changesnoncredit-related unrealized gains and losses, net of tax, reported in fair value reflected in other Other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. Ason the Consolidated Statement of December 31, 2017, the Company’sComprehensive Income. Pre-tax net unrealized lossesgain on available-for-sale investmentAFS debt securities were $53.3 million, compared to $49.6was $74.1 million as of December 31, 2016. The increase in2020, a net improvement of $77.6 million from pre-tax net unrealized losses was primarily attributed to an increase in interest rate. Gross unrealized losses on available-for-sale investment securities totaled $58.3of $3.4 million as of December 31, 2017, compared2019. This change was primarily due to $56.3a decrease in benchmark interest rates as of December 31, 2020. Gross unrealized losses on AFS debt securities totaled $22.5 million as of December 31, 2016.2020, compared with $23.2 million as of December 31, 2019. As of December 31, 2017,2020, the Company had no intention to sell securities with unrealized losses and believesbelieved it is more likely than notmore-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost. No other-than-temporary impairment loss was recognized forcosts.
48
Of the years endedsecurities with gross unrealized losses, substantially all were rated investment grade as of both December 31, 20172020 and 2016.2019, as classified based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. The 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 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 records 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 credit losses recognized in earnings for 2020 and no OTTI credit losses were recognized in earnings for 2019. The Company assesses individual securities for credit losses for each reporting period. For complete discussionadditional information of the Company’s accounting policies, valuation and disclosure,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.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 the periods indicated.December 31, 2020 and 2019. Actual maturities of mortgage-backedcertain securities can differ from contractual maturities as the borrowers have the right to prepay the obligations.obligations with or without prepayment penalties. In addition, factors such factors as prepayments and interest rate changesrates may affect the yields on the carrying valuevalues 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) | 2017 | 2016 | ||||||||||||||||||||
Amortized Cost | Fair Value | Yield (1) | Amortized Cost | Fair Value | Yield (1) | |||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||||||||
| U.S. Treasury securities: | ||||||||||||||||||||||
| Maturing in one year or less | $ | 120,233 | $ | 119,844 | 1.01 | % | $ | 100,707 | $ | 100,653 | 0.65 | % | ||||||||||
| Maturing after one year through five years | 531,162 | 520,436 | 1.55 | % | 376,580 | 371,917 | 1.27 | % | ||||||||||||||
| Maturing after five years through ten years | — | — | — | % | 253,000 | 247,909 | 1.59 | % | ||||||||||||||
| Total | 651,395 | 640,280 | 1.45 | % | 730,287 | 720,479 | 1.29 | % | ||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities: | ||||||||||||||||||||||
| Maturing in one year or less | 24,999 | 24,882 | 1.02 | % | 118,966 | 118,982 | 0.94 | % | ||||||||||||||
| Maturing after one year through five years | 9,720 | 9,743 | 2.36 | % | 52,622 | 52,630 | 1.38 | % | ||||||||||||||
| Maturing after five years through ten years | 119,645 | 116,570 | 2.05 | % | 81,829 | 78,977 | 2.07 | % | ||||||||||||||
| Maturing after ten years | 52,451 | 52,197 | 2.58 | % | 24,474 | 24,277 | 2.50 | % | ||||||||||||||
| Total | 206,815 | 203,392 | 2.07 | % | 277,891 | 274,866 | 1.49 | % | ||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||
| Maturing after one year through five years | 48,363 | 47,811 | 2.34 | % | 47,278 | 46,950 | 1.74 | % | ||||||||||||||
| Maturing after five years through ten years | 71,562 | 70,507 | 2.48 | % | 79,379 | 78,903 | 3.11 | % | ||||||||||||||
| Maturing after ten years | 1,408,292 | 1,390,910 | 2.31 | % | 1,412,387 | 1,399,693 | 2.34 | % | ||||||||||||||
| Total | 1,528,217 | 1,509,228 | 2.32 | % | 1,539,044 | 1,525,546 | 2.36 | % | ||||||||||||||
Municipal securities (2): | ||||||||||||||||||||||
| Maturing in one year or less | 7,395 | 7,424 | 2.69 | % | 6,404 | 6,317 | 2.56 | % | ||||||||||||||
| Maturing after one year through five years | 83,104 | 83,301 | 2.31 | % | 127,178 | 127,080 | 2.31 | % | ||||||||||||||
| Maturing after five years through ten years | 4,156 | 4,215 | 2.92 | % | 9,785 | 9,515 | 2.50 | % | ||||||||||||||
| Maturing after ten years | 4,981 | 5,042 | 4.40 | % | 4,935 | 4,742 | 3.95 | % | ||||||||||||||
| Total | 99,636 | 99,982 | 2.47 | % | 148,302 | 147,654 | 2.40 | % | ||||||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||||||||
| Maturing after ten years | 9,136 | 9,117 | 2.79 | % | 11,592 | 11,477 | 2.52 | % | ||||||||||||||
| Corporate debt securities: | ||||||||||||||||||||||
| Maturing in one year or less | 12,650 | 11,905 | 2.29 | % | 12,671 | 11,347 | 1.80 | % | ||||||||||||||
| Maturing after five years through ten years | 24,935 | 25,098 | 2.90 | % | 40,479 | 40,500 | 2.40 | % | ||||||||||||||
| Maturing after ten years | — | — | — | % | 179,231 | 179,703 | 2.26 | % | ||||||||||||||
| Total | 37,585 | 37,003 | 2.70 | % | 232,381 | 231,550 | 2.26 | % | ||||||||||||||
| Foreign bonds: | ||||||||||||||||||||||
| Maturing in one year or less | 405,396 | 387,729 | 2.13 | % | 304,427 | 287,695 | 2.09 | % | ||||||||||||||
| Maturing after one year through five years | 100,000 | 98,679 | 2.71 | % | 101,016 | 96,199 | 2.11 | % | ||||||||||||||
| Total | 505,396 | 486,408 | 2.24 | % | 405,443 | 383,894 | 2.09 | % | ||||||||||||||
| Other securities: | ||||||||||||||||||||||
| Maturing in one year or less | 31,887 | 31,342 | 2.71 | % | 40,501 | 40,329 | 2.72 | % | ||||||||||||||
| Total: | ||||||||||||||||||||||
| Maturing in one year or less | 602,560 | 583,126 | 583,676 | 565,323 | ||||||||||||||||||
| Maturing after one year through five years | 772,349 | 759,970 | 704,674 | 694,776 | ||||||||||||||||||
| Maturing after five years through ten years | 220,298 | 216,390 | 464,472 | 455,804 | ||||||||||||||||||
| Maturing after ten years | 1,474,860 | 1,457,266 | 1,632,619 | 1,619,892 | ||||||||||||||||||
| Total available-for-sale investment securities | $ | 3,070,067 | $ | 3,016,752 | $ | 3,385,441 | $ | 3,335,795 | ||||||||||||||
| Held-to-maturity investment security: | ||||||||||||||||||||||
| Non-agency commercial mortgage-backed security: | ||||||||||||||||||||||
| Maturing after ten years | $ | — | $ | — | — | % | $ | 143,971 | $ | 144,593 | 3.91 | % | ||||||||||
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 lending loans, (which are comprisedwhich consist of commercial and industrial (“C&I”),&I, CRE, multifamily residential, and construction and land loans)loans; and consumer lending loans, (which are comprisedwhich consist of single-family residential, home equity lines of credit (“HELOCs”) and other consumer loans).loans. Total net loans, including loans held-for-sale, increased $3.50 billion or 14% from $25.27were $37.77 billion as of December 31, 2016 to $28.772020, an increase of $3.35 billion or 10% from $34.42 billion as of December 31, 2017. The increase2019. This was broad based and primarily driven by strong increases of $1.14$1.48 billion or 33%12% in C&I loans, driven by PPP loan growth; $1.08 billion or 15% in single-family residential loans $1.07 billion or 11% in C&I loans, $957.6and $896.2 million or 12%9% in CRE loans and $342.7 million or 22% in multifamily residential loans. The composition of the loan portfolio as of December 31, 2020 was similar to the composition as of December 31, 2019.
The following table presents the composition of the Company’s total loan portfolio by segmentloan type as of the periods indicated:
| ($ 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, | ||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | Amount (1) | % | ||||||||||||||||||||||||||
| Commercial lending: | |||||||||||||||||||||||||||||||||||
| C&I | $ | 10,697,231 | 37 | % | $ | 9,640,563 | 38 | % | $ | 8,991,535 | 38 | % | $ | 8,076,450 | 37 | % | $ | 5,760,648 | 32 | % | |||||||||||||||
| CRE | 8,936,897 | 31 | % | 8,016,109 | 31 | % | 7,471,812 | 32 | % | 6,253,195 | 29 | % | 5,265,861 | 30 | % | ||||||||||||||||||||
| Multifamily residential | 1,916,176 | 7 | % | 1,585,939 | 6 | % | 1,524,367 | 6 | % | 1,451,918 | 7 | % | 1,369,051 | 8 | % | ||||||||||||||||||||
| Construction and land | 659,697 | 2 | % | 674,754 | 3 | % | 628,260 | 3 | % | 563,196 | 2 | % | 408,035 | 2 | % | ||||||||||||||||||||
| Total commercial lending | 22,210,001 | 77 | % | 19,917,365 | 78 | % | 18,615,974 | 79 | % | 16,344,759 | 75 | % | 12,803,595 | 72 | % | ||||||||||||||||||||
| Consumer lending: | |||||||||||||||||||||||||||||||||||
| Single-family residential | 4,646,289 | 16 | % | 3,509,779 | 14 | % | 3,069,969 | 13 | % | 3,872,141 | 18 | % | 3,474,701 | 19 | % | ||||||||||||||||||||
| HELOCs | 1,782,924 | 6 | % | 1,760,776 | 7 | % | 1,681,228 | 7 | % | 1,258,079 | 6 | % | 735,993 | 4 | % | ||||||||||||||||||||
| Other consumer | 336,504 | 1 | % | 315,219 | 1 | % | 276,577 | 1 | % | 254,970 | 1 | % | 835,999 | 5 | % | ||||||||||||||||||||
| Total consumer lending | 6,765,717 | 23 | % | 5,585,774 | 22 | % | 5,027,774 | 21 | % | 5,385,190 | 25 | % | 5,046,693 | 28 | % | ||||||||||||||||||||
Total loans held-for-investment (2) | 28,975,718 | 100 | % | 25,503,139 | 100 | % | 23,643,748 | 100 | % | 21,729,949 | 100 | % | 17,850,288 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (287,128 | ) | (260,520 | ) | (264,959 | ) | (261,679 | ) | (249,675 | ) | |||||||||||||||||||||||||
Loans held-for-sale (3) | 78,217 | 23,076 | 31,958 | 45,950 | 204,970 | ||||||||||||||||||||||||||||||
| Total loans, net | $ | 28,766,807 | $ | 25,265,695 | $ | 23,410,747 | $ | 21,514,220 | $ | 17,805,583 | |||||||||||||||||||||||||
(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 2016, respectively,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 largely related100% guaranteed by the SBA. The substantial majority of the Company’s PPP loans have a term of two years. Related to U.S. domiciled companies that import goodsthe PPP loans made in 2020, as of February 25 2021, the Company has submitted and received approval from Greater Chinathe SBA for U.S. consumer consumption, manyforgiveness approximately 2,700 PPP loan applications, totaling $341.9 million.
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In January 2021, the Company began processing applications to provide additional support for those in need under the latest round of which are companies basedthe SBA’s PPP in California.response to the CAA signed by the President on December 27, 2020. Year-to-date through February 25, 2021, the Company funded over 4,300 new PPP loans, totaling $700.3 million. For more information on PPP loans, refer to Item 7. MD&A — Overview — Regulatory Developments Relating to the COVID-19 Pandemic — Paycheck Protection Program and Note 1 — Summary of Significant Accounting Policies — Paycheck Protection Program to the Consolidated Financial Statements in this Form 10-K.
Commercial
The commercial loan portfolio comprised 75% of total loans as of both December 31, 2020 and 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. Year-over-year, C&I loans increased $1.48 billion, or 12%, driven by PPP loan funding. The C&I loan portfolio includes loans and financing for businesses in a 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 finance. The Company also has a syndicated loan portfolio within theof broadly syndicated C&I loan sector,loans, primarily Term B, which totaled $616.2$892.1 million and $758.5$894.6 million as of December 31, 20172020 and 2016,2019, respectively. The majority of the C&I loans have variable interest rates.
The C&I portfolio is well-diversified by industry. The Company monitors concentrations within the C&I loan sectorportfolio by customer exposure and industry classifications, setting limits for specialized lending verticals andclassification, setting diversification targets.targets and exposure limits by industry or loan product. The following charts illustrate the industry mix within our C&I portfolio as of December 31, 2020 and 2019.
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 Lending — Commercial Real Estate Loans. The CRE Loans.portfolio consists of income-producing CRE, multifamily residential, and construction and land loans. Total CRE loans represent income producing real estateoutstanding were $14.81 billion, or 39% of total loans whereheld-for-investment as of December 31, 2020, compared with $13.76 billion, or 40% of total loans held-for-investment as of December 31, 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’s total CRE portfolio is granular and broadly diversified by property type, which serves to mitigate a portion of its geographical concentration in California. The average size of total CRE loans was $2.4 million and $2.1 million as of December 31, 2020 and 2019, respectively. The following table summarizes the interest rates may be fixed, variableCompany’s total CRE loans by property type as of December 31, 2020 and 2019:
| ($ 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 had an LTV ratio of 65% or hybrid.lower as of December 31, 2020, compared with 85% as of December 31, 2019. The Company focuses on providing financing to experienced real estate investorsconsistency of the Company’s low LTV underwriting standards has historically resulted in lower credit losses for income-producing CRE and developers who have moderate levels of leverage, many of whom are long-time customers. Loans are generally underwritten with high standards for cash flows, debt service coverage ratios and loan-to-value ratios.multifamily residential loans.
The following tables summarizeprovide a summary of the Company’s income-producing CRE, multifamily residential, and construction and land loans by geographic marketsgeography as of December 31, 20172020 and 2016:
| ($ in thousands) | December 31, 2017 | ||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | ||||||||||||||||
| Geographic markets: | |||||||||||||||||||||
| Northern California | $ | 1,975,890 | $ | 446,068 | $ | 137,539 | |||||||||||||||
| Southern California | 4,809,095 | 1,170,565 | 293,814 | ||||||||||||||||||
| California | 6,784,985 | 76 | % | 1,616,633 | 84 | % | 431,353 | 65 | % | ||||||||||||
| New York | 707,910 | 8 | % | 98,391 | 5 | % | 132,866 | 20 | % | ||||||||||||
| Texas | 555,397 | 6 | % | 46,910 | 2 | % | 34,330 | 5 | % | ||||||||||||
| Washington | 328,570 | 4 | % | 61,779 | 3 | % | 25,377 | 4 | % | ||||||||||||
| Other markets | 560,035 | 6 | % | 92,463 | 6 | % | 35,771 | 6 | % | ||||||||||||
Total loans (1) | $ | 8,936,897 | 100 | % | $ | 1,916,176 | 100 | % | $ | 659,697 | 100 | % | |||||||||
| ($ in thousands) | December 31, 2016 | ||||||||||||||||||||
| CRE | % | Multifamily Residential | % | Construction and Land | % | ||||||||||||||||
| Geographic markets: | |||||||||||||||||||||
| Northern California | $ | 1,810,131 | $ | 433,919 | $ | 81,537 | |||||||||||||||
| Southern California | 4,214,110 | 903,733 | 299,234 | ||||||||||||||||||
| California | 6,024,241 | 75 | % | 1,337,652 | 84 | % | 380,771 | 56 | % | ||||||||||||
| New York | 591,530 | 7 | % | 84,911 | 5 | % | 181,793 | 27 | % | ||||||||||||
| Texas | 490,076 | 6 | % | 45,635 | 3 | % | 34,240 | 5 | % | ||||||||||||
| Washington | 336,782 | 4 | % | 59,663 | 4 | % | 38,609 | 6 | % | ||||||||||||
| Other markets | 573,480 | 8 | % | 58,078 | 4 | % | 39,341 | 6 | % | ||||||||||||
Total loans (1) | $ | 8,016,109 | 100 | % | $ | 1,585,939 | 100 | % | $ | 674,754 | 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 which comprised 76% and 75% of the CRE loan portfolio as of both December 31, 20172020 and 2016, respectively. Accordingly,2019, changes in the CaliforniaCalifornia’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 focuses on providing financing to experienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers of the Bank. Income-producing CRE loans totaled $11.17 billion, or 29% of total loans held-for-investment, as of December 31, 2020, compared with $10.28 billion, or 30% of total loans held-for-investment as of December 31, 2019. Interest rates on CRE loans may be fixed, variable or hybrid. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV.
Owner-occupied properties comprised 20% of the totalincome-producing CRE loans as of each ofboth December 31, 20172020 and 20162019. The remainder were owner occupiednon-owner-occupied properties, while the remaining 80% were non-owner occupied properties (wherewhere 50% or more of the debt service for the loan is typically provided by unaffiliated rental income) asincome from a third party.
Commercial —Multifamily Residential Loans. The multifamily residential loan portfolio is largely made up of each of December 31, 2017 and 2016.
| ($ in thousands) | December 31, | |||||||||||||
| 2017 | 2016 | |||||||||||||
| Amount | % | Amount | % | |||||||||||
| Retail | $ | 3,077,556 | 34 | % | $ | 2,940,374 | 37 | % | ||||||
| Offices | 1,714,821 | 19 | % | 1,460,056 | 18 | % | ||||||||
| Industrial | 1,696,253 | 19 | % | 1,440,992 | 18 | % | ||||||||
| Hotel/Motel | 1,279,884 | 14 | % | 1,233,534 | 15 | % | ||||||||
| Other | 1,168,383 | 14 | % | 941,153 | 12 | % | ||||||||
Total CRE loans (1) | $ | 8,936,897 | 100 | % | $ | 8,016,109 | 100 | % | ||||||
Commercial —Construction and Land Loans. Construction and land loans provide financing for a portfolio of eachprojects diversified by real estate property type. These loans totaled $599.7 million December 31, 20172020, compared with $628.5 million as of December 31, 2019, and 2016, 84%accounted for 2% of the Company’s multifamily residentialtotal loans were concentratedheld-for-investment as of both dates. Construction loan exposure was made up of $554.7 million in California.loans outstanding, plus $288.2 million in unfunded commitments, as of December 31, 2020, compared with $558.2 million in loans outstanding, plus $351.4 million in unfunded commitments, as of December 31, 2019.
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Consumer
The following table summarizestables summarize the Company’s single-family residential and HELOCHELOCs loan portfolioportfolios by geographic marketgeography as of December 31, 20172020 and 2016:2019:
| ($ 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, | |||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||||
Single- Family Residential | % | HELOCs | % | Single- Family Residential | % | HELOCs | % | |||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||
| Northern California | $ | 738,680 | $ | 380,184 | $ | 565,961 | $ | 369,735 | ||||||||||||||||||||
| Southern California | 2,270,420 | 918,492 | 1,829,142 | 958,691 | ||||||||||||||||||||||||
| California | 3,009,100 | 65 | % | 1,298,676 | 73 | % | 2,395,103 | 68 | % | 1,328,426 | 75 | % | ||||||||||||||||
| New York | 788,917 | 17 | % | 270,291 | 15 | % | 562,998 | 16 | % | 255,620 | 15 | % | ||||||||||||||||
| Washington | 408,497 | 9 | % | 144,950 | 8 | % | 190,935 | 5 | % | 121,039 | 7 | % | ||||||||||||||||
| Other markets | 439,775 | 9 | % | 69,007 | 4 | % | 360,743 | 11 | % | 55,691 | 3 | % | ||||||||||||||||
Total (1) | $ | 4,646,289 | 100 | % | $ | 1,782,924 | 100 | % | $ | 3,509,779 | 100 | % | $ | 1,760,776 | 100 | % | ||||||||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Single- Family Residential | % | HELOCs | % | Total Residential Mortgage | % | |||||||||||||||||||||||||||||||||
| Geographic markets: | ||||||||||||||||||||||||||||||||||||||
| Southern California | $ | 3,081,368 | $ | 702,915 | $ | 3,784,283 | ||||||||||||||||||||||||||||||||
| Northern California | 1,038,945 | 309,883 | 1,348,828 | |||||||||||||||||||||||||||||||||||
| 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 | % | |||||||||||||||||||||||||||||
| Washington | 630,307 | 9 | % | 133,625 | 9 | % | 763,932 | 9 | % | |||||||||||||||||||||||||||||
| Massachusetts | 235,393 | 3 | % | 31,310 | 2 | % | 266,703 | 3 | % | |||||||||||||||||||||||||||||
| Texas | 188,838 | 3 | % | — | — | % | 188,838 | 2 | % | |||||||||||||||||||||||||||||
| 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 | % | ||||||||||||||||||||||||||
| Lien priority: | ||||||||||||||||||||||||||||||||||||||
| 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 | % | |||||||||||||||||||||||||||||
Total (1) | $ | 7,108,590 | 100 | % | $ | 1,472,783 | 100 | % | $ | 8,581,373 | 100 | % | ||||||||||||||||||||||||||
(1)Loans net of ASC 310-30 discount.
Consumer Lending — Single-Family Residential Loans. The Company offers a varietyLoans. Single-family residential loans totaled $8.19 billion, or 21% of first lien mortgage loan programs, including fixed rate conformingtotal loans held-for-investment, as wellof December 31, 2020, compared with $7.11 billion, or 20% of total loans held-for-investment as adjustable rate mortgage loans with interest rates. The first lien mortgage loans are secured by one-to-four unit residential properties located in the Company’s primary lending areas. Many of theDecember 31, 2019. Year-over-year, single-family residential loans within the Company’s portfolioincreased $1.08 billion, or 15%, primarily driven by growth in New York and Southern California. The Company was in a first lien position for virtually all single-family residential loans as of both December 31, 2020 and 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 65% or less. These loans have historically experienced low delinquency and loss rates. 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.
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Consumer — Home Equity Lines of Credit. HELOCs totaled $1.60 billion as of December 31, 2020, compared with $1.47 billion as of December 31, 2019, and accounted for 4% of total loans held-for-investment as of both dates. Year-over-year, HELOCs increased $128.9 million, or 9%, primarily driven by growth in California and Washington. The Company was in a first lien position for 86% and 84% of its HELOCs as of December 31, 2020 and 2019, respectively. Many of the loans within this portfolio are reduced documentation loans, for which a substantial down payment is required, resulting in a low LTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and defaultloss rates. AsVirtually all of December 31, 2017 and 2016, 65% and 68% of the Company’s single-family residential loans, respectively, were concentrated in California.
All originated commercial and consumer loans are subject to the Company’s underwriting guidelines and loan portfolio was comprised largely of loans originated through a reduced documentation loan program where a substantial down payment is required, resulting in a low loan-to-value ratio, typically 60% or less.origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements, to ensure that the Company is in a first lien position for many ofcompliant with these reduced documentation HELOCs. These loans have historically experienced low delinquency and default rates. As of December 31, 2017 and 2016, 73% and 75% of the Company’s HELOC loans, respectively, were concentrated in California.requirements.
The following table presents the contractual loan maturities by loan categoriescategory and the contractual distribution of loans in those categories to changes in interest rates as of December 31, 2017:2020:
| ($ 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 but within five years | More than five years | Total | ||||||||||||
| Commercial lending: | ||||||||||||||||
| C&I | $ | 3,966,385 | $ | 5,414,089 | $ | 1,316,757 | $ | 10,697,231 | ||||||||
| CRE | 803,604 | 2,947,192 | 5,186,101 | 8,936,897 | ||||||||||||
| Multifamily residential | 116,652 | 304,853 | 1,494,671 | 1,916,176 | ||||||||||||
| Construction and land | 399,178 | 238,857 | 21,662 | 659,697 | ||||||||||||
| Consumer lending: | ||||||||||||||||
| Single-family residential | 2,551 | 12,643 | 4,631,095 | 4,646,289 | ||||||||||||
| HELOCs | 696 | 10 | 1,782,218 | 1,782,924 | ||||||||||||
| Other consumer | 58,711 | 256,935 | 20,858 | 336,504 | ||||||||||||
Total loans held-for-investment (1) | $ | 5,347,777 | $ | 9,174,579 | $ | 14,453,362 | $ | 28,975,718 | ||||||||
| Distribution of loans to changes in interest rates: | ||||||||||||||||
| Fixed rate loans | $ | 609,839 | $ | 701,951 | $ | 1,002,560 | $ | 2,314,350 | ||||||||
| Variable rate loans | 4,706,173 | 8,233,794 | 8,283,397 | 21,223,364 | ||||||||||||
| Hybrid adjustable-rate loans | 31,765 | 238,834 | 5,167,405 | 5,438,004 | ||||||||||||
Total loans held-for-investment (1) | $ | 5,347,777 | $ | 9,174,579 | $ | 14,453,362 | $ | 28,975,718 | ||||||||
Purchased Credit-ImpairedCredit Deteriorated Loans
56
Loans Held-for-Sale
Sales of December 31, 2017,Originated Loans and Purchased Loans
All loans held-for-sale amounted to $78.2 million, which comprised primarily of loans relatedoriginated by the Company are underwritten pursuant to the pending saleCompany’s policies and procedures. Although the Company’s primary focus is on directly originated loans, in certain circumstances, the Company also purchases loans and participates in loans with other banks. The Company also participates out interests in directly originated commercial loans to other financial institutions or sells loans in the normal course of DCB branches of $78.1 million included in Branch assets held-for-sale on the Consolidated Balance Sheet. For additionalbusiness.
The following tables provide information on the pending sale, see Note 2 — Dispositions and Held-for-Sale to the Consolidated Financial Statements. The remaining loans held-for-sale, which amounted to $85 thousand were comprised of single-family residential loans. In comparison, loans held-for-sale of $23.1 million and $32.0 million as of December 31, 2016 and 2015, respectively, were comprised primarily of student loans. Loans transferred from held-for-investment to held-for-sale of $613.1 million during the year ended December 31, 2017, were comprised primarily of C&I and CRE loans. In comparison, $819.1 million and $1.75 billion of loans were transferred from held-for-investment to held-for-saleloan sales during the years ended December 31, 20162020, 2019 and 2015, respectively. These loan transfers were comprised primarily of C&I, multifamily residential and CRE loans for the year ended December 31, 2016, and single-family residential and C&I loans for the year ended December 31, 2015. As the result of these loan transfers, the Company recorded $473 thousand, $1.9 million and $5.1 million in write-downs2018. Refer to the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015, respectively.
| ($ in thousands) | December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Nonaccrual loans: | ||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||
| C&I | $ | 69,213 | $ | 81,256 | $ | 64,883 | $ | 28,801 | $ | 28,894 | ||||||||||
| CRE | 26,986 | 26,907 | 29,345 | 28,513 | 37,693 | |||||||||||||||
| Multifamily residential | 1,717 | 2,984 | 16,268 | 20,819 | 27,652 | |||||||||||||||
| Construction and land | 3,973 | 5,326 | 700 | 9,636 | 19,694 | |||||||||||||||
| Consumer lending: | ||||||||||||||||||||
| Single-family residential | 5,923 | 4,214 | 8,759 | 8,625 | 12,206 | |||||||||||||||
| HELOCs | 4,006 | 2,130 | 1,743 | 703 | 1,495 | |||||||||||||||
| Other consumer | 2,491 | — | — | 3,165 | 1,681 | |||||||||||||||
| Total nonaccrual loans | 114,309 | 122,817 | 121,698 | 100,262 | 129,315 | |||||||||||||||
| OREO | 830 | 6,745 | 7,034 | 32,111 | 40,273 | |||||||||||||||
| Total nonperforming assets | $ | 115,139 | $ | 129,562 | $ | 128,732 | $ | 132,373 | $ | 169,588 | ||||||||||
Non-PCI nonperforming assets to total assets (1) | 0.31 | % | 0.37 | % | 0.40 | % | 0.46 | % | 0.69 | % | ||||||||||
Non-PCI nonaccrual loans to loans held-for-investment (1) | 0.39 | % | 0.48 | % | 0.51 | % | 0.46 | % | 0.72 | % | ||||||||||
| Allowance for loan losses to non-PCI nonaccrual loans | 251.19 | % | 212.12 | % | 217.72 | % | 261.00 | % | 193.08 | % | ||||||||||
| ($ in thousands) | December 31, | |||||||||||||||
| 2017 | 2016 | |||||||||||||||
Performing TDRs | Nonperforming TDRs | Performing TDRs | Nonperforming TDRs | |||||||||||||
| Commercial lending: | ||||||||||||||||
| C&I | $ | 29,472 | $ | 39,509 | $ | 44,363 | $ | 23,771 | ||||||||
| CRE | 8,570 | 17,830 | 19,601 | 9,522 | ||||||||||||
| Multifamily residential | 8,919 | 289 | 7,057 | 511 | ||||||||||||
| Construction and land | — | 3,973 | 544 | 4,924 | ||||||||||||
| Consumer lending: | ||||||||||||||||
| Single-family residential | 8,415 | 778 | 10,121 | 206 | ||||||||||||
| HELOCs | 1,202 | 530 | 1,552 | 49 | ||||||||||||
| Total TDRs | $ | 56,578 | $ | 62,909 | $ | 83,238 | $ | 38,983 | ||||||||
| ($ in thousands) | December 31, | |||||||||||||
| 2017 | 2016 | |||||||||||||
| Amount | % | Amount | % | |||||||||||
| Commercial lending: | ||||||||||||||
| C&I | $ | 98,685 | 58 | % | $ | 125,619 | 61 | % | ||||||
| CRE | 35,556 | 21 | % | 46,508 | 22 | % | ||||||||
| Multifamily residential | 10,636 | 6 | % | 10,041 | 5 | % | ||||||||
| Construction and land | 3,973 | 2 | % | 5,870 | 3 | % | ||||||||
| Total commercial lending | 148,850 | 87 | % | 188,038 | 91 | % | ||||||||
| Consumer lending: | ||||||||||||||
| Single-family residential | 14,338 | 8 | % | 14,335 | 7 | % | ||||||||
| HELOCs | 5,208 | 3 | % | 3,682 | 2 | % | ||||||||
| Other consumer | 2,491 | 2 | % | — | — | % | ||||||||
| Total consumer lending | 22,037 | 13 | % | 18,017 | 9 | % | ||||||||
| Total non-PCI impaired loans | $ | 170,887 | 100 | % | $ | 206,055 | 100 | % | ||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Allowance for loan losses, beginning of period | $ | 260,520 | $ | 264,959 | $ | 261,679 | $ | 249,675 | $ | 234,535 | ||||||||||
| Provision for loan losses | 49,069 | 31,718 | 6,569 | 47,583 | 20,207 | |||||||||||||||
| Gross charge-offs: | ||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||
| C&I | (38,118 | ) | (47,739 | ) | (20,423 | ) | (39,984 | ) | (8,461 | ) | ||||||||||
| CRE | — | (464 | ) | (1,052 | ) | (2,317 | ) | (2,119 | ) | |||||||||||
| Multifamily residential | (635 | ) | (29 | ) | (1,650 | ) | (1,011 | ) | (2,810 | ) | ||||||||||
| Construction and land | (149 | ) | (117 | ) | (493 | ) | (1,343 | ) | (1,618 | ) | ||||||||||
| Consumer lending: | ||||||||||||||||||||
| Single-family residential | (1 | ) | (137 | ) | (36 | ) | (92 | ) | (387 | ) | ||||||||||
| HELOCs | (55 | ) | (9 | ) | (98 | ) | (125 | ) | (1,264 | ) | ||||||||||
| Other consumer | (17 | ) | (13 | ) | (502 | ) | (5,746 | ) | (1,121 | ) | ||||||||||
| Total gross charge-offs | (38,975 | ) | (48,508 | ) | (24,254 | ) | (50,618 | ) | (17,780 | ) | ||||||||||
| Gross recoveries: | ||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||
| C&I | 12,065 | 8,453 | 8,782 | 10,198 | 4,392 | |||||||||||||||
| CRE | 2,111 | 1,488 | 2,488 | 1,134 | 1,258 | |||||||||||||||
| Multifamily residential | 1,357 | 1,476 | 4,298 | 2,287 | 1,452 | |||||||||||||||
| Construction and land | 259 | 203 | 4,647 | 848 | 3,535 | |||||||||||||||
| Consumer lending: | ||||||||||||||||||||
| Single-family residential | 546 | 401 | 323 | 123 | 552 | |||||||||||||||
| HELOCs | 24 | 7 | 54 | 252 | 2 | |||||||||||||||
| Other consumer | 152 | 323 | 373 | 197 | 1,522 | |||||||||||||||
| Total gross recoveries | 16,514 | 12,351 | 20,965 | 15,039 | 12,713 | |||||||||||||||
| Net charge-offs | (22,461 | ) | (36,157 | ) | (3,289 | ) | (35,579 | ) | (5,067 | ) | ||||||||||
| Allowance for loan losses, end of period | 287,128 | 260,520 | 264,959 | 261,679 | 249,675 | |||||||||||||||
| Allowance for unfunded credit reserves, beginning of period | 16,121 | 20,360 | 12,712 | 11,282 | 9,437 | |||||||||||||||
| (Reversal of) provision for unfunded credit reserves | (2,803 | ) | (4,239 | ) | 7,648 | 1,575 | 2,157 | |||||||||||||
| Charge-offs | — | — | — | (145 | ) | (312 | ) | |||||||||||||
| Allowance for unfunded credit reserves, end of period | 13,318 | 16,121 | 20,360 | 12,712 | 11,282 | |||||||||||||||
| Allowance for credit losses | $ | 300,446 | $ | 276,641 | $ | 285,319 | $ | 274,391 | $ | 260,957 | ||||||||||
| Average loans held-for-investment | $ | 27,237,981 | $ | 24,223,535 | $ | 22,140,443 | $ | 20,093,921 | $ | 16,030,030 | ||||||||||
| Loans held-for-investment | $ | 28,975,718 | $ | 25,503,139 | $ | 23,643,748 | $ | 21,729,949 | $ | 17,850,288 | ||||||||||
| Allowance for loan losses to loans held-for-investment | 0.99 | % | 1.02 | % | 1.12 | % | 1.20 | % | 1.40 | % | ||||||||||
| Net charge-offs to average loans held-for-investment | 0.08 | % | 0.15 | % | 0.01 | % | 0.18 | % | 0.03 | % | ||||||||||
| ($ 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, 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 newly originatedpurchased loans resulting in loans held-for-investment increasing at a higher rate than the estimated allowance for loan losses. In addition, the relatively stable economic cycle and prudent credit risk management practices have led to continued declines in the Company’s historical loss rate experience, which has resulted in a slower rate of change in the allowance for loan losses compared to the Company’s loan growth. Provision for credit losses includes provision for loan losses and unfunded credit reserves. Provision for credit losses is charged to income to bring the allowance for credit losses to a level deemed appropriate by the Company based on the factors described above. The fluctuation in the provision for credit losses is impacted by the historical loss rates trend along with the net charge-offs experienced during the period. The increase in the provision for credit losses for the year ended December 31, 2017, compared to the same periods in 2016 and 2015, was reflective of the overall loan portfolio growth, partially offset by a decline in the historical loss factor during the year ended December 31, 2017. The Company believes the allowance for credit losses as of December 31, 2017, 2016 and 2015 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at each respective date.were insignificant or none.
| ($ in thousands) | December 31, | ||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Allowance Allocation | % of Total Loans | Allowance Allocation | % of Total Loans | Allowance Allocation | % of Total Loans | Allowance Allocation | % of Total Loans | Allowance Allocation | % of Total Loans | ||||||||||||||||||||||||||
| Commercial lending: | |||||||||||||||||||||||||||||||||||
| C&I | $ | 163,058 | 37 | % | $ | 142,167 | 38 | % | $ | 134,606 | 38 | % | $ | 134,598 | 37 | % | $ | 115,496 | 32 | % | |||||||||||||||
| CRE | 41,237 | 31 | % | 47,927 | 31 | % | 58,623 | 32 | % | 53,989 | 29 | % | 56,742 | 30 | % | ||||||||||||||||||||
| Multifamily residential | 19,109 | 7 | % | 17,543 | 6 | % | 19,630 | 6 | % | 14,043 | 7 | % | 14,012 | 8 | % | ||||||||||||||||||||
| Construction and land | 26,881 | 2 | % | 24,989 | 3 | % | 22,915 | 3 | % | 18,988 | 2 | % | 15,369 | 2 | % | ||||||||||||||||||||
| Consumer lending: | |||||||||||||||||||||||||||||||||||
| Single-family residential | 26,362 | 16 | % | 19,795 | 14 | % | 19,665 | 13 | % | 29,813 | 18 | % | 36,704 | 19 | % | ||||||||||||||||||||
| HELOCs | 7,354 | 6 | % | 7,506 | 7 | % | 8,745 | 7 | % | 10,538 | 6 | % | 861 | 4 | % | ||||||||||||||||||||
| Other consumer | 3,127 | 1 | % | 593 | 1 | % | 775 | 1 | % | (290 | ) | 1 | % | 10,491 | 5 | % | |||||||||||||||||||
| Total | $ | 287,128 | 100 | % | $ | 260,520 | 100 | % | $ | 264,959 | 100 | % | $ | 261,679 | 100 | % | $ | 249,675 | 100 | % | |||||||||||||||
| ($ in thousands) | December 31, 2017 | % of Total Deposits | December 31, 2016 | % of Total Deposits | Change | ||||||||||||||||
| $ | % | ||||||||||||||||||||
| Core deposits: | |||||||||||||||||||||
| Noninterest-bearing demand | $ | 10,887,306 | 34 | % | $ | 10,183,946 | 34 | % | $ | 703,360 | 7 | % | |||||||||
| Interest-bearing checking | 4,419,089 | 14 | % | 3,674,417 | 12 | % | 744,672 | 20 | % | ||||||||||||
| Money market | 8,359,425 | 26 | % | 8,174,854 | 27 | % | 184,571 | 2 | % | ||||||||||||
| Savings | 2,308,494 | 7 | % | 2,242,497 | 8 | % | 65,997 | 3 | % | ||||||||||||
| Total core deposits | 25,974,314 | 82 | % | 24,275,714 | 81 | % | 1,698,600 | 7 | % | ||||||||||||
| Time deposits | 5,640,749 | 18 | % | 5,615,269 | 19 | % | 25,480 | 0 | % | ||||||||||||
| Total deposits | $ | 31,615,063 | 100 | % | $ | 29,890,983 | 100 | % | $ | 1,724,080 | 6 | % | |||||||||
| ($ in thousands) | December 31, 2017 | |||
| 3 months or less | $ | 1,309,451 | ||
| Over 3 months through 6 months | 746,101 | |||
| Over 6 months through 12 months | 1,095,836 | |||
| Over 12 months | 483,293 | |||
| Total | $ | 3,634,681 | ||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||
| Year-end balance | $ | — | $ | 60,050 | $ | — | ||||||
| Weighted-average rate on amount outstanding at year-end | — | % | 3.01 | % | — | % | ||||||
| Highest month-end balance | $ | 60,603 | $ | 60,050 | $ | 23,269 | ||||||
| Average amount outstanding | $ | 31,725 | $ | 25,560 | $ | 4,776 | ||||||
| Weighted-average rate | 3.11 | % | 2.84 | % | 2.37 | % | ||||||
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 economicpolitical uncertainties. In addition, the Company’s financial assets held in the branch in Hong Kong branch and the subsidiary bank in China may be affected by changes in demand or pricing resulting from 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 below presents the major financial assets held in the Company’s overseas offices as of December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ 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, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||||
| Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | Amount | % of Total Consolidated Assets | ||||||||||||||||
| Hong Kong Branch | |||||||||||||||||||||
| Cash and cash equivalents | $ | 151,631 | 0 | % | $ | 46,895 | 0 | % | $ | 71,268 | 0 | % | |||||||||
Loans held-for-investment (1)(2) | $ | 713,728 | 2 | % | $ | 733,286 | 2 | % | $ | 694,608 | 2 | % | |||||||||
Available-for-sale investment securities (3) | $ | 242,107 | 1 | % | $ | 251,680 | 1 | % | $ | 263,292 | 1 | % | |||||||||
| Total assets | $ | 1,100,471 | 3 | % | $ | 1,040,465 | 3 | % | $ | 1,036,485 | 3 | % | |||||||||
| Subsidiary Bank in China | |||||||||||||||||||||
| Cash and cash equivalents | $ | 626,658 | 2 | % | $ | 387,354 | 1 | % | $ | 331,959 | 1 | % | |||||||||
Loans held-for-investment (2) | $ | 484,214 | 1 | % | $ | 425,336 | 1 | % | $ | 356,535 | 1 | % | |||||||||
| Total assets | $ | 1,302,562 | 4 | % | $ | 987,286 | 3 | % | $ | 830,727 | 3 | % | |||||||||
(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 below presents the total revenue generated by the Company’s overseas offices for the years ended December 31, 2017, 2016in 2020, 2019 and 2015:2018:
| ($ 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 | % | ||||||||||||||||||||||||||
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| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | Amount | % of Total Consolidated Revenue | |||||||||||||||
| Hong Kong Branch | ||||||||||||||||||||
| Total revenue | $ | 28,096 | 2 | % | $ | 26,754 | 2 | % | 21,774 | 2 | % | |||||||||
| Subsidiary Bank in China | ||||||||||||||||||||
| Total revenue | $ | 24,235 | 2 | % | $ | 21,055 | 2 | % | 23,574 | 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 East Westthe 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. Theneeds, allocating capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. In addition,Furthermore, the Company conducts capital stress tests as part of its annual 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 increased by $414.2 million or 12% to $3.84was $5.27 billion as of December 31, 2017, compared to $3.432020, an increase of $251.6 million or 5% from $5.02 billion as of December 31, 2016.2019. The increase in the Company’s primary source of capital is the retention of its operating earnings. Retained earnings increased by $388.6 million or 18% to $2.58 billion as of December 31, 2017, compared to $2.19 billion as of December 31, 2016. The increasestockholders’ equity was primarily due to 2020 net income of $505.6$567.8 million, partially offset by $117.0 million of cash dividends during the year ended December 31, 2017. In addition, common stockdeclared of $158.8 million and additional paid-in capital increased by $27.9 million or 2% primarily due to the activities in employee stock compensation plans.share repurchases of $146.0 million. For other factors that contributed to the changes in stockholders’ equity, refer to theItem 8. Financial Statements and Supplementary Data — Consolidated Statement of Changes in Stockholders’ Equity.Equity in this Form 10-K.
Book value was $26.58$37.22 per common share based on 144.5 million common shares outstanding as of December 31, 2017, compared to $23.782020, an increase of 8% from $34.46 per common share based on 144.2 million common shares outstanding as of December 31, 2016.2019. The Company made dividend paymentspaid cash dividends of $0.20$1.100 per common share in each quarter during the years ended December 31, 2017 and 2016.2020, compared with $1.055 per share in 2019. In January 2018,2021, the Company’s Board of Directors declared first quarter 20182021 cash dividends forof $0.330 per common share, which represents a 20% increase, or 5.5 cents per share, from the Company’s common stock. The common stockprevious quarterly cash dividend of $0.20$0.275 per sharecommon share. The dividend was paid on February15, 2018February 23, 2021 to stockholders of record as of February 5, 2018.9, 2021.
Deposits and Other Sources of Funds
Deposits are the Company’s primary source of funding, the cost of which has a significant impact on the Company’s net interest income and net interest margin. Additional funding is provided by short- and long-term borrowings, and long-term debt. See Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity in this Form 10-Kfor a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of December 31, 2020 and 2019:
| ($ 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 | % | ||||||||||||||||||||||||||||||
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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.
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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 are designed to reflectbanking organizations maintain capital that is commensurate with the degree of risk associated with a banking organization’s operations and transactions. The guidelines cover transactions that are reported on the balance sheet as well as those recorded as off-balance sheet items. In 2013, the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency issued the final Basel III Capital Rules establishing a new comprehensive capital framework for strengthening international capital standards as well as implementing certain provisions of the Dodd-Frank Act.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.
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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, became effectiveand those required by regulatory agencies for the Companycapital 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 onsince there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
(2)As of January 1, 2015 (subject to phase-in periods for certain components).
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, 20172020 and 2016,2019, both the Company and the Bank were considered “well capitalized,” and metcontinued 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, 2017 | December 31, 2016 | Minimum Regulatory Requirements | Well Capitalized Requirements | Fully Phased- in Minimum Regulatory Requirements | |||||||||||||||||
| Company | East West Bank | Company | East West Bank | ||||||||||||||||||
| CET1 risk-based capital | 11.4 | % | 11.4 | % | 10.9 | % | 11.3 | % | 4.5 | % | 6.5 | % | 7.0 | % | |||||||
| Tier 1 risk-based capital | 11.4 | % | 11.4 | % | 10.9 | % | 11.3 | % | 6.0 | % | 8.0 | % | 8.5 | % | |||||||
| Total risk-based capital | 12.9 | % | 12.4 | % | 12.4 | % | 12.3 | % | 8.0 | % | 10.0 | % | 10.5 | % | |||||||
| Tier 1 leverage capital | 9.2 | % | 9.2 | % | 8.7 | % | 9.1 | % | 4.0 | % | 5.0 | % | 4.0 | % | |||||||
Other Matters
LIBOR Transition
On July 27, 2017, the growthFCA, which regulates 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. A portion of the Company’s assets. Asloans, derivatives, debt securities, resale agreements, FHLB advances, as well as junior subordinated debt and repurchase agreements are indexed to LIBOR and mature after 2021. The volume of December 31, 2017, the Company’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capitalproducts that are indexed to LIBOR is significant and, Tier 1 leverage capital ratios were all well aboveif not sufficiently planned for, the well capitalized requirements.discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company.
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Off-Balance Sheet Arrangements and Aggregate 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 wherebyto 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 an unconsolidateda 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 Credit
As a financial service provider, the Company routinely enters into commitments to extend credit to customers, such as loan commitments, commercial letters of credit for foreign and domestic trade, SBLCsstandby letters of credit (“SBLCs”), and financial guarantees.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. The following table presentsInformation about the Company’s loan commitments, commercial letters of credit and SBLCs as of December 31, 2017:
| ($ in thousands) | Commitments Outstanding | |||
| Loan commitments | $ | 5,075,480 | ||
| Commercial letters of credit and SBLCs | $ | 1,655,897 | ||
Guarantees
In addition,the ordinary course of business, the Company has commitmentsenters 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 12 — Commitments, Contingencies and obligations under post-retirement benefit plans as described in Note 15 — Employee Benefit PlansRelated Party Transactions to the Consolidated Financial Statements.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, 2017:2020:
| ($ 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.
Risk Management
Overview
In conducting its 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-approved ERM framework, which outlines the 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. It identifies the Company’s major risk categories as credit risk; liquidity risk; capital risk; market risk; operational risk; regulatory, compliance and legal risks; accounting and tax risks, and 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. Under the direction of the Risk Oversight Committee, management committees apply targeted strategies to reduce the risks to which the Company’s operations are exposed.
The Company’s ERM program is executed along the three lines of defense model, which provides for a consistent and standardized risk management control environment across the enterprise. The first line of defense is comprised of production, operational, and support units. The second line of defense is comprised of various risk management and control functions charged with monitoring and managing specific major risk categories and/or risk subcategories. The third line of defense is comprised of the Internal Audit function and Independent Asset Review. Internal Audit provides assurance and evaluates the effectiveness of risk management, control and governance processes as established by the Company. Internal Audit has organizational independence and objectivity, reporting directly to the Board’s Audit Committee. Further discussion and analysis of each major risk area are included in the following sub-sections of Risk Management.
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| ($ in thousands) | Payment Due by Period | |||||||||||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | After 5 years | Indeterminate Maturity (1) | Total | |||||||||||||||||||
Deposits (2) | $ | 4,930,794 | $ | 497,042 | $ | 180,910 | $ | 32,003 | $ | 25,974,314 | $ | 31,615,063 | ||||||||||||
FHLB advances (2) | — | 81,286 | — | 242,605 | — | 323,891 | ||||||||||||||||||
Gross repurchase agreements (2) | — | — | 150,000 | 300,000 | — | 450,000 | ||||||||||||||||||
| Affordable housing partnership and other tax credit investment commitments | 98,000 | 51,534 | 18,812 | 841 | — | 169,187 | ||||||||||||||||||
Short-term borrowings (2) | — | — | — | — | — | — | ||||||||||||||||||
Long-term debt (2) | 20,000 | 5,000 | — | 146,577 | — | 171,577 | ||||||||||||||||||
Operating lease obligations (3) | 31,845 | 49,247 | 32,579 | 27,988 | — | 141,659 | ||||||||||||||||||
Unrecognized tax liabilities (4) | — | — | 18,798 | — | — | 18,798 | ||||||||||||||||||
| Projected cash payments for postretirement benefit plan | 319 | 668 | 708 | 7,855 | — | 9,550 | ||||||||||||||||||
| Total contractual obligations | $ | 5,080,958 | $ | 684,777 | $ | 401,807 | $ | 757,869 | $ | 25,974,314 | $ | 32,899,725 | ||||||||||||
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 the Company’s assets and exposures such as loans and certain derivatives. The majority of the 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; as well as portfolio credit risk management strategies and processes, such as diversification and liquidity; all of which enable management to control credit risk. At the management level, the Credit Risk Management Committee has primary oversight responsibility for credit risk. 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-rated according to the requirements of the credit risk rating policy. The Senior Credit Supervision function evaluates and reports the overall credit risk exposure 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 assessment of underwriting and documentation quality, reporting directly to the Board’s Risk Oversight Committee. A key focus of our credit risk management is adherence to a well-controlled underwriting process.
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. Other nonperforming assets and OREO are repossessed assets and properties, respectively, acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. Loans 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 condition and the adequacy of collateral, if any. For additional details regarding the Company’s nonaccrual loan policy, see Note 1 — Summary of Significant Accounting Policies— Loans Held-for-Investment to the Consolidated Cash Flows AnalysisFinancial Statements in this Form 10-K.
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The following table presents information regarding 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 | ||||||||||||||||||||||
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 from 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 condition and loan repayment capabilities. Nonaccrual loans were $215.2 million or 0.56% of loans held-for-investments, as of December 31, 2020, compared with $120.2 million or 0.35% of loans held-for-investments, as of December 31, 2019. Year-over-year, nonaccrual loans increased by $94.9 million or 79%, primarily driven by inflows of C&I oil & gas loans and CRE loans to nonaccrual status, partially offset by charge-offs and sales of C&I loans, as well as a transfer of a CRE loan to OREO. C&I nonaccrual loans were 62% of total nonaccrual loans as of both December 31, 2020 and 2019. As of December 31, 2020, $106.4 million, or 49% of nonaccrual loans were less than 90 days delinquent. In comparison, $35.6 million, or 30% of nonaccrual loans were less than 90 days delinquent as of December 31, 2019.
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 for which contractual terms have been modified by the Company for economic or legal reasons related to a borrower’s financial difficulties, and for which a concession to the borrower was granted that the Company would not otherwise consider. The 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 borrower’s financial needs. The following table presents the performing and nonperforming TDRs by loan portfolio segments as of December 31, 2020 and 2019. The allowance for loan losses for TDRs was $10.3 million as ofDecember 31, 2020 and $400 thousand as of December 31, 2019.
| ($ 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 | ||||||||||||||||||||||||||||||||||||
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Performing TDRs were $143.2 million as of December 31, 2020, an increase of $65.3 million or 84% from $77.9 million as of December 31, 2019. This increase reflected $68.4 million in newly designated C&I TDRs, primarily from general manufacturing & wholesale, and oil & gas sectors, and $21.2 million in newly designated CRE TDRs. Over 85% of the performing TDRs were current as of both December 31, 2020 and 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. This increase primarily reflected additions to nonperforming TDR, from C&I oil & gas loans, partially offset by a sale of one 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 that 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, 2019; and (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 not 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 current as of the implementation date of a loan modification, or modifications granted under government mandated modification programs, are not considered as TDRs under ASC Subtopic 310-40. See additional information in Note 1 — Summary of Significant Accounting Policies — Troubled Debt Restructurings in this Form 10-K.
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.
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The following table provides a summary of the COVID-19 pandemic-related loan modifications that remained under their modified terms as of December 31, 2020. 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 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 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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, 2020, the Company 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 modifications outstanding as of December 31, 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.
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Allowance for Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses that 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 allowance for credit losses estimate uses various models and estimation techniques based on historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts, and other relevant factors. On January 1, 2020, the adoption of the new accounting standard increased the allowance for loan losses by $125.2 million, and the allowance for unfunded credit commitments by $10.5 million. Corresponding with the increase to the allowance due the adoption of ASU 2016-13, there was an after-tax decrease to opening retained earnings of $98.0 million.
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 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 facilities. While the Company believes that the allowance for credit losses was appropriate as of December 31, 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. For a description of the policies, methodologies and judgements used to determine the allowance for credit losses, see Item 7. MD&A — Critical Accounting Policies and Estimates, Note 1 — Summary of Significant Accounting Policies and Note 6 — Loans Receivable and Allowance for Credit Losses to the Consolidated StatementFinancial Statements in this Form 10-K.
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The following table presents an allocation of Cash Flowsthe 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 deterioration in the macroeconomic conditions and outlook as a result of the 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.
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The Company considers multiple economic scenarios to develop the estimate of the allowance for loans. 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 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.
As of December 31, 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 $52.8 million, or 0.16% of average loan held-for-investment, in 2019. The year-over-year change in net loan charge-offs was largely due to higher CRE charge-offs, compared with recoveries in 2019. The COVID-19 pandemic may continue to impact the credit quality of our loan portfolio. Although the potential impacts were considered in our allowance for loan losses, payment deferral activities instituted in response to the COVID-19 pandemic could delay the recognition of some loan charge-offs.
The following tables summarize activity in the allowance for loan losses for loans by loan portfolio segments for the periods indicated:
| ($ 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, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net cash provided by operating activities | $ | 696,906 | $ | 641,856 | $ | 469,624 | ||||||
| Net cash used in investing activities | (2,500,455 | ) | (1,792,660 | ) | (3,627,881 | ) | ||||||
| Net cash provided by financing activities | 2,068,460 | 1,680,360 | 3,490,306 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 31,178 | (11,940 | ) | (11,047 | ) | |||||||
| Net increase in cash and cash equivalents | 296,089 | 517,616 | 321,002 | |||||||||
| Cash and cash equivalents, beginning of year | 1,878,503 | 1,360,887 | 1,039,885 | |||||||||
| Cash and cash equivalents, end of year | $ | 2,174,592 | $ | 1,878,503 | $ | 1,360,887 | ||||||
| ($ 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 Company’s net cash inflows from operating activities were $696.9 million, $641.9 million and $469.6 millionfollowing table summarizes activity in the allowance for unfunded credit commitments for the years endedperiods indicated:
| ($ 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 allowance for unfunded credit commitments was $33.6 million as of December 31, 2017, 2016 and 2015, respectively. The $55.12020, compared with $11.2 million increase in net cash inflows from operating activities for the year endedas of December 31, 2017, compared to2019. The Company believes the allowance for credit losses as of December 31, 2020 and 2019 was adequate.
Upon adoption of ASU 2016-13, allowance for loan losses for PCD loans is determined using the same period in 2016, was primarily due to a $73.9 million increase in net income and a $22.3 million increase in net changes in cash flows receivable frommethodology as other assets, partially offset by a $19.3 million change in non-cash amounts and a $17.3 million decrease in net changes in the cash flows from accrued expenses and other liabilities. The increase in net changes in cash flows receivable from other assets, comparing the year endedloans held-for-investment. As of December 31, 2017 to the same period in 2016, was primarily due to a reduction in tax receivables. The $172.2 million increase in net cash inflows from operating activities for the year ended December 31, 2016, compared to the same period in 2015, was primarily due to a $47.0 million increase in net income, a $133.0 million reduction of payments related to FDIC shared-loss agreements and a $140.7 million increase in cash inflows from accrued interest receivable and other assets, partially offset by a $126.1 million decrease in non-cash charges mainly due to lower deferred tax expenses.
Liquidity
Liquidity is a financial institution’s capacity to meet its deposit obligations and other counterpartycounterparties’ obligations as they come due, or to obtain adequate funding at a reasonable cost.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 either 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 accessesutilizes 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 The Company’s primary source of funding is from deposits generated by its banking business, which are 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. The Company’s loan-to-deposit ratio was 86% December 31, 2020, compared with 93% as of December 31, 2019.
In addition to deposits, the Company has access to various sources of wholesale funding, as well as borrowing capacity at the FHLB and FRBSF 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 maintains its liquidity in the form of cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements, and unpledged investmentunencumbered high-quality and liquid AFS debt securities. These assets totaled $5.51 billion and $5.91 billion, accounting for 15% and 17% of totalThe following table presents the Company’s liquid assets as of December 31, 20172020 and 2016, respectively, including the reserve requirement of $503.8 million and $699.4 million2019:
| ($ 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 | ||||||||||||||||||||||||||
Unencumbered liquid assets totaled $10.68 billion as of December 31, 2017 and 2016, respectively. Investment2020, compared with $6.70 billion as of December 31, 2019. AFS debt securities included as part of liquidity sources are comprised primarilyconsists 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, as well as the U.S. Treasury.liquidity risks. The Company believes these investmentAFS debt securities provide quick sources of liquidity through sales or pledging to obtain financing, regardless of market conditions. Traditional forms of funding such as deposit growth and borrowings augment these liquid assets. Total deposits (including deposits held-for-sale) amounted to $32.22 billion as of December 31, 2017, compared to $29.89 billion as of December 31, 2016, of which core deposits comprised 81% of total deposits as of both December 31, 2017 and 2016. 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’funds lines of credit with various correspondent banks, to purchase of overnight funds, 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 $3.15 billion, respectively, as of December 31, 2017. The Bank’s unsecured federal funds’ lines of credit, subject to availability, totaled $731.0 million with correspondent banks as of December 31, 2017.$17.04 billion. The Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term and intermediate-term needs.needs over the next 12 months
As of December 31, 2017,2020, 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 awarehave any outstanding balance under the PPPLF.
Liquidity Risk — Liquidity for East West In addition to bank level liquidity management, the Company manages liquidity at the parent company level for various operating needs including payment of any trends, events or uncertainties that had or were reasonably likely to have a material effectdividends, repurchases of common stock, principal and interest payments on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expendituresborrowings, acquisitions and additional investments in the foreseeable future.
its subsidiaries. East West’s primary source of liquidity has historically been dependent on the payment ofis from cash dividends distributed by its subsidiary, East West Bank. The Bank is subject to applicable statutes, regulationsvarious statutory and special approvalregulatory restrictions on its ability to pay dividends as discussed in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds. Thein this Form 10-K. As 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 in dividends from the Bank. Each year, the dividends from the Bank paid total dividends of $35.0 million to East West in January 2018, in additionare sufficient to $255.0 million and $100.0 millionmeet the projected cash obligations of dividends to East West during the years ended December 31, 2017 and 2016, respectively. In addition, in January 2018,parent company for the Board of Directors declared a quarterly common stock cash dividend of $0.20 per share, payable on February 15, 2018 to stockholders of record on February 5, 2018.coming year.
Liquidity Risk — Liquidity Stress 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, 2020, the Company was not aware of any material commitments for capital expenditures in the foreseeable 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. While this information may be helpful to highlight business strategies and certain 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 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 | ||||||||||||||
Operating Activities — Net cash provided by operating activities was $693.3 million, $735.8 million and $883.2 million in 2020, 2019 and 2018, respectively. During 2020, 2019 and 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 for each of the respective years. During 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 to reconcile net income to net operating cash, partially offset by net changes in accrued interest receivable and other assets of $170.8 million. Net operating cash inflows for 2018 benefited from $150.4 million in noncash adjustments to reconcile net income to net operating cash, as well as net changes in accrued expenses and other liabilities of $88.1 million, partially offset by net changes in accrued interest receivable and other assets of $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 2018, 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 investments in qualified affordable housing partnerships, tax credit and other investments. These investing cash outflows were partially offset by cash inflows of $325.0 million from resale agreements and $193.5 million from interest-bearing deposits with banks. 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 funding of investments in qualified affordable housing partnerships, tax credit and other investments, partially offset by $217.7 million of net cash inflows from AFS debt securities.
Financing Activities —Net cash provided by financing activities was $6.91 billion, $2.12 billion and $3.80 billion in2020, 2019 and 2018, respectively. During 2020, net cash provided by financing activities primarily reflected net increases of $7.48 billion in deposits, and $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. Net cash inflows in 2018 primarily reflected net increases in deposits of $3.90 billion, partially offset by cash dividends 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 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, as well as affect the difference between the interest the Company earns on interest-earning assets and pays on interest-bearing liabilities, and the level of the noninterest-bearing funding sources.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’s interest rate riskCompany 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 off-balance sheet derivative instruments to assist in managing interest rate risk.
The interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analysisanalyses under multiple interest rate scenarios. The model includesincorporates the Company’s cash instruments, loans, investmentdebt securities, resale agreements, deposits, borrowings and borrowing portfolios, including repurchase agreements. Theagreements, as well as financial instruments from the Company’s domestic and foreign operations, forecasted noninterest income and noninterest expense items are also incorporated in the simulation. The interest rate scenarios simulated include an instantaneous parallel shift and non-parallel shift in the yield curve. In addition, the Company also performs various simulations using alternative interest rate scenarios. The alternative interest rate scenarios include yield curve flattening, yield curve steepening and yield curve inverting. In order to apply the assumed interest rate environment, adjustments are made to reflect the shift in the U.S. Treasury and other appropriate yield curves.operations. The Company incorporatesuses both a static balance sheet and a forward growth balance sheet in order to perform these evaluations.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. The Company’s net interest income simulation modelIt also incorporates various assumptions, which management believes to be reasonable but may have a significant impact on results. They include: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 periodic loan caps and lifetime loan caps. In addition, theThe modeled results are highly sensitive to the deposit decay and deposit beta assumptions, used for deposits that do not have specific maturities. The Company uses historicalwhich are derived from a regression analysis of the Company’s internalhistorical deposit data as a guidedata. Deposit beta commonly refers to set deposit decay assumptions. The model is also highly sensitive to certain assumptions on the correlation of the changechanges in interest rates paid on core deposits to changes in benchmark market interest rates, commonly referred to as deposit beta assumptions. Deposit beta assumptions are developed based on the Company’s historical experience.rates. The model is also sensitive to the loan and investment prepayment assumption. The loanassumptions, based on an independent model and investmentthe Company’s historical prepayment assumption,data, which considers theconsider anticipated prepayments under different interest rate environments, is based on an independent model, as well as the Company’s historical prepayment experiences.environments.
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Since the federal funds rate range was lowered to near zero in March 2020 and the Federal Reserve has committed its resources to support the financial markets, businesses, and state and local governments, it is not expected that rates will decline further, nor is it expected that rates will enter into the negative territory. Consequently, the simulation results for the downward interest rate scenarios as of December 31, 2020 are not provided.
Twelve-Month Net Interest Income Simulation
Net interest income simulation modeling 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, over a specified time horizon for defined interest rates scenarios. Net interest income simulations generate insight into the impact of 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 and economic value of equity (“EVE”) sensitivity 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 as of December 31, 20172019.
| 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 environment versus net interest income in the various rate scenarios.
The Company’s net interest income profile as of December 31, 2020 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and 2016: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.
Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | EVE Volatility (2) | ||||||||||
| December 31, | December 31, | |||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| +200 | 18.9 | % | 22.4 | % | 7.1 | % | 12.3 | % | ||||
| +100 | 10.7 | % | 12.0 | % | 3.2 | % | 7.5 | % | ||||
| -100 | (7.4 | )% | (6.8 | )% | (3.5 | )% | (5.0 | )% | ||||
| -200 | (12.6 | )% | (7.5 | )% | (8.8 | )% | (9.3 | )% | ||||
The Company’s estimated twelve-month net interest income sensitivity as of December 31, 20172020 was lower compared to December 31, 2016 for both upward interest rate scenarios, as simulated increases in interest income are offset by an increase inthan the rate of repricing for the Company’s deposit portfolio. In a simulated downward interest rate scenario, sensitivity increased overall for both of the downward interest rate scenarios, mainly due to the impact of the recent interest rate increases on December 14, 2016, March 15, 2017, and June 14, 2017. As interest rates rise further away from all time historical lows, there is more room for the Company’s simulated interest income to decline in a downward interest rate scenario, relative to previous simulations.
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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 notedmore 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 of the yield curve upward and downward, in even quarterly increments over the first 12 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) | % | |||||||||||
NM — Not meaningful.
(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 despite the rate ramp table, shown above, when evaluated together with the results of the rate shock simulation, presents a more meaningful indication of the potential impact of rising interest rates to the Company’s twelve-month net interest income. During 2020, the Company’s modeled asset sensitivity decreased under a ramp simulation for the higher interest rate increasesscenarios.
Economic Value of Equityat 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. The economic value approach provides a comparatively broader scope than the net income volatility approach since December 16, 2015, asit captures all anticipated cash flows.
EVE simulation reflects the effect of December 31, 2017,interest rate shifts on the value of the Company has not observed this deposit movementand is used to assess the degree of interest rate risk exposure. In contrast to the earnings perspective, the economic perspective identifies risks arising from repricing or maturity gaps over the life of the balance sheet. Changes in its own portfolio, though thereeconomic value indicate anticipated changes in the value of the bank’s future cash flows. Thus, the economic perspective can be no assurance as to how long this is expected to continue.provide a leading indicator of the bank’s future earnings and capital values. The economic value method also reflects sensitivity across the full maturity spectrum of the bank’s assets and liabilities.
The following table presents the Company’s netEVE sensitivity related to an instantaneous and sustained non-parallel shift in market interest income sensitivity for the upwardrates of 100 and 200 basis point interest rate scenarios assuming a $1.00 billion, $2.00 billion and $3.00 billion demand deposit migrationspoints in an upward direction as of December 31, 2017:2020 and in both 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) | Net Interest Income Volatility | |||||
| December 31, 2017 | ||||||
$1.00 Billion Migration 12 Months | $2.00 Billion Migration 12 Months | $3.00 Billion Migration 12 Months | ||||
| +200 | 16.9% | 14.9% | 13.0% | |||
| +100 | 9.4% | 8.1% | 6.9% | |||
(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 decreasedfor the upward interest rate scenarios increased as of December 31, 2017,2020, compared to December 31, 2016, for both ofwith the upward interest rate scenarios. In the simulated upward 100 and 200 basis point interest rate scenarios, EVE sensitivity was 3.2% and 7.1%, respectively,results as of December 31, 2017, compared to 7.5% and 12.3%, respectively, as of December 31, 2016. These decreases2019. The changes in EVE sensitivity during this period were primarily due to changes in the balance sheet portfolio mix. In the declining 100level and 200 basis point rate scenarios, EVE sensitivity was (3.5)% and (8.8)%, respectively, as of December 31, 2017, compared to (5.0)% and (9.3)%, respectively, as of December 31, 2016. The Company regularly reviews and updates its assumptions with regards to the timing and magnitude of changes in interest rates, and the shape and evolution of the yield curve, to more accurately reflect expected customer behavior.and an increased proportion of low cost and noninterest-bearing deposits in total deposits.
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The Company’s net interest income and EVE profile as of December 31, 2017, as presented in the net interest income and EVE sensitivity tables,2020 reflects an asset sensitive netEVE position under the higher interest income position and an asset sensitive EVE position. Net interest income would be expected to increase if interest rates increase and to decline if interest rates decrease. The Company is naturally asset sensitive due to its large portfolio of rate-sensitive loans that are funded in large part by noninterest-bearing and rate-stable core deposits. As a result, if there are no significant changes in the mix of assets and liabilities, net interest income increases when interest rates increase, and decreases when interest rates decrease.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, or foreign currency exchange rates.rates and commodity prices. However, the Company will from time to time,periodically enter into derivativesderivative transactions in order to reduce its exposure to market risks, includingprimarily 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 orand liabilities and against risk in specific transactions. Hedging transactions may be implemented using a variety of derivative instruments such as swaps, caps, floors, financial futures, 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, such 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 counterparty financial institutions.
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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)As of December 31, 2017 and 2016, the Company had two cancellable2020, there were no interest rate swap contracts with original terms of 20 years.designated as fair value hedges. The objective of these interest rate swaps, which werecontracts designated as fair value hedges was to obtain low-cost floating rate funding onas of December 31, 2019 were dedesignated when the Company’s brokered certificates of deposit. deposits were called during 2020.
(2)As of December 31, 20172019, there were no interest rate contracts designated as cash flow hedges.
Derivatives Designated as Hedging Instruments — Interest rate and 2016, underforeign exchange derivative contracts are utilized in our asset and liability management activities and serve as an efficient tool to manage the termsCompany’s interest rate risk and foreign exchange risk. We use derivatives to hedge the risk of variable cash flows that the Company is exposed to from its variable interest rate borrowings, including repurchase agreements and FHLB advances. The Company also uses derivatives to hedge the risk of changes in the USD equivalent value of a designated monetary amount of the swap contracts,Company’s net investment in East West Bank (China) Limited. For both cash flow and net investment hedges, the Company received a fixed interest rate and paid a variable interest rate.change in the fair value of the hedging instruments is recognized in AOCI, net of tax, on the Consolidated Balance Sheet.
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, 2017 and 2016,2020, the notional amountsoutstanding foreign currency forwards effectively hedged approximately 50% of the RMB exposure in East West Bank (China) Limited.
Changes to the composition of the Company’s brokered certificates of depositderivatives designated as hedging instruments during 2020 reflect actions taken for interest rate swaps were $35.8 millionrisk and $48.4 million, respectively.foreign exchange rate risk management. The fair value liabilitiesdecisions to reposition our derivatives portfolio are based on the current assessment of economic and financial conditions, including the interest rate swaps were $6.8 million and $6.0 millionforeign currency environments, balance sheet composition and trends, and the relative mix of our cash and derivative positions.
Derivatives Not Designated as of December 31, 2017 and 2016, respectively.
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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 hedgehedging relationship, and are therefore are economic hedges. The contracts are marked to marketmarked-to-market at each reporting period. Fair value is determined from verifiableThe changes in fair values of the derivative contracts traded with third-party sources that have considerable experience with derivative markets. The Company provides datafinancial institutions are expected to be largely comparable to the third party source to calculatechanges in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation componentadjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the fair value of the client derivative contracts.
customers. For a majority of the foreign exchange transactionscontracts entered into with its customers, the Company entersmanaged its foreign exchange and credit exposures by entering into offsetting foreign exchange contracts with institutionalthird-party financial institutions and/or entering into bilateral collateral and master netting agreements with customer counterparties. The changes in the fair values entered with third-party financial institutions are expected to be largely comparable to the changes in fair values of the foreign exchange transactions executed with the customers throughout the terms of these contracts. As of December 31, 2020, the Company anticipates performance by all counterparties and has not experienced nonperformance by any of its counterparties, and therefore did not incur any related losses. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign exchange risk. These transactions are economic hedgescurrency on-balance sheet assets and the Company does not apply hedge accounting.liabilities, primarily foreign currency denominated deposits offered to its customers. The Company’s policies also permit taking proprietary currency positions within approved limits, in compliance with theexemptions to proprietary trading exemptionrestrictions provided under Section 619 of the Dodd-Frank Act.Act, or the Volcker Rule. The Company does not speculate in the foreign exchange markets, and actively manages its foreign exchange exposures within prescribed risk limits and defined controls.
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.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 U.S. 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.
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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 prices 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 $273 thousand and $421 thousand as of December 31, 2020 and 2019, respectively, and there were no recurring Level 3 liabilities as of December 31, 2020 and 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.Statements in this Form 10-K.
Allowance for Loan Losses and Unfunded Credit Commitments
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses
The Company’s allowance for loan losses and the allowance 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 a classification migration model with quantitative factors and qualitative considerations. The migration model examines pools of loans having similar characteristics and analyzes their loss rates over a historical period. The Company assigns loss rates to each loan grade within each pool of loans. Loss rates derived by the migration model are based predominantly on historical loss trends that may not be entirely indicativeperiodic evaluation of the actual or inherent loss potential within its current loan portfolio. Additionally, the Company utilizes qualitativeportfolio, lending-related commitments and environmental factors as adjusting mechanisms to supplement the historical results of the classification migration model. Qualitative and environmental factors are reflected as percentage adjustments and are added to the historical loss rates derived from the classified asset migration model to determine the appropriate allowance for each loan pool. Theother 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 for 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 designed for each pool to develop the expected 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 supportable forecast period, may consist of 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. Additionally, non-classified loans are also considered inTo the extent actual results differ from estimates or management’s judgments, the allowance for loancredit losses calculation and are factored in based on the historical loss experience adjusted for various qualitative factors.
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 the methodologyits methodologies to keep pace with the changing credit environment and the size and complexity of the loan portfolio and the changingunfunded credit environment.commitments. Changes in any of the factors cited above could have a significant impact on the allowance for credit loss calculation. The Company believes that the methodologies currently employed continue to be appropriate given the Company’s size and level of complexity. For additional information on allowance for credit losses, see Note 71 — Summary of Significant Accounting Policies and Note 6 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements presented elsewhere in this report.Form 10-K.
Goodwill Impairment
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Significant judgments are applied and assumptions are made when estimating the income approach, the Company provides a net income projection and a terminal growth rate to calculate the discounted cash flows and the presentfair value of the reporting units. Under the market approach, theEstimates of fair value is calculated using the current fair value of comparable peer banks of similar size and focus. The market capitalizations and multiples of these peer banks are used to calculate the market pricedependent upon various factors including estimates of the Company and each reporting unit. The fair value is also subject to a control premium adjustment, which is the cost savings that a purchaseprofitability of the Company’s reporting unit could achieve by eliminating duplicative costs. Underunits, long term growth rates and the combined income andestimated market approach,cost of equity. Imprecision in estimating these factors can affect the value from each approach is weighted based on management’s perceived risk of each approach to determine the fair value. If the fair value is less than the carrying value, then the second part of the test is needed to measure the amount of goodwill impairment. The impliedestimated fair value of the reporting unit goodwill is calculated and compared tounits. Certain events or circumstances could have a negative effect on the actual carrying value of goodwill recorded within the reporting unit. If the carrying value of reporting unit goodwill exceeds the impliedestimated fair value of thatthe 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 COVID-19 pandemic impact and market volatility, an interim goodwill thenimpairment analysis was conducted as of March 31, 2020. In addition, the Company would recognize anperformed its annual goodwill impairment losstest on all reporting units as of December 31, 2020. There was no goodwill impairment for the amountits business segments as of the difference, which would be recorded as a charge against net income. For complete disclosure, see Note 9 — GoodwillMarch 31, 2020 and Other Intangible Assets to the Consolidated Financial Statements presented elsewhere in this report.December 31, 2020.
Income Taxes
The Company examines its Consolidated Financial Statements, itsis subject to income tax provision,laws of the various tax jurisdictions in which it conducts business, including the U.S., its states and its federalthe municipalities, and statethe tax jurisdictions in Hong Kong and China. The Company estimates income tax returnsexpense 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 due from various tax jurisdictions and analyzes itsare 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 permanent and temporary differences, as well asevaluating uncertain tax positions. Changes in the major componentsestimate of income and expenseaccrued taxes occur periodically due to determine whether achanges in tax benefit is more likely than not to be sustained upon examination byrates, interpretations of tax authorities. Inlaws, the event a tax position is not more likely than not to be sustainedstatus 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 occur, impact tax expense and can materially affect our operating results and financial condition. The Company reviews its tax positions on a reserve is established by management.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 notmore-likely-than-not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established, when necessary,
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to reducebe taken, in an income tax return. Uncertain tax positions that meet the deferred tax assetsmore-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 is more likelymanagement believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not to be realized. Management has concluded that it is more likely than not that all of the benefit of the deferredmeeting our realization criteria represent unrecognized tax assets will be realized, with the exception of the deferred tax assetsbenefits. The Company establishes a liability for potential taxes, interest and penalties related to certain state NOLs. Accordingly, a valuation allowance has been recorded for these amounts.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 the standards of ASC 740-10, 740, 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.Statements in this Form 10-K.
Reconciliation of GAAP to 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 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 impairment charge, reversed $30.1 million of certain previously claimed tax credits and subsequently recovered $1.6 million related to DC Solar. During 2018, the Company sold its eight DCB branches and recognized a pre-tax gain on sale of $31.5 million.
The following tables present the reconciliation of GAAP to non-GAAP financial measures in 2020, 2019 and 2018:
| ($ 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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| ($ 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.
| ($ and shares in thousands, except per share data) | December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Stockholders’ equity | (a) | $ | 5,269,175 | $ | 5,017,617 | $ | 4,423,974 | |||||||||||||||||||
| Less: Goodwill | (465,697) | (465,697) | (465,547) | |||||||||||||||||||||||
Other intangible assets (1) | (11,899) | (16,079) | (22,365) | |||||||||||||||||||||||
| Non-GAAP tangible common equity | (b) | $ | 4,791,579 | $ | 4,535,841 | $ | 3,936,062 | |||||||||||||||||||
| Total assets | (c) | $ | 52,156,913 | $ | 44,196,096 | $ | 41,042,356 | |||||||||||||||||||
| Less: Goodwill | (465,697) | (465,697) | (465,547) | |||||||||||||||||||||||
Other intangible assets (1) | (11,899) | (16,079) | (22,365) | |||||||||||||||||||||||
| Non-GAAP tangible assets | (d) | $ | 51,679,317 | $ | 43,714,320 | $ | 40,554,444 | |||||||||||||||||||
| Total stockholders’ equity to total assets | (a)/(c) | 10.10 | % | 11.35 | % | 10.78 | % | |||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | (b)/(d) | 9.27 | % | 10.38 | % | 9.71 | % | |||||||||||||||||||
| Number of common shares, at period-end | (e) | 141,565 | 145,625 | 144,961 | ||||||||||||||||||||||
| Non-GAAP tangible common equity per share | (b)/(e) | $ | 33.85 | $ | 31.15 | $ | 27.15 | |||||||||||||||||||
(1)Includes core deposit intangibles and mortgage servicing assets.
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| ($ 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 | % | ||||||||||||||||||||||||||||
(1)Applied statutory rate of 28.37% for 2020 and 29.56% for both 2019 and 2018.
(2)Includes core deposit intangibles and mortgage servicing assets.
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 — Asset Liability andRisk Management — Market Risk Management of the Results of Operations and Financial Condition in Part II and Note 65 — Derivatives to the Consolidated Financial Statements in Part IV of this report.
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 ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheet of East West Bancorp, Inc. and subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-yearthree‑year period ended December 31, 2017,2020, 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, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017,2020, 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, 2017,2020, 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, 201826, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.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 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for loan losses for loans evaluated on a collective pool basis
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company 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 (ALL) was $483 million, which includes the ALL for commercial loans and residential mortgage loans evaluated on a collective pool basis (the January 1, 2020 collective ALL). As of December 31, 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 at the portfolio segment level. The collective ALL methodology used various models and estimation techniques based on the Company’s historical loss experience, current borrower characteristics, which included internal risk ratings, current conditions, and reasonable and 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 life 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 residential mortgage projected probability of defaults (PDs) and loss given defaults (LGDs) are applied to the 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 average 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 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 January 1, 2020 collective ALL and the December 31, 2020 commercial collective ALL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ALL methodology, including an evaluation of the conceptual soundness and performance of the methods and models used to estimate (1) the quantitative component and its significant data elements and assumptions, which included portfolio segments, historic loss experience, reasonable and supportable forecast period, internal risk ratings, probability-weighted macroeconomic forecast scenarios, contractual term of the loan adjusted for estimated prepayments, and (2) the qualitative 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 this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ALL estimates, including controls over the:
•development of the collective ALL methodology
•development of the quantitative models
•performance monitoring of the quantitative models for the December 31, 2020 commercial collective ALL
•identification and determination of the significant 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 performed ratio and trend analysis over key ratios and peer comparison information relevant to the collective ALL. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s collective ALL methodology for compliance with U.S. generally accepted accounting principles
•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 by comparing to the Company’s business environment and relevant industry practices
•evaluating risk ratings for a selection of collectively evaluated loans
•evaluating the conceptual soundness of the framework used to develop the qualitative 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.
We also assessed the sufficiency of the audit evidence obtained related to the collective ALL estimates by evaluating the:
•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, 201826, 2021
93
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
| 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 | ||||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 457,181 | $ | 460,559 | ||||
| Interest-bearing cash with banks | 1,717,411 | 1,417,944 | ||||||
| Cash and cash equivalents | 2,174,592 | 1,878,503 | ||||||
| Interest-bearing deposits with banks | 398,422 | 323,148 | ||||||
| Securities purchased under resale agreements (“resale agreements”) | 1,050,000 | 2,000,000 | ||||||
| Securities: | ||||||||
| Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $534,327 in 2017 and $767,437 in 2016) | 3,016,752 | 3,335,795 | ||||||
| Held-to-maturity investment security, at cost (fair value of $144,593 in 2016) | — | 143,971 | ||||||
| Restricted equity securities, at cost | 73,521 | 72,775 | ||||||
| Loans held-for-sale | 85 | 23,076 | ||||||
| Loans held-for-investment (net of allowance for loan losses of $287,128 in 2017 and $260,520 in 2016; includes assets pledged as collateral of $18,880,598 in 2017 and $16,441,068 in 2016) | 28,688,590 | 25,242,619 | ||||||
| Investments in qualified affordable housing partnerships, net | 162,824 | 183,917 | ||||||
| Investments in tax credit and other investments, net | 224,551 | 173,280 | ||||||
| Premises and equipment (net of accumulated depreciation of $111,898 in 2017 and $114,890 in 2016) | 121,209 | 159,923 | ||||||
| Goodwill | 469,433 | 469,433 | ||||||
| Branch assets held-for-sale | 91,318 | — | ||||||
| Other assets | 678,952 | 782,400 | ||||||
| TOTAL | $ | 37,150,249 | $ | 34,788,840 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 10,887,306 | $ | 10,183,946 | ||||
| Interest-bearing | 20,727,757 | 19,707,037 | ||||||
| Total deposits | 31,615,063 | 29,890,983 | ||||||
| Branch liability held-for-sale | 605,111 | — | ||||||
| Short-term borrowings | — | 60,050 | ||||||
| Federal Home Loan Bank (“FHLB”) advances | 323,891 | 321,643 | ||||||
| Securities sold under repurchase agreements (“repurchase agreements”) | 50,000 | 350,000 | ||||||
| Long-term debt | 171,577 | 186,327 | ||||||
| Accrued expenses and other liabilities | 542,656 | 552,096 | ||||||
| Total liabilities | 33,308,298 | 31,361,099 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized; 165,214,770 and 164,604,072 shares issued in 2017 and 2016, respectively | 165 | 164 | ||||||
| Additional paid-in capital | 1,755,330 | 1,727,434 | ||||||
| Retained earnings | 2,576,302 | 2,187,676 | ||||||
| Treasury stock, at cost — 20,671,710 shares in 2017 and 20,436,621 shares in 2016 | (452,327 | ) | (439,387 | ) | ||||
| Accumulated other comprehensive loss, net of tax | (37,519 | ) | (48,146 | ) | ||||
| Total stockholders’ equity | 3,841,951 | 3,427,741 | ||||||
| TOTAL | $ | 37,150,249 | $ | 34,788,840 | ||||
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, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| INTEREST AND DIVIDEND INCOME | INTEREST AND DIVIDEND INCOME | |||||||||||||||||||||||||||||||
| Loans receivable, including fees | $ | 1,198,440 | $ | 1,035,377 | $ | 968,625 | Loans receivable, including fees | $ | 1,464,382 | $ | 1,717,415 | $ | 1,503,514 | |||||||||||||||||||
| Investment securities | 58,670 | 53,399 | 41,375 | |||||||||||||||||||||||||||||
| AFS debt securities | AFS debt securities | 82,553 | 67,838 | 60,911 | ||||||||||||||||||||||||||||
| Resale agreements | 32,095 | 30,547 | 19,799 | Resale agreements | 21,389 | 28,061 | 29,432 | |||||||||||||||||||||||||
| Restricted equity securities | 2,524 | 3,427 | 6,077 | Restricted equity securities | 1,543 | 2,468 | 3,146 | |||||||||||||||||||||||||
| Interest-bearing cash and deposits with banks | 33,390 | 14,731 | 17,939 | Interest-bearing cash and deposits with banks | 25,175 | 66,518 | 54,700 | |||||||||||||||||||||||||
| Total interest and dividend income | 1,325,119 | 1,137,481 | 1,053,815 | Total interest and dividend income | 1,595,042 | 1,882,300 | 1,651,703 | |||||||||||||||||||||||||
| INTEREST EXPENSE | INTEREST EXPENSE | |||||||||||||||||||||||||||||||
| Deposits | 116,391 | 84,224 | 73,505 | Deposits | 184,742 | 375,802 | 234,752 | |||||||||||||||||||||||||
| Federal funds purchased and other short-term borrowings | 1,003 | 713 | 58 | |||||||||||||||||||||||||||||
| Short-term borrowings | Short-term borrowings | 1,504 | 1,763 | 1,398 | ||||||||||||||||||||||||||||
| FHLB advances | 7,751 | 5,585 | 4,270 | FHLB advances | 13,792 | 16,697 | 10,447 | |||||||||||||||||||||||||
| Repurchase agreements | 9,476 | 9,304 | 20,907 | Repurchase agreements | 11,766 | 13,582 | 12,110 | |||||||||||||||||||||||||
| Long-term debt | 5,429 | 5,017 | 4,636 | |||||||||||||||||||||||||||||
| Long-term debt and finance lease liabilities | Long-term debt and finance lease liabilities | 6,045 | 6,643 | 6,488 | ||||||||||||||||||||||||||||
| Total interest expense | 140,050 | 104,843 | 103,376 | Total interest expense | 217,849 | 414,487 | 265,195 | |||||||||||||||||||||||||
| Net interest income before provision for credit losses | 1,185,069 | 1,032,638 | 950,439 | Net interest income before provision for credit losses | 1,377,193 | 1,467,813 | 1,386,508 | |||||||||||||||||||||||||
| Provision for credit losses | 46,266 | 27,479 | 14,217 | Provision for credit losses | 210,653 | 98,685 | 64,255 | |||||||||||||||||||||||||
| Net interest income after provision for credit losses | 1,138,803 | 1,005,159 | 936,222 | Net interest income after provision for credit losses | 1,166,540 | 1,369,128 | 1,322,253 | |||||||||||||||||||||||||
| NONINTEREST INCOME | NONINTEREST INCOME | |||||||||||||||||||||||||||||||
| Branch fees | 42,490 | 41,178 | 39,495 | |||||||||||||||||||||||||||||
| Letters of credit fees and foreign exchange income | 42,779 | 45,760 | 38,985 | |||||||||||||||||||||||||||||
| Ancillary loan fees and other income | 23,333 | 19,352 | 15,029 | |||||||||||||||||||||||||||||
| Lending fees | Lending fees | 74,842 | 63,670 | 59,758 | ||||||||||||||||||||||||||||
| Deposit account fees | 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 | Foreign exchange income | 22,370 | 26,398 | 21,259 | ||||||||||||||||||||||||||||
| Wealth management fees | 14,632 | 13,240 | 18,268 | Wealth management fees | 17,494 | 16,547 | 13,624 | |||||||||||||||||||||||||
| Derivative fees and other income | 17,671 | 16,781 | 16,493 | |||||||||||||||||||||||||||||
| Net gains on sales of loans | 8,870 | 6,085 | 24,873 | Net gains on sales of loans | 4,501 | 4,035 | 6,590 | |||||||||||||||||||||||||
| Net gains on sales of available-for-sale investment securities | 8,037 | 10,362 | 40,367 | |||||||||||||||||||||||||||||
| Net gains on sales of fixed assets | 77,388 | 3,178 | 3,567 | |||||||||||||||||||||||||||||
| 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 | 3,807 | — | — | Net gain on sale of business | 0 | 0 | 31,470 | |||||||||||||||||||||||||
Changes in Federal Deposit Insurance Corporation (“FDIC”) indemnification asset and receivable/payable | — | — | (37,980 | ) | ||||||||||||||||||||||||||||
| Other fees and operating income | 19,399 | 26,982 | 24,286 | |||||||||||||||||||||||||||||
| Other investment income | Other investment income | 10,641 | 18,117 | 7,731 | ||||||||||||||||||||||||||||
| Other income | Other income | 13,567 | 11,035 | 16,310 | ||||||||||||||||||||||||||||
| Total noninterest income | 258,406 | 182,918 | 183,383 | Total noninterest income | 235,547 | 222,245 | 217,433 | |||||||||||||||||||||||||
| NONINTEREST EXPENSE | NONINTEREST EXPENSE | |||||||||||||||||||||||||||||||
| Compensation and employee benefits | 335,291 | 300,115 | 262,193 | Compensation and employee benefits | 404,071 | 401,700 | 379,622 | |||||||||||||||||||||||||
| Occupancy and equipment expense | 64,921 | 61,453 | 61,292 | Occupancy and equipment expense | 66,489 | 69,730 | 68,896 | |||||||||||||||||||||||||
| Deposit insurance premiums and regulatory assessments | 23,735 | 23,279 | 18,772 | 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 | 11,444 | 2,841 | 16,373 | Legal expense | 7,766 | 8,441 | 8,781 | |||||||||||||||||||||||||
| Data processing | 12,093 | 11,683 | 10,185 | |||||||||||||||||||||||||||||
| Consulting expense | 14,922 | 22,742 | 17,234 | |||||||||||||||||||||||||||||
| Deposit related expense | 9,938 | 10,394 | 10,379 | |||||||||||||||||||||||||||||
| Computer software expense | 18,183 | 12,914 | 8,660 | |||||||||||||||||||||||||||||
| Other operating expense | 76,697 | 78,936 | 68,624 | Other operating expense | 79,489 | 92,249 | 88,042 | |||||||||||||||||||||||||
| Amortization of tax credit and other investments | 87,950 | 83,446 | 36,120 | Amortization of tax credit and other investments | 70,082 | 98,383 | 96,152 | |||||||||||||||||||||||||
| Amortization of core deposit intangibles | 6,935 | 8,086 | 9,234 | |||||||||||||||||||||||||||||
| Repurchase agreements’ extinguishment costs | — | — | 21,818 | |||||||||||||||||||||||||||||
| Repurchase agreements’ extinguishment cost | Repurchase agreements’ extinguishment cost | 8,740 | 0 | 0 | ||||||||||||||||||||||||||||
| Total noninterest expense | 662,109 | 615,889 | 540,884 | Total noninterest expense | 716,322 | 747,456 | 720,990 | |||||||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | 735,100 | 572,188 | 578,721 | INCOME BEFORE INCOME TAXES | 685,765 | 843,917 | 818,696 | |||||||||||||||||||||||||
| INCOME TAX EXPENSE | 229,476 | 140,511 | 194,044 | INCOME TAX EXPENSE | 117,968 | 169,882 | 114,995 | |||||||||||||||||||||||||
| NET INCOME | $ | 505,624 | $ | 431,677 | $ | 384,677 | NET INCOME | $ | 567,797 | $ | 674,035 | $ | 703,701 | |||||||||||||||||||
| EARNINGS PER SHARE (“EPS”) | EARNINGS PER SHARE (“EPS”) | |||||||||||||||||||||||||||||||
| BASIC | $ | 3.50 | $ | 3.00 | $ | 2.67 | BASIC | $ | 3.99 | $ | 4.63 | $ | 4.86 | |||||||||||||||||||
| DILUTED | $ | 3.47 | $ | 2.97 | $ | 2.66 | DILUTED | $ | 3.97 | $ | 4.61 | $ | 4.81 | |||||||||||||||||||
| WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | |||||||||||||||||||||||||||||||
| BASIC | 144,444 | 144,087 | 143,818 | BASIC | 142,336 | 145,497 | 144,862 | |||||||||||||||||||||||||
| DILUTED | 145,913 | 145,172 | 144,512 | DILUTED | 142,991 | 146,179 | 146,169 | |||||||||||||||||||||||||
| CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||||||||||||||||||||||
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, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Net changes in unrealized losses on available-for-sale investment securities | (2,126 | ) | (22,628 | ) | (10,381 | ) | ||||||
| Foreign currency translation adjustments | 12,753 | (10,577 | ) | (8,797 | ) | |||||||
| Other comprehensive income (loss) | 10,627 | (33,205 | ) | (19,178 | ) | |||||||
| COMPREHENSIVE INCOME | $ | 516,251 | $ | 398,472 | $ | 365,499 | ||||||
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, JANUARY 1, 2015 | 143,582,229 | $ | 1,677,931 | $ | 1,604,141 | $ | (430,198 | ) | $ | 4,237 | $ | 2,856,111 | |||||||||||
| Net income | — | — | 384,677 | — | — | 384,677 | |||||||||||||||||
| Other comprehensive loss | — | — | — | — | (19,178 | ) | (19,178 | ) | |||||||||||||||
| Stock compensation costs | — | 16,502 | — | — | — | 16,502 | |||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements, and related tax benefits | 327,004 | 7,026 | — | (5,964 | ) | — | 1,062 | ||||||||||||||||
| Cash dividends on common stock | — | — | (116,224 | ) | — | — | (116,224 | ) | |||||||||||||||
| BALANCE, DECEMBER 31, 2015 | 143,909,233 | $ | 1,701,459 | $ | 1,872,594 | $ | (436,162 | ) | $ | (14,941 | ) | $ | 3,122,950 | ||||||||||
| Net income | — | — | 431,677 | — | — | 431,677 | |||||||||||||||||
| Other comprehensive loss | — | — | — | — | (33,205 | ) | (33,205 | ) | |||||||||||||||
| Stock compensation costs | — | 22,102 | — | — | — | 22,102 | |||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements, and related tax benefits | 258,218 | 4,037 | — | (3,225 | ) | — | 812 | ||||||||||||||||
| Cash dividends on common stock | — | — | (116,595 | ) | — | — | (116,595 | ) | |||||||||||||||
| 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 | |||||||||||||||||
| Stock compensation costs | — | 24,657 | — | — | — | 24,657 | |||||||||||||||||
| Net activity of common stock pursuant to various stock compensation plans and agreements | 375,609 | 3,240 | — | (12,940 | ) | — | (9,700 | ) | |||||||||||||||
| Cash dividends on common stock | — | — | (116,998 | ) | — | — | (116,998 | ) | |||||||||||||||
| BALANCE, DECEMBER 31, 2017 | 144,543,060 | $ | 1,755,495 | $ | 2,576,302 | $ | (452,327 | ) | $ | (37,519 | ) | $ | 3,841,951 | ||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||||
(1)Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018.
(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, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Provision for credit losses | 210,653 | 98,685 | 64,255 | |||||||||||||||||
| Depreciation and amortization | 119,908 | 144,178 | 139,499 | |||||||||||||||||
| Accretion of discount and amortization of premiums, net | (16,456) | (22,379) | (20,572) | |||||||||||||||||
| Stock compensation costs | 29,237 | 30,761 | 30,937 | |||||||||||||||||
| Deferred income tax benefit | (41,515) | (21,604) | (16,470) | |||||||||||||||||
| Net gains on sales of loans | (4,501) | (4,035) | (6,590) | |||||||||||||||||
| Gains on sales of AFS debt securities | (12,299) | (3,930) | (2,535) | |||||||||||||||||
| Net gain on sale of business | 0 | 0 | (31,470) | |||||||||||||||||
| Loans held-for-sale: | ||||||||||||||||||||
| Originations and purchases | (81,662) | (10,569) | (20,176) | |||||||||||||||||
| 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 | 8,786 | 3,470 | 3,761 | |||||||||||||||||
| Net change in accrued interest receivable and other assets | (339,868) | (170,819) | (60,791) | |||||||||||||||||
| Net change in accrued expenses and other liabilities | 170,403 | 7,012 | 88,070 | |||||||||||||||||
| Other net operating activities | 2,183 | 588 | (8,515) | |||||||||||||||||
| Total adjustments | 125,528 | 61,794 | 179,471 | |||||||||||||||||
| Net cash provided by operating activities | 693,325 | 735,829 | 883,172 | |||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||||
| Net (increase) decrease in: | ||||||||||||||||||||
| Investments in qualified affordable housing partnerships, tax credit and other investments | (154,887) | (146,902) | (132,605) | |||||||||||||||||
| Interest-bearing deposits with banks | (577,607) | 193,455 | 4,212 | |||||||||||||||||
| Resale agreements: | ||||||||||||||||||||
| Proceeds from paydowns and maturities | 450,000 | 650,000 | 175,000 | |||||||||||||||||
| Purchases | (800,000) | (325,000) | (160,000) | |||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||
| Proceeds from sales | 525,433 | 627,110 | 364,270 | |||||||||||||||||
| Proceeds from repayments, maturities and redemptions | 2,070,131 | 1,155,002 | 742,132 | |||||||||||||||||
| Purchases | (4,758,254) | (2,303,317) | (888,673) | |||||||||||||||||
| Loans held-for-investment: | ||||||||||||||||||||
| Proceeds from sales of loans originally classified as held-for-investment | 331,864 | 288,823 | 483,948 | |||||||||||||||||
| Purchases | (389,863) | (524,142) | (597,112) | |||||||||||||||||
| Other changes in loans held-for-investment, net | (3,557,369) | (2,184,915) | (3,313,382) | |||||||||||||||||
| Premises and equipment: | ||||||||||||||||||||
| Proceeds from sales | 5,154 | 403 | 1,638 | |||||||||||||||||
| Purchases | (2,656) | (9,859) | (13,787) | |||||||||||||||||
| Payment received from the sales of businesses, net of cash transferred | 0 | 0 | (503,687) | |||||||||||||||||
| Distributions received from equity method investees | 15,901 | 9,502 | 5,185 | |||||||||||||||||
| Other net investing activities | (6,563) | (1,336) | 449 | |||||||||||||||||
| Net cash used in investing activities | (6,848,716) | (2,571,176) | (3,832,412) | |||||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 149,822 | 137,578 | 88,728 | |||||||||
| Accretion of discount and amortization of premiums, net | (7,260 | ) | (26,024 | ) | (45,101 | ) | ||||||
| Changes in FDIC indemnification asset and receivable/payable | — | — | 37,980 | |||||||||
| Stock compensation costs | 24,657 | 22,102 | 16,502 | |||||||||
| Deferred income tax expense | 33,856 | 26,966 | 261,214 | |||||||||
| Provision for credit losses | 46,266 | 27,479 | 14,217 | |||||||||
| Net gains on sales of loans | (8,870 | ) | (6,085 | ) | (24,873 | ) | ||||||
| Net gains on sales of available-for-sale investment securities | (8,037 | ) | (10,362 | ) | (40,367 | ) | ||||||
| Net gains on sales of premises and equipment | (77,388 | ) | (3,178 | ) | (3,567 | ) | ||||||
| Net gains on sales of OREO | (1,024 | ) | (951 | ) | (11,079 | ) | ||||||
| Net gain on sale of business | (3,807 | ) | — | — | ||||||||
| Originations and purchases of loans held-for-sale | (20,521 | ) | (18,804 | ) | (623 | ) | ||||||
| Proceeds from sales and paydowns/payoffs in loans held-for-sale | 21,363 | 23,749 | 3,174 | |||||||||
| Repurchase agreements’ extinguishment costs | — | — | 21,818 | |||||||||
| Net payments to FDIC shared-loss agreements | — | — | (132,999 | ) | ||||||||
| Net change in accrued interest receivable and other assets | 46,005 | 23,685 | (117,046 | ) | ||||||||
| Net change in accrued expenses and other liabilities | (1,966 | ) | 15,353 | 16,785 | ||||||||
| Other net operating activities | (1,814 | ) | (1,329 | ) | 184 | |||||||
| Total adjustments | 191,282 | 210,179 | 84,947 | |||||||||
| Net cash provided by operating activities | 696,906 | 641,856 | 469,624 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Net (increase) decrease in: | ||||||||||||
| Loans held-for-investment | (3,514,786 | ) | (1,549,736 | ) | (3,285,436 | ) | ||||||
| Interest-bearing deposits with banks | (63,096 | ) | (38,249 | ) | 30,140 | |||||||
| Investments in qualified affordable housing partnerships, tax credit and other investments | (161,661 | ) | (87,860 | ) | (95,074 | ) | ||||||
| Purchases of: | ||||||||||||
| Resale agreements | (600,000 | ) | (1,550,000 | ) | (1,675,000 | ) | ||||||
| Available-for-sale investment securities | (828,604 | ) | (2,396,199 | ) | (3,547,193 | ) | ||||||
| Loans held-for-investment | (534,816 | ) | (1,142,054 | ) | (282,548 | ) | ||||||
| Premises and equipment | (13,754 | ) | (12,181 | ) | (6,555 | ) | ||||||
| Proceeds from sale of: | ||||||||||||
| Available-for-sale investment securities | 832,844 | 1,275,645 | 1,669,334 | |||||||||
| Loans held-for-investment | 566,688 | 661,025 | 1,729,187 | |||||||||
| Other real estate owned (“OREO”) | 6,999 | 7,408 | 41,050 | |||||||||
| Premises and equipment | 119,749 | 8,163 | 7,133 | |||||||||
| Business, net of cash transferred | 3,633 | — | — | |||||||||
| Paydowns and maturities of resale agreements | 1,250,000 | 1,500,000 | 1,050,000 | |||||||||
| Repayments, maturities and redemptions of available-for-sale investment securities | 413,593 | 1,503,127 | 734,934 | |||||||||
| Other net investing activities | 22,756 | 28,251 | 2,147 | |||||||||
| Net cash used in investing activities | (2,500,455 | ) | (1,792,660 | ) | (3,627,881 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Net increase (decrease) in: | ||||||||||||
| Deposits | 2,272,500 | 2,452,870 | 3,492,603 | |||||||||
| Short-term borrowings | (61,560 | ) | 62,506 | — | ||||||||
| Proceeds from: | ||||||||||||
| FHLB advances | — | — | 700,000 | |||||||||
| Issuance of common stock pursuant to various stock compensation plans and agreements | 2,280 | 2,982 | 2,835 | |||||||||
| Payments for: | ||||||||||||
| Repayment of FHLB advances | — | (700,000 | ) | — | ||||||||
| Repayment of long-term debt | (15,000 | ) | (20,000 | ) | (20,000 | ) | ||||||
| Extinguishment of repurchase agreements | — | — | (566,818 | ) | ||||||||
| Repurchase of vested shares due to employee tax liability | (12,940 | ) | (3,225 | ) | (5,964 | ) | ||||||
| Cash dividends on common stock | (116,820 | ) | (115,828 | ) | (115,641 | ) | ||||||
| Other net financing activities | — | 1,055 | 3,291 | |||||||||
| Net cash provided by financing activities | 2,068,460 | 1,680,360 | 3,490,306 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 31,178 | (11,940 | ) | (11,047 | ) | |||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 296,089 | 517,616 | 321,002 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 1,878,503 | 1,360,887 | 1,039,885 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 2,174,592 | $ | 1,878,503 | $ | 1,360,887 | ||||||
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, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| SUPPLEMENTAL CASH FLOWS INFORMATION: | ||||||||||||
| Cash paid (received) during the year for: | ||||||||||||
| Interest paid | $ | 138,766 | $ | 104,251 | $ | 105,831 | ||||||
| Income taxes paid (refunded), net | $ | 98,126 | $ | 39,478 | $ | (18,601 | ) | |||||
| Noncash investing and financing activities: | ||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 613,088 | $ | 819,100 | $ | 1,747,621 | ||||||
| Loans transferred from held-for-sale to held-for-investment | $ | — | $ | (4,943 | ) | $ | (53,376 | ) | ||||
| Deposits transferred to branch liability held-for-sale | $ | 605,111 | $ | — | $ | — | ||||||
| Investment security transferred from held-to-maturity to available-for-sale | $ | 115,615 | $ | — | $ | — | ||||||
| Held-to-maturity investment security retained from securitization of loans | $ | — | $ | 160,135 | $ | — | ||||||
| Premises and equipment transferred to branch assets held-for-sale | $ | 8,043 | $ | — | $ | — | ||||||
| Loans transferred to OREO | $ | 777 | $ | 8,083 | $ | 9,296 | ||||||
| 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 | ||||||||||||||
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, 2017,2020, the Company operates over 130in more than 120 locations worldwide including its headquarters, main administrative offices, branchesin the United States (“U.S.”) and representative offices.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 Taipei and Xiamen. 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 to Flagstar Bank and a pre-tax gain of $31.5 million for the year ended December 31, 2018.
In 2019, the Company acquired East West Markets, LLC, a private broker-dealer and established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly owned subsidiaries of East West.
Significant Accounting Policies
Basis of Presentation —The accounting and reporting policies of the Company conform with United Statesthe U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), applicable guidelines prescribed by regulatory authorities and general practices in the banking industry. The preparation of the Consolidated Financial Statements in conformity with U.S. 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 20172020 presentation.
Principles of Consolidation — The Consolidated Financial Statements in this Form 10-K include the accounts of East West and its subsidiaries, as well as East West Bank.subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. East West also has six wholly-owned6 wholly owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements.
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 (“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 atas receivables based on the balancesvalues at which the securities or loans are acquired. The Company’s policy is to monitor the market values of the underlying securities collateralizing the related receivable of the resale agreements, including accrued interest, and obtain collateral from or return collateral pledged to counterparties when appropriate. Repurchase agreements are accounted for as collateralized financing transactions and recorded atas liabilities based on the balancesvalues 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 may receive collateral returned from counterparties,requirements for the repurchase agreements when 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.
100
Securities — The Company’s securities include various debt andsecurities, 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 and marketable equity securities as available-for-saletrading securities, AFS or held-to-maturity investmentdebt securities based on management’s intention on the date of the purchase. Predominantly all of the Company’s investment
Debt securities are held in connection with itspurchased for liquidity and investment purpose, as part of asset-liability management objectives. Available-for-sale investmentand other strategic activities. Debt securities for which the Company does not have the positive intention and ability to hold to maturity are carriedclassified as AFS. AFS debt securities are reported at fair value on the Consolidated Balance Sheet. Unrealizedwith unrealized gains and losses, net of applicable income taxes, are reportedincluded in other comprehensive income. The specific identification method is used in computingAOCI, and net of the allowance for credit losses. We recognize realized gains and losses on available-for-sale investmentthe sale of AFS debt securities in earnings, using the specific identification method.
Marketable equity securities that were sold. Held-to-maturity debthave 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.
Non-marketable equity securities that management hasdo not have readily determinable fair values are accounted for under one of the intent andfollowing accounting methods:
•Equity Method — When we have the ability to hold until maturityexert 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 amortized cost. Amortizationcost adjusted for impairment, if any, plus or minus observable price changes in orderly transactions of premiums and accretionan identical or similar security of discounts on investmentthe same issuer.
Non-marketable equity securities are recorded as yield adjustments on such securities using the effective interest method.
Our review for impairment for equity method, cost method and measurement alternative securities typically includes an unrealized loss position are analyzed as partanalysis of the Company’s ongoing assessmentfacts 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 other-than-temporary impairment (“OTTI”). In determining whether an impairment is other-than-temporary,For securities accounted for under the Company considersmeasurement alternative, we reduce the severity and duration of the decline in fairasset value the length of time expected for recovery, the financial condition of the issuer, changes in the securities’ ratings and other qualitative factors, as well as whether the Company either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of the amortized cost. When the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery of the amortized cost, the credit component of an OTTI of a debt security is recognized as OTTI loss on the Consolidated Statement of Income and the non-credit component is recognized in other comprehensive income. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost, the full amount of the impairment loss is recognized as OTTI loss on the Consolidated Statement of Income. If there is an other-than-temporary decline inwhen the fair value is less than the carrying value, without the consideration of any individual available-for-sale marketable equity security, the cost basis is reduced and the Company reclassifies the associated net unrealized loss out of other comprehensive income with a corresponding charge to the Consolidated Statement of Income.recovery.
Restricted equity securities include Federal Reserve BankFRBSF and FHLB stocks.stock. The Federal Reserve BankFRBSF 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. When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the foreseeable future, subjectSubject to periodic review under the Company’s management evaluation processes,process, including asset/liability management and credit risk management. Whenmanagement, the Company subsequently changes its intent to holdmay transfer certain loans the loans are transferred from the loans held-for-investment portfolio to the loans held-for-sale portfoliomeasured at the lower of cost or fair value. Any write-downwrite-downs in the carrying amount of the loan at the date of transfer isare recorded as a charge-off.charge-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. A valuation allowance is established if the fair value of such loans is lower than their cost, with a corresponding charge to noninterest income.
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Loans Held-for-Investment — Loans receivable that At the Company hastime of commitment to originate or purchase a loan, the loan is determined to be held-for-investment if it is the Company’s intent and ability to hold the loan to maturity or for the foreseeable future or until maturity“foreseeable 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, unearned income, andnet 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 or Discounts/premiums on purchased loans are accreted or 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.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, thethese 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.
The Company has implemented various loan modification programs to provide its borrowers relief from the economic impacts of the COVID-19 pandemic. As provided under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021 (“CAA”), the Company has elected not to apply TDR classification to any COVID-19 pandemic related loan modifications that were executed after March 1, 2020 and earlier of (A) 60 days after the national emergency termination date concerning the COVID-19 pandemic outbreak declared by the President on March 13, 2020 under the National Emergencies Act, or (B) January 1, 2022 to borrowers who were current as of December 31, 2019. For loans that were modified in response to the COVID-19 pandemic that do not meet the CARES Act criteria (e.g., current payment status as of December 31, 2019), the Company has applied the guidance included in the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued by the federal banking regulators on April 7, 2020. The Interagency Statement states that short-term loan modifications (i.e. six months or less) are not TDRs if they were made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current as of the implementation date of a loan modification program. The aging on the delinquency of the loans modified under the CARES Act, as amended by the CAA, and the Interagency Statement is frozen at the time of the modification. Interest income continues to be recognized over the accommodation 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 impairmentloan losses methodology at the portfolio segment level —thecommercial 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 do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis. The Company’s impairedIndividually assessed loans include predominantly non-purchasednonaccrual and TDR loans. The Company evaluates loans for expected credit impaired (“non-PCI”) loans held-for-investmentlosses on nonaccrual status and any non-PCI loans modified as a TDR, designated either as performing or nonperforming. 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 the loan’s effective interesta 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
Purchased Credit-Impaired LoansPrior to 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 reservesAdoption 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.
Variable Interest and Voting Interest Entities —The amountCompany 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 cash flowslosses 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 initial investmentfinancial and operating policies of an investee, which can occur if we have a 50% or more voting interest in the loan represents the “accretable yield,” which is recognized as interest income on a level yield basis over the life of the loan. The excess of total contractual cash flows over the cash flows expected to be received at origination is deemed the “nonaccretable difference.” In estimating the nonaccretable difference, the Company (a) calculates the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (b) estimates the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The cash flows expected over the life of the pools are estimated by an internal cash flows model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions such as cumulative loss rates, loss curves and prepayment speeds are utilized to calculate the expected cash flows. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. Subsequent to the acquisition date, any increases in expected cash flows over the expected cash flows at purchase date in excess of fair value that are significant and probable are adjusted through the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows over the expected cash flows at purchase date that are probable are recognized by a charge to the provision for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures, result in the removal of the loan from the ASC 310-30 portfolio at the carrying amount.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 expenseon the Consolidated Statement of Income as a component of Income tax expense..
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 and is reviewedtested for impairment on an annual basis as of December 31, or on an interim basis, if an event occursmore frequently as events occur or circumstances change that could 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 comprised of core deposit 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 acquisitions,various acquisitions. Core deposit intangibles are amortized over the projected useful lives of the deposits, which is typically 7between eight to 15 years. Core deposit intangibles are reviewed forThe impairment whenevertest is performed annually, or more frequently as events occur or changes in circumstances indicate that the intangible asset’s carrying valuevalues 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.risks, and to assist customers with their risk management objectives. Derivatives utilized by the Company include primarily swaps, forwards and option contracts. All derivativeDerivative instruments are included in Other assetsorAccrued Expenseexpenses 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. ChangesFor fair value hedges of interest rate risk, changes in fair value of derivatives designated as fair value hedges are reported in within Interest expense on the Consolidated Statement of Income. Changes in fair value of derivatives useddesignated as hedges of the net investments in foreign operations to the extent effective, are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). TheAOCI. For cash flow hedges of floating-rate interest payments, the change in the fair value attributable to the ineffective portion of the hedging instrumenthedges is recognized immediately in Noninterest income 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 StatementStatements of Income. For all other derivatives, changes in fair value are recognized on the Consolidated Statement 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 hedgehedging 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. Retroactiveitems 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 the 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, the effective portion of the 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, and foreign currency, and energy commodity derivative products to customers, and enters into derivative transactions in due course.customers. These transactions are not linked to specific assets or liabilities on the Consolidated Balance Sheet or to forecasted transactions in a hedgehedging relationship and, therefore, do not qualify for hedge accounting. TheThese contracts are marked-to-marketrecorded at the end of each reporting periodfair value 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 nonperformance 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 observable 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 available-for-sale investmentAFS debt 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 the fair value, see Note 32 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements.Statements in this Form 10-K.
Stock-Based Compensation — The Company issues stock-based awards to certaineligible 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 nonqualified stock options, restricted stock awards (“RSAs”) and 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. The stock option awards vest between three to four years from the grant date. RSAs vest ratably over three years, cliff vest after three years, or vest at a rate of 50% each at the fourth and fifth year of continued employment from the date of the grant. 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 expensecost 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 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 are recorded as increases to Additional paid-in capital on the Consolidated Statement of Changes in Stockholder’s Equity.
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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 (receivable(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 are recognized forbetween period, and is determined using the expected futurebalance sheet method. Under the balance sheet method, the net deferred tax consequencesasset or liability is based on the tax effects 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 notmore-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 1211 — 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 establishedreports a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an allowanceincome 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. This contingent reserve is estimatedpositions 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. In prior years, the Company issued RSAs, which are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents. These RSAs are considered participating securities. Accordingly, the Company applied the two-class method in the computation of basic and diluted EPS when the RSAs were outstanding during 2015. RSUs do not contain nonforfeitable rights to dividends when granted.
Foreign Currency Translation — During the third quarter of 2015, the The Company’s foreign subsidiary in China, East West Bank (China) Limited, changed itsLimited’s functional currency from U.S. dollar (“USD”) tois in Chinese Renminbi (“RMB”). As a result, assets and liabilities of this foreign subsidiary wereEast West Bank (China) Limited are translated, for consolidation purpose, from its functional currenciescurrency into USDU.S. dollar (“USD”) using period-end spot foreign exchange rates. Revenues and expenses of this foreign subsidiary wereEast West Bank (China) Limited are translated, for the purpose of consolidation, purpose, from its functional currenciescurrency into USD at the transaction date foreign exchange rates. The effects of those translation adjustments are reported in the Foreign currency translation adjustmentadjustments account within Other comprehensive income (loss)on the Consolidated Statement of Comprehensive Income, along withnet 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 withthat 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 StandardsPronouncements Adopted in 20172020
| Standard | Required Date of Adoption | Description | Effects on Financial Statements | ||||||||
| Standards Adopted in 2020 | |||||||||||
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent related ASUs | January 1, 2020 Early adoption is permitted on January 1, 2019. | The ASU introduces a new CECL model that applies to most financial assets measured at amortized cost and certain instruments, including trade and other receivables, loan receivables, AFS and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. ASU 2016-13 also eliminates the guidance for PCI loans, but requires an allowance for loan losses for purchased financial assets with more than an insignificant deterioration of credit since origination. The ASU also modifies the OTTI model for AFS debt securities to require an allowance for credit losses instead of a direct write-down. A reversal of the allowance for credit losses is allowed in future periods based on improvements in credit performance expectations. This ASU expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The new guidance also allows optional relief for certain instruments measured at amortized cost with an option to irrevocably elect the fair value option under ASC Topic 825, Financial Instruments. | The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2020 without electing the fair value option on eligible financial instruments under ASU 2019-05. The adoption of this ASU increased the allowance for loan losses by $125.2 million, and allowance for unfunded credit commitments by $10.5 million and an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the C&I and CRE loan portfolios. The Company did not record an allowance for credit losses related to the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with the incurred-loss methodology before CECL adoption. The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period. 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. | ||||||||
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | January 1, 2020 Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. | The ASU simplifies the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value and the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. This guidance should be applied prospectively. | The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements. | ||||||||
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | January 1, 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 Standards Update (“ASU”) 2016-05, Derivatives and Hedging (Topic 815):Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship provided that all other hedge accounting criteria in ASC 815 continue to be met. This clarification applies to both cash flows and fair value hedging relationships. The Company adopted this guidance prospectively in the first quarter of 2017. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.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 32 — Fair Value Measurement and Fair Value of Financial Instruments
Fair Value Determination
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value of financial instruments, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to 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 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 the inputs to the valuation methodology used for measurement are observable or unobservable, and the significance of those inputs in the fair valuationvalue 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 Valuation ProcessMeasured at Fair Value on a Recurring Basis
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017 and 2016:
| ($ in thousands) | Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of December 31, 2017 | |||||||||||||||
| Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 640,280 | $ | 640,280 | $ | — | $ | — | ||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 203,392 | — | 203,392 | — | ||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 318,957 | — | 318,957 | — | ||||||||||||
| Residential mortgage-backed securities | 1,190,271 | — | 1,190,271 | — | ||||||||||||
| Municipal securities | 99,982 | — | 99,982 | — | ||||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||
| Investment grade | 9,117 | — | 9,117 | — | ||||||||||||
| Corporate debt securities: | ||||||||||||||||
| Investment grade | 37,003 | — | 37,003 | — | ||||||||||||
| Foreign bonds: | ||||||||||||||||
| Investment grade | 486,408 | — | 486,408 | — | ||||||||||||
| Other securities | 31,342 | 20,735 | 10,607 | — | ||||||||||||
| Total available-for-sale investment securities | $ | 3,016,752 | $ | 661,015 | $ | 2,355,737 | $ | — | ||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate swaps and options | $ | 58,633 | $ | — | $ | 58,633 | $ | — | ||||||||
| Foreign exchange contracts | 5,840 | — | 5,840 | — | ||||||||||||
| Credit risk participation agreements (“RPAs”) | 1 | — | 1 | — | ||||||||||||
| Warrants | 1,672 | — | 993 | 679 | ||||||||||||
| Total derivative assets | $ | 66,146 | $ | — | $ | 65,467 | $ | 679 | ||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate swaps on certificates of deposit | $ | (6,799 | ) | $ | — | $ | (6,799 | ) | $ | — | ||||||
| Interest rate swaps and options | (57,958 | ) | — | (57,958 | ) | — | ||||||||||
| Foreign exchange contracts | (10,170 | ) | — | (10,170 | ) | — | ||||||||||
| RPAs | (8 | ) | — | (8 | ) | — | ||||||||||
| Total derivative liabilities | $ | (74,935 | ) | $ | — | $ | (74,935 | ) | $ | — | ||||||
| Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of December 31, 2016 | ||||||||||||||||
| ($ in thousands) | Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 720,479 | $ | 720,479 | $ | — | $ | — | ||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 274,866 | — | 274,866 | — | ||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 266,799 | — | 266,799 | — | ||||||||||||
| Residential mortgage-backed securities | 1,258,747 | — | 1,258,747 | — | ||||||||||||
| Municipal securities | 147,654 | — | 147,654 | — | ||||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||
| Investment grade | 11,477 | — | 11,477 | — | ||||||||||||
| Corporate debt securities: | ||||||||||||||||
| Investment grade | 222,377 | — | 222,377 | — | ||||||||||||
| Non-investment grade | 9,173 | — | 9,173 | — | ||||||||||||
| Foreign bonds: | ||||||||||||||||
| Investment grade | 383,894 | — | 383,894 | — | ||||||||||||
| Other securities | 40,329 | 30,991 | 9,338 | — | ||||||||||||
| Total available-for-sale investment securities | $ | 3,335,795 | $ | 751,470 | $ | 2,584,325 | $ | — | ||||||||
| Derivative assets: | ||||||||||||||||
| Foreign currency forward contracts | $ | 4,325 | $ | — | $ | 4,325 | $ | — | ||||||||
| Interest rate swaps and options | 67,578 | — | 67,578 | — | ||||||||||||
| Foreign exchange contracts | 11,874 | — | 11,874 | — | ||||||||||||
| RPAs | 3 | — | 3 | — | ||||||||||||
| Total derivative assets | $ | 83,780 | $ | — | $ | 83,780 | $ | — | ||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate swaps on certificates of deposit | $ | (5,976 | ) | $ | — | $ | (5,976 | ) | $ | — | ||||||
| Interest rate swaps and options | (65,131 | ) | — | (65,131 | ) | — | ||||||||||
| Foreign exchange contracts | (11,213 | ) | — | (11,213 | ) | — | ||||||||||
| RPAs | (3 | ) | — | (3 | ) | — | ||||||||||
| Total derivative liabilities | $ | (82,323 | ) | $ | — | $ | (82,323 | ) | $ | — | ||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||
| 2017 | 2015 | |||||||||||||||
| Other Securities | Warrants | Corporate Debt Securities: Non-Investment Grade | Embedded Derivative Liabilities | |||||||||||||
| Beginning balance | $ | — | $ | — | $ | 6,528 | $ | (3,392 | ) | |||||||
| Transfer of investment security from held-to-maturity to available-for-sale | 115,615 | — | — | — | ||||||||||||
| Total gains (losses) for the period: | ||||||||||||||||
Included in earnings (1) | 1,156 | — | 960 | (20 | ) | |||||||||||
Included in other comprehensive income (loss)(2) | — | — | 922 | — | ||||||||||||
| Issuances, sales and settlements: | ||||||||||||||||
| Issuances | — | 679 | — | — | ||||||||||||
| Sales | (116,771 | ) | — | (7,219 | ) | — | ||||||||||
| Settlements | — | — | (98 | ) | 3,412 | |||||||||||
| Transfers out of Level 3 | — | — | (1,093 | ) | — | |||||||||||
| Ending balance | $ | — | $ | 679 | $ | — | $ | — | ||||||||
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Weighted- Average | ||||||
| Derivative assets: | ||||||||||
| Warrants | $ | 679 | Black-Scholes option pricing model | Volatility | 44% | |||||
| Liquidity discount | 47% | |||||||||
| ($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2017 | |||||||||||||||
Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Non-PCI impaired loans: | ||||||||||||||||
| Commercial lending: | ||||||||||||||||
| C&I | $ | 31,404 | $ | — | $ | — | $ | 31,404 | ||||||||
| CRE | 2,667 | — | — | 2,667 | ||||||||||||
| Construction and land | 3,973 | — | — | 3,973 | ||||||||||||
| Consumer lending: | ||||||||||||||||
| Single-family residential | 144 | — | — | 144 | ||||||||||||
| HELOCs | — | — | — | — | ||||||||||||
| Total non-PCI impaired loans | $ | 38,188 | $ | — | $ | — | $ | 38,188 | ||||||||
| OREO | $ | 9 | $ | — | $ | — | $ | 9 | ||||||||
| ($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2016 | |||||||||||||||
Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Non-PCI impaired loans: | ||||||||||||||||
| Commercial lending: | ||||||||||||||||
| C&I | $ | 52,172 | $ | — | $ | — | $ | 52,172 | ||||||||
| CRE | 14,908 | — | — | 14,908 | ||||||||||||
| Consumer lending: | ||||||||||||||||
| Single-family residential | 2,464 | — | — | 2,464 | ||||||||||||
| HELOCs | 610 | — | — | 610 | ||||||||||||
| Total non-PCI impaired loans | $ | 70,154 | $ | — | $ | — | $ | 70,154 | ||||||||
| OREO | $ | 345 | $ | — | $ | — | $ | 345 | ||||||||
| Loans held-for-sale | $ | 22,703 | $ | — | $ | 22,703 | $ | — | ||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Non-PCI impaired loans: | ||||||||||||
| Commercial lending: | ||||||||||||
| C&I | $ | (19,703 | ) | $ | (27,106 | ) | $ | (5,612 | ) | |||
| CRE | (272 | ) | 1,084 | (2,629 | ) | |||||||
| Multifamily residential | — | — | (115 | ) | ||||||||
| Construction and land | (147 | ) | — | (118 | ) | |||||||
| Consumer lending: | ||||||||||||
| Single-family residential | (11 | ) | (224 | ) | (496 | ) | ||||||
| HELOCs | — | 34 | (59 | ) | ||||||||
| Other consumer | (2,491 | ) | — | — | ||||||||
| Total non-PCI impaired loans | $ | (22,624 | ) | $ | (26,212 | ) | $ | (9,029 | ) | |||
| OREO | $ | (1 | ) | $ | (23 | ) | $ | (233 | ) | |||
| Loans held-for-sale | $ | — | $ | (5,565 | ) | $ | (1,991 | ) | ||||
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique(s) | Unobservable Input(s) | Range of Input(s) | Weighted- Average | ||||||||
| December 31, 2017 | |||||||||||||
| Non-PCI impaired loans | $ | 22,802 | Discounted cash flows | Discount | 4% — 10% | 6 | % | ||||||
| $ | 9,773 | Fair value of property | Selling cost | 8% | 8 | % | |||||||
| $ | 3,207 | Fair value of collateral | Discount | 20% — 32% | 29 | % | |||||||
| $ | 2,406 | Fair value of collateral | Contract value | NM | NM | ||||||||
| OREO | $ | 9 | Fair value of property | Selling cost | 8% | 8 | % | ||||||
| December 31, 2016 | |||||||||||||
| Non-PCI impaired loans | $ | 31,835 | Discounted cash flows | Discount | 4% — 8% | 5 | % | ||||||
| $ | 14,941 | Fair value of property | Selling cost | 4% — 8% | 6 | % | |||||||
| $ | 18,417 | Fair value of collateral | Discount | 0% — 75% | 35 | % | |||||||
| $ | 4,961 | Fair value of collateral | Contract value | NM | NM | ||||||||
| OREO | $ | 345 | Fair value of property | Selling cost | 8% | 8 | % | ||||||
| ($ in thousands) | December 31, 2017 | |||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 2,174,592 | $ | 2,174,592 | $ | — | $ | — | $ | 2,174,592 | ||||||||||
| Interest-bearing deposits with banks | $ | 398,422 | $ | — | $ | 398,422 | $ | — | $ | 398,422 | ||||||||||
Resale agreements (1) | $ | 1,050,000 | $ | — | $ | 1,035,158 | $ | — | $ | 1,035,158 | ||||||||||
| Restricted equity securities | $ | 73,521 | $ | — | $ | 73,521 | $ | — | $ | 73,521 | ||||||||||
| Loans held-for-sale | $ | 85 | $ | — | $ | 85 | $ | — | $ | 85 | ||||||||||
| Loans held-for-investment, net | $ | 28,688,590 | $ | — | $ | — | $ | 28,956,349 | $ | 28,956,349 | ||||||||||
| Branch assets held-for-sale | $ | 91,318 | $ | 5,143 | $ | 10,970 | $ | 78,132 | $ | 94,245 | ||||||||||
| Accrued interest receivable | $ | 121,719 | $ | — | $ | 121,719 | $ | — | $ | 121,719 | ||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Customer deposits: | ||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 25,974,314 | $ | — | $ | 25,974,314 | $ | — | $ | 25,974,314 | ||||||||||
| Time deposits | $ | 5,640,749 | $ | — | $ | 5,626,855 | $ | — | $ | 5,626,855 | ||||||||||
| Branch liability held-for-sale | $ | 605,111 | $ | — | $ | — | $ | 643,937 | $ | 643,937 | ||||||||||
| FHLB advances | $ | 323,891 | $ | — | $ | 335,901 | $ | — | $ | 335,901 | ||||||||||
Repurchase agreements (1) | $ | 50,000 | $ | — | $ | 104,830 | $ | — | $ | 104,830 | ||||||||||
| Long-term debt | $ | 171,577 | $ | — | $ | 171,673 | $ | — | $ | 171,673 | ||||||||||
| Accrued interest payable | $ | 10,724 | $ | — | $ | 10,724 | $ | — | $ | 10,724 | ||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 1,878,503 | $ | 1,878,503 | $ | — | $ | — | $ | 1,878,503 | ||||||||||
| Interest-bearing deposits with banks | $ | 323,148 | $ | — | $ | 323,148 | $ | — | $ | 323,148 | ||||||||||
Resale agreements (1) | $ | 2,000,000 | $ | — | $ | 1,980,457 | $ | — | $ | 1,980,457 | ||||||||||
| Held-to-maturity investment security | $ | 143,971 | $ | — | $ | — | $ | 144,593 | $ | 144,593 | ||||||||||
| Restricted equity securities | $ | 72,775 | $ | — | $ | 72,775 | $ | — | $ | 72,775 | ||||||||||
| Loans held-for-sale | $ | 23,076 | $ | — | $ | 23,076 | $ | — | $ | 23,076 | ||||||||||
| Loans held-for-investment, net | $ | 25,242,619 | $ | — | $ | — | $ | 24,915,143 | $ | 24,915,143 | ||||||||||
| Accrued interest receivable | $ | 100,524 | $ | — | $ | 100,524 | $ | — | $ | 100,524 | ||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Customer deposits: | ||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 24,275,714 | $ | — | $ | 24,275,714 | $ | — | $ | 24,275,714 | ||||||||||
| Time deposits | $ | 5,615,269 | $ | — | $ | 5,611,746 | $ | — | $ | 5,611,746 | ||||||||||
| Short-term borrowings | $ | 60,050 | $ | — | $ | 60,050 | $ | — | $ | 60,050 | ||||||||||
| FHLB advances | $ | 321,643 | $ | — | $ | 334,859 | $ | — | $ | 334,859 | ||||||||||
Repurchase agreements (1) | $ | 350,000 | $ | — | $ | 411,368 | $ | — | $ | 411,368 | ||||||||||
| Long-term debt | $ | 186,327 | $ | — | $ | 186,670 | $ | — | $ | 186,670 | ||||||||||
| Accrued interest payable | $ | 9,440 | $ | — | $ | 9,440 | $ | — | $ | 9,440 | ||||||||||
Available-for-SaleInvestmentDebt Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investmentAFS debt securities, which are classified as Level 1. Level 1 available-for-sale investmentAFS debt securities are primarily comprised of U.S. Treasury securities. The fair value of other available-for-sale investmentAFS debt securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In obtaining such valuation information from third parties,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 reviewedvalidates the methodologiesvaluations 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 developascertain the resulting fair value. The available-for-sale investmentreliability 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, valued using such methodsthe Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. These valuations are based on observable inputs in the current marketplace and are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation technique are reviewed.
Interest Rate Swaps and OptionsContracts— The Company enters into interest rate swap and option contracts with institutional counterparties to hedge against interest rate swap and option products offered to bank customers. These products allowits borrowers to lock in attractive intermediate and long-term interest rates, by entering into an interest rate swap or option contract with the Company, resulting in the customer obtaining a synthetic fixedfixed-rate loan. To economically hedge against the interest rate loan.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. This product allows the Company to lock in attractive floatingcertain variable interest rate funding.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 variable cash receipts (or payments) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. The fair value of the interest rate options, consistingwhich 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 fellfall below (rise above) the strike rate of the floors (caps). The variable interest rates used in the calculation of projected receipts on the floors (caps) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. 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, model-derived credit spreads.inputs. As of December 31, 2017,2020 and 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 of the fair value hierarchy due to the observable nature of the significant inputs utilized.
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Foreign Exchange Contracts— The Company enters into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates inaccommodate the future. These contracts economically hedge againstbusiness needs of its customers. For a majority of the foreign exchange rate fluctuations.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 enters into contracts with institutional counterparties to hedge againstutilizes foreign exchange products offeredcontracts that are not designated as hedging instruments to bankmitigate 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. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company assumes minimal foreign exchange rate risk because the contracts with the customer and the institutional party mirror each other. 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. Valuation depends on the type of derivative, and the nature of the underlying rate and contractual terms including period of maturity, price and index upon which the derivative’s value is based. Key inputs include foreign exchange rates (spot and/or forward rates), volatility of currencies and the correlation of such inputs. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts are classified as Level 2. As of December 31, 2017,2020 and 2019, the Bank held foreign exchangecurrency non-deliverable forward contracts used to economically hedge the Company’sits net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. Dollarnon-USD functional currency subsidiary in China,China. These foreign currency non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are includedused to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in this caption. See Foreign Currency Forwardderiving the estimated fair value, these instruments are classified as Level 2.
Credit Contracts in the section below for details on valuation methodologies and significant assumptions.
Equity Contracts — As part of the fair value hierarchy.
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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.
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| ($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2019 | |||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 176,422 | $ | 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.
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For the years ended December 31, 2015,2020, 2019 and 2018, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the Company began entering into foreign currency forwardbeginning 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 to hedge its net investmentare included in its China subsidiary, East West Bank (China) Limited. Previously, Lending fees on the foreign currency forward contracts were eligible for hedge accounting. Consolidated Statement of Income.
(2)During the year ended December 31, 2017,2020, the foreign currency forwardCompany transferred $8.4 million of equity contracts were dedesignated whenmeasured on a recurring basis out of Level 3 into Level 2 after the hedge relationship ceased to be highly effective. The Company continues to economically hedge its foreign currency exposure resulting from East West Bank (China) Limited and the foreign currency forward contracts are included as partcorresponding issuer of the Foreign Exchange Contracts captionequity warrant, which was previously a private company, completed its initial public offering and became a public company.
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of December 31, 2017.2020 and 2019, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||||||||||||||||||||||
| 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% | ||||||||||||||||||||||||||||||
(1)Weighted-average is calculated based on fair value of equity warrants as of December 31, 2020 and 2019, respectively.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain individually evaluated loans held-for-investment, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain individually 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.
Individually Evaluated Loans Held-For-Investment — Individually evaluated loans held-for-investment are classified as Level 3 assets. The following two methods are used to derive the fair value of individually evaluated loans held-for-investment:
•Discounted cash flow valuation techniques that consist of developing an expected stream of cash flows over the life of the loans, and then calculating the present value of the loans by discounting the expected cash flows at a designated discount rate.
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•When an individually evaluated loan is collateral-dependent, the fair value of the loan is determined based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of foreign currency forward contractsthe underlying collateral is valuedgenerally based on third-party appraisals or an internal valuation, if a third-party appraisal is not required by comparingregulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of its monitoring process, the contracted foreign exchange rateCompany conducts ongoing due diligence on its investments in qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the current market foreign exchange rate. Inputs include spot rates, forward ratesplaced-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 investment entity, the annual review of the financial statements of the guarantor (if any), the review of the annual tax returns of the investment entity, and the interest rate curvescomparison of the domesticactual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit and foreign currency. Interest rate forward curvesother investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the investments may not be realizable. These circumstances can include, but are used to determine which forward rate pertains to a specific maturity. Duenot limited to the observable naturefollowing factors:
•The expected future cash flows is less than the carrying amount of the inputs usedinvestment;
•Changes in deriving the economic, market or technological environment that could adversely affect the investee’s operations; and
•Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.
All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value these instrumentsless 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 2.3.
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, 2020 and 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
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 and 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 | ||||||||||||||
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, 2020 and 2019:
| ($ in thousands) | Fair Value Measurements (Level 3) | Valuation Techniques | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| 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% | |||||||||||||||||||||||||||
| Investments in tax credit and other investments, net | $ | 3,140 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||||||||||||||||||||||
| OREO | $ | 15,824 | Fair value of property | Selling cost | 8% | 8% | ||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Loans held-for-investment | $ | 27,841 | Discounted cash flows | Discount | 4% — 15% | 14% | ||||||||||||||||||||||||||
| $ | 1,014 | Fair value of collateral | Discount | 8% — 20% | 19% | |||||||||||||||||||||||||||
| $ | 20,824 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||
| 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% | ||||||||||||||||||||||||||
| Other nonperforming assets | $ | 1,167 | Fair value of collateral | Contract value | NM | NM | ||||||||||||||||||||||||||
NM —Not 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 presented herein are based on pertinent information available to managementfor financial instruments as of each reporting date. Although the Company is not aware of any factors that would significantly affect the estimatedDecember 31, 2020 and 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 such amounts have not been comprehensively revaluedin the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for purposesaccrued 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 | |||||||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3,261,149 | $ | 3,261,149 | $ | 0 | $ | 0 | $ | 3,261,149 | ||||||||||||||||||||||
| Interest-bearing deposits with banks | $ | 196,161 | $ | 0 | $ | 196,161 | $ | 0 | $ | 196,161 | ||||||||||||||||||||||
Resale agreements (1) | $ | 860,000 | $ | 0 | $ | 856,025 | $ | 0 | $ | 856,025 | ||||||||||||||||||||||
| Restricted equity securities, at cost | $ | 78,580 | $ | 0 | $ | 78,580 | $ | 0 | $ | 78,580 | ||||||||||||||||||||||
| Loans held-for-sale | $ | 434 | $ | 0 | $ | 434 | $ | 0 | $ | 434 | ||||||||||||||||||||||
| Loans held-for-investment, net | $ | 34,420,252 | $ | 0 | $ | 0 | $ | 35,021,300 | $ | 35,021,300 | ||||||||||||||||||||||
| Mortgage servicing rights | $ | 6,068 | $ | 0 | $ | 0 | $ | 8,199 | $ | 8,199 | ||||||||||||||||||||||
| Accrued interest receivable | $ | 144,599 | $ | 0 | $ | 144,599 | $ | 0 | $ | 144,599 | ||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||||||
| Demand, checking, savings and money market deposits | $ | 27,109,951 | $ | 0 | $ | 27,109,951 | $ | 0 | $ | 27,109,951 | ||||||||||||||||||||||
| Time deposits | $ | 10,214,308 | $ | 0 | $ | 10,208,895 | $ | 0 | $ | 10,208,895 | ||||||||||||||||||||||
| Short-term borrowings | $ | 28,669 | $ | 0 | $ | 28,669 | $ | 0 | $ | 28,669 | ||||||||||||||||||||||
| FHLB advances | $ | 745,915 | $ | 0 | $ | 755,371 | $ | 0 | $ | 755,371 | ||||||||||||||||||||||
Repurchase agreements (1) | $ | 200,000 | $ | 0 | $ | 232,597 | $ | 0 | $ | 232,597 | ||||||||||||||||||||||
| Long-term debt | $ | 147,101 | $ | 0 | $ | 152,641 | $ | 0 | $ | 152,641 | ||||||||||||||||||||||
| 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 these Consolidated Financial Statements since that date, and therefore, current estimatesDecember 31, 2020, NaN of fair value may differ significantly from the amounts presented herein.$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.
Note 43 — SecuritiesAssets Purchased under Resale Agreements and Sold under Repurchase Agreements
Assets Purchased under Resale Agreements
Securities Purchased under Resale Agreements — Total securities purchased under resale agreements were $1.45$1.16 billion and $2.10$1.11 billion as of December 31, 20172020 and 2016,2019, respectively. The weighted-average yields were 1.94%, 2.66% and 2.63% for the years ended December 31, 2020, 2019 and 2018, 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, 2020, the collateral for the repurchase agreements were comprised of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and U.S. Treasury securities. Gross repurchase agreements were $300.0 million and $450.0 million as of December 31, 2020 and 2019, respectively. The weighted-average interest rates were 2.43%3.25%, 4.74% and 1.84% as of December 31, 2017 and 2016, respectively. As of December 31, 2017, total gross resale agreements that are maturing in the next five years are as follows: 2018 — $450.0 million; 2019 — $0.0 million; 2020 — $100.0 million; 2021 — $0.0 million; 2022 — $250.0 million; and thereafter — $650.0 million.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that, provide the Company, in the event of default by the counterparty, provide the Company the right to liquidate securitiesassets held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11.210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral acceptedreceived includes securitiesassets that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securitiesassets that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral acceptedreceived or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, butand is usually delivered to and held by the third partythird-party trustees. The collateral amounts received/postedpledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of December 31, 20172020 and 2016:2019:
| ($ 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 | |||||||||||||||||||||
122
| ($ in thousands) | As of December 31, 2017 | ($ 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 | 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 | |||||||||||||||||||||||||||||||||||||||||||||
| Financial Instruments | Collateral Received | Collateral Received | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Resale agreements | $ | 1,450,000 | $ | (400,000 | ) | $ | 1,050,000 | $ | — | $ | (1,045,696 | ) | (2) | $ | 4,304 | 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 | 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 | |||||||||||||||||||||||||||||||||||||||||||||
| Financial Instruments | Collateral Pledged | Collateral Pledged | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase agreements | $ | 450,000 | $ | (400,000 | ) | $ | 50,000 | $ | — | $ | (50,000 | ) | (3) | $ | — | 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.
| ($ In thousands) | As of December 31, 2016 | |||||||||||||||||||||||
| 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 | |||||||||||||||||||
| Financial Instruments | Collateral Received | |||||||||||||||||||||||
| Resale agreements | $ | 2,100,000 | $ | (100,000 | ) | $ | 2,000,000 | $ | (150,000 | ) | (1) | $ | (1,839,120 | ) | (2) | $ | 10,880 | |||||||
| 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 | |||||||||||||||||||
| Financial Instruments | Collateral Pledged | |||||||||||||||||||||||
| Repurchase agreements | $ | 450,000 | $ | (100,000 | ) | $ | 350,000 | $ | (150,000 | ) | (1) | $ | (200,000 | ) | (3) | $ | — | |||||||
(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, referderivatives. Refer to Note 6 5 — 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 available-for-sale investmentAFS debt securities which are carried at fair value, and the held-to-maturity investment security, which is carried at amortized cost, as of December 31, 20172020 and 2016:2019:
| ($ 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) | As of December 31, 2017 | |||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 651,395 | $ | — | $ | (11,115 | ) | $ | 640,280 | |||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 206,815 | 62 | (3,485 | ) | 203,392 | |||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 328,348 | 141 | (9,532 | ) | 318,957 | |||||||||||
| Residential mortgage-backed securities | 1,199,869 | 3,964 | (13,562 | ) | 1,190,271 | |||||||||||
| Municipal securities | 99,636 | 655 | (309 | ) | 99,982 | |||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||
Investment grade (1) | 9,136 | 3 | (22 | ) | 9,117 | |||||||||||
| Corporate debt securities: | ||||||||||||||||
Investment grade (1) | 37,585 | 164 | (746 | ) | 37,003 | |||||||||||
| Foreign bonds: | ||||||||||||||||
Investment grade (1) (2) | 505,396 | 24 | (19,012 | ) | 486,408 | |||||||||||
| Other securities | 31,887 | — | (545 | ) | 31,342 | |||||||||||
| Total available-for-sale investment securities | 3,070,067 | 5,013 | (58,328 | ) | 3,016,752 | |||||||||||
| Held-to-maturity investment security: | ||||||||||||||||
| Non-agency commercial mortgage-backed security | — | — | — | — | ||||||||||||
| Total investment securities | $ | 3,070,067 | $ | 5,013 | $ | (58,328 | ) | $ | 3,016,752 | |||||||
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||
| 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: | ||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
| Municipal securities | 101,621 | 790 | (109) | 102,302 | ||||||||||||||||||||||
| Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 86,609 | 1,947 | (6) | 88,550 | ||||||||||||||||||||||
| Residential mortgage-backed securities | 46,830 | 3 | (285) | 46,548 | ||||||||||||||||||||||
| Corporate debt securities | 11,250 | 12 | (113) | 11,149 | ||||||||||||||||||||||
| Foreign government bonds | 354,481 | 198 | (507) | 354,172 | ||||||||||||||||||||||
| Asset-backed securities | 66,106 | 0 | (1,354) | 64,752 | ||||||||||||||||||||||
| CLOs | 294,000 | 0 | (9,294) | 284,706 | ||||||||||||||||||||||
| Total AFS debt securities | $ | 3,320,648 | $ | 19,805 | $ | (23,239) | $ | 3,317,214 | ||||||||||||||||||
| ($ in thousands) | As of December 31, 2016 | |||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U.S. Treasury securities | $ | 730,287 | $ | 21 | $ | (9,829 | ) | $ | 720,479 | |||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 277,891 | 224 | (3,249 | ) | 274,866 | |||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
| Commercial mortgage-backed securities | 272,672 | 345 | (6,218 | ) | 266,799 | |||||||||||
| Residential mortgage-backed securities | 1,266,372 | 3,924 | (11,549 | ) | 1,258,747 | |||||||||||
| Municipal securities | 148,302 | 1,252 | (1,900 | ) | 147,654 | |||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||
Investment grade (1) | 11,592 | — | (115 | ) | 11,477 | |||||||||||
| Corporate debt securities: | ||||||||||||||||
Investment grade (1) | 222,190 | 562 | (375 | ) | 222,377 | |||||||||||
Non-investment grade (1) | 10,191 | — | (1,018 | ) | 9,173 | |||||||||||
| Foreign bonds: | ||||||||||||||||
Investment grade (1) (2) | 405,443 | 30 | (21,579 | ) | 383,894 | |||||||||||
| Other securities | 40,501 | 337 | (509 | ) | 40,329 | |||||||||||
| Total available-for-sale investment securities | 3,385,441 | 6,695 | (56,341 | ) | 3,335,795 | |||||||||||
| Held-to-maturity investment security: | ||||||||||||||||
| Non-agency commercial mortgage-backed security | 143,971 | 622 | — | 144,593 | ||||||||||||
| Total investment securities | $ | 3,529,412 | $ | 7,317 | $ | (56,341 | ) | $ | 3,480,388 | |||||||
As of December 31, 2020 and 2019, the amortized cost of AFS debt securities excluded accrued interest receivables of $22.3 million and $11.1 million, respectively, which are included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in this Form 10-K.
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses and related fair value of the Company’s investment portfolio,AFS debt securities, aggregated by investment category and the length of time that individual security hasthe securities have been in a continuous unrealized loss position, as of December 31, 20172020 and 2016:2019:
| ($ 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) | ||||||||||||||||||||||||||
| ($ in thousands) | As of December 31, 2017 | |||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | 168,061 | $ | (1,005 | ) | $ | 472,219 | $ | (10,110 | ) | $ | 640,280 | $ | (11,115 | ) | |||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 99,935 | (623 | ) | 85,281 | (2,862 | ) | 185,216 | (3,485 | ) | |||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
| Commercial mortgage-backed securities | 113,775 | (2,071 | ) | 191,827 | (7,461 | ) | 305,602 | (9,532 | ) | |||||||||||||||
| Residential mortgage-backed securities | 413,621 | (4,205 | ) | 361,809 | (9,357 | ) | 775,430 | (13,562 | ) | |||||||||||||||
| Municipal securities | 8,490 | (123 | ) | 8,588 | (186 | ) | 17,078 | (309 | ) | |||||||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||||||||||
| Investment grade | 4,599 | (22 | ) | — | — | 4,599 | (22 | ) | ||||||||||||||||
| Corporate debt securities: | ||||||||||||||||||||||||
| Investment grade | — | — | 11,905 | (746 | ) | 11,905 | (746 | ) | ||||||||||||||||
| Foreign bonds: | ||||||||||||||||||||||||
| Investment grade | 103,149 | (1,325 | ) | 352,239 | (17,687 | ) | 455,388 | (19,012 | ) | |||||||||||||||
| Other securities | 31,215 | (545 | ) | — | — | 31,215 | (545 | ) | ||||||||||||||||
| Total available-for-sale investment securities | 942,845 | (9,919 | ) | 1,483,868 | (48,409 | ) | 2,426,713 | (58,328 | ) | |||||||||||||||
| Held-to-maturity investment security: | ||||||||||||||||||||||||
| Non-agency commercial mortgage-backed security | — | — | — | — | — | — | ||||||||||||||||||
| Total investment securities | $ | 942,845 | $ | (9,919 | ) | $ | 1,483,868 | $ | (48,409 | ) | $ | 2,426,713 | $ | (58,328 | ) | |||||||||
124
| ($ in thousands) | As of December 31, 2016 | |||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | 670,268 | $ | (9,829 | ) | $ | — | $ | — | $ | 670,268 | $ | (9,829 | ) | ||||||||||
| U.S. government agency and U.S. government sponsored enterprise debt securities | 203,901 | (3,249 | ) | — | — | 203,901 | (3,249 | ) | ||||||||||||||||
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
| Commercial mortgage-backed securities | 202,106 | (5,452 | ) | 29,201 | (766 | ) | 231,307 | (6,218 | ) | |||||||||||||||
| Residential mortgage-backed securities | 629,324 | (9,594 | ) | 119,603 | (1,955 | ) | 748,927 | (11,549 | ) | |||||||||||||||
| Municipal securities | 57,655 | (1,699 | ) | 2,692 | (201 | ) | 60,347 | (1,900 | ) | |||||||||||||||
| Non-agency residential mortgage-backed securities: | ||||||||||||||||||||||||
| Investment grade | 5,033 | (101 | ) | 6,444 | (14 | ) | 11,477 | (115 | ) | |||||||||||||||
| Corporate debt securities: | ||||||||||||||||||||||||
| Investment grade | — | — | 71,667 | (375 | ) | 71,667 | (375 | ) | ||||||||||||||||
| Non-investment grade | — | — | 9,173 | (1,018 | ) | 9,173 | (1,018 | ) | ||||||||||||||||
| Foreign bonds: | ||||||||||||||||||||||||
| Investment grade | 363,618 | (21,327 | ) | 14,258 | (252 | ) | 377,876 | (21,579 | ) | |||||||||||||||
| Other securities | 30,991 | (509 | ) | — | — | 30,991 | (509 | ) | ||||||||||||||||
| Total available-for-sale investment securities | 2,162,896 | (51,760 | ) | 253,038 | (4,581 | ) | 2,415,934 | (56,341 | ) | |||||||||||||||
| Held-to-maturity investment security: | ||||||||||||||||||||||||
| Non-agency commercial mortgage-backed security | — | — | — | — | — | — | ||||||||||||||||||
| Total investment securities | $ | 2,162,896 | $ | (51,760 | ) | $ | 253,038 | $ | (4,581 | ) | $ | 2,415,934 | $ | (56,341 | ) | |||||||||
| ($ 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 examines all individual securitiesassesses each 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.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 yield curve movements and widened spreads. Securities that were in unrealized 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 interest 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 additionspreads. 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 widened liquiditybe 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 spreads.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 as market interest rates have fluctuated. The Company believes that the gross unrealized losses detailed in the previous tables are temporary and not due to reasons of credit quality. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, no impairment lossthere was recorded on0 allowance for credit losses as of December 31, 2020 against these securities, and there was 0 provision for credit losses recognized for the Company’s Consolidated Statement of Income for each ofyear ended December 31, 2020. For the years ended December 31, 2017, 20162019 and 2015. As of December 31, 2017, the Company had 165 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily comprised of 98 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 25 U.S. Treasury securities and 16 investment grade foreign bonds. In comparison, as of December 31, 2016, the Company had 170 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily comprised of 82 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 26 U.S. Treasury securities and 13 investment grade foreign bonds.
| Year Ended December 31, | ||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||
| Beginning balance | $ | — | $ | — | $ | 112,338 | ||||||
| Reduction for securities sold | — | — | (112,338 | ) | ||||||||
| Ending balance | $ | — | $ | — | $ | — | ||||||
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and losses, and tax expense related to the sales of available-for-sale investmentAFS debt securities for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ 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 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||
| Proceeds from sales | $ | 832,844 | $ | 1,275,645 | $ | 1,669,334 | ||||||
| Gross realized gains | $ | 8,037 | $ | 10,487 | $ | 40,367 | ||||||
| Gross realized losses | $ | — | $ | 125 | $ | — | ||||||
| Related tax expense | $ | 3,380 | $ | 4,357 | $ | 16,974 | ||||||
The following table presents the scheduledcontractual maturities of available-for-sale investmentAFS debt securities as of December 31, 2017:
| ($ in thousands) | Amortized Cost | Fair Value | ||||||
| Due within one year | $ | 602,560 | $ | 583,126 | ||||
| Due after one year through five years | 772,349 | 759,970 | ||||||
| Due after five years through ten years | 220,298 | 216,390 | ||||||
| Due after ten years | 1,474,860 | 1,457,266 | ||||||
| Total available-for-sale investment securities | $ | 3,070,067 | $ | 3,016,752 | ||||
| ($ 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 interest rates may affect the yields on the carrying values of mortgage-backed securities.
Restricted Equity Securities
| ($ 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 | ||||||||||
126
| December 31, | ||||||||
| ($ in thousands) | 2017 | 2016 | ||||||
| Federal Reserve Bank stock | $ | 56,271 | $ | 55,525 | ||||
| FHLB stock | 17,250 | 17,250 | ||||||
| Total | $ | 73,521 | $ | 72,775 | ||||
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.Statements in this Form 10-K.
The following table presents the total notional amounts and gross fair valuevalues of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of December 31, 20172020 and 2016:2019. 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, 2020 and 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 | ||||||||||||||||||||||||||||||
(1)The Company held equity contracts in 2 public companies and 17 private companies as of December 31, 2020. In comparison, the Company held equity contracts in 3 public companies and 18 private companies as of December 31, 2019.
(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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| ($ in thousands) | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||
Derivative Assets (1) | Derivative Liabilities (1) | Derivative Assets (1) | Derivative Liabilities (1) | |||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||
| Interest rate swaps on certificates of deposit | $ | 35,811 | $ | — | $ | 6,799 | $ | 48,365 | $ | — | $ | 5,976 | ||||||||||||
| Foreign currency forward contracts | — | — | — | 83,026 | 4,325 | — | ||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 35,811 | $ | — | $ | 6,799 | $ | 131,391 | $ | 4,325 | $ | 5,976 | ||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
| Interest rate swaps and options | $ | 9,333,860 | $ | 58,633 | $ | 57,958 | $ | 7,668,482 | $ | 67,578 | $ | 65,131 | ||||||||||||
| Foreign exchange contracts | 770,215 | 5,840 | 10,170 | 767,764 | 11,874 | 11,213 | ||||||||||||||||||
| RPAs | 49,033 | 1 | 8 | 71,414 | 3 | 3 | ||||||||||||||||||
| Warrants | — | (2) | 1,672 | — | — | — | — | |||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | 10,153,108 | $ | 66,146 | $ | 68,136 | $ | 8,507,660 | $ | 79,455 | $ | 76,347 | ||||||||||||
Derivatives Designated as Hedging Instruments
The following table presents the net gains (losses) gains recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ 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, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Losses) gains recorded in interest expense: | ||||||||||||
| Recognized on interest rate swaps | $ | (2,734 | ) | $ | (794 | ) | $ | 3,452 | ||||
| Recognized on certificates of deposit | $ | 2,271 | $ | 157 | $ | (3,190 | ) | |||||
As of December 31, 2020, there was no fair value hedge or hedged certificates of deposit outstanding. 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, 2017, 2016,2020, 2019 and 2015,2018. The after-tax impact of cash flow hedges on AOCI is shown in Note 14 — Accumulated Other Comprehensive Income (Loss) to the Company also recognized net reductions to interest expense of $1.0 million, $3.0 million, and $3.6 million, respectively, primarily related to net settlements ofConsolidated Financial Statements in the derivatives.Form-10-K.
| ($ 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 | ||||||||||||||
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. During the fourth quarter of 2015, theThe Company began enteringenters into foreign currency forward contracts to hedge itsa portion of the 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 China,East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate.rate of the RMB. The Company recorded the changes in the carrying amount of its China subsidiary in the Foreign currency translation adjustment account within AOCI. Simultaneously, the effective portion of the hedge of this exposure was also recorded in the Foreign currency translation adjustment account and the ineffective portion, if any, was recorded in current earnings. During the first quarter of 2017, the Company discontinued hedge accounting prospectively. The cumulative effective portion ofmay de-designate the net investment hedges recorded throughwhen the pointCompany expects the hedge will cease to be highly effective. The notional and fair value amounts of dedesignation remained in theForeign currency translation adjustment account within AOCI, and will be reclassified into earnings only upon the sale or liquidation of the China subsidiary. The Company continues to economically hedge its foreign currency exposure in its China subsidiary through foreign exchange forward contracts which were included as part of the Derivatives Not Designated as Hedging Instruments — Foreign Exchange Contracts caption$84.3 million and $235 thousand liability, respectively, as of December 31, 2017.
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The following table presents the after-tax (losses) gains recordedrecognized in the Foreign currency translation adjustment account within AOCI related to the effective portion of theon net investment hedges and the ineffective portion recorded on the Consolidated Statement of Income for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ 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, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Losses) gains recognized in AOCI on net investment hedges (effective portion) | $ | (648 | ) | $ | 2,908 | $ | 1,485 | |||||
| (Losses) gains recognized in foreign exchange income (ineffective portion) | $ | (1,953 | ) | $ | 1,124 | $ | 880 | |||||
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps and Options Contracts —The Company enters into interest rate derivatives includingcontracts, which include interest rate swaps and options with its customers to allow themcustomers 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 institutional counterparties. Asthird-party financial institutions, including central clearing organizations.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of December 31, 2017,2020 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 amountsamount 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 and options, including mirroredthat cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions with institutional counterparties and the Company’s customers, totaled $4.69 billion for derivatives that were in an asset valuation position and $4.65 billion for derivatives that wereresulted in a reduction in derivative asset fair values of $1.3 million and liability valuation position. Asfair values of $187.4 million, as of December 31, 2016,2020. In comparison, included in the total notional amountsamount of $7.75 billion of interest rate contracts entered into with financial counterparties as of December 31, 2019, was a notional amount of $2.53 billion of interest rate swaps and options, including mirroredthat cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions with institutional counterparties and the Company’s customers, totaled $3.86 billion for derivatives that were in an asset valuation position and $3.81 billion for derivatives that wereresulted in a reduction in derivative asset fair values of $2.9 million and liability valuation position. The fair valuevalues of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $58.6$75.1 million, asset and a $58.0 million liability as of December 31, 2017. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $67.6 million asset and a $65.1 million liability as of December 31, 2016.2019.
Foreign Exchange Contracts— The Company enters into foreign exchange contracts with its customers, primarily comprisedconsisting of forward,forwards, spot, swap and spotoption contracts to enableaccommodate the business needs of its customers to hedge their transactions in foreign currencies against fluctuations in foreign exchange rates, and also to allow the Company to economically hedge against foreign currency fluctuations in certain foreign currency denominated deposits that it offers to its customers, as well as the Company’s investment in its China subsidiary, East West Bank (China) Limited. For a majority of the foreign exchange transactions entered with its customers, thecustomers. The Company enters into offsetting foreign exchange contracts with institutionalthird-party financial institutions 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 exchange risk.currency-denominated on-balance sheet assets and liabilities, primarily for foreign currency-denominated deposits offered to its customers. A majority of thesethe foreign exchange contracts havehad original maturities of one year or less. Asless as of both December 31, 20172020 and 2016,2019.
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The following tables present the total notional amounts and the gross fair values of the foreign exchange derivative contracts were $770.2 million and $767.8 million, respectively. The fair value of the foreign exchange contracts recorded was a $5.8 million asset and a $10.2 million liabilityoutstanding as of December 31, 2017. The fair value of the foreign exchange contracts recorded was an $11.9 million asset2020 and an $11.2 million liability as of December 31, 2016.2019:
| ($ 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 | |||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | Financial Counterparty | |||||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | ($ in thousands) | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||
| Written options | 87,036 | 127 | 0 | Purchased options | 87,036 | 0 | 127 | |||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||
Credit Risk Participation Agreements Contracts — The Company has enteredmay periodically enter into RPAs under which the Company assumed its pro-rata share ofRPA contracts with institutional counterparties to manage the credit exposure on interest rate contracts associated with the borrower’s performance related to interest rate derivative contracts.syndicated loans. The Company may enter into protection sold or may not be a party toprotection purchased RPAs. Under the interest rate derivative contract and enters into such RPAs, in instances where the Company iswill receive or make a party to the related loan participation agreement with the borrower. The Company will make or receive payments under the RPAspayment if thea borrower defaults on its obligation to perform under the related interest rate derivative contract. The Company manages its creditCredit risk on the RPAs is managed by monitoring the credit 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, 2020 and 2019. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. AsThe following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of December 31, 2017, the notional amount2020 and fair value of the RPAs purchased were $35.2 million and an $8 thousand liability, respectively. As of December 31, 2017, the notional amount and fair value of the RPAs sold were $13.8 million and a $1 thousand asset, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs purchased were $48.3 million and a $3 thousand liability, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs sold were $23.1 million and a $3 thousand asset, respectively. 2019:
| ($ 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 | ||||||||||||||||||||||||||
Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of December 31, 20172020 and 2016,2019, the exposuresexposure from the RPAs purchasedwith protections sold would be $419$662 thousand and $179$125 thousand for 2020 and 2019, respectively. As of December 31, 20172020 and 2016,2019, the weighted-average remaining maturities of the outstanding RPAs were 6.03.7 years and 3.72.2 years, respectively.
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The following tables present the notional amounts and paid interest based on the performancefair values of the RMB relativecommodity derivative positions outstanding as of December 31, 2020 and 2019.
| ($ and units in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collars | 2,022 | Barrels | $ | 2,344 | $ | 2,193 | Collars | 2,022 | Barrels | $ | 2,217 | $ | 2,402 | |||||||||||||||||||||||||||||||||||||||||||
| Swaps | 4,299 | Barrels | 9,282 | 14,283 | Swaps | 4,299 | Barrels | 8,220 | 7,135 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 6,321 | $ | 11,626 | $ | 16,476 | Total | 6,321 | $ | 10,437 | $ | 9,537 | |||||||||||||||||||||||||||||||||||||||||||||
| Natural gas: | Natural gas: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Written options | 597 | MMBTUs | $ | 0 | $ | 59 | Purchased options | 597 | MMBTUs | $ | 59 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Collars | 12,733 | MMBTUs | 1,063 | 205 | Collars | 16,293 | MMBTUs | 205 | 813 | |||||||||||||||||||||||||||||||||||||||||||||||
| Swaps | 96,305 | MMBTUs | 32,073 | 27,238 | Swaps | 103,973 | MMBTUs | 26,988 | 29,837 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 109,635 | $ | 33,136 | $ | 27,502 | Total | 120,863 | $ | 27,252 | $ | 30,650 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 44,762 | $ | 43,978 | Total | $ | 37,689 | $ | 40,187 | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ and units in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Written options | 36 | Barrels | $ | 0 | $ | 30 | Purchased options | 36 | Barrels | $ | 29 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Collars | 3,174 | Barrels | 2,673 | 538 | Collars | 3,630 | Barrels | 677 | 2,815 | |||||||||||||||||||||||||||||||||||||||||||||||
| Swaps | 4,601 | Barrels | 6,949 | 5,531 | Swaps | 4,721 | Barrels | 4,516 | 5,215 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 7,811 | $ | 9,622 | $ | 6,099 | Total | 8,387 | $ | 5,222 | $ | 8,030 | |||||||||||||||||||||||||||||||||||||||||||||
| Natural gas: | Natural gas: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Written options | 540 | MMBTUs | $ | 0 | $ | 22 | Purchased options | 530 | MMBTUs | $ | 21 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Collars | 14,277 | MMBTUs | 186 | 522 | Collars | 14,517 | MMBTUs | 471 | 150 | |||||||||||||||||||||||||||||||||||||||||||||||
| Swaps | 48,956 | MMBTUs | 30,257 | 35,497 | Swaps | 48,779 | MMBTUs | 35,601 | 30,197 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 63,773 | $ | 30,443 | $ | 36,041 | Total | 63,826 | $ | 36,093 | $ | 30,347 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 40,065 | $ | 42,140 | Total | $ | 41,315 | $ | 38,377 | |||||||||||||||||||||||||||||||||||||||||||||||
Beginning in January 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments made to and received from CME as settlements of derivatives and not as collateral against derivatives. As of December 31, 2020, the notional quantities that cleared through CME totaled 1,275 thousand barrels of crude oil and 29,733 thousand MMBTUs of natural gas. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in reductions to the USD. Under ASC 815,gross derivative asset fair value of $7.9 million and to the liability fair value of $3.7 million as of December 31, 2020, to a certificatenet fair value of deposit0. In comparison, the notional quantities that pays interest based on changescleared through CME totaled 1,752 thousand barrels of crude oil and 6,075 thousand MMBTUs of natural gas as of December 31, 2019. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in foreign exchange rates is a hybrid instrument with an embeddedreduction to the gross derivative that must be accounted for separately fromasset fair value of $2.9 million and to the host contract (i.e., certificatesliability fair value of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are recorded at$1.5 million, respectively, as of December 31, 2019, to a net asset fair value. These instruments expired in the second quartervalue of 2015.$986 thousand.
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The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Classification on Consolidated Statement of Income | Year Ended December 31, | ||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Interest rate contracts | Interest rate contracts and other derivative income | $ | (8,637) | $ | (2,126) | $ | 280 | |||||||||||||||||||
| Foreign exchange contracts | Foreign exchange income | 23,215 | 22,264 | 16,784 | ||||||||||||||||||||||
| Credit contracts | Interest rate contracts and other derivative income | (5) | 59 | (156) | ||||||||||||||||||||||
| Equity contracts | Lending fees | 11,025 | 678 | 512 | ||||||||||||||||||||||
| Commodity contracts | Interest rate contracts and other derivative income | (35) | (67) | (11) | ||||||||||||||||||||||
| Net gains | $ | 25,563 | $ | 20,808 | $ | 17,409 | ||||||||||||||||||||
| ($ in thousands) | Location in Consolidated Statement of Income | Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||
| Interest rate swaps and options | Derivative fees and other income | $ | (1,772 | ) | $ | 2,557 | $ | 65 | ||||||
| Foreign exchange contracts | Foreign exchange income | 22,076 | 12,632 | 4,235 | ||||||||||
| Foreign exchange options | Foreign exchange income | — | — | 236 | ||||||||||
| RPAs | Derivative fees and other income | (7 | ) | — | — | |||||||||
| Warrants | Ancillary loan fees and other income | 1,672 | — | — | ||||||||||
| Embedded derivative liabilities | Other operating expense | — | — | (136 | ) | |||||||||
| Total net gains | $ | 21,969 | $ | 15,189 | $ | 4,400 | ||||||||
Credit-Risk-Related Contingent Features— Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit-risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. As of December 31, 2017 and 2016,2020, the aggregate fair value amounts of all derivative instruments with such credit-risk-relatedcredit risk-related contingent features that arewere in a net liability position totaled $107.4 million, in which $106.8 million of collateral was $6.3posted to cover these positions. As of December 31, 2019, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that were in a net liability position totaled $56.4 million, and $7.1in which $56.4 million respectively, withof collateral was posted of $6.2 million and $9.1 million, respectively.to cover these positions. In the event that the credit rating of East West Bank’s credit rating isBank had been downgraded to below investment grade, minimal additional collateral would have been required to be posted as of December 31, 20172020 and 2016.2019.
Offsetting of Derivatives
| ($ in thousands) | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized (1) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
| Master Netting Arrangements | Cash Collateral Received (3) | Security Collateral Received (5) | ||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 602,754 | $ | (93,063) | $ | (8,449) | $ | 501,242 | $ | (35) | $ | 501,207 | ||||||||||||||||||||||||||
Gross Amounts Recognized (2) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
| Master Netting Arrangements | Cash Collateral Pledged (4) | Security Collateral Pledged (5) | ||||||||||||||||||||||||||||||||||||
| Derivative liabilities | $ | 424,828 | $ | (93,063) | $ | (91,634) | $ | 240,131 | $ | (221,150) | $ | 18,981 | ||||||||||||||||||||||||||
132
| ($ in thousands) | As of December 31, 2017 | ($ in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Contracts Not Subject to Master Netting Arrangements | Contracts Subject to Master Netting Arrangements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | Gross Amounts Recognized (1) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Amounts | Collateral Received | Master Netting Arrangements | Cash Collateral Received (3) | Security Collateral Received (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 66,146 | $ | 36,941 | $ | 29,205 | $ | — | $ | 29,205 | $ | (18,955 | ) | (1) | $ | (9,839 | ) | (2) | $ | 411 | Derivative assets | $ | 330,316 | $ | (121,561) | $ | (3,758) | $ | 204,997 | $ | 0 | $ | 204,997 | |||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | Gross Amounts Recognized (2) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Amounts | Collateral Posted | Master Netting Arrangements | Cash Collateral Pledged (4) | Security Collateral Pledged (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liabilities | $ | 74,935 | $ | 26,732 | $ | 48,203 | $ | — | $ | 48,203 | $ | (18,955 | ) | (1) | $ | (28,796 | ) | (3) | $ | 452 | Derivative liabilities | $ | 256,528 | $ | (121,561) | $ | (38,238) | $ | 96,729 | $ | (79,619) | $ | 17,110 | |||||||||||||||||||||||||||||||||||||
(1)Included $1.1 million and $1.6 million of gross fair value assets with counterparties that were not subject to enforceable master netting arrangements or similar agreements as of December 31, 2020 and 2019, respectively.
| ($ in thousands) | As of December 31, 2016 | |||||||||||||||||||||||||||||||
| Total | Contracts Not Subject to Master Netting Arrangements | Contracts Subject to Master Netting Arrangements | ||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||
| Derivative Amounts | Collateral Received | |||||||||||||||||||||||||||||||
| Derivative assets | $ | 83,780 | $ | 51,218 | $ | 32,562 | $ | — | $ | 32,562 | $ | (20,991 | ) | (1) | $ | (10,687 | ) | (2) | $ | 884 | ||||||||||||
Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Recognized | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||
| �� | Derivative Amounts | Collateral Received | ||||||||||||||||||||||||||||||
| Derivative liabilities | $ | 82,323 | $ | 24,097 | $ | 58,226 | $ | — | $ | 58,226 | $ | (20,991 | ) | (1) | $ | (36,349 | ) | (3) | $ | 886 | ||||||||||||
(2)Included $220 thousand and $20 thousand of gross fair value liabilities with counterparties that were not subject to enforceable master netting arrangements or similar agreements as of December 31, 2020 and 2019, respectively.
(3)Gross cash collateral received under master netting arrangements or similar agreements were $15.8 million and $3.8 million, respectively, as of December 31, 2020 and 2019. Of the gross cash collateral received, $8.4 million and $3.8 million were used to offset against derivative assets, respectively, as of December 31, 2020 and 2019.
(4)Gross cash collateral pledged under master netting arrangements or similar agreements were $91.6 million and $43.0 million, respectively, as of December 31, 2020 and 2019. Of the gross cash collateral pledged, $91.6 million and $38.2 million were used to offset against derivative liabilities, respectively, as of December 31, 2020 and 2019.
(5)Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of noncash collateral on the consolidated balance sheet but requires disclosure of such amounts.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 43 — SecuritiesAssets Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer to Note 32 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K for fair value measurement disclosures on derivatives.
133
Note 76 — Loans Receivable and Allowance for Credit Losses
The following table presents the composition of the Company’s non-PCI and PCI loans held-for-investment as of December 31, 20172020 and 2016:2019:
| ($ in thousands) | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
Amortized Cost (1) | Non-PCI Loans (1) | PCI Loans | Total (1) | ||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
C&I (2) | $ | 13,631,726 | $ | 12,149,121 | $ | 1,810 | $ | 12,150,931 | |||||||||||||||||||||
| CRE: | |||||||||||||||||||||||||||||
| CRE | 11,174,611 | 10,165,247 | 113,201 | 10,278,448 | |||||||||||||||||||||||||
| Multifamily residential | 3,033,998 | 2,834,212 | 22,162 | 2,856,374 | |||||||||||||||||||||||||
| Construction and land | 599,692 | 628,459 | 40 | 628,499 | |||||||||||||||||||||||||
| Total CRE | 14,808,301 | 13,627,918 | 135,403 | 13,763,321 | |||||||||||||||||||||||||
| Total commercial | 28,440,027 | 25,777,039 | 137,213 | 25,914,252 | |||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||
| Single-family residential | 8,185,953 | 7,028,979 | 79,611 | 7,108,590 | |||||||||||||||||||||||||
| HELOCs | 1,601,716 | 1,466,736 | 6,047 | 1,472,783 | |||||||||||||||||||||||||
| Total residential mortgage | 9,787,669 | 8,495,715 | 85,658 | 8,581,373 | |||||||||||||||||||||||||
| Other consumer | 163,259 | 282,914 | 0 | 282,914 | |||||||||||||||||||||||||
| Total consumer | 9,950,928 | 8,778,629 | 85,658 | 8,864,287 | |||||||||||||||||||||||||
| Total loans held-for-investment | $ | 38,390,955 | $ | 34,555,668 | $ | 222,871 | $ | 34,778,539 | |||||||||||||||||||||
| Allowance for loan losses | (619,983) | (358,287) | 0 | (358,287) | |||||||||||||||||||||||||
| Loans held-for-investment, net | $ | 37,770,972 | $ | 34,197,381 | $ | 222,871 | $ | 34,420,252 | |||||||||||||||||||||
| ($ in thousands) | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
Non-PCI Loans (1) | PCI Loans (2) | Total (1)(2) | Non-PCI Loans (1) | PCI Loans (2) | Total (1)(2) | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 10,685,436 | $ | 11,795 | $ | 10,697,231 | $ | 9,602,176 | $ | 38,387 | $ | 9,640,563 | ||||||||||||
| CRE | 8,659,209 | 277,688 | 8,936,897 | 7,667,661 | 348,448 | 8,016,109 | ||||||||||||||||||
| Multifamily residential | 1,855,128 | 61,048 | 1,916,176 | 1,490,285 | 95,654 | 1,585,939 | ||||||||||||||||||
| Construction and land | 659,326 | 371 | 659,697 | 672,836 | 1,918 | 674,754 | ||||||||||||||||||
| Total commercial lending | 21,859,099 | 350,902 | 22,210,001 | 19,432,958 | 484,407 | 19,917,365 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 4,528,911 | 117,378 | 4,646,289 | 3,370,669 | 139,110 | 3,509,779 | ||||||||||||||||||
| HELOCs | 1,768,917 | 14,007 | 1,782,924 | 1,741,852 | 18,924 | 1,760,776 | ||||||||||||||||||
| Other consumer | 336,504 | — | 336,504 | 315,215 | 4 | 315,219 | ||||||||||||||||||
| Total consumer lending | 6,634,332 | 131,385 | 6,765,717 | 5,427,736 | 158,038 | 5,585,774 | ||||||||||||||||||
| Total loans held-for-investment | $ | 28,493,431 | $ | 482,287 | $ | 28,975,718 | $ | 24,860,694 | $ | 642,445 | $ | 25,503,139 | ||||||||||||
| Allowance for loan losses | (287,070 | ) | (58 | ) | (287,128 | ) | (260,402 | ) | (118 | ) | (260,520 | ) | ||||||||||||
| Loans held-for-investment, net | $ | 28,206,361 | $ | 482,229 | $ | 28,688,590 | $ | 24,600,292 | $ | 642,327 | $ | 25,242,619 | ||||||||||||
(1)Includes net deferred loan fees, unearned fees, unamortized premiums |
(2)Includes PPP loans of $18.88$1.57 billion as of December 31, 2020.
Loans held-for-investments’ accrued interest receivable was $107.5 million and $121.8 million as of December 31, 2020 and 2019, respectively. Reversal of interest income related to nonaccrual loans was approximately $2.5 million during the year ended December 31, 2020. Interest income recognized on nonaccrual loans was approximately $44 thousand for the year ended December 31, 2020. For the accounting policy on accrued interest receivable related to loans held-for-investment, see Note 1 — Summary of Significant Accounting Policies — Loans Held-for-Investment to the Consolidated Financial Statements in this Form 10-K.
Loans totaling $23.26 billion and $16.44$22.43 billion as of December 31, 2020 and 2019, respectively, were pledged to secure borrowings and to provide additional borrowing capacity from the Federal Reserve BankFRBSF and the FHLB.
Credit Quality Indicators
All loans are subject to the Company’s internal and external credit review and monitoring. LoansFor the commercial portfolio, loans are risk rated based on an analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes a review of all repayment sources, the borrower’s current payment performance/performance or delinquency, currentrepayment sources, financial and liquidity statusfactors, including industry and all other relevant information.geographic considerations. For single-family residential loans,the majority of the consumer portfolio, payment performance/performance or delinquency is the driving indicator for the risk ratings. Risk
For the Company’s internal credit risk ratings, are the overall credit quality indicator for the Company and the credit quality indicator utilized for estimating the appropriate allowance foreach individual loan losses. The Company utilizesis given a risk rating system, which classifiesof 1 through 10. Loans risk rated 1 through 5 are assigned an internal risk rating of “Pass,” with loans within the following categories:risk rated 1 being fully secured by cash or U.S. government and its agencies. Pass Watch, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the repayment sources.
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The following table summarizes the Company’s loans held-for-investment as of December 31, 2020, presented by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification.
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Term Loans | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term Loans Amortized Cost Basis | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 3,912,147 | $ | 1,477,740 | $ | 483,725 | $ | 245,594 | $ | 69,482 | $ | 245,615 | $ | 6,431,003 | $ | 29,487 | $ | 12,894,793 | ||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 120,183 | 74,601 | 56,785 | 19,426 | 1,487 | 5,872 | 324,640 | 0 | 602,994 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 2,125 | 25,267 | 22,240 | 18,787 | 4,964 | 1,592 | 58,964 | 0 | 133,939 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total C&I | 4,034,455 | 1,577,608 | 562,750 | 283,807 | 75,933 | 253,079 | 6,814,607 | 29,487 | 13,631,726 | |||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 2,296,649 | 2,402,136 | 2,310,748 | 1,328,251 | 732,694 | 1,529,681 | 173,267 | 19,064 | 10,792,490 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 47,459 | 63,654 | 43,447 | 98,259 | 2,094 | 80,662 | 0 | 0 | 335,575 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 0 | 0 | 42,067 | 1,115 | 0 | 3,364 | 0 | 0 | 46,546 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 2,344,108 | 2,465,790 | 2,396,262 | 1,427,625 | 734,788 | 1,613,707 | 173,267 | 19,064 | 11,174,611 | |||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 783,671 | 783,589 | 479,959 | 411,945 | 181,213 | 348,751 | 5,895 | 0 | 2,995,023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 0 | 735 | 22,330 | 6,101 | 264 | 5,877 | 0 | 0 | 35,307 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 0 | 0 | 1,475 | 0 | 0 | 2,193 | 0 | 0 | 3,668 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total multifamily residential | 783,671 | 784,324 | 503,764 | 418,046 | 181,477 | 356,821 | 5,895 | 0 | 3,033,998 | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 224,924 | 172,707 | 156,712 | 0 | 20,897 | 1,028 | 0 | 0 | 576,268 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 3,524 | 0 | 0 | 0 | 0 | 19,900 | 0 | 0 | 23,424 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total construction and land | 228,448 | 172,707 | 156,712 | 0 | 20,897 | 20,928 | 0 | 0 | 599,692 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 3,356,227 | 3,422,821 | 3,056,738 | 1,845,671 | 937,162 | 1,991,456 | 179,162 | 19,064 | 14,808,301 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 7,390,682 | 5,000,429 | 3,619,488 | 2,129,478 | 1,013,095 | 2,244,535 | 6,993,769 | 48,551 | 28,440,027 | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass (1) | 2,385,853 | 1,813,200 | 1,501,660 | 1,021,707 | 523,170 | 921,714 | 0 | 0 | 8,167,304 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 0 | 1,429 | 0 | 0 | 119 | 1,034 | 0 | 0 | 2,582 | |||||||||||||||||||||||||||||||||||||||||||||||
Criticized (Nonaccrual) (1) | 0 | 226 | 812 | 1,789 | 1,994 | 11,246 | 0 | 0 | 16,067 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total single-family residential mortgage | 2,385,853 | 1,814,855 | 1,502,472 | 1,023,496 | 525,283 | 933,994 | 0 | 0 | 8,185,953 | |||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,131 | 880 | 2,879 | 5,363 | 8,433 | 13,475 | 1,328,919 | 225,810 | 1,586,890 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 0 | 0 | 200 | 0 | 996 | 0 | 1,328 | 606 | 3,130 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 0 | 151 | 285 | 4,617 | 164 | 1,962 | 0 | 4,517 | 11,696 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total HELOCs | 1,131 | 1,031 | 3,364 | 9,980 | 9,593 | 15,437 | 1,330,247 | 230,933 | 1,601,716 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 2,386,984 | 1,815,886 | 1,505,836 | 1,033,476 | 534,876 | 949,431 | 1,330,247 | 230,933 | 9,787,669 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 9,531 | 0 | 0 | 1,830 | 0 | 83,255 | 66,136 | 0 | 160,752 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (accrual) | 16 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 16 | |||||||||||||||||||||||||||||||||||||||||||||||
| Criticized (nonaccrual) | 0 | 0 | 0 | 2,491 | 0 | 0 | 0 | 0 | 2,491 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total other consumer | 9,547 | 0 | 0 | 4,321 | 0 | 83,255 | 66,136 | 0 | 163,259 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 2,396,531 | 1,815,886 | 1,505,836 | 1,037,797 | 534,876 | 1,032,686 | 1,396,383 | 230,933 | 9,950,928 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 9,787,213 | $ | 6,816,315 | $ | 5,125,324 | $ | 3,167,275 | $ | 1,547,971 | $ | 3,277,221 | $ | 8,390,152 | $ | 279,484 | $ | 38,390,955 | ||||||||||||||||||||||||||||||||||||||
(1)As of December 31, 2020, $747 thousand of nonaccrual loans whose payments are guaranteed by the Federal Housing Administration were classified with a pass rating.
Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns. During the year ended December 31, 2020, HELOCs totaling $145.0 million were converted to term loans. NaN C&I revolving loans of $23.9 million were converted to a term loan during the year ended December 31, 2020.
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The following tables present the credit risk ratings for non-PCI and PCI loans by portfolio segmentsegments as of December 31, 2017 and 2016:2019:
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | Criticized | Total Non-PCI Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrual | Nonaccrual | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 11,423,094 | $ | 651,192 | $ | 74,835 | $ | 12,149,121 | ||||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 10,003,749 | 145,057 | 16,441 | 10,165,247 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 2,806,475 | 26,918 | 819 | 2,834,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 603,447 | 25,012 | 0 | 628,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 13,413,671 | 196,987 | 17,260 | 13,627,918 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 24,836,765 | 848,179 | 92,095 | 25,777,039 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential (1) | 7,012,522 | 2,278 | 14,179 | 7,028,979 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,453,207 | 2,787 | 10,742 | 1,466,736 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 8,465,729 | 5,065 | 24,921 | 8,495,715 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 280,392 | 5 | 2,517 | 282,914 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 8,746,121 | 5,070 | 27,438 | 8,778,629 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 33,582,886 | $ | 853,249 | $ | 119,533 | $ | 34,555,668 | ||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2017 | ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass/Watch | Special Mention | Substandard | Doubtful | Loss | Total Non- PCI Loans | Pass | Criticized | Total PCI Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | ($ in thousands) | Pass | Accrual | Nonaccrual | Total PCI Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 10,369,516 | $ | 114,769 | $ | 180,269 | $ | 20,882 | $ | — | $ | 10,685,436 | $ | 1,810 | $ | 0 | $ | 0 | $ | 1,810 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | CRE: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 8,484,635 | 65,616 | 108,958 | — | — | 8,659,209 | CRE | 102,257 | 10,939 | 5 | 113,201 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 1,839,958 | — | 15,170 | — | — | 1,855,128 | Multifamily residential | 22,162 | 0 | 0 | 22,162 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 614,441 | 4,590 | 40,295 | — | — | 659,326 | Construction and land | 40 | 0 | 0 | 40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial lending | 21,308,550 | 184,975 | 344,692 | 20,882 | — | 21,859,099 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | Total CRE | 124,459 | 10,939 | 5 | 135,403 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | Total commercial | 126,269 | 10,939 | 5 | 137,213 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 4,490,672 | 16,504 | 21,735 | — | — | 4,528,911 | Single-family residential | 79,517 | 0 | 94 | 79,611 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,744,903 | 11,900 | 12,114 | — | — | 1,768,917 | HELOCs | 5,849 | 0 | 198 | 6,047 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 333,895 | 111 | 2,498 | — | — | 336,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer lending | 6,569,470 | 28,515 | 36,347 | — | — | 6,634,332 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 27,878,020 | $ | 213,490 | $ | 381,039 | $ | 20,882 | $ | — | $ | 28,493,431 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | Total residential mortgage | 85,366 | 0 | 292 | 85,658 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | Total consumer | 85,366 | 0 | 292 | 85,658 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (2) | Total (2) | $ | 211,635 | $ | 10,939 | $ | 297 | $ | 222,871 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||||||
| Pass/Watch | Special Mention | Substandard | Doubtful | Loss | Total Non- PCI Loans | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 9,194,701 | $ | 164,711 | $ | 237,599 | $ | 5,157 | $ | 8 | $ | 9,602,176 | ||||||||||||
| CRE | 7,476,804 | 29,005 | 161,852 | — | — | 7,667,661 | ||||||||||||||||||
| Multifamily residential | 1,462,522 | 2,268 | 25,495 | — | — | 1,490,285 | ||||||||||||||||||
| Construction and land | 659,536 | — | 13,290 | 10 | — | 672,836 | ||||||||||||||||||
| Total commercial lending | 18,793,563 | 195,984 | 438,236 | 5,167 | 8 | 19,432,958 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 3,341,015 | 10,179 | 19,475 | — | — | 3,370,669 | ||||||||||||||||||
| HELOCs | 1,728,254 | 6,717 | 6,881 | — | — | 1,741,852 | ||||||||||||||||||
| Other consumer | 315,151 | 47 | 17 | — | — | 315,215 | ||||||||||||||||||
| Total consumer lending | 5,384,420 | 16,943 | 26,373 | — | — | 5,427,736 | ||||||||||||||||||
| Total | $ | 24,177,983 | $ | 212,927 | $ | 464,609 | $ | 5,167 | $ | 8 | $ | 24,860,694 | ||||||||||||
(2)Loans net of ASC 310-30 discount.
136
| ($ in thousands) | December 31, 2017 | |||||||||||||||||||||||
| Pass/Watch | Special Mention | Substandard | Doubtful | Loss | Total PCI Loans | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 10,712 | $ | 57 | $ | 1,026 | $ | — | $ | — | $ | 11,795 | ||||||||||||
| CRE | 238,605 | 531 | 38,552 | — | — | 277,688 | ||||||||||||||||||
| Multifamily residential | 56,720 | — | 4,328 | — | — | 61,048 | ||||||||||||||||||
| Construction and land | 44 | — | 327 | — | — | 371 | ||||||||||||||||||
| Total commercial lending | 306,081 | 588 | 44,233 | — | — | 350,902 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 113,905 | 1,543 | 1,930 | — | — | 117,378 | ||||||||||||||||||
| HELOCs | 12,642 | — | 1,365 | — | — | 14,007 | ||||||||||||||||||
| Other consumer | — | — | — | — | — | — | ||||||||||||||||||
| Total consumer lending | 126,547 | 1,543 | 3,295 | — | — | 131,385 | ||||||||||||||||||
Total (1) | $ | 432,628 | $ | 2,131 | $ | 47,528 | $ | — | $ | — | $ | 482,287 | ||||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||||||
| Pass/Watch | Special Mention | Substandard | Doubtful | Loss | Total PCI Loans | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 33,885 | $ | 772 | $ | 3,730 | $ | — | $ | — | $ | 38,387 | ||||||||||||
| CRE | 293,529 | 3,239 | 51,680 | — | — | 348,448 | ||||||||||||||||||
| Multifamily residential | 86,190 | — | 9,464 | — | — | 95,654 | ||||||||||||||||||
| Construction and land | 1,562 | — | 356 | — | — | 1,918 | ||||||||||||||||||
| Total commercial lending | 415,166 | 4,011 | 65,230 | — | — | 484,407 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 136,245 | 1,239 | 1,626 | — | — | 139,110 | ||||||||||||||||||
| HELOCs | 17,429 | 316 | 1,179 | — | — | 18,924 | ||||||||||||||||||
| Other consumer | 4 | — | — | — | — | 4 | ||||||||||||||||||
| Total consumer lending | 153,678 | 1,555 | 2,805 | — | — | 158,038 | ||||||||||||||||||
Total (1) | $ | 568,844 | $ | 5,566 | $ | 68,035 | $ | — | $ | — | $ | 642,445 | ||||||||||||
Nonaccrual and Past Due Loans
| ($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current Accruing Loans | Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Total Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 13,488,070 | $ | 8,993 | $ | 724 | $ | 9,717 | $ | 100,602 | $ | 33,337 | $ | 133,939 | $ | 13,631,726 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 11,127,690 | 375 | 0 | 375 | 448 | 46,098 | 46,546 | 11,174,611 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 3,028,512 | 1,818 | 0 | 1,818 | 2,375 | 1,293 | 3,668 | 3,033,998 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 579,792 | 19,900 | 0 | 19,900 | 0 | 0 | 0 | 599,692 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 14,735,994 | 22,093 | 0 | 22,093 | 2,823 | 47,391 | 50,214 | 14,808,301 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 28,224,064 | 31,086 | 724 | 31,810 | 103,425 | 80,728 | 184,153 | 28,440,027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 8,156,645 | 9,911 | 2,583 | 12,494 | 2,385 | 14,429 | 16,814 | 8,185,953 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,583,968 | 2,922 | 3,130 | 6,052 | 577 | 11,119 | 11,696 | 1,601,716 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 9,740,613 | 12,833 | 5,713 | 18,546 | 2,962 | 25,548 | 28,510 | 9,787,669 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 160,534 | 217 | 17 | 234 | 0 | 2,491 | 2,491 | 163,259 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 9,901,147 | 13,050 | 5,730 | 18,780 | 2,962 | 28,039 | 31,001 | 9,950,928 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 38,125,211 | $ | 44,136 | $ | 6,454 | $ | 50,590 | $ | 106,387 | $ | 108,767 | $ | 215,154 | $ | 38,390,955 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of December 31, 2020:
| ($ in thousands) | December 31, 2020 | |||||||
| Commercial: | ||||||||
| C&I | $ | 62,040 | ||||||
| CRE: | ||||||||
| CRE | 45,537 | |||||||
| Multifamily residential | 2,519 | |||||||
| Total CRE | 48,056 | |||||||
| Total commercial | 110,096 | |||||||
| Consumer: | ||||||||
| Residential mortgage: | ||||||||
| Single-family residential | 6,013 | |||||||
| HELOCs | 8,076 | |||||||
| Total residential mortgage | 14,089 | |||||||
| Other consumer | 2,491 | |||||||
| Total consumer | 16,580 | |||||||
| Total nonaccrual loans with no related allowance for loan losses | $ | 126,676 | ||||||
137
The following table presents the aging analysis of non-PCI loans as of December 31, 2017 and 2016:2019:
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current Accruing Loans | Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Total Non-PCI Loans | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 12,026,131 | $ | 31,121 | $ | 17,034 | $ | 48,155 | $ | 31,084 | $ | 43,751 | $ | 74,835 | $ | 12,149,121 | ||||||||||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 10,123,999 | 22,830 | 1,977 | 24,807 | 540 | 15,901 | 16,441 | 10,165,247 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 2,832,664 | 198 | 531 | 729 | 534 | 285 | 819 | 2,834,212 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 628,459 | 0 | 0 | 0 | 0 | 0 | — | 628,459 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total CRE | 13,585,122 | 23,028 | 2,508 | 25,536 | 1,074 | 16,186 | 17,260 | 13,627,918 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | 25,611,253 | 54,149 | 19,542 | 73,691 | 32,158 | 59,937 | 92,095 | 25,777,039 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 6,993,597 | 15,443 | 5,074 | 20,517 | 1,964 | 12,901 | 14,865 | 7,028,979 | ||||||||||||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,448,930 | 4,273 | 2,791 | 7,064 | 1,448 | 9,294 | 10,742 | 1,466,736 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 8,442,527 | 19,716 | 7,865 | 27,581 | 3,412 | 22,195 | 25,607 | 8,495,715 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 280,386 | 6 | 5 | 11 | 0 | 2,517 | 2,517 | 282,914 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 8,722,913 | 19,722 | 7,870 | 27,592 | 3,412 | 24,712 | 28,124 | 8,778,629 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 34,334,166 | $ | 73,871 | $ | 27,412 | $ | 101,283 | $ | 35,570 | $ | 84,649 | $ | 120,219 | $ | 34,555,668 | ||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2017 | |||||||||||||||||||||||||||||||
Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Current Accruing Loans | Total Non- PCI Loans | |||||||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||||||||||
| C&I | $ | 30,964 | $ | 82 | $ | 31,046 | $ | 27,408 | $ | 41,805 | $ | 69,213 | $ | 10,585,177 | $ | 10,685,436 | ||||||||||||||||
| CRE | 3,414 | 466 | 3,880 | 5,430 | 21,556 | 26,986 | 8,628,343 | 8,659,209 | ||||||||||||||||||||||||
| Multifamily residential | 4,846 | 14 | 4,860 | 1,418 | 299 | 1,717 | 1,848,551 | 1,855,128 | ||||||||||||||||||||||||
| Construction and land | 758 | — | 758 | — | 3,973 | 3,973 | 654,595 | 659,326 | ||||||||||||||||||||||||
| Total commercial lending | 39,982 | 562 | 40,544 | 34,256 | 67,633 | 101,889 | 21,716,666 | 21,859,099 | ||||||||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||||||||||
| Single-family residential | 13,269 | 5,355 | 18,624 | 6 | 5,917 | 5,923 | 4,504,364 | 4,528,911 | ||||||||||||||||||||||||
| HELOCs | 4,286 | 4,186 | 8,472 | 89 | 3,917 | 4,006 | 1,756,439 | 1,768,917 | ||||||||||||||||||||||||
| Other consumer | 14 | 23 | 37 | — | 2,491 | 2,491 | 333,976 | 336,504 | ||||||||||||||||||||||||
| Total consumer lending | 17,569 | 9,564 | 27,133 | 95 | 12,325 | 12,420 | 6,594,779 | 6,634,332 | ||||||||||||||||||||||||
| Total | $ | 57,551 | $ | 10,126 | $ | 67,677 | $ | 34,351 | $ | 79,958 | $ | 114,309 | $ | 28,311,445 | $ | 28,493,431 | ||||||||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||||||||||||||
Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Current Accruing Loans | Total Non- PCI Loans | |||||||||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||||||||||
| C&I | $ | 45,052 | $ | 2,279 | $ | 47,331 | $ | 60,519 | $ | 20,737 | $ | 81,256 | $ | 9,473,589 | $ | 9,602,176 | ||||||||||||||||
| CRE | 6,233 | 14,080 | 20,313 | 14,872 | 12,035 | 26,907 | 7,620,441 | 7,667,661 | ||||||||||||||||||||||||
| Multifamily residential | 3,951 | 374 | 4,325 | 2,790 | 194 | 2,984 | 1,482,976 | 1,490,285 | ||||||||||||||||||||||||
| Construction and land | 4,994 | — | 4,994 | 433 | 4,893 | 5,326 | 662,516 | 672,836 | ||||||||||||||||||||||||
| Total commercial lending | 60,230 | 16,733 | 76,963 | 78,614 | 37,859 | 116,473 | 19,239,522 | 19,432,958 | ||||||||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||||||||||
| Single-family residential | 9,595 | 8,076 | 17,671 | — | 4,214 | 4,214 | 3,348,784 | 3,370,669 | ||||||||||||||||||||||||
| HELOCs | 2,845 | 2,606 | 5,451 | 165 | 1,965 | 2,130 | 1,734,271 | 1,741,852 | ||||||||||||||||||||||||
| Other consumer | 482 | 622 | 1,104 | — | — | — | 314,111 | 315,215 | ||||||||||||||||||||||||
| Total consumer lending | 12,922 | 11,304 | 24,226 | 165 | 6,179 | 6,344 | 5,397,166 | 5,427,736 | ||||||||||||||||||||||||
| Total | $ | 73,152 | $ | 28,037 | $ | 101,189 | $ | 78,779 | $ | 44,038 | $ | 122,817 | $ | 24,636,688 | $ | 24,860,694 | ||||||||||||||||
PCI loans arewere excluded from the above aging analysis tablestable as of December 31, 2019, as the Company has elected to account for these loans on a pool level basis under ASC 310-30 at the time of acquisition. Refer to the discussion on PCI loans within this note for additional details on interest income recognition. As of December 31, 2017 and 2016,2019, PCI loans on nonaccrual status totaled $5.3 million$297 thousand.
Foreclosed Assets
Foreclosed assets, consisting of OREO and $11.7 million, respectively.
Troubled Debt Restructurings
138
The following tables present the additions to non-PCI TDRs for the years ended December 31, 2017, 20162020, 2019 and 2015:
| ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2017 | ||||||||||||||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | ||||||||||||
| Commercial lending: | |||||||||||||||
| C&I | 16 | $ | 43,884 | $ | 37,900 | $ | 11,520 | ||||||||
| CRE | 4 | $ | 2,675 | $ | 2,627 | $ | 157 | ||||||||
| Multifamily residential | 1 | $ | 3,655 | $ | 2,969 | $ | — | ||||||||
| Consumer lending: | |||||||||||||||
| HELOCs | 1 | $ | 152 | $ | 155 | $ | — | ||||||||
| ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2016 | ||||||||||||||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | ||||||||||||
| Commercial lending: | |||||||||||||||
| C&I | 18 | $ | 65,991 | $ | 40,405 | $ | 20,574 | ||||||||
| CRE | 6 | $ | 19,275 | $ | 18,824 | $ | 701 | ||||||||
| Construction and land | 1 | $ | 5,522 | $ | 4,883 | $ | — | ||||||||
| Consumer lending: | |||||||||||||||
| Single-family residential | 3 | $ | 1,291 | $ | 1,268 | $ | — | ||||||||
| HELOCs | 3 | $ | 491 | $ | 382 | $ | 1 | ||||||||
| ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2020 | |||||||||||||||||||||||||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | |||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||
| C&I | 14 | $ | 152,249 | $ | 134,467 | $ | 19,555 | |||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||
| CRE | 2 | 21,429 | 21,221 | 18 | ||||||||||||||||||||||
| Multifamily residential | 1 | 1,220 | 1,226 | 0 | ||||||||||||||||||||||
| Total CRE | 3 | 22,649 | 22,447 | 18 | ||||||||||||||||||||||
| Total commercial | 17 | 174,898 | 156,914 | 19,573 | ||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||
| Total consumer | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
| Total | 17 | $ | 174,898 | $ | 156,914 | $ | 19,573 | |||||||||||||||||||
| ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2015 | ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | ||||||||||||||||||||||||||||||||||
| Commercial lending: | |||||||||||||||||||||||||||||||||||||||||
| Commercial: | Commercial: | ||||||||||||||||||||||||||||||||||||||||
| C&I | 18 | $ | 42,816 | $ | 34,165 | $ | 6,726 | C&I | 8 | $ | 95,742 | $ | 71,332 | $ | 8,004 | ||||||||||||||||||||||||||
| CRE | 3 | $ | 1,802 | $ | 1,727 | $ | — | ||||||||||||||||||||||||||||||||||
| CRE: | CRE: | ||||||||||||||||||||||||||||||||||||||||
| Construction and land | 2 | $ | 2,227 | $ | 83 | $ | 102 | Construction and land | 1 | 19,696 | 19,691 | 0 | |||||||||||||||||||||||||||||
| Consumer lending: | |||||||||||||||||||||||||||||||||||||||||
| Total CRE | Total CRE | 1 | 19,696 | 19,691 | 0 | ||||||||||||||||||||||||||||||||||||
| Total commercial | Total commercial | 9 | 115,438 | 91,023 | 8,004 | ||||||||||||||||||||||||||||||||||||
| Consumer: | Consumer: | ||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 1 | $ | 281 | $ | 279 | $ | 2 | Single-family residential | 2 | 1,123 | 1,098 | 2 | |||||||||||||||||||||||||||||
| HELOCs | HELOCs | 2 | 539 | 528 | 0 | ||||||||||||||||||||||||||||||||||||
| Total residential mortgage | Total residential mortgage | 4 | 1,662 | 1,626 | 2 | ||||||||||||||||||||||||||||||||||||
| Total consumer | Total consumer | 4 | 1,662 | 1,626 | 2 | ||||||||||||||||||||||||||||||||||||
| Total | Total | 13 | $ | 117,100 | $ | 92,649 | $ | 8,006 | |||||||||||||||||||||||||||||||||
139
| ($ in thousands) | Loans Modified as TDRs During the Year Ended December 31, 2018 | |||||||||||||||||||||||||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment (1) | Financial Impact (2) | |||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||
| C&I | 8 | $ | 11,366 | $ | 9,520 | $ | 699 | |||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||
| CRE | 1 | 750 | 752 | 0 | ||||||||||||||||||||||
| Total CRE | 1 | 750 | 752 | 0 | ||||||||||||||||||||||
| Total commercial | 9 | 12,116 | 10,272 | 699 | ||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||
| Single-family residential | 2 | 405 | 391 | (28) | ||||||||||||||||||||||
| HELOCs | 2 | 1,546 | 1,418 | 0 | ||||||||||||||||||||||
| Total residential mortgage | 4 | 1,951 | 1,809 | (28) | ||||||||||||||||||||||
| Total consumer | 4 | 1,951 | 1,809 | (28) | ||||||||||||||||||||||
| Total | 13 | $ | 14,067 | $ | 12,081 | $ | 671 | |||||||||||||||||||
(1)Includes subsequent payments after modification and reflects the balance as of December 31, 2020, 2019 and 2018.
(2)Includes charge-offs and specific reserves recorded since the modification date.
The following tables present the non-PCI TDR modificationspost-modifications outstanding balances for the years ended December 31, 2017, 20162020, 2019 and 20152018 by modification type:
| ($ in thousands) | Modification Type During the Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other (3) | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 59,134 | $ | 10,863 | $ | 31,913 | $ | 32,557 | $ | 0 | $ | 134,467 | ||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||
| CRE | 21,221 | 0 | 0 | 0 | 0 | 21,221 | ||||||||||||||||||||||||||||||||||||||
| Multifamily residential | 1,226 | 0 | 0 | 0 | 0 | 1,226 | ||||||||||||||||||||||||||||||||||||||
| Total CRE | 22,447 | 0 | 0 | 0 | 0 | 22,447 | ||||||||||||||||||||||||||||||||||||||
| Total commercial | 81,581 | 10,863 | 31,913 | 32,557 | 0 | 156,914 | ||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 81,581 | $ | 10,863 | $ | 31,913 | $ | 32,557 | $ | 0 | $ | 156,914 | ||||||||||||||||||||||||||||||||
140
| ($ in thousands) | Modification Type During the Year Ended December 31, 2017 | |||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other | Total | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 13,568 | $ | 7,848 | $ | — | $ | — | $ | 16,484 | $ | 37,900 | ||||||||||||
| CRE | 2,627 | — | — | — | — | 2,627 | ||||||||||||||||||
| Multifamily residential | 2,969 | — | — | — | — | 2,969 | ||||||||||||||||||
| Total commercial lending | 19,164 | 7,848 | — | — | 16,484 | 43,496 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| HELOCs | — | 155 | — | — | — | 155 | ||||||||||||||||||
| Total consumer lending | — | 155 | — | — | — | 155 | ||||||||||||||||||
| Total | $ | 19,164 | $ | 8,003 | $ | — | $ | — | $ | 16,484 | $ | 43,651 | ||||||||||||
| ($ in thousands) | Modification Type During the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other (3) | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 31,611 | $ | 0 | $ | 0 | $ | 0 | $ | 39,721 | $ | 71,332 | ||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 0 | 0 | 19,691 | 0 | 0 | 19,691 | ||||||||||||||||||||||||||||||||||||||
| Total CRE | 0 | 0 | 19,691 | 0 | 0 | 19,691 | ||||||||||||||||||||||||||||||||||||||
| Total commercial | 31,611 | 0 | 19,691 | 0 | 39,721 | 91,023 | ||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 0 | 1,098 | 0 | 0 | 0 | 1,098 | ||||||||||||||||||||||||||||||||||||||
| HELOCs | 0 | 397 | 0 | 0 | 131 | 528 | ||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 0 | 1,495 | 0 | 0 | 131 | 1,626 | ||||||||||||||||||||||||||||||||||||||
| Total consumer | 0 | 1,495 | 0 | 0 | 131 | 1,626 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 31,611 | $ | 1,495 | $ | 19,691 | $ | 0 | $ | 39,852�� | $ | 92,649 | ||||||||||||||||||||||||||||||||
| ($ in thousands) | Modification Type During the Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other (3) | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
| C&I | $ | 5,472 | $ | 0 | $ | 0 | $ | 0 | $ | 4,048 | $ | 9,520 | ||||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||||||||
| CRE | 0 | 0 | 752 | 0 | 0 | 752 | ||||||||||||||||||||||||||||||||||||||
| Total CRE | 0 | 0 | 752 | 0 | 0 | 752 | ||||||||||||||||||||||||||||||||||||||
| Total commercial | 5,472 | 0 | 752 | 0 | 4,048 | 10,272 | ||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||
| Single-family residential | 66 | 0 | 0 | 0 | 325 | 391 | ||||||||||||||||||||||||||||||||||||||
| HELOCs | 1,353 | 0 | 0 | 0 | 65 | 1,418 | ||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | 1,419 | 0 | 0 | 0 | 390 | 1,809 | ||||||||||||||||||||||||||||||||||||||
| Total consumer | 1,419 | 0 | 0 | 0 | 390 | 1,809 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,891 | $ | 0 | $ | 752 | $ | 0 | $ | 4,438 | $ | 12,081 | ||||||||||||||||||||||||||||||||
(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
(2)Includes principal and interest deferments or reductions.
(3)Includes primarily funding to secure additional collateral and provides liquidity to collateral-dependent C&I loans.
141
| ($ in thousands) | Modification Type During the Year Ended December 31, 2016 | |||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other | Total | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 34,499 | $ | — | $ | 5,876 | $ | 30 | $ | — | $ | 40,405 | ||||||||||||
| CRE | 17,750 | — | — | — | 1,074 | 18,824 | ||||||||||||||||||
| Construction and land | 4,883 | — | — | — | — | 4,883 | ||||||||||||||||||
| Total commercial lending | 57,132 | — | 5,876 | 30 | 1,074 | 64,112 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 264 | — | 797 | 207 | — | 1,268 | ||||||||||||||||||
| HELOCs | 333 | — | 49 | — | — | 382 | ||||||||||||||||||
| Total consumer lending | 597 | — | 846 | 207 | — | 1,650 | ||||||||||||||||||
| Total | $ | 57,729 | $ | — | $ | 6,722 | $ | 237 | $ | 1,074 | $ | 65,762 | ||||||||||||
| ($ in thousands) | Modification Type During the Year Ended December 31, 2015 | |||||||||||||||||||||||
Principal (1) | Principal and Interest (2) | Interest Rate Reduction | Interest Deferments | Other | Total | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 16,364 | $ | 17,801 | $ | — | $ | — | $ | — | $ | 34,165 | ||||||||||||
| CRE | 548 | 787 | — | — | 392 | 1,727 | ||||||||||||||||||
| Construction and land | — | — | — | — | 83 | 83 | ||||||||||||||||||
| Total commercial lending | 16,912 | 18,588 | — | — | 475 | 35,975 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 279 | — | — | — | — | 279 | ||||||||||||||||||
| Total consumer lending | 279 | — | — | — | — | 279 | ||||||||||||||||||
| Total | $ | 17,191 | $ | 18,588 | $ | — | $ | — | $ | 475 | $ | 36,254 | ||||||||||||
| ($ in thousands) | Loans Modified as TDRs that Subsequently Defaulted During the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||
| C&I | 1 | $ | 15,852 | 3 | $ | 13,112 | 4 | $ | 1,890 | |||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||
| CRE | 0 | 0 | 0 | 0 | 1 | 186 | ||||||||||||||||||||||||||||||||
| Total CRE | 0 | 0 | 0 | 0 | 1 | 186 | ||||||||||||||||||||||||||||||||
| Total commercial | 1 | 15,852 | 3 | 13,112 | 5 | 2,076 | ||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| HELOCs | 0 | 0 | 0 | 0 | 1 | 150 | ||||||||||||||||||||||||||||||||
| Total residential mortgage | 0 | 0 | 0 | 0 | 1 | 150 | ||||||||||||||||||||||||||||||||
| Total consumer | 0 | 0 | 0 | 0 | 1 | 150 | ||||||||||||||||||||||||||||||||
| Total | 1 | $ | 15,852 | 3 | $ | 13,112 | 6 | $ | 2,226 | |||||||||||||||||||||||||||||
| ($ in thousands) | Loans Modified as TDRs that Subsequently Defaulted During the Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||||
| Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | ||||||||||||||||
| Commercial lending: | |||||||||||||||||||||
| C&I | 3 | $ | 8,659 | — | $ | — | — | $ | — | ||||||||||||
| CRE | — | $ | — | 2 | $ | 3,150 | — | $ | — | ||||||||||||
| Construction and land | — | $ | — | 1 | $ | 4,883 | — | $ | — | ||||||||||||
| Consumer lending: | |||||||||||||||||||||
| Single-family residential | — | $ | — | — | $ | — | 1 | $ | 279 | ||||||||||||
Impaired Loans
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| C&I | $ | 174,656 | $ | 73,956 | $ | 40,086 | $ | 114,042 | $ | 2,881 | ||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||
| CRE | 27,601 | 20,098 | 1,520 | 21,618 | 97 | |||||||||||||||||||||||||||
| Multifamily residential | 4,965 | 1,371 | 3,093 | 4,464 | 55 | |||||||||||||||||||||||||||
| Construction and land | 19,696 | 19,691 | 0 | 19,691 | 0 | |||||||||||||||||||||||||||
| Total CRE | 52,262 | 41,160 | 4,613 | 45,773 | 152 | |||||||||||||||||||||||||||
| Total commercial | 226,918 | 115,116 | 44,699 | 159,815 | 3,033 | |||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||
| Single-family residential | 23,626 | 8,507 | 13,704 | 22,211 | 35 | |||||||||||||||||||||||||||
| HELOCs | 13,711 | 6,125 | 7,449 | 13,574 | 8 | |||||||||||||||||||||||||||
| Total residential mortgage | 37,337 | 14,632 | 21,153 | 35,785 | 43 | |||||||||||||||||||||||||||
| Other consumer | 2,517 | 0 | 2,517 | 2,517 | 2,517 | |||||||||||||||||||||||||||
| Total consumer | 39,854 | 14,632 | 23,670 | 38,302 | 2,560 | |||||||||||||||||||||||||||
| Total non-PCI impaired loans | $ | 266,772 | $ | 129,748 | $ | 68,369 | $ | 198,117 | $ | 5,593 | ||||||||||||||||||||||
| ($ in thousands) | December 31, 2017 | |||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | ||||||||||||||||
| Commercial lending: | ||||||||||||||||||||
| C&I | $ | 98,889 | $ | 36,086 | $ | 62,599 | $ | 98,685 | $ | 16,094 | ||||||||||
| CRE | 35,550 | 28,699 | 6,857 | 35,556 | 684 | |||||||||||||||
| Multifamily residential | 10,625 | 8,019 | 2,617 | 10,636 | 88 | |||||||||||||||
| Construction and land | 3,973 | 3,973 | — | 3,973 | — | |||||||||||||||
| Total commercial lending | 149,037 | 76,777 | 72,073 | 148,850 | 16,866 | |||||||||||||||
| Consumer lending: | ||||||||||||||||||||
| Single-family residential | 14,287 | — | 14,338 | 14,338 | 534 | |||||||||||||||
| HELOCs | 5,201 | 2,287 | 2,921 | 5,208 | 4 | |||||||||||||||
| Other consumer | 2,491 | — | 2,491 | 2,491 | 2,491 | |||||||||||||||
| Total consumer lending | 21,979 | 2,287 | 19,750 | 22,037 | 3,029 | |||||||||||||||
| Total non-PCI impaired loans | $ | 171,016 | $ | 79,064 | $ | 91,823 | $ | 170,887 | $ | 19,895 | ||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | ||||||||||||||||
| Commercial lending: | ||||||||||||||||||||
| C&I | $ | 167,466 | $ | 78,316 | $ | 47,303 | $ | 125,619 | $ | 10,477 | ||||||||||
| CRE | 50,718 | 32,507 | 14,001 | 46,508 | 1,263 | |||||||||||||||
| Multifamily residential | 11,181 | 5,684 | 4,357 | 10,041 | 180 | |||||||||||||||
| Construction and land | 6,457 | 5,427 | 443 | 5,870 | 63 | |||||||||||||||
| Total commercial lending | 235,822 | 121,934 | 66,104 | 188,038 | 11,983 | |||||||||||||||
| Consumer lending: | ||||||||||||||||||||
| Single-family residential | 15,435 | — | 14,335 | 14,335 | 687 | |||||||||||||||
| HELOCs | 4,016 | — | 3,682 | 3,682 | 31 | |||||||||||||||
| Total consumer lending | 19,451 | — | 18,017 | 18,017 | 718 | |||||||||||||||
| Total non-PCI impaired loans | $ | 255,273 | $ | 121,934 | $ | 84,121 | $ | 206,055 | $ | 12,701 | ||||||||||
The following table presents the average recorded investment and interest income recognized on non-PCI impaired loans for the years ended December 31, 2017, 20162019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| Average Recorded Investment | Recognized Interest Income (1) | Average Recorded Investment | Recognized Interest Income (1) | |||||||||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||||||||
| C&I | $ | 248,619 | $ | 2,932 | $ | 143,430 | $ | 1,046 | ||||||||||||||||||||||||||||||
| CRE: | ||||||||||||||||||||||||||||||||||||||
| CRE | 33,046 | 464 | 35,049 | 491 | ||||||||||||||||||||||||||||||||||
| Multifamily residential | 6,116 | 228 | 11,742 | 249 | ||||||||||||||||||||||||||||||||||
| Construction and land | 19,691 | 68 | 3,973 | 0 | ||||||||||||||||||||||||||||||||||
| Total CRE | 58,853 | 760 | 50,764 | 740 | ||||||||||||||||||||||||||||||||||
| Total commercial | 307,472 | 3,692 | 194,194 | 1,786 | ||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Single-family residential | 37,315 | 496 | 22,350 | 474 | ||||||||||||||||||||||||||||||||||
| HELOCs | 22,851 | 130 | 14,134 | 70 | ||||||||||||||||||||||||||||||||||
| Total residential mortgage | 60,166 | 626 | 36,484 | 544 | ||||||||||||||||||||||||||||||||||
| Other consumer | 2,552 | 0 | 2,502 | 0 | ||||||||||||||||||||||||||||||||||
| Total consumer | 62,718 | 626 | 38,986 | 544 | ||||||||||||||||||||||||||||||||||
| Total non-PCI impaired loans | $ | 370,190 | $ | 4,318 | $ | 233,180 | $ | 2,330 | ||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
Average Recorded Investment | Recognized Interest Income (1) | Average Recorded Investment | Recognized Interest Income (1) | Average Recorded Investment | Recognized Interest Income (1) | |||||||||||||||||||
| Commercial lending: | ||||||||||||||||||||||||
| C&I | $ | 110,662 | $ | 1,517 | $ | 148,986 | $ | 2,612 | $ | 85,290 | $ | 538 | ||||||||||||
| CRE | 36,003 | 578 | 47,064 | 1,253 | 43,598 | 536 | ||||||||||||||||||
| Multifamily residential | 11,455 | 422 | 15,763 | 302 | 24,024 | 312 | ||||||||||||||||||
| Construction and land | 4,382 | — | 6,388 | 34 | 2,740 | 39 | ||||||||||||||||||
| Total commercial lending | 162,502 | 2,517 | 218,201 | 4,201 | 155,652 | 1,425 | ||||||||||||||||||
| Consumer lending: | ||||||||||||||||||||||||
| Single-family residential | 14,994 | 417 | 14,323 | 447 | 15,365 | 242 | ||||||||||||||||||
| HELOCs | 5,494 | 55 | 3,703 | 63 | 1,252 | 47 | ||||||||||||||||||
| Other consumer | 2,142 | — | — | — | — | — | ||||||||||||||||||
| Total consumer lending | 22,630 | 472 | 18,026 | 510 | 16,617 | 289 | ||||||||||||||||||
| Total non-PCI impaired loans | $ | 185,132 | $ | 2,989 | $ | 236,227 | $ | 4,711 | $ | 172,269 | $ | 1,714 | ||||||||||||
(1)Includes interest income recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal, not as interest income.
Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13 that establishes a single allowance framework for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. It 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. Balance sheet information and results of operations for reporting periods beginning with January 1, 2020 are presented under ASC 326, while prior period comparisons continue to be presented under legacy GAAP.
The allowance for credit losses is deducted from the amortized cost basis of a financial asset or a group of financial assets so that the balance sheet reflects the net amount the Company expects to collect. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, and deferred fees and costs. Subsequent changes in expected credit losses are recognized in net income as a provision for credit loss expense or a reversal of credit loss expense.
The process of the allowance for credit losses involves procedures to consider the unique risk characteristics of the portfolio segments. The majority of the Company’s credit exposures share risk characteristics with other similar exposures, and as a result are collectively evaluated. The collectively evaluated loans cover performing risk-rated loans and unfunded credit commitments. If an exposure does not share risk characteristics with other exposures, the Company generally estimates expected credit losses on an individual basis. The individually assessed loans cover loans modified or reasonably expected to be modified in a TDR, collateral-dependent loans, as well as, risk-rated loans that have been placed on nonaccrual status.
Allowance for Collectively Evaluated Loans
The allowance for collectively evaluated loans consists of a quantitative component that assesses many different risk factors which are considered in our models and a qualitative component that considers risk factors external to the models. Each of these components are described below.
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Quantitative Component—The allowance for loan losses is estimated using quantitative methods that 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. The forward-looking information is limited to the reasonable and supportable period. These macroeconomic scenarios include variables that are considered key drivers of increases and decreases in credit losses. The Company utilizes a probability-weighted multiple scenario forecast approach. These scenarios may 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. A probability-weighted average of these macroeconomic scenarios over a reasonable and supportable forecast period is incorporated into the quantitative models. If the loans’ life extends beyond the reasonable and supportable forecast period, then historical experience, or long-run macroeconomic trends is considered over the remaining life of the loans in estimation of the allowance for loan losses.
Qualitative Component— The Company also considers the following qualitative factors in the determination of the collectively evaluated allowance, if these factors have not already been captured by the quantitative model. Such qualitative factors may include, but not limited to:
•Loan growth trends;
•The volume and severity of past due financial assets, and the volume and severity of adversely classified or rated financial assets;
•The Company’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices,
•Knowledge of the borrower’s operations;
•The quality of the Company’s credit review system;
•The experience, ability and depth of the Company’s management, lending staff and other relevant staff;
•The effect of other external factors such as the regulatory, legal and technological environments; and
•Actual and expected changes in international, national, regional, and local economic and business conditions in which the Company operates, including the actual and expected conditions of various market segments.
The magnitude of the impact of these factors on the Company’s qualitative assessment of the allowance for credit losses changes from period to period according to changes made by management in its assessment of these factors. The extent to which these factors change may be dependent on whether they are already reflected in quantitative loss estimates during the current period and the extent changes in these factors diverge from period to period. For the year ended December 31, 2020, there were no changes to the reasonable and supportable forecast period, and reversion to historical loss experience method.
The following table presentsprovides key credit risk characteristics and macroeconomic variables that the Company uses to estimate the expected credit losses by portfolio segment:
| Portfolio Segment | Risk Characteristics | Macroeconomic Variables | ||||||||||||
| C&I | Internal risk rating; size and credit spread at origination, and time to maturity | Unemployment rate, and two and ten year treasury spread | ||||||||||||
| CRE, Multifamily residential, and Construction and land | Delinquency status; maturity date; collateral value; property type, and geographic location | Unemployment rate; GDP, and U.S. Treasury rates | ||||||||||||
| Single-family residential and HELOCs | FICO; delinquency status; maturity date; collateral value, and geographic location | Unemployment rate; GDP, and home price index | ||||||||||||
| Other consumer | Historical loss experience | Immaterial (1) | ||||||||||||
(1)Macroeconomic variables are included in the qualitative estimate.
Allowance for Loan Losses for the Commercial Loan Portfolio— The Company’s C&I loan lifetime loss rate model estimates credit losses by estimating a summaryloss rate expected over the life of activitiesa loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivable, to determine expected credit losses. The lifetime loss rate model’s reasonable and supportable period spans eight quarters, thereafter immediately reverting to the historical average loss rate, expressed through the loan-level lifetime loss rate.
For CRE loans, projected probability of defaults (“PDs”) and loss given defaults (“LGDs”) are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. Within the reasonable and supportable period, the forecast of future economic conditions returns to long-run historical economic trends.
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In order to estimate the life of a loan under both models, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.
Allowance for Loan Losses for the Consumer Loan Portfolio — For single-family residential and HELOC loans, projected PDs and LGDs are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. Within the reasonable and supportable period, the forecast of future economic conditions returns to long-run historical economic trends.
For other consumer loans, the Company uses a loss rate approach. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.
Qualitative Allowance for Collectively Evaluated Loans — While the Company’s allowance methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. The Company may hold additional qualitative reserves that are designed to provide coverage for losses attributable to such risk. The allowance for loan losses as of December 31, 2020 also included qualitative adjustments for certain industry sectors, such as oil & gas, included as part of the C&I loan portfolio.
Allowance for Individually Evaluated Loans
When a loan no longer shares similar risk characteristics with other loans, such as in the case for certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and their fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the fair value of collateral less costs to sell; (2) the present value of expected future cash flows; and (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined not to be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan.
Collateral-Dependent Loans — When a loan is collateral dependent, the allowance is measured on an individual loan basis and is limited to the difference between the recorded value and fair value of the collateral less cost of disposal or sale. As of December 31, 2020, collateral-dependent commercial and consumer loans totaled $97.2 million and $17.3 million, respectively. The Company's commercial collateral-dependent loans were secured by real estates or other collateral. The Company's consumer collateral-dependent loans were all residential mortgage loans, secured by their underlying real estates. As of December 31, 2020, the collateral value of the properties securing each of these collateral dependent loans, net of selling costs, exceeded the recorded value of the individual loans.
The following tables summarize the activity in the allowance for loan losses by portfolio segmentsegments for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ 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) | 0 | 0 | 0 | (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 | 0 | 0 | 0 | 0 | 0 | 0 | 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, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Non-PCI Loans | ||||||||||||
| Allowance for non-PCI loans, beginning of period | $ | 260,402 | $ | 264,600 | $ | 260,965 | ||||||
| Provision for loan losses on non-PCI loans | 49,129 | 31,959 | 6,924 | |||||||||
| Gross charge-offs: | ||||||||||||
| Commercial lending: | ||||||||||||
| C&I | (38,118 | ) | (47,739 | ) | (20,423 | ) | ||||||
| CRE | — | (464 | ) | (1,052 | ) | |||||||
| Multifamily residential | (635 | ) | (29 | ) | (1,650 | ) | ||||||
| Construction and land | (149 | ) | (117 | ) | (493 | ) | ||||||
| Consumer lending: | ||||||||||||
| Single-family residential | (1 | ) | (137 | ) | (36 | ) | ||||||
| HELOCs | (55 | ) | (9 | ) | (98 | ) | ||||||
| Other consumer | (17 | ) | (13 | ) | (502 | ) | ||||||
| Total gross charge-offs | (38,975 | ) | (48,508 | ) | (24,254 | ) | ||||||
| Gross recoveries: | ||||||||||||
| Commercial lending: | ||||||||||||
| C&I | 12,065 | 8,453 | 8,782 | |||||||||
| CRE | 2,111 | 1,488 | 2,488 | |||||||||
| Multifamily residential | 1,357 | 1,476 | 4,298 | |||||||||
| Construction and land | 259 | 203 | 4,647 | |||||||||
| Consumer lending: | ||||||||||||
| Single-family residential | 546 | 401 | 323 | |||||||||
| HELOCs | 24 | 7 | 54 | |||||||||
| Other consumer | 152 | 323 | 373 | |||||||||
| Total gross recoveries | 16,514 | 12,351 | 20,965 | |||||||||
| Net charge-offs | (22,461 | ) | (36,157 | ) | (3,289 | ) | ||||||
| Allowance for non-PCI loans, end of period | 287,070 | 260,402 | 264,600 | |||||||||
| PCI Loans | ||||||||||||
| Allowance for PCI loans, beginning of period | 118 | 359 | 714 | |||||||||
| Reversal of loan losses on PCI loans | (60 | ) | (241 | ) | (355 | ) | ||||||
| Allowance for PCI loans, end of period | 58 | 118 | 359 | |||||||||
| Allowance for loan losses | $ | 287,128 | $ | 260,520 | $ | 264,959 | ||||||
| ($ 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) | 0 | 0 | (11) | 0 | (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) | 0 | 0 | 0 | 0 | 0 | 0 | (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) | 0 | 0 | 0 | (1) | 0 | (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) | 0 | 0 | 0 | 0 | 0 | 0 | (743) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses, end of period | $ | 189,117 | $ | 40,666 | $ | 19,885 | $ | 20,290 | $ | 31,340 | $ | 5,774 | $ | 4,250 | $ | 311,322 | ||||||||||||||||||||||||||||||||||||||||||||||
The following table presents a summary ofsummarizes the activities in the allowance for unfunded credit reservescommitments for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Unfunded credit facilities | ||||||||||||||||||||
| Allowance for unfunded credit commitments, beginning of period | $ | 11,158 | $ | 12,566 | $ | 13,318 | ||||||||||||||
| Impact of ASU 2016-13 adoption | 10,457 | 0 | 0 | |||||||||||||||||
| Provision for (reversal of ) credit losses on unfunded credit commitments | (b) | 11,962 | (1,408) | (752) | ||||||||||||||||
| Allowance for unfunded credit commitments, end of period | 33,577 | 11,158 | 12,566 | |||||||||||||||||
| Provision for credit losses | (a) + (b) | $ | 210,653 | $ | 98,685 | $ | 64,255 | |||||||||||||
The allowance for loan losses as of December 31, 2020 was $620.0 million, an increase of $261.7 million compared with $358.3 million as of December 31, 2019. The adoption of ASU 2016-13 increased the allowance for loan losses by $125.2 million on January 1, 2020. In addition, the overall increases in allowance for loan losses and the provision for credit losses of $210.7 million for the year ended December 31, 2020 were primarily driven by the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic. During the year ended December 31, 2020, the macroeconomic environment declined in the first half of the year, and then improved slightly for the second half of 2020. The Company uses a multi-scenario approach in calculating the allowance for loan losses and applies management judgment to add qualitative factors for the impact of COVID-19 pandemic on industry and CRE sectors that are affected by the pandemic.
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| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Allowance for unfunded credit reserves, beginning of period | $ | 16,121 | $ | 20,360 | $ | 12,712 | ||||||
| (Reversal of) provision for unfunded credit reserves | (2,803 | ) | (4,239 | ) | 7,648 | |||||||
| Allowance for unfunded credit reserves, end of period | $ | 13,318 | $ | 16,121 | $ | 20,360 | ||||||
The allowance for unfunded credit reservescommitments is maintained at a level that management believes to be sufficient to absorb estimated probableexpected credit losses related to unfunded credit facilities. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. See Note 1312 — Commitments, Contingencies and Related Party Transactions to the Consolidated Financial Statements in this Form 10-K for additional information related to unfunded credit reserves.
The following tables presenttable presents the Company’s allowance for loan losses and recorded investments by portfolio segmentsegments and impairment methodology as of December 31, 2017 and 2016:2019. This table is no longer presented after December 31, 2019, given the adoption of ASU 2016-13 on January 1, 2020, which has a single impairment methodology.
| ($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 2,881 | $ | 97 | $ | 55 | $ | 0 | $ | 35 | $ | 8 | $ | 2,517 | $ | 5,593 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 235,495 | 40,412 | 22,771 | 19,404 | 28,492 | 5,257 | 863 | 352,694 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 238,376 | $ | 40,509 | $ | 22,826 | $ | 19,404 | $ | 28,527 | $ | 5,265 | $ | 3,380 | $ | 358,287 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recorded investment in loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 114,042 | $ | 21,618 | $ | 4,464 | $ | 19,691 | $ | 22,211 | $ | 13,574 | $ | 2,517 | $ | 198,117 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 12,035,079 | 10,143,629 | 2,829,748 | 608,768 | 7,006,768 | 1,453,162 | 280,397 | 34,357,551 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | 1,810 | 113,201 | 22,162 | 40 | 79,611 | 6,047 | 0 | 222,871 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (1) | $ | 12,150,931 | $ | 10,278,448 | $ | 2,856,374 | $ | 628,499 | $ | 7,108,590 | $ | 1,472,783 | $ | 282,914 | $ | 34,778,539 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, 2017 | |||||||||||||||||||||||||||||||
| Commercial Lending | Consumer Lending | |||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 16,094 | $ | 684 | $ | 88 | $ | — | $ | 534 | $ | 4 | $ | 2,491 | $ | 19,895 | ||||||||||||||||
| Collectively evaluated for impairment | 146,964 | 40,495 | 19,021 | 26,881 | 25,828 | 7,350 | 636 | 267,175 | ||||||||||||||||||||||||
| Acquired with deteriorated credit quality | — | 58 | — | — | — | — | — | 58 | ||||||||||||||||||||||||
| Total | $ | 163,058 | $ | 41,237 | $ | 19,109 | $ | 26,881 | $ | 26,362 | $ | 7,354 | $ | 3,127 | $ | 287,128 | ||||||||||||||||
| Recorded investment in loans | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 98,685 | $ | 35,556 | $ | 10,636 | $ | 3,973 | $ | 14,338 | $ | 5,208 | $ | 2,491 | $ | 170,887 | ||||||||||||||||
| Collectively evaluated for impairment | 10,586,751 | 8,623,653 | 1,844,492 | 655,353 | 4,514,573 | 1,763,709 | 334,013 | 28,322,544 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | 11,795 | 277,688 | 61,048 | 371 | 117,378 | 14,007 | — | 482,287 | ||||||||||||||||||||||||
Total (1) | $ | 10,697,231 | $ | 8,936,897 | $ | 1,916,176 | $ | 659,697 | $ | 4,646,289 | $ | 1,782,924 | $ | 336,504 | $ | 28,975,718 | ||||||||||||||||
| ($ in thousands) | December 31, 2016 | |||||||||||||||||||||||||||||||
| Commercial Lending | Consumer Lending | |||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 10,477 | $ | 1,263 | $ | 180 | $ | 63 | $ | 687 | $ | 31 | $ | — | $ | 12,701 | ||||||||||||||||
| Collectively evaluated for impairment | 131,689 | 46,552 | 17,363 | 24,926 | 19,103 | 7,475 | 593 | 247,701 | ||||||||||||||||||||||||
| Acquired with deteriorated credit quality | 1 | 112 | — | — | 5 | — | — | 118 | ||||||||||||||||||||||||
| Total | $ | 142,167 | $ | 47,927 | $ | 17,543 | $ | 24,989 | $ | 19,795 | $ | 7,506 | $ | 593 | $ | 260,520 | ||||||||||||||||
| Recorded investment in loans | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 125,619 | $ | 46,508 | $ | 10,041 | $ | 5,870 | $ | 14,335 | $ | 3,682 | $ | — | $ | 206,055 | ||||||||||||||||
| Collectively evaluated for impairment | 9,476,557 | 7,621,153 | 1,480,244 | 666,966 | 3,356,334 | 1,738,170 | 315,215 | 24,654,639 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | 38,387 | 348,448 | 95,654 | 1,918 | 139,110 | 18,924 | 4 | 642,445 | ||||||||||||||||||||||||
Total (1) | $ | 9,640,563 | $ | 8,016,109 | $ | 1,585,939 | $ | 674,754 | $ | 3,509,779 | $ | 1,760,776 | $ | 315,219 | $ | 25,503,139 | ||||||||||||||||
Purchased Credit ImpairedCredit-Impaired Loans
The following table presents the changes in the accretable yield foron PCI loans for the years ended December 31, 2017, 20162019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| Accretable yield for PCI loans, beginning of period | $ | 74,870 | $ | 101,977 | ||||||||||||||||
| Accretion | (24,220) | (34,662) | ||||||||||||||||||
| Changes in expected cash flows | (140) | 7,555 | ||||||||||||||||||
| Accretable yield for PCI loans, end of period | $ | 50,510 | $ | 74,870 | ||||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Accretable yield for PCI loans, beginning of period | $ | 136,247 | $ | 214,907 | $ | 311,688 | ||||||
| Accretion | (42,487 | ) | (68,708 | ) | (107,442 | ) | ||||||
| Changes in expected cash flows | 8,217 | (9,952 | ) | 10,661 | ||||||||
| Accretable yield for PCI loans, end of period | $ | 101,977 | $ | 136,247 | $ | 214,907 | ||||||
Loans Held-for-Sale
As of December 31, 2020 and 2019, loans held-for-sale of $1.8 million and $434 thousand, respectively, consisted of single-family residential loans. Refer to Note 1— Summary of Significant Accounting Policies — Significant Accounting Policies — Loans held-for-sale are carried atHeld-for-Sale to the lower of cost or fair value. When a determination is made at the time of commitmentConsolidated Financial Statements in this Form 10-K for additional details related to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability managementheld-for-sale.
147
Loan Transfers, Sales and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value. From time to time, thePurchases
The Company purchases and sells loans in the secondary market. Certain purchasedmarket in the ordinary course of business. Purchased loans aremay be transferred from held-for-investment to held-for-sale;held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate.
The following tables presentprovide information about the sales, purchases and securitizationcarrying value of loans purchased for the held-for-investment portfolio, loans sold and reclassification of loans held-for-investment to/from loans held-for-saleloan transfers during the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | Residential Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | ||||||||||||||||||||||||||||||||||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 300,677 | $ | 26,994 | $ | 1,398 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 329,069 | ||||||||||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 303,520 | $ | 26,994 | $ | 1,398 | $ | 0 | $ | 80,309 | $ | 0 | $ | 0 | $ | 412,221 | ||||||||||||||||||||||||||||||||||
Purchases (5) | $ | 154,154 | $ | 0 | $ | 2,358 | $ | 0 | $ | 233,068 | $ | 0 | $ | 0 | $ | 389,580 | ||||||||||||||||||||||||||||||||||
| ($ 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 transferred from held-for-investment to held-for-sale (1) | $ | 245,002 | $ | 39,062 | $ | 0 | $ | 1,573 | $ | 0 | $ | 0 | $ | 0 | $ | 285,637 | ||||||||||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 245,791 | $ | 39,062 | $ | 0 | $ | 1,573 | $ | 10,410 | $ | 0 | $ | 0 | $ | 296,836 | ||||||||||||||||||||||||||||||||||
Purchases (5) | $ | 397,615 | $ | 0 | $ | 8,988 | $ | 0 | $ | 117,227 | $ | 0 | $ | 0 | $ | 523,830 | ||||||||||||||||||||||||||||||||||
| ($ 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 transferred from held-for-investment to held-for-sale (1) | $ | 404,321 | $ | 62,291 | $ | 0 | $ | 0 | $ | 14,981 | $ | 0 | $ | 0 | $ | 481,593 | ||||||||||||||||||||||||||||||||||
| Loans transferred from held-for-sale to held-for-investment | $ | 2,306 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2,306 | ||||||||||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 413,844 | $ | 62,291 | $ | 0 | $ | 0 | $ | 34,966 | $ | 0 | $ | 0 | $ | 511,101 | ||||||||||||||||||||||||||||||||||
Purchases (5) | $ | 525,767 | $ | 0 | $ | 7,389 | $ | 0 | $ | 63,781 | $ | 0 | $ | 0 | $ | 596,937 | ||||||||||||||||||||||||||||||||||
(1)The Company recorded write-downs of $2.8 million, $789 thousand and $14.6 million to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the years ended December 31, 2020, 2019 and 2018, respectively.
(2)Includes originated loans sold of $400.4 million, $230.3 million and $309.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Originated loans sold consist primarily of C&I for all periods.
(3)Includes purchased loans of $11.8 million, $66.5 million and $201.4 million sold in the secondary market for the years ended December 31, 2020, 2019 and 2018, respectively.
(4)Net gains on sales of loans were $4.5 million, $4.0 million and $6.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(5)C&I loan purchases comprised primarily of syndicated C&I term loans.
148
| ($ in thousands) | Year Ended December 31, 2017 | ||||||||||||||||||||||||||||||||
| Commercial Lending | Consumer Lending | ||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | Total | ||||||||||||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 476,644 | $ | 52,217 | $ | 531 | $ | 1,609 | $ | 249 | $ | — | $ | 3,706 | $ | 534,956 | (1) | ||||||||||||||||
Loans of DCB branches transferred from held-for-investment to held-for-sale (included in Branch assets held-for-sale) | $ | 17,590 | $ | 36,783 | $ | 12,448 | $ | 241 | $ | 6,416 | $ | 4,309 | $ | 345 | $ | 78,132 | (1) | ||||||||||||||||
| Sales | $ | 476,644 | $ | 52,217 | $ | 531 | $ | 1,609 | $ | 21,058 | $ | — | $ | 25,905 | $ | 577,964 | (2)(3)(4) | ||||||||||||||||
| Purchases | $ | 503,359 | $ | — | $ | 2,311 | $ | — | $ | 29,060 | $ | — | $ | — | $ | 534,730 | (6) | ||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2016 | ||||||||||||||||||||||||||||||||
| Commercial Lending | Consumer Lending | ||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | Total | ||||||||||||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 434,137 | $ | 110,927 | $ | 269,791 | $ | 4,245 | $ | — | $ | — | $ | — | $ | 819,100 | (1) | ||||||||||||||||
| Loans transferred from held-for-sale to held-for-investment | $ | — | $ | — | $ | (4,943 | ) | $ | — | $ | — | $ | — | $ | — | $ | (4,943 | ) | |||||||||||||||
| Sales | $ | 434,137 | $ | 110,927 | $ | 61,268 | $ | 4,245 | $ | 18,092 | $ | — | $ | — | $ | 628,669 | (2)(3)(4) | ||||||||||||||||
| Securitization of loans held-for-investment | $ | — | $ | — | $ | 201,675 | $ | — | $ | — | $ | — | $ | — | $ | 201,675 | (5) | ||||||||||||||||
| Purchases | $ | 646,793 | $ | — | $ | 5,658 | $ | — | $ | 488,577 | $ | — | $ | — | $ | 1,141,028 | (6)(7) | ||||||||||||||||
| ($ in thousands) | Year Ended December 31, 2015 | ||||||||||||||||||||||||||||||||
| Commercial Lending | Consumer Lending | ||||||||||||||||||||||||||||||||
| C&I | CRE | Multifamily Residential | Construction and Land | Single-Family Residential | HELOCs | Other Consumer | Total | ||||||||||||||||||||||||||
| Loans transferred from held-for-investment to held-for-sale | $ | 779,854 | $ | 227 | $ | — | $ | 4,754 | $ | 962,538 | $ | 248 | $ | — | $ | 1,747,621 | (1) | ||||||||||||||||
| Loans transferred from held-for-sale to held-for-investment | $ | — | $ | — | $ | — | $ | — | $ | (53,376 | ) | $ | — | $ | — | $ | (53,376 | ) | |||||||||||||||
| Sales | $ | 779,682 | $ | 227 | $ | — | $ | 4,754 | $ | 907,373 | $ | 248 | $ | 9,913 | $ | 1,702,197 | (2)(3)(4) | ||||||||||||||||
| Purchases | $ | 233,090 | $ | — | $ | 11,046 | $ | — | $ | 38,271 | $ | — | $ | — | $ | 282,407 | (6) | ||||||||||||||||
Note 8 7 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities
The CRACommunity Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities, for housingparticularly including low- and other purposes, particularly in neighborhoods with low or moderate income.moderate-income individuals and neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA and tax credits. Such limited partnershipsThese entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. EachTo fully utilize the available tax credits, each of the partnershipsthese entities must meet the regulatory requirements for affordable housing requirements for a minimum 15-year compliance period to fully utilize the tax credits.period. In addition to affordable housing limited partnerships,projects, the Company also invests in new market tax creditNew Market Tax Credit projects that qualify for CRA credits, andas well as eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, whileand the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.
Investments in Qualified Affordable Housing Partnerships, Net
The Company records its 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 following table presents the balances of the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of the periods indicated:December 31, 2020 and 2019:
| ($ in thousands) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| Investments in qualified affordable housing partnerships, net | $ | 213,555 | $ | 207,037 | ||||||||||
| Accrued expenses and other liabilities — Unfunded commitments | $ | 77,444 | $ | 80,294 | ||||||||||
| ($ in thousands) | December 31, | |||||||
| 2017 | 2016 | |||||||
| Investments in qualified affordable housing partnerships, net | $ | 162,824 | $ | 183,917 | ||||
| Accrued expenses and other liabilities — Unfunded commitments | $ | 55,815 | $ | 57,243 | ||||
The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the periods indicated:years ended December 31, 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Tax credits and other tax benefits recognized | $ | 45,971 | $ | 46,034 | $ | 39,262 | ||||||||||||||
| Amortization expense included in income tax expense | $ | 37,132 | $ | 36,561 | $ | 28,046 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Tax credits and other tax benefits recognized | $ | 46,698 | $ | 37,252 | $ | 38,271 | ||||||
| Amortization expense included in income tax expense | $ | 38,464 | $ | 28,206 | $ | 26,814 | ||||||
Investments in Tax Credit and Other Investments, Net
| ($ in thousands) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| Investments in tax credit and other investments, net | $ | 266,525 | $ | 254,140 | ||||||||||
| Accrued expenses and other liabilities — Unfunded commitments | $ | 105,282 | $ | 113,515 | ||||||||||
Amortization of tax credit and other investments was $88.0$70.1 million, $83.4$98.4 million, and $36.1$96.2 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
149
The Company held equity securities with readily determinable fair values of $31.3 million and $31.7 million, as of December 31, 2020 and 2019, respectively. These equity securities were CRA investments measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $732 thousand for the year ended December 31, 2020, and unrealized gains of $789 thousand for the year ended December 31, 2019. Equity securities with readily determinable fair value were included in Investments in tax credit and other investments, net on the Consolidated Balance Sheet.
The Company held equity securities without readily determinable fair values totaling $23.7 million and $19.1 million as of December 31, 2020 and 2019, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. The increase during 2020 was primarily due to a $5.0 million purchase of 1 new security in the fourth quarter of 2020. For the year ended December 31, 2020, the Company recorded $360 thousand in OTTI charges related to these securities. NaN adjustments were made to these securities for the year ended December 31, 2019. Equity securities without readily determinable fair values were included in Investments in tax credit and other investments, net and Other Assets on the Consolidated Balance Sheet.
As of December 31, 2017,2020, the Company’s unfunded commitments related to investments in qualified affordable housing partnerships, tax credit and other investments are estimated to be funded as follows:
| ($ in thousands) | Amount | |||||||
| 2021 | $ | 125,142 | ||||||
| 2022 | 37,175 | |||||||
| 2023 | 14,499 | |||||||
| 2024 | 2,034 | |||||||
| 2025 | 462 | |||||||
| Thereafter | 3,414 | |||||||
| Total | $ | 182,726 | ||||||
Tax credit investments are evaluated for possible OTTI on an annual basis or when events or changes in circumstances suggest that the carrying amount of the tax credit investments may not be realizable. OTTI charges are recorded within Amortization of tax credit and other investments, net on the Consolidated Statement of Income. Refer to Note 2 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. There were $4.8 million OTTI charges, offset by OTTI recoveries of $1.5 million recorded on the Company’s investments in tax credits and other investments, net, during the year ended December 31, 2020. Comparatively, there were $14.6 million in OTTI charges, offset by OTTI recoveries of $1.6 million recorded during the year ended December 31, 2019. The higher OTTI charges recorded during the year ended December 31, 2019 were primarily due to $5.4 million in net OTTI charges related to the Company’s investment in DC Solar and affiliates (“DC Solar”) discussed below.
The Company invested in 4 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. 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 a Federal Bureau of Investigation (“FBI”) 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 had been received by DC Solar might not have existed.
During 2019, the Company recorded $7.0 million OTTI charge on its remaining tax credit investment related to DC Solar, and subsequently recovered $1.6 million. During 2020, the Company further recorded $10.7 million in recoveries, of which $1.1 million was recorded as an impairment recovery. There were 0 balances in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of both December 31, 2020 and 2019. Refer to Note 11 — Income Taxes to the Consolidated Financial Statements in this Form 10-K for a further discussion related to the impacts on the Company’s income tax expense related to the DC solar tax credit investments.
150
| ($ in thousands) | Amount | |||
| 2018 | $ | 98,000 | ||
| 2019 | 34,790 | |||
| 2020 | 16,744 | |||
| 2021 | 7,734 | |||
| 2022 | 11,078 | |||
| Thereafter | 841 | |||
| Total | $ | 169,187 | ||
The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation, wind and solar projects, of which the majority of such investments are VIEs. As a limited partner in these partnerships, these investments are designed to generate a return primarily through the realization of federal tax credits and tax benefits. An unrelated third party is typically the general partner or managing member who has control over the significant activities of such investments. While the Company’s interest in some of the investments may exceed 50% of the outstanding equity interests, the Company does not consolidate these structures due to the general partner or managing member’s ability to manage the entity, which is indicative of power over them. The Company’s maximum exposure to loss in connection with these partnerships consist of the unamortized investment balance and any tax credits claimed that may become subject to recapture.
Special purpose entities formed in connection with securitization transactions are generally considered VIEs. A CLO is a VIE that purchases a pool of assets consisting primarily of non-investment grade corporate loans, and issues multiple tranches of notes to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. The Company served as the collateral manager of a CLO that closed in 2019 and subsequently reassigned its portfolio manager responsibilities in 2020. The Company had retained the top 3 investment grade-rated tranches issued by the CLO, which the carrying amounts were $287.5 million and $284.7 million as of December 31, 2020 and 2019, respectively.
Note 98 — Goodwill and Other Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill by reporting units during the year ended December 31, 2017 as2019:
| ($ in thousands) | Consumer and Business Banking | Commercial Banking | Total | |||||||||||||||||
| Beginning balance, January 1, 2019 | $ | 353,321 | $ | 112,226 | $ | 465,547 | ||||||||||||||
| Acquisition of East West Markets, LLC | 0 | 150 | 150 | |||||||||||||||||
| Ending balance, December 31, 2019 | $ | 353,321 | $ | 112,376 | $ | 465,697 | ||||||||||||||
There were 0 changes in the fair valuecarrying amount of all reporting units exceeded their respective carrying value. No assurance can be given that goodwill will not be written down in future periods.during the year ended December 31, 2020.
Core Deposit Intangibles
| ($ in thousands) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
Gross balance (1) | $ | 86,099 | $ | 86,099 | ||||||||||
Accumulated amortization (1) | (79,722) | (76,088) | ||||||||||||
Net carrying balance (1) | $ | 6,377 | $ | 10,011 | ||||||||||
(1) Excludes fully amortized core deposit liabilities assumed in various acquisitions and are included in Other assets on the Consolidated Balance Sheet. These intangibles are tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. intangible assets.
There were no0 impairment write-downs on core deposit intangibles for the years ended December 31, 2017, 20162020, 2019 and 2015.
151
| ($ in thousands) | December 31, | |||||||
| 2017 | 2016 | |||||||
| Gross balance | $ | 108,814 | $ | 108,814 | ||||
| Accumulated amortization | (87,760 | ) | (80,825 | ) | ||||
| Net carrying balance | $ | 21,054 | $ | 27,989 | ||||
Amortization Expense
The Company amortizes the core deposit intangibles based on the projected useful lives of the related deposits. The amortization expense related to the core deposit intangible assets was $6.9$3.6 million, $8.1$4.5 million and $9.2$5.5 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
The following table presents the estimated future amortization expense of core deposit intangibles for the five years succeedingas of December 31, 2017 and thereafter:2020:
| ($ in thousands) | Amount | |||||||
| 2021 | $ | 2,749 | ||||||
| 2022 | 1,865 | |||||||
| 2023 | 1,199 | |||||||
| 2024 | 553 | |||||||
| 2025 | 11 | |||||||
| Thereafter | 0 | |||||||
| Total | $ | 6,377 | ||||||
| ($ in thousands) | Amount | |||
| 2018 | $ | 5,883 | ||
| 2019 | 4,864 | |||
| 2020 | 3,846 | |||
| 2021 | 2,833 | |||
| 2022 | 1,865 | |||
| Thereafter | 1,763 | |||
| Total | $ | 21,054 | ||
Note 109 — Deposits
The following table presents the balances forcomposition of the Company’s deposits as of December 31, 20172020 and 2016:2019:
| ($ in thousands) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| Deposits: | ||||||||||||||
| Noninterest-bearing demand | $ | 16,298,301 | $ | 11,080,036 | ||||||||||
| Interest-bearing checking | 6,142,193 | 5,200,755 | ||||||||||||
| Money market | 10,740,667 | 8,711,964 | ||||||||||||
| Savings | 2,681,242 | 2,117,196 | ||||||||||||
| Time deposits: | ||||||||||||||
| Less than $100,000 | 999,664 | 1,993,950 | ||||||||||||
| $100,000 or greater | 8,000,685 | 8,220,358 | ||||||||||||
| Total deposits | $ | 44,862,752 | $ | 37,324,259 | ||||||||||
| December 31, | ||||||||
| ($ in thousands) | 2017 | 2016 | ||||||
| Core deposits: | ||||||||
| Noninterest-bearing demand | $ | 10,887,306 | $ | 10,183,946 | ||||
| Interest-bearing checking | 4,419,089 | 3,674,417 | ||||||
| Money market | 8,359,425 | 8,174,854 | ||||||
| Savings | 2,308,494 | 2,242,497 | ||||||
| Total core deposits | 25,974,314 | 24,275,714 | ||||||
| Time deposits: | ||||||||
| Less than $100,000 | 1,176,973 | 1,300,091 | ||||||
| $100,000 or greater | 4,463,776 | 4,315,178 | ||||||
| Total time deposits | 5,640,749 | 5,615,269 | ||||||
| Total deposits | $ | 31,615,063 | $ | 29,890,983 | ||||
The aggregate amount of domestic time deposits that meet or exceed the current FDICFederal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 was $2.37$5.78 billion and $2.35$5.44 billion as of December 31, 20172020 and 2016,2019, respectively. TheAs of December 31, 2020 and 2019, the aggregate amount of foreign office time deposits, including both Hong Kong and China that meet or exceed the current FDIC insurance limit of $250,000 was $814.6$823.2 million and $538.0$1.19 billion, respectively.
As of December 31, 2020, $696.1 million of interest-bearing demand deposits and $840.7 million of time deposits were held by the Company’s branch in Hong Kong and subsidiary bank in China. In comparison, $493.4 million of interest-bearing demand deposits and $1.21 billion of time deposits were held by the Company’s branch in Hong Kong and subsidiary bank in China as of December 31, 2017 and 2016, respectively.2019.
The following table presents the scheduled maturities of time deposits for the five years succeeding December 31, 20172020 and thereafter:
| ($ in thousands) | Amount | |||||||
| 2021 | $ | 8,608,547 | ||||||
| 2022 | 332,809 | |||||||
| 2023 | 41,178 | |||||||
| 2024 | 11,085 | |||||||
| 2025 | 6,715 | |||||||
| Thereafter | 15 | |||||||
| Total | $ | 9,000,349 | ||||||
152
| ($ in thousands) | Amount | |||
| 2018 | $ | 4,930,794 | ||
| 2019 | 394,274 | |||
| 2020 | 102,768 | |||
| 2021 | 86,308 | |||
| 2022 | 94,602 | |||
| Thereafter | 32,003 | |||
| Total | $ | 5,640,749 | ||
Note 1110 — Federal Home Loan Bank Advances and Long-Term Debt
The following table presents the balance of the Company’s junior subordinated debt and FHLB advances totaled $323.9 million and $321.6 million as of December 31, 20172020 and 2016,2019, and the related contractual rates and maturity dates as of December 31, 2020:
| ($ in thousands) | Interest Rate | Maturity Dates | December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Amount | Amount | |||||||||||||||||||||||||||||||
| Parent Company | ||||||||||||||||||||||||||||||||
Junior subordinated debt (1 ) — floating | 1.57% — 2.12% | 2034 — 2037 | $ | 147,376 | $ | 147,101 | ||||||||||||||||||||||||||
| Bank | ||||||||||||||||||||||||||||||||
FHLB advances (2): | ||||||||||||||||||||||||||||||||
| Fixed | 0.00% — 2.34% | 2021 | 405,000 | 400,000 | ||||||||||||||||||||||||||||
Floating (3) | 0.60% — 0.63% | 2022 | 247,612 | 345,915 | ||||||||||||||||||||||||||||
| Total FHLB advances | $ | 652,612 | $ | 745,915 | ||||||||||||||||||||||||||||
(1)The weighted-average contractual interest rates for junior subordinated debt were 2.26% and 3.98% as of December 31, 2020 and 2019, respectively.
(2)The weighted-average contractual interest rates for FHLB advances have floatingwere 1.77% and 2.19% as of December 31, 2020 and 2019, respectively.
(3)Floating interest rates that reset monthly or quarterly based on LIBOR. The weighted-average interest rate was 1.85% and 1.13% as of December 31, 2017 and 2016, respectively. The interest rates ranged from 0.67% to 1.95% and 0.41% to 1.27% for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017,
FHLB advances that will mature in the next five years include $81.3 million in 2019 and $242.6 million in 2022.Advances
The Company’sBank’s available borrowing capacity from FHLB advances totaled $6.83$6.33 billion and $5.65$6.83 billion as of December 31, 20172020 and 2016,2019, respectively. The Company’sBank’s available borrowing capacity from the FHLB is derived from its portfolio of loans that are pledged to the FHLB reduced by its outstanding FHLB advances. As of December 31, 20172020 and 2016,2019, all advances were secured by real estate loans.
Long-Term Debt
| ($ in thousands) | December 31, | |||||||
| 2017 | 2016 | |||||||
| Junior subordinated debt | $ | 146,577 | $ | 146,327 | ||||
| Term loan | 25,000 | 40,000 | ||||||
| Total long-term debt | $ | 171,577 | $ | 186,327 | ||||
— Junior Subordinated Debt—
As of December 31, 2017, the Company2020, East West has six6 statutory business trusts for the purpose of issuing junior subordinated debt to third party investors. The junior subordinated debt was issued in connection with the Company’sEast West’s various pooled trust preferred securities offerings. The Trusts issued both fixed and variable rate capital securities, representing undivided preferred beneficial interests in the assets of the Trusts, to third party investors. The CompanyEast West is the owner of all the beneficial interests represented by the common securities of the Trusts. The junior subordinated debt is recorded as a component of long-term debt and includes the value of the common stock issued by six6 of the Company’s wholly-ownedEast West’s wholly owned subsidiaries in conjunction with these transactions. The common stock is recorded in Other assets on the Consolidated Balance Sheet for the amount issued in connection with these junior subordinated debt issuances. The proceeds from these issuances represent liabilities of East West to the Trusts and are reported on the Consolidated Balance Sheet as a component of Long-term debt. Interest payments on these securities are made quarterly and are deductible for tax purposes.
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The following table presents the outstanding junior subordinated debt issued by each trust as of December 31, 20172020 and 2016:2019:
| Issuer | Stated Maturity (1) | Stated Interest Rate | Current Rate | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
| Aggregate Principal Amount of Trust Securities | Aggregate Principal Amount of the Junior Subordinated Debts | Aggregate Principal Amount of Trust Securities | Aggregate Principal Amount of the Junior Subordinated Debts | |||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| East West Capital Trust V | November 2034 | 3-month LIBOR + 1.80% | 2.01% | $ | 464 | $ | 15,000 | $ | 464 | $ | 15,000 | |||||||||||||||||||||||||||||||||
| East West Capital Trust VI | September 2035 | 3-month LIBOR + 1.50% | 1.72% | 619 | 20,000 | 619 | 20,000 | |||||||||||||||||||||||||||||||||||||
| East West Capital Trust VII | June 2036 | 3-month LIBOR + 1.35% | 1.57% | 928 | 30,000 | 928 | 30,000 | |||||||||||||||||||||||||||||||||||||
| East West Capital Trust VIII | June 2037 | 3-month LIBOR + 1.40% | 1.63% | 619 | 18,000 | 619 | 18,000 | |||||||||||||||||||||||||||||||||||||
| East West Capital Trust IX | September 2037 | 3-month LIBOR + 1.90% | 2.12% | 928 | 30,000 | 928 | 30,000 | |||||||||||||||||||||||||||||||||||||
| MCBI Statutory Trust I | December 2035 | 3-month LIBOR + 1.55% | 1.77% | 1,083 | 35,000 | 1,083 | 35,000 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 4,641 | $ | 148,000 | $ | 4,641 | $ | 148,000 | ||||||||||||||||||||||||||||||||||||
| Issuer | Stated Maturity (1) | Stated Interest Rate | Current Rate | December 31, 2017 | December 31, 2016 | |||||||||||||||||
Aggregate Principal Amount of Trust Securities | Aggregate Principal Amount of the Junior Subordinated Debts | Aggregate Principal Amount of Trust Securities | Aggregate Principal Amount of the Junior Subordinated Debts | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||
| East West Capital Trust V | November 2034 | 3-month LIBOR + 1.80% | 3.25% | $ | 464 | $ | 15,000 | $ | 464 | $ | 15,000 | |||||||||||
| East West Capital Trust VI | September 2035 | 3-month LIBOR + 1.50% | 3.09% | 619 | 20,000 | 619 | 20,000 | |||||||||||||||
| East West Capital Trust VII | June 2036 | 3-month LIBOR + 1.35% | 2.94% | 928 | 30,000 | 928 | 30,000 | |||||||||||||||
| East West Capital Trust VIII | June 2037 | 3-month LIBOR + 1.40% | 2.91% | 619 | 18,000 | 619 | 18,000 | |||||||||||||||
| East West Capital Trust IX | September 2037 | 3-month LIBOR + 1.90% | 3.49% | 928 | 30,000 | 928 | 30,000 | |||||||||||||||
| MCBI Statutory Trust I | December 2035 | 3-month LIBOR + 1.55% | 3.14% | 1,083 | 35,000 | 1,083 | 35,000 | |||||||||||||||
| Total | $ | 4,641 | $ | 148,000 | $ | 4,641 | $ | 148,000 | ||||||||||||||
| (1)All |
Note 1211 — Income Taxes
The following table presents the components of income tax expense for the years indicated:
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current income tax expense (benefit): | ||||||||||||
| Federal | $ | 120,968 | $ | 63,642 | $ | (62,829 | ) | |||||
| State | 72,837 | 48,558 | (4,750 | ) | ||||||||
| Foreign | 1,815 | 1,345 | 409 | |||||||||
| Total current income tax expense (benefit) | 195,620 | 113,545 | (67,170 | ) | ||||||||
| Deferred income tax expense (benefit): | ||||||||||||
| Federal | 40,057 | 25,296 | 199,858 | |||||||||
| State | (6,201 | ) | 1,883 | 60,437 | ||||||||
| Foreign | — | (213 | ) | 919 | ||||||||
| Total deferred income tax expense | 33,856 | 26,966 | 261,214 | |||||||||
| Income tax expense | $ | 229,476 | $ | 140,511 | $ | 194,044 | ||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current income tax expense (benefit): | ||||||||||||||||||||
| Federal | $ | 84,560 | $ | 107,393 | $ | 63,035 | ||||||||||||||
| State | 74,252 | 86,578 | 64,917 | |||||||||||||||||
| Foreign | 671 | (2,485) | 3,513 | |||||||||||||||||
| Total current income tax expense | 159,483 | 191,486 | 131,465 | |||||||||||||||||
| Deferred income tax (benefit) expense: | ||||||||||||||||||||
| Federal | (28,093) | (8,801) | (11,870) | |||||||||||||||||
| State | (11,671) | (16,390) | (4,600) | |||||||||||||||||
| Foreign | (1,751) | 3,587 | 0 | |||||||||||||||||
| Total deferred income tax benefit | (41,515) | (21,604) | (16,470) | |||||||||||||||||
| Income tax expense | $ | 117,968 | $ | 169,882 | $ | 114,995 | ||||||||||||||
The following table presents the reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Statutory U.S. federal tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| U.S. state income taxes, net of U.S. federal income tax effect | 7.2 | 7.1 | 5.8 | |||||||||||||||||
| Tax credits and benefits, net of related expenses | (12.4) | (6.8) | (12.7) | |||||||||||||||||
| Other, net | 1.4 | (1.2) | (0.1) | |||||||||||||||||
| Effective tax rate | 17.2 | % | 20.1 | % | 14.0 | % | ||||||||||||||
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| Year Ended December 31, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Federal income tax provision at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State franchise taxes, net of federal tax effect | 5.9 | 6.1 | 6.3 | ||||||
| Tax Cuts and Jobs Act of 2017 (the “Tax Act”) | 4.5 | — | — | ||||||
| Tax credits, net of amortization | (15.1 | ) | (18.3 | ) | (8.7 | ) | |||
| Other, net | 0.9 | 1.8 | 0.9 | ||||||
| Effective tax rate | 31.2 | % | 24.6 | % | 33.5 | % | |||
The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and deferred tax liabilities as of December 31, 20172020 and 20162019 are presented below:
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | $ | 192,534 | $ | 109,903 | ||||||||||||||||||||||||||||||||||||||||||||||
| Investments in qualified affordable housing partnerships, tax credit and other investments, net | 11,174 | 11,190 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation | 23,604 | 23,816 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income on nonaccrual loans | 5,909 | 9,527 | ||||||||||||||||||||||||||||||||||||||||||||||||
| State taxes | 273 | 5,848 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Premises and equipment | 2,096 | 1,578 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Lease liability | 30,554 | 35,948 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 1,441 | 965 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total gross deferred tax assets | 267,585 | 198,775 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Valuation allowance | 0 | (21) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total deferred tax assets, net of valuation allowance | $ | 267,585 | $ | 198,754 | ||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equipment lease financing | $ | 29,990 | $ | 30,669 | ||||||||||||||||||||||||||||||||||||||||||||||
| Investments in qualified affordable housing partnerships, tax credit and other investments, net | 14,912 | 12,301 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Core deposit intangibles | 1,934 | 3,032 | ||||||||||||||||||||||||||||||||||||||||||||||||
| FHLB stock dividends | 1,855 | 1,854 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage servicing assets | 1,675 | 1,839 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired debt | 1,597 | 1,679 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Prepaid expenses | 1,194 | 1,100 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Premises and equipment | 99 | 1,890 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains/losses on securities | 21,593 | 890 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | 28,468 | 34,313 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 453 | 2,700 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total gross deferred tax liabilities | $ | 103,770 | $ | 92,267 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net deferred tax assets | $ | 163,815 | $ | 106,487 | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||||||||
| Federal | State | Foreign | Total | Federal | State | Foreign | Total | |||||||||||||||||||||||||
| Deferred tax assets: | ||||||||||||||||||||||||||||||||
| Allowance for loan losses and OREO reserves | $ | 62,942 | $ | 28,857 | $ | 1,365 | $ | 93,164 | $ | 97,921 | $ | 27,792 | $ | 1,365 | $ | 127,078 | ||||||||||||||||
| Deferred compensation | 11,483 | 5,220 | — | 16,703 | 20,093 | 5,731 | — | 25,824 | ||||||||||||||||||||||||
| Mortgage servicing assets | 2,727 | 1,206 | — | 3,933 | — | — | — | — | ||||||||||||||||||||||||
| Unrealized losses on securities | 10,730 | 5,354 | — | 16,084 | 16,253 | 5,315 | — | 21,568 | ||||||||||||||||||||||||
| State taxes | 5,217 | — | — | 5,217 | 1,333 | — | — | 1,333 | ||||||||||||||||||||||||
| Interest income on nonaccrual loans | 5,396 | 2,451 | — | 7,847 | 4,461 | 1,258 | — | 5,719 | ||||||||||||||||||||||||
| Other, net | 744 | 5,481 | 97 | 6,322 | 2,053 | 5,269 | 97 | 7,419 | ||||||||||||||||||||||||
| Total gross deferred tax assets | 99,239 | 48,569 | 1,462 | 149,270 | 142,114 | 45,365 | 1,462 | 188,941 | ||||||||||||||||||||||||
| Valuation allowance | — | (256 | ) | — | (256 | ) | — | (283 | ) | — | (283 | ) | ||||||||||||||||||||
| Total deferred tax assets, net of valuation allowance | $ | 99,239 | $ | 48,313 | $ | 1,462 | $ | 149,014 | $ | 142,114 | $ | 45,082 | $ | 1,462 | $ | 188,658 | ||||||||||||||||
| Deferred tax liabilities: | ||||||||||||||||||||||||||||||||
| Core deposit intangibles | $ | (4,408 | ) | $ | (2,117 | ) | $ | — | $ | (6,525 | ) | $ | (9,768 | ) | $ | (2,874 | ) | $ | — | $ | (12,642 | ) | ||||||||||
| Investments in partnerships, tax credit and other investments, net | (10,838 | ) | 7,025 | — | (3,813 | ) | (7,012 | ) | 5,318 | — | (1,694 | ) | ||||||||||||||||||||
| Fixed assets | (2,671 | ) | 914 | — | (1,757 | ) | (13,166 | ) | (3,360 | ) | — | (16,526 | ) | |||||||||||||||||||
| Equipment financing | (21,844 | ) | (3,760 | ) | — | (25,604 | ) | (13,240 | ) | (1,866 | ) | — | (15,106 | ) | ||||||||||||||||||
| FHLB stock dividends | (1,285 | ) | (583 | ) | — | (1,868 | ) | (1,189 | ) | (335 | ) | — | (1,524 | ) | ||||||||||||||||||
| Acquired debt | (1,273 | ) | (578 | ) | — | (1,851 | ) | (2,210 | ) | (623 | ) | — | (2,833 | ) | ||||||||||||||||||
| Acquired loans and OREO | (2,252 | ) | (754 | ) | (406 | ) | (3,412 | ) | (5,407 | ) | (1,242 | ) | (406 | ) | (7,055 | ) | ||||||||||||||||
| Prepaid expenses | (4,142 | ) | (1,517 | ) | — | (5,659 | ) | (1,088 | ) | (251 | ) | — | (1,339 | ) | ||||||||||||||||||
| Other, net | (510 | ) | (609 | ) | — | (1,119 | ) | (121 | ) | (120 | ) | — | (241 | ) | ||||||||||||||||||
| Total gross deferred tax liabilities | $ | (49,223 | ) | $ | (1,979 | ) | $ | (406 | ) | $ | (51,608 | ) | $ | (53,201 | ) | $ | (5,353 | ) | $ | (406 | ) | $ | (58,960 | ) | ||||||||
| Net deferred tax assets | $ | 50,016 | $ | 46,334 | $ | 1,056 | $ | 97,406 | $ | 88,913 | $ | 39,729 | $ | 1,056 | $ | 129,698 | ||||||||||||||||
The tax benefits of deductible temporary differences and tax carryforwards are recorded as an asset to the extent that management assesses the utilization of such temporary differences and carryforwards to be more likely than not.more-likely-than-not. A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more likely than notmore-likely-than-not to be realized. Evidence the Company consideredconsiders includes 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. Apart from this factor, theThe Company also performed an overall assessment by weighing all positive evidence against all negative evidence and concluded that it is more likely than notmore-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 NOLnet operating losses (“NOL”) carryforwards. For states other than California, Georgia, Massachusetts and New York, becauseAs of December 31, 2020, management believes thatreleased $21 thousand of valuation allowance provided as of December 31, 2019, which related to the state NOL carryforwards may not be fully utilized, acarryforwards. NaN additional valuation allowance was recorded as of December 31, 2020.
155
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits for such carryforwards. the years ended December 31, 2020, 2019 and 2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Beginning balance | $ | 0 | $ | 4,378 | $ | 10,419 | ||||||||||||||
| Additions for tax positions related to prior years | 5,045 | 30,103 | 0 | |||||||||||||||||
| Deductions for tax positions related to prior years | 0 | (34,481) | (3,969) | |||||||||||||||||
| Settlements with taxing authorities | 0 | 0 | (2,072) | |||||||||||||||||
| Ending balance | $ | 5,045 | $ | 0 | $ | 4,378 | ||||||||||||||
The Company believes that adequate provisions have been maderecorded for all income tax uncertainties consistent with the standards of ASC 740-10. As of December 31, 2017 and 2016, the Company recorded net deferred tax assets of $97.4 million and $129.7 million, respectively,The increase inOther assets on the Consolidated Balance Sheet.
| ($ in thousands) | Year Ended December 31, | |||||||
| 2017 | 2016 | |||||||
| Beginning Balance | $ | 10,419 | $ | 7,125 | ||||
| Additions for tax positions related to prior years | — | 5,819 | ||||||
| Settlements with taxing authorities | — | (2,525 | ) | |||||
| Ending Balance | $ | 10,419 | $ | 10,419 | ||||
Beginning with its 2012 tax year, the Company has executed a Memorandum of Understanding (“MOU”) with the Internal Revenue Service (“IRS”) to voluntarily participate in the IRS Compliance Assurance Process (“CAP”). Under the CAP, the IRS audits the tax position of the Company to identify and identifies and resolvesresolve any tax issues that may arise throughout the tax year. The objective of the CAP is to resolve issues in a timely and contemporaneous manner and eliminate the need for a lengthy post-filing examination. Filed in September 2017, the 2016 tax return received a full acceptance of all tax matters from the IRS. The Company has executed a MOU with the IRS for the 2017 to 20182019 tax years.year. For federal tax purposes, the IRS had completed the 2017 and earlier tax years from 2013 and beyond remain open. For California franchise tax purposes, tax years from 2009 and beyond remain open. The City of New York initiated an audit of the Company’syears’ corporate income tax return forexamination. For the 2012 to 20142020 tax years in September 2016.year, the Company was accepted by IRS as a CAP Bridge Year. The Company is also currently being audited by the state of Missouri and California and the City of New York. The Company does not believe that the outcome of unresolved issues or claims in any tax jurisdiction is likely to be material to the Company’s financial position, cash flows or results of operations. The Company further believes that adequate provisions have been recorded for all income tax uncertainties.uncertainties consistent with ASC 740, Income Taxes as of December 31, 2020.
Impact of Investment in DC Solar Tax Credit Funds
Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. 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 does not anticipatealso received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. Between fiscal year 2014 and 2018, the Company had invested in 4 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.
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 total amountposition will be sustained upon examination. The term “more-likely-than-not” means a likelihood of unrecognizedmore 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 benefits will significantlyposition is subject to judgment and depends on available information as of the balance sheet date. 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 next twelve months.period in which the change occurs.
In February 2019, an affidavit from a FBI 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. The Company, in coordination with other fund investors, engaged an unaffiliated third-party inventory firm to investigate the actual number of mobile solar generators in existence. Based on the inventory report, NaN of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information, as well as management’s best judgments regarding the future settlement of the related tax positions with the IRS, the Company concluded that a portion of the previously claimed tax credits would be recaptured. During the year ended December 31, 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense. In December 2020, the Company recorded an additional $5.1 million income tax expense regarding DC Solar investments.
The Company continues to conduct an ongoing investigation related to this matter. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 137 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 2 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.
Note 12 — Commitments, Contingencies and Related Party Transactions
Commitments to Extend Credit Extensions — In the normalordinary course of business, the Company has variousprovides customers loan commitments on predetermined terms. These outstanding commitments to extend credit that are not reflected in the accompanying Consolidated Financial Statements. While the Company does not anticipate losses as a result of these transactions, commitments to extend credit are included in determining the appropriate level of the allowance for unfunded credit commitments, and outstanding commercial and standby letters of credit (“SBLCs”).SBLCs.
The following table presents the Company’s credit-related commitments as of the periods indicated:December 31, 2020 and 2019:
| ($ in thousands) | December 31, | ($ in thousands) | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Expire in One Year or Less | Expire After One Year Through Three Years | Expire After Three Years Through Five Years | Expire After Five Years | Total | Total | ||||||||||||||||||||||||||||||||||||||||
| $ | 5,075,480 | $ | 5,077,869 | Loan commitments | $ | 3,126,551 | $ | 1,836,523 | $ | 589,114 | $ | 138,729 | $ | 5,690,917 | $ | 5,330,211 | ||||||||||||||||||||||||||||||
| $ | 1,655,897 | $ | 1,525,613 | Commercial letters of credit and SBLCs | 1,159,357 | 420,222 | 137,394 | 523,840 | 2,240,813 | 1,860,414 | ||||||||||||||||||||||||||||||||||||
| Total | Total | $ | 4,285,908 | $ | 2,256,745 | $ | 726,508 | $ | 662,569 | $ | 7,931,730 | $ | 7,190,625 | |||||||||||||||||||||||||||||||||
Loan commitments are agreements to lend to a customercustomers provided that there are no violations of any conditions established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements.
Commercial letters of credit are issued to facilitate domestic and foreign trade transactions, while SBLCs are generally contingent upon the failure of the customers to perform according to the terms of the underlying contract with the third party. As a result, the total contractual amounts do not necessarily represent future funding requirements. The Company’s historical experience is that SBLCs typically expire without being funded. Additionally, in many cases, the Company holds collateral in various forms against these SBLCs. As a part of its risk management activities, the Company monitors the creditworthiness of customers in conjunction with its SBLC exposure. Customers are obligated to reimburse the Company for any payment made on the customers’ behalf. If the customers fail to pay, the Company would, as applicable, liquidate the collateral and/or offset accounts. As of December 31, 2017,2020, total letters of credit which amounted to $1.66of $2.24 billion were comprisedconsisted of SBLCs of $1.60$2.12 billion and commercial letters of credit of $55.7$124.9 million. In comparison, total letters of credit of $1.86 billion consisted of SBLCs of $1.81 billion and commercial letters of credit of $48.5 million as of December 31, 2019.
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The Company usesapplies the same credit underwriting criteria in extendingto extend loans, commitments and conditional obligations to customers. Each customer’s creditworthiness is evaluated on a case-by-case basis. Collateral and financial guarantees may be obtained based on management’s assessment of thea customer’s credit. Collateral may include cash, accounts receivable, inventory, property, plant and equipment, and income-producing commercial property.
Estimated exposure to loss from these commitments is included in the allowance for unfunded credit reserves,commitments, and amounted to $12.7$33.5 million and $11.1 million as of December 31, 20172020 and $15.7 million as of December 31, 2016. These amounts are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.2019.
Guarantees — The Company has soldsells or securitizedsecuritizes single-family and multifamily residential loans with recourse in the ordinary course of business. The recourse component inof the loans sold or securitized with recourse is considered a guarantee. As the guarantor, the Company is obligated to repurchase up to the recourse component of the loans whenif the loans default. AsThe following table presents the types of December 31, 2017 and 2016, the unpaid principal balance of total single-family and multifamily residential loans sold or securitized with recourse amounted to $113.7 million and $150.5 million, respectively. The maximum potential future payments up to the recourse component thatguarantees the Company is obligated to repurchase amounted to $38.7 million and $46.4 millionhad outstanding as of December 31, 20172020 and 2016, respectively. 2019:
| ($ in thousands) | Maximum Potential Future Payments | Carrying Value | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Expire in One Year or Less | Expire After One Year Through Three Years | Expire After Three Years Through Five Years | Expire After Five Years | Total | Total | Total | Total | |||||||||||||||||||||||||||||||||||||||||||
| Single-family residential loans sold or securitized with recourse | $ | 0 | $ | 344 | $ | 484 | $ | 9,698 | $ | 10,526 | $ | 12,578 | $ | 10,526 | $ | 12,578 | ||||||||||||||||||||||||||||||||||
| Multi-family residential loans sold or securitized with recourse | 370 | 481 | 0 | 14,894 | 15,745 | 15,892 | 26,619 | 40,708 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 370 | $ | 825 | $ | 484 | $ | 24,592 | $ | 26,271 | $ | 28,470 | $ | 37,145 | $ | 53,286 | ||||||||||||||||||||||||||||||||||
The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit reserves,commitments and totaled $214$88 thousand and $373$76 thousand as of December 31, 20172020 and 2016,2019, respectively. The allowance for unfunded credit reservescommitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse during 2017.recourse.
| Years Ending December 31, | Amount ($ in thousands) | |||
| 2018 | $ | 31,845 | ||
| 2019 | 27,005 | |||
| 2020 | 22,242 | |||
| 2021 | 18,635 | |||
| 2022 | 13,944 | |||
| Thereafter | 27,988 | |||
| Total | $ | 141,659 | ||
Litigation — The Company is a party to various legal actions arising in the course of its business. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more than the amounts accrued.
Other Commitments — The Company has commitments to invest in qualified affordable housing partnerships, tax credit and other investments as discussed in Note 8 7 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entitiesto the Consolidated Financial Statements. These commitments are payable on demand.Statements in this Form 10-K. As of December 31, 20172020 and 2016,2019, these commitments were $169.2totaled $182.7 million and $174.3$193.8 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.
Related Party Transactions — In the ordinary course of business, the Company may extend credit to related parties, including executive officers, directors and principal shareholders. These related party loans were not material for the years ended December 31, 2020 and 2019.
Note 1413 — Stock Compensation Plans
Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stocks, stock options, RSAs,restricted stock, RSUs, stock purchase warrants, stock appreciation rights, stock purchase warrants, phantom stock and dividend equivalents to certaineligible employees, and non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were 0 outstanding stock awards other than RSUs as of December 31, 2020, 2019 and 2018. An aggregate of 14.0 million shares of common stock were authorized under the 2016 Stock Incentive Plan, and the total number of shares available for grant was approximately 4.72.8 million as of December 31, 2017.2020.
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The following table presents a summary of the total share-based compensation expense and the related net tax benefit(deficiencies) benefits associated with the Company’s various employee share-based compensation plans for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Stock compensation costs | $ | 29,237 | $ | 30,761 | $ | 30,937 | ||||||||||||||
| Related net tax (deficiencies) benefits for stock compensation plans | $ | (1,839) | $ | 4,792 | $ | 5,089 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Stock compensation costs | $ | 24,657 | $ | 22,102 | $ | 16,502 | ||||||
| Related net tax benefits for stock compensation plans | $ | 4,775 | $ | 1,055 | $ | 3,291 | ||||||
Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted torange between a minimum of zero and0% to a maximum of 200% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together to determineas the total number of performance shares that are eligible to vest. Performance-based RSUs cliff vest three years from the date of each grant.
Compensation costs for the time-based awards that will be settled in shares of the Company’s common stock are based on the quoted market price of the Company’s common stock at the grant date. Compensation costs for certain time-based awards that will be settled in cash are adjusted to fair value based on changes in the share price of the Company’s common stock up to the settlement date. Compensation costs associated with performance-based RSUs are based on grant date fair value which considers both market and performance conditions, and is subject to subsequent adjustments based on the changes in the Company’s stock price and the projected outcome of the performance criteria. Compensation costs of both time-based and performance-based awards are estimated based on awards ultimately expected to vest and recognized on a straight-line basis from the grant date until the vesting date of each grant.
The following table presents a summary of the activityactivities for the Company’s time-based and performance-based RSUs that will be settled in shares for the year ended December 31, 2017 based on2020. The number of outstanding performance-based RSUs provided below assumes that performance will be met at the target amountlevel.
| Time-Based RSUs | Performance-Based RSUs | |||||||||||||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | |||||||||||||||||||||||
| Outstanding, January 1, 2020 | 1,139,868 | $ | 57.78 | 386,483 | $ | 60.13 | ||||||||||||||||||||
| Granted | 680,172 | 40.61 | 165,084 | 39.79 | ||||||||||||||||||||||
| Vested | (290,147) | 55.23 | (131,597) | 56.59 | ||||||||||||||||||||||
| Forfeited | (184,258) | 53.61 | (21,913) | 45.64 | ||||||||||||||||||||||
| Outstanding, December 31, 2020 | 1,345,635 | $ | 50.22 | 398,057 | $ | 53.66 | ||||||||||||||||||||
The following table presents a summary of awards:the activities for the Company’s time-based RSUs that will be settled in cash for the year ended December 31, 2020:
| Shares | ||||||||||||||
| Outstanding, January 1, 2020 | 11,638 | |||||||||||||
| Granted | 11,215 | |||||||||||||
| Vested | 0 | |||||||||||||
| Forfeited | (1,051) | |||||||||||||
| Outstanding, December 31, 2020 | 21,802 | |||||||||||||
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| 2017 | ||||||||||||||
| Time-Based RSUs | Performance-Based RSUs | |||||||||||||
| Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | |||||||||||
| Outstanding at beginning of year | 1,218,714 | $ | 35.92 | 410,746 | $ | 35.27 | ||||||||
| Granted | 411,290 | 55.28 | 131,597 | 56.59 | ||||||||||
| Vested | (312,226 | ) | 36.55 | (118,044 | ) | 36.85 | ||||||||
| Forfeited | (151,198 | ) | 40.38 | — | — | |||||||||
| Outstanding at end of year | 1,166,580 | $ | 42.00 | 424,299 | $ | 41.44 | ||||||||
The weighted-average grant date fair value of the time-based awards granted during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $55.28, $31.86$40.61, $52.46 and $40.36,$66.86, respectively. The weighted-average grant date fair value of the performance-based awards granted during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $56.59, $29.18$39.79, $54.64 and $41.15,$70.13, respectively. The total fair value of time-based awards that vested during the years ended December 31, 2017, 2016,2020, 2019 and 20152018 was $17.2$11.5 million, $4.2$20.7 million and $9.1$23.1 million, respectively. The total fair value of performance-based awards that vested during the years ended December 31, 2017, 20162020, 2019 and 20152018 was $13.0$8.9 million, $4.4$14.5 million and $5.8$16.2 million, respectively.
As of December 31, 2017, total2020, there was $22.8 million of unrecognized compensation costs related to unvested time-based and performance-based RSUs amounted to $25.3 million and $14.1 million, respectively. These costs are expected to be recognized over a weighted-average period of 2.021.72 years, and 1.85 years, respectively.
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash proceeds from options exercised | $ | — | $ | — | $ | 874 | ||||||
| Net tax benefit recognized from options exercised | $ | — | $ | — | $ | 320 | ||||||
| Total intrinsic value of options exercised | $ | — | $ | — | $ | 760 | ||||||
Stock Purchase Plan — The 1998 Employee Stock Purchase Plan (the “Purchase Plan”) provides eligible employees of the Company the right to purchase shares of its common stock at a discount. Employees could purchase shares at 90% of the fair market price subject to an annual purchase limitation of $22,500 per employee. As of December 31, 2017,2020, the Purchase Plan qualifies as a non-compensatory plan under Section 423 of the Internal Revenue Code and, accordingly, no0 compensation expense has been recognized. 2,000,000 shares of the Company’s common stock have been made available-for-saleAFS under the Purchase Plan. During the years ended December 31, 20172020 and 2016, 45,3432019, 89,425 shares totaling $2.3 million and 67,19881,221 shares totaling $2.1$3.4 million, respectively, have been sold to employees under the Purchase Plan. As of December 31, 2017,2020, there were 526,687304,500 shares available under the Purchase Plan.
Note 1514 — Employee Benefit Plans
The Company sponsors a defined contribution plan, the East West Bank Employees 401(k) Savings Plan (the “Plan”“401(k) Plan”), designed to provide retirement benefits financed by participants’ tax deferred contributions for the benefits of its employees.ARoth 401(k) investment option is also available to the participants, with contributions to be made on an after-tax basis. Under the terms401(k) Plan, after three months of the Plan,service, eligible employees may elect to defer up to 80% of their compensation before taxes, up to the dollar limit imposed by the IRS for tax purposes. Participants can also designate a part or all of their contributions as Roth 401(k) contributions. Effective as of April 1, 2014,2020, the Company matches 75% of the first 6% of the Plan participant’s deferred compensation. The Company’s contributions to the Plan are determined annually by the Board of Directors in accordance with the Plan requirements.requirements and are invested based on employee investment elections. Plan participants become vested in matching contributions received from the Plan sponsorCompany at the rate of 20% per year for each full year of service, such that the Plan participants become 100% vested after five years of credited service. For the Plan years ended December 31, 2017, 20162020, 2019 and 2015,2018, the Company expensed $8.9$12.6 million, $8.4$14.0 million and $7.5$9.9 million, respectively.
During 2002, the Company adopted a Supplemental Executive Retirement Plan (“SERP”) pursuant to which the Company will pay supplemental pension benefits to certain executive officers designated by the Board of Directors upon retirement based upon the officers’ years of service and compensation. The SERP meets the definition of a pension plan per ASC 715-30, Compensation — Retirement Benefits — Defined Benefit Plans — Pension. The SERP is an unfunded, non-qualified plan under which the participants have no rights beyond those of a general creditor of the Company, and there are no specific assets set aside by the Company in connection with the plan. As of December 31, 2017,2020, there were no0 additional benefits to be accrued for under the SERP. As of each of December 31, 20172020 and 2016,2019, there was one1 former executive officer remaining under the SERP. ForBenefits expensed and accrued for the years ended December 31, 2017, 20162020, 2019 and 2015, $3312018 were $333 thousand, $624$333 thousand and $619$332 thousand, respectively, of benefits were expensed and accrued for.respectively. The benefit obligation was $4.2 million and $4.1 million as of both December 31, 20172020 and 2016, respectively.2019. The following table presents a summary of expected SERP payments to be paid for the next five years and thereafter as of December 31, 2017:2020:
| Years Ending December 31, | Amount ($ in thousands) | |||||||
| 2021 | $ | 349 | ||||||
| 2022 | 359 | |||||||
| 2023 | 370 | |||||||
| 2024 | 381 | |||||||
| 2025 | 393 | |||||||
| Thereafter | 6,710 | |||||||
| Total | $ | 8,562 | ||||||
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| Years Ending December 31, | Amount ($ in thousands) | |||
| 2018 | $ | 319 | ||
| 2019 | 329 | |||
| 2020 | 339 | |||
| 2021 | 349 | |||
| 2022 | 359 | |||
| Thereafter | 7,855 | |||
| Total | $ | 9,550 | ||
Note 1615 — Stockholders’ Equity and Earnings Per Share
| ($ and shares in thousands, except per share data) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Basic: | ||||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
| Basic weighted-average number of shares outstanding | 142,336 | 145,497 | 144,862 | |||||||||||||||||
| Basic EPS | $ | 3.99 | $ | 4.63 | $ | 4.86 | ||||||||||||||
| Diluted: | ||||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
Basic weighted-average number of shares outstanding (1) | 142,336 | 145,497 | 144,862 | |||||||||||||||||
Diluted potential common shares (1)(2) | 655 | 682 | 1,307 | |||||||||||||||||
Diluted weighted-average number of shares outstanding (1)(2) | 142,991 | 146,179 | 146,169 | |||||||||||||||||
| Diluted EPS | $ | 3.97 | $ | 4.61 | $ | 4.81 | ||||||||||||||
| ($ and shares in thousands, except per share data) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Basic | ||||||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||
| Less: earnings allocated to participating securities | — | — | (3 | ) | ||||||||
| Net income allocated to common stockholders | $ | 505,624 | $ | 431,677 | $ | 384,674 | ||||||
| Basic weighted-average number of shares outstanding | 144,444 | 144,087 | 143,818 | |||||||||
| Basic EPS | $ | 3.50 | $ | 3.00 | $ | 2.67 | ||||||
| Diluted | ||||||||||||
| Net income allocated to common stockholders | $ | 505,624 | $ | 431,677 | $ | 384,680 | ||||||
| Basic weighted-average number of shares outstanding | 144,444 | 144,087 | 143,818 | |||||||||
Diluted potential common shares (1) | 1,469 | 1,085 | 694 | |||||||||
| Diluted weighted-average number of shares outstanding | 145,913 | 145,172 | 144,512 | |||||||||
| Diluted EPS | $ | 3.47 | $ | 2.97 | $ | 2.66 | ||||||
For the years ended December 31, 2017, 20162020, 2019 and 2015, 142018, 134 thousand, 815 thousand and 1610 thousand weighted-average anti-dilutive shares fromof anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation.
Stock Repurchase Program — 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. For the year ended December 31, 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the years ended December 31, 2019 and 2018.
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Note 1716 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of AOCI balances for the years ended December 31, 2020, 2019 and 2018:
| ($ in thousands) | AFS Debt Securities | Cash Flow Hedges | Foreign Currency Translation Adjustments (1) | Total | ||||||||||||||||||||||
| Balance, December 31, 2017 | $ | (30,898) | $ | 0 | $ | (6,621) | $ | (37,519) | ||||||||||||||||||
Cumulative-effect of change in accounting principle related to marketable equity securities (2) | 385 | 0 | 0 | 385 | ||||||||||||||||||||||
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (3) | (6,656) | 0 | 0 | (6,656) | ||||||||||||||||||||||
| Balance, January 1, 2018, adjusted | (37,169) | 0 | (6,621) | (43,790) | ||||||||||||||||||||||
| Net unrealized losses arising during the period | (6,866) | 0 | (5,732) | (12,598) | ||||||||||||||||||||||
| Amounts reclassified from AOCI | (1,786) | 0 | 0 | (1,786) | ||||||||||||||||||||||
| Changes, net of tax | (8,652) | 0 | (5,732) | (14,384) | ||||||||||||||||||||||
| Balance, December 31, 2018 | $ | (45,821) | $ | 0 | $ | (12,353) | $ | (58,174) | ||||||||||||||||||
| Net unrealized gains (losses) arising during the period | 46,170 | 0 | (3,636) | 42,534 | ||||||||||||||||||||||
| Amounts reclassified from AOCI | (2,768) | 0 | 0 | (2,768) | ||||||||||||||||||||||
| Changes, net of tax | 43,402 | 0 | (3,636) | 39,766 | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | (2,419) | $ | 0 | $ | (15,989) | $ | (18,408) | ||||||||||||||||||
| Net unrealized gains (losses) arising during the period | 63,329 | (1,149) | 9,297 | 71,477 | ||||||||||||||||||||||
| Amounts reclassified from AOCI | (8,663) | (81) | 0 | (8,744) | ||||||||||||||||||||||
| Changes, net of tax | 54,666 | (1,230) | 9,297 | 62,733 | ||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 52,247 | $ | (1,230) | $ | (6,692) | $ | 44,325 | ||||||||||||||||||
(1)Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. The functional currency and reporting currency of the Company’s foreign subsidiary was RMB and USD, respectively.
(2)Represents the impact of the adoption of ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018.
(3)Represents the 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. ASU 2018-02 permits companies to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 2016from AOCI to retained earnings on a retrospective basis. The adoption of the guidance resulted in a cumulative-effect adjustment as of January 1, 2018 that increased retained earnings by $6.7 million and 2015:reduced AOCI by the same amount.
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| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
Available- for-Sale Investment Securities | Foreign Currency Translation Adjustments (1) | Total | Available- for-Sale Investment Securities | Foreign Currency Translation Adjustments (1) | Total | Available- for-Sale Investment Securities | Foreign Currency Translation Adjustments (1) | Total | ||||||||||||||||||||||||||||
| Beginning balance | $ | (28,772 | ) | $ | (19,374 | ) | $ | (48,146 | ) | $ | (6,144 | ) | $ | (8,797 | ) | $ | (14,941 | ) | $ | 4,237 | $ | — | $ | 4,237 | ||||||||||||
| Net unrealized gains (losses) arising during the period | 2,531 | 12,753 | 15,284 | (16,623 | ) | (10,577 | ) | (27,200 | ) | 13,012 | (8,797 | ) | 4,215 | |||||||||||||||||||||||
| Amounts reclassified from AOCI | (4,657 | ) | — | (4,657 | ) | (6,005 | ) | — | (6,005 | ) | (23,393 | ) | — | (23,393 | ) | |||||||||||||||||||||
| Changes, net of taxes | (2,126 | ) | 12,753 | 10,627 | (22,628 | ) | (10,577 | ) | (33,205 | ) | (10,381 | ) | (8,797 | ) | (19,178 | ) | ||||||||||||||||||||
| Ending balance | $ | (30,898 | ) | $ | (6,621 | ) | $ | (37,519 | ) | $ | (28,772 | ) | $ | (19,374 | ) | $ | (48,146 | ) | $ | (6,144 | ) | $ | (8,797 | ) | $ | (14,941 | ) | |||||||||
The following table presents the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Before - Tax | Tax Effect | Net-of- Tax | Before - Tax | Tax Effect | Net-of- Tax | Before - Tax | Tax Effect | Net-of- Tax | ||||||||||||||||||||||||||||||||||||||||||||||||
| AFS debt securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period | $ | 89,868 | $ | (26,539) | $ | 63,329 | $ | 65,549 | $ | (19,379) | $ | 46,170 | $ | (9,748) | $ | 2,882 | $ | (6,866) | ||||||||||||||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (1) | (12,299) | 3,636 | (8,663) | (3,930) | 1,162 | (2,768) | (2,535) | 749 | (1,786) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net change | 77,569 | (22,903) | 54,666 | 61,619 | (18,217) | 43,402 | (12,283) | 3,631 | (8,652) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period | (1,604) | 455 | (1,149) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (2) | (113) | 32 | (81) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net change | (1,717) | 487 | (1,230) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) arising during the period (3) | 7,398 | 1,899 | 9,297 | 290 | (3,926) | (3,636) | (5,732) | 0 | (5,732) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net change | 7,398 | 1,899 | 9,297 | 290 | (3,926) | (3,636) | (5,732) | 0 | (5,732) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | 83,250 | $ | (20,517) | $ | 62,733 | $ | 61,909 | $ | (22,143) | $ | 39,766 | $ | (18,015) | $ | 3,631 | $ | (14,384) | ||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
Before - Tax | Tax Effect | Net-of- Tax | Before - Tax | Tax Effect | Net-of- Tax | Before - Tax | Tax Effect | Net-of- Tax | ||||||||||||||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period | $ | 4,368 | $ | (1,837 | ) | $ | 2,531 | $ | (28,681 | ) | $ | 12,058 | $ | (16,623 | ) | $ | 22,454 | $ | (9,442 | ) | $ | 13,012 | ||||||||||||||
Net realized gains reclassified into net income (1) | (8,037 | ) | 3,380 | (4,657 | ) | (10,362 | ) | 4,357 | (6,005 | ) | (40,367 | ) | 16,974 | (23,393 | ) | |||||||||||||||||||||
| Net change | (3,669 | ) | 1,543 | (2,126 | ) | (39,043 | ) | 16,415 | (22,628 | ) | (17,913 | ) | 7,532 | (10,381 | ) | |||||||||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||||||||||||||||||
| Net unrealized gains (losses) arising during period | 12,753 | — | 12,753 | (10,577 | ) | — | (10,577 | ) | (8,797 | ) | — | (8,797 | ) | |||||||||||||||||||||||
| Net change | 12,753 | — | 12,753 | (10,577 | ) | — | (10,577 | ) | (8,797 | ) | — | (8,797 | ) | |||||||||||||||||||||||
| Other comprehensive income (loss) | $ | 9,084 | $ | 1,543 | $ | 10,627 | $ | (49,620 | ) | $ | 16,415 | $ | (33,205 | ) | $ | (26,710 | ) | $ | 7,532 | $ | (19,178 | ) | ||||||||||||||
(1)For the years ended December 31, 2020, 2019 and 2018, pre-tax amounts were reported in Gains on sales of AFS debt securities on the Consolidated Statement of Income.
(2)For the year ended December 31, 2020, pre-tax amounts were reported in Interest expense on the Consolidated Statement of Income.
(3)The tax effects on foreign currency translation adjustments, net of hedges represent the cumulative net deferred tax liabilities on net investment hedges since its inception.
Note 1817 — Regulatory Requirements and Matters
Capital Adequacy — The Company and the Bank are subject to regulatory capital adequacy requirements administered by the federal banking agencies. The Bank is a member bank of the Federal Reserve System and is primarily regulated by the Federal Reserve Bank isand the Bank’s primary regulator. Effective January 1, 2015, theCalifornia Department of Financial Protection and Innovation. The Company and the Bank are required to comply with the Basel III Capital Rules adopted by the Federal Reserve Bank. The capital requirementsfederal banking agencies. Both the Company and the Bank are standardized approaches institutions under the Basel III framework, among other things, prescribed a new standardized approach for determining risk-weighted assets used in calculating capital ratios, increased minimum required capital ratios, and introduced a minimum Common Equity Tier 1 (“CET1”) capital ratio to ensure that banking organizations hold sufficient high quality regulatory capital that is available to absorb losses on a going-concern basis.Capital Rules. The Basel III Capital Rule requires that banking organizations maintain a minimum CET1Common Equity Tier 1 (“CET1”) capital ratio of at least 4.5%, a Tier 1 capital ratio of at least 6.0%, and a total capital ratio of at least 8.0%, and a Tier 1 leverage ratio of a least 4.0% to be considered adequately capitalized. Failure to meet the minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements. The Basel III Capital Rules also requires the Company and the Bank to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital ratios in order to absorb losses during periods of economic stress, effective January 1, 2019. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The Federal Deposit Insurance CorporationFDIC Improvement Act of 1991 requires that the federal regulatory agencies adopt regulations defining capital categories for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Consistent with the Basel III Capital Rules, the capital categories were augmented by including the CET1 capital measure, and revised risk-based capital measures to reflect the rule changes to the minimum risk-based capital ratios.
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As of December 31, 20172020 and 2016,2019, the Company and the Bank were both categorized as well capitalized based on applicable U.S. regulatory capital ratio requirements in accordance with Basel III standardized approaches, as set forth in the table below. The Company believes that no changes in conditions or events have occurred since December 31, 2017,2020, which would result in changes that would cause the Company or the Bank to fall below the well capitalized level. The following table presents the regulatory capital information of the Company and the Bank as of December 31, 20172020 and 2016:2019:
| ($ in thousands) | Basel III | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | Minimum Capital Ratios | Fully Phased-in Minimum Capital Ratios (3) | Well- Capitalized Requirement | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Actual | Actual | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | $ | 5,510,640 | 14.3 | % | $ | 5,064,037 | 14.4 | % | 8.0 | % | 10.5 | % | 10.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 5,143,246 | 13.4 | % | $ | 4,886,237 | 13.9 | % | 8.0 | % | 10.5 | % | 10.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | $ | 4,882,555 | 12.7 | % | $ | 4,546,592 | 12.9 | % | 6.0 | % | 8.5 | % | 8.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 4,662,426 | 12.1 | % | $ | 4,516,792 | 12.9 | % | 6.0 | % | 8.5 | % | 8.0 | % | ||||||||||||||||||||||||||||||||||||||||||
CET1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | $ | 4,882,555 | 12.7 | % | $ | 4,546,592 | 12.9 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 4,662,426 | 12.1 | % | $ | 4,516,792 | 12.9 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage capital (to adjusted average assets) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company (1) | $ | 4,882,555 | 9.4 | % | $ | 4,546,592 | 10.3 | % | 4.0 | % | 4.0 | % | N/A | |||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 4,662,426 | 9.0 | % | $ | 4,516,792 | 10.3 | % | 4.0 | % | 4.0 | % | 5.0 | % | ||||||||||||||||||||||||||||||||||||||||||
| Risk-weighted assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | $ | 38,406,071 | N/A | $ | 35,136,427 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 38,481,275 | N/A | $ | 35,127,920 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
Adjusted quarterly average total assets (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | $ | 52,540,964 | N/A | $ | 44,449,802 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| East West Bank | $ | 52,594,313 | N/A | $ | 44,419,308 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| Basel III | ||||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||
| ($ in thousands) | Actual | Minimum Requirement | Well Capitalized Requirement | Actual | Minimum Requirement | Well Capitalized Requirement | ||||||||||||||||||||
| Amount | Ratio | Ratio | Ratio | Amount | Ratio | Ratio | Ratio | |||||||||||||||||||
| Total capital (to risk-weighted assets) | ||||||||||||||||||||||||||
| Company | $ | 3,838,516 | 12.9 | % | 8.0 | % | 10.0 | % | $ | 3,400,642 | 12.4 | % | 8.0 | % | 10.0 | % | ||||||||||
| East West Bank | $ | 3,679,261 | 12.4 | % | 8.0 | % | 10.0 | % | $ | 3,371,885 | 12.3 | % | 8.0 | % | 10.0 | % | ||||||||||
| Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||
| Company | $ | 3,390,070 | 11.4 | % | 6.0 | % | 8.0 | % | $ | 2,976,002 | 10.9 | % | 6.0 | % | 8.0 | % | ||||||||||
| East West Bank | $ | 3,378,815 | 11.4 | % | 6.0 | % | 8.0 | % | $ | 3,095,245 | 11.3 | % | 6.0 | % | 8.0 | % | ||||||||||
CET1 capital (to risk-weighted assets) | ||||||||||||||||||||||||||
| Company | $ | 3,390,070 | 11.4 | % | 4.5 | % | 6.5 | % | $ | 2,976,002 | 10.9 | % | 4.5 | % | 6.5 | % | ||||||||||
| East West Bank | $ | 3,378,815 | 11.4 | % | 4.5 | % | 6.5 | % | $ | 3,095,245 | 11.3 | % | 4.5 | % | 6.5 | % | ||||||||||
| Tier 1 leverage capital (to adjusted average assets) | ||||||||||||||||||||||||||
| Company | $ | 3,390,070 | 9.2 | % | 4.0 | % | 5.0 | % | $ | 2,976,002 | 8.7 | % | 4.0 | % | 5.0 | % | ||||||||||
| East West Bank | $ | 3,378,815 | 9.2 | % | 4.0 | % | 5.0 | % | $ | 3,095,245 | 9.1 | % | 4.0 | % | 5.0 | % | ||||||||||
| Risk-weighted assets | ||||||||||||||||||||||||||
| Company | $ | 29,669,251 | N/A | N/A | N/A | $ | 27,357,753 | N/A | N/A | N/A | ||||||||||||||||
| East West Bank | $ | 29,643,711 | N/A | N/A | N/A | $ | 27,310,540 | N/A | N/A | N/A | ||||||||||||||||
Adjusted quarterly average total assets (1) | ||||||||||||||||||||||||||
| Company | $ | 37,307,975 | N/A | N/A | N/A | $ | 34,209,827 | N/A | N/A | N/A | ||||||||||||||||
| East West Bank | $ | 37,283,273 | N/A | N/A | N/A | $ | 34,163,667 | N/A | N/A | N/A | ||||||||||||||||
(2)Reflects adjusted quarterly average total assets for the years ended December 31, 2020 and 2019.
(3)As of January 1, 2019, the 2.5% capital conservation buffer above the minimum risk-based capital ratios was required in order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers.
N/A — Not applicable.
Reserve Requirement — The Bank is required to maintain a percentage of its deposits as reserves at the Federal Reserve. In an effort to provide monetary stimulus to counteract the economic disruption caused by the COVID-19 pandemic, the Federal Reserve Bank of San Francisco (the “FRB”).reduced reserve requirement ratio to zero percent. The daily average reserve requirement was approximately $699.4 millionrequirements were 0 as of December 31, 2020 and $503.8$829.0 million as of December 31, 2017 and 2016, respectively.2019.
Note 18 — The Bank entered into a Written Agreement, dated November 9, 2015, with the Federal Reserve Bank of San Francisco (the “Written Agreement”), to correct less than satisfactory Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) programs detailed in a joint examination by the FRB and the California Department of Business Oversight (“DBO”). The Bank also entered into a related MOU with the DBO in 2015. The Written Agreement, among other things, requires the Bank to enhance the compliance programs related to the BSA and AML and Office of Foreign Assets Control (“OFAC”) laws, rules and regulations and retain an independent firm to conduct a review of the account and transaction activity covering a six-month period to determine whether any suspicious activity was properly identified and reported in accordance with applicable regulatory requirements.Segments
The Company believes that it is making progress in executing the compliance plansorganizes its operations into 3 reportable operating segments: (1) Consumer and programs required by the Written Agreement and MOU, although there can be no assurances that our plans and progress will be found to be satisfactory by our regulators. To date, the Company has added significant resources to comply with the Written Agreement and MOU, and to address any additional findings or recommendations by the regulators.
The RetailConsumer and Business Banking segment focuses primarily on deposit operationsprovides financial products and services to consumer and commercial customers through the Bank’sCompany’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 small and medium-sized enterprises through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.
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The Commercial Banking segment primarily generates commercial loans and deposits through domesticdeposits. Commercial loan products include commercial lending offices in the U.S.business loans and foreign commercial lending offices in China and Hong Kong. Furthermore, the Commercial Banking segment offers a wide varietylines of international finance,credit, trade finance loans and cashletters of credit, CRE loans, construction and land loans, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and products. interest rate and commodity risk hedging.
The remaining 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 two2 core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
which allowances are evaluated. The Company’s internal funds transfer pricingreporting process utilizes a full-allocation methodology. Under this methodology, corporate and indirect expenses incurred by the Other segment are allocated to the Consumer and Business Banking and the Commercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.
The corporate treasury function within the Other segment is responsible for liquidity and interest rate management of the Company. The Company’s internal FTP process is also managed by the corporate treasury function within the Other segment. The process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to provideproviding a reasonable and consistent basis for the measurement of its business segments and productsegments’ net interest margins. margins and profitability. The FTP process charges a cost to fund loans (“FTP charges for loans”) and allocates credits for funds provided from deposits (“FTP credits for deposits”) using internal FTP rates. FTP charges for loans are determined based on a matched cost of funds, which is tied to the pricing and term characteristics of the loans. FTP credits for deposits are based on matched funding credit rates, which are tied to the implied or stated maturity of the deposits. FTP credits for deposits reflect the long-term value generated by the deposits. The net spread between the total internal FTP charges and credits is recorded as part of net interest income in the Other segment. The FTP process transfers the corporate interest rate risk exposure to the treasury function within the Other segment, where such exposures are centrally managed.
The Company’s internal funds transfer pricingFTP assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. ChangesEffective January 1, 2020, in connection with the Company’s management structure and allocation or reporting methodologies may result in changes inadoption of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), the measurementprovision for credit losses is booked by segment based on segment loans against which an allowance is recorded instead of operating segment results. Results for prior year periods are generally reclassified for comparability for changes in management structure and allocation or reporting methodologies unless it is deemed not practicable to do so.
The following tables present the operating results and other key financial measures for the individual operating segments as of and for the years ended December 31, 2017, 20162020, 2019 and 2015:2018:
| ($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Net interest income before provision for credit losses | $ | 530,829 | $ | 706,286 | $ | 140,078 | $ | 1,377,193 | ||||||||||||||||||
| Provision for credit losses | 3,885 | 206,768 | 0 | 210,653 | ||||||||||||||||||||||
| Noninterest income | 67,115 | 139,365 | 29,067 | 235,547 | ||||||||||||||||||||||
| Noninterest expense | 331,750 | 266,923 | 117,649 | 716,322 | ||||||||||||||||||||||
| Segment income before income taxes | 262,309 | 371,960 | 51,496 | 685,765 | ||||||||||||||||||||||
| Segment net income | $ | 187,931 | $ | 266,342 | $ | 113,524 | $ | 567,797 | ||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||
| Segment assets | $ | 13,351,060 | $ | 26,958,766 | $ | 11,847,087 | $ | 52,156,913 | ||||||||||||||||||
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| ($ in thousands) | Retail Banking | Commercial Banking | Other | Total | ||||||||||||
| Year ended December 31, 2017: | ||||||||||||||||
| Interest income | $ | 364,906 | $ | 844,303 | $ | 115,910 | $ | 1,325,119 | ||||||||
| Charge for funds used | (142,619 | ) | (326,902 | ) | (64,256 | ) | (533,777 | ) | ||||||||
| Interest spread on funds used | 222,287 | 517,401 | 51,654 | 791,342 | ||||||||||||
| Interest expense | (76,770 | ) | (24,603 | ) | (38,677 | ) | (140,050 | ) | ||||||||
| Credit on funds provided | 445,304 | 61,019 | 27,454 | 533,777 | ||||||||||||
| Interest spread on funds provided | 368,534 | 36,416 | (11,223 | ) | 393,727 | |||||||||||
| 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 | $ | 55,093 | $ | 110,104 | $ | 93,209 | $ | 258,406 | ||||||||
| Noninterest expense | $ | 320,287 | $ | 193,176 | $ | 148,646 | $ | 662,109 | ||||||||
| Segment income (loss) before income taxes | $ | 323,815 | $ | 426,291 | $ | (15,006 | ) | $ | 735,100 | |||||||
| Segment income after income taxes | $ | 190,404 | $ | 251,834 | $ | 63,386 | $ | 505,624 | ||||||||
| As of December 31, 2017: | ||||||||||||||||
| Segment assets | $ | 9,316,587 | $ | 21,431,472 | $ | 6,402,190 | $ | 37,150,249 | ||||||||
| ($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| 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 | 0 | 98,685 | ||||||||||||||||||||||
| Noninterest income | 57,920 | 134,622 | 29,703 | 222,245 | ||||||||||||||||||||||
| Noninterest expense | 343,001 | 263,064 | 141,391 | 747,456 | ||||||||||||||||||||||
| Segment income before income taxes | 397,292 | 438,464 | 8,161 | 843,917 | ||||||||||||||||||||||
| Segment net income | $ | 284,161 | $ | 313,833 | $ | 76,041 | $ | 674,035 | ||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||||
| Segment assets | $ | 11,520,586 | $ | 25,501,534 | $ | 7,173,976 | $ | 44,196,096 | ||||||||||||||||||
| ($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||||||||||||
| 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 | 0 | 64,255 | ||||||||||||||||||||||
| Noninterest income | 85,607 | 110,287 | 21,539 | 217,433 | ||||||||||||||||||||||
| Noninterest expense | 341,396 | 237,520 | 142,074 | 720,990 | ||||||||||||||||||||||
| 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 | ||||||||||||||||||
| As of December 31, 2018 | ||||||||||||||||||||||||||
| Segment assets | $ | 10,587,621 | $ | 23,761,469 | $ | 6,693,266 | $ | 41,042,356 | ||||||||||||||||||
| ($ in thousands) | Retail Banking | Commercial Banking | Other | Total | ||||||||||||
| Year ended December 31, 2016: | ||||||||||||||||
| Interest income | $ | 315,146 | $ | 726,013 | $ | 96,322 | $ | 1,137,481 | ||||||||
| Charge for funds used | (95,970 | ) | (216,849 | ) | (47,646 | ) | (360,465 | ) | ||||||||
| Interest spread on funds used | 219,176 | 509,164 | 48,676 | 777,016 | ||||||||||||
| Interest expense | (60,180 | ) | (16,892 | ) | (27,771 | ) | (104,843 | ) | ||||||||
| Credit on funds provided | 300,446 | 38,636 | 21,383 | 360,465 | ||||||||||||
| Interest spread on funds provided | 240,266 | 21,744 | (6,388 | ) | 255,622 | |||||||||||
| Net interest income before (reversal of) provision for credit losses | $ | 459,442 | $ | 530,908 | $ | 42,288 | $ | 1,032,638 | ||||||||
| (Reversal of) provision for credit losses | $ | (4,356 | ) | $ | 31,835 | $ | — | $ | 27,479 | |||||||
| Noninterest income | $ | 51,435 | $ | 96,010 | $ | 35,473 | $ | 182,918 | ||||||||
| Noninterest expense | $ | 306,570 | $ | 172,259 | $ | 137,060 | $ | 615,889 | ||||||||
| Segment income (loss) before income taxes | $ | 208,663 | $ | 422,824 | $ | (59,299 | ) | $ | 572,188 | |||||||
| Segment income after income taxes | $ | 122,256 | $ | 248,474 | $ | 60,947 | $ | 431,677 | ||||||||
| As of December 31, 2016: | ||||||||||||||||
| Segment assets | $ | 7,821,610 | $ | 19,128,510 | $ | 7,838,720 | $ | 34,788,840 | ||||||||
| ($ in thousands) | Retail Banking | Commercial Banking | Other | Total | ||||||||||||
| Year ended December 31, 2015: | ||||||||||||||||
| Interest income | $ | 331,755 | $ | 654,966 | $ | 67,094 | $ | 1,053,815 | ||||||||
| Charge for funds used | (86,769 | ) | (163,601 | ) | (66,773 | ) | (317,143 | ) | ||||||||
| Interest spread on funds used | 244,986 | 491,365 | 321 | 736,672 | ||||||||||||
| Interest expense | (53,088 | ) | (18,025 | ) | (32,263 | ) | (103,376 | ) | ||||||||
| Credit on funds provided | 261,117 | 36,251 | 19,775 | 317,143 | ||||||||||||
| Interest spread on funds provided | 208,029 | 18,226 | (12,488 | ) | 213,767 | |||||||||||
| Net interest income (loss) before (reversal of) provision for credit losses | $ | 453,015 | $ | 509,591 | $ | (12,167 | ) | $ | 950,439 | |||||||
| (Reversal of) provision for credit losses | $ | (5,835 | ) | $ | 20,052 | $ | — | $ | 14,217 | |||||||
| Noninterest income | $ | 46,265 | $ | 71,867 | $ | 65,251 | $ | 183,383 | ||||||||
| Noninterest expense | $ | 276,144 | $ | 159,987 | $ | 104,753 | $ | 540,884 | ||||||||
| Segment income (loss) before income taxes | $ | 228,971 | $ | 401,419 | $ | (51,669 | ) | $ | 578,721 | |||||||
| Segment income after income taxes | $ | 134,383 | $ | 236,459 | $ | 13,835 | $ | 384,677 | ||||||||
| As of December 31, 2015: | ||||||||||||||||
| Segment assets | $ | 7,095,737 | $ | 17,923,319 | $ | 7,331,866 | $ | 32,350,922 | ||||||||
Note 2019 — Parent Company Condensed Financial Statements
The principal sources of East West’s income (on a Parent Company-only basis) are dividends from the Bank. In addition to dividend restrictions set forth in statutes and regulations, the banking agencies have the authority to prohibit or to limit the Bank from paying dividends, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Bank. The Bank declared $255.0$511.0 million, $190.0 million and $100.0$160.0 million of dividends to East West during the years ended December 31, 20172020, 2019 and 2016,2018, respectively. The Bank did not declare any dividends to East West during the year ended December 31, 2015. For information on the statutory and regulatory limitations on the ability of the Company to pay dividends to its stockholders and on the Bank to pay dividends to East West, see Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds.
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The following tables present the Parent Company-only condensed financial statements:
CONDENSED BALANCE SHEET
| ($ in thousands, except shares) | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Cash and cash equivalents due from subsidiary bank | $ | 439,065 | $ | 166,131 | ||||||||||
| Investments in subsidiaries: | ||||||||||||||
| Bank | 5,048,896 | 4,987,666 | ||||||||||||
| Nonbank | 6,738 | 5,630 | ||||||||||||
| Investments in tax credit investments, net | 6,586 | 11,637 | ||||||||||||
| Other assets | 3,072 | 4,091 | ||||||||||||
| TOTAL | $ | 5,504,357 | $ | 5,175,155 | ||||||||||
| LIABILITIES | ||||||||||||||
| Long-term debt | $ | 147,376 | $ | 147,101 | ||||||||||
| Accrued income tax payable | 81,741 | 4,534 | ||||||||||||
| Other liabilities | 6,065 | 5,903 | ||||||||||||
| Total liabilities | 235,182 | 157,538 | ||||||||||||
| 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) | ||||||||||||
| AOCI, net of tax | 44,325 | (18,408) | ||||||||||||
| Total stockholders’ equity | 5,269,175 | 5,017,617 | ||||||||||||
| TOTAL | $ | 5,504,357 | $ | 5,175,155 | ||||||||||
| ($ in thousands, except shares) | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Cash placed with subsidiary bank | $ | 159,566 | $ | 39,264 | ||||
| Available-for-sale investment securities, at fair value | — | 9,338 | ||||||
| Investments in subsidiaries: | ||||||||
| Bank | 3,830,696 | 3,546,984 | ||||||
| Nonbank | 3,664 | 5,675 | ||||||
| Investments in tax credit investments, net | 25,511 | 32,245 | ||||||
| Other assets | 7,062 | 4,812 | ||||||
| TOTAL | $ | 4,026,499 | $ | 3,638,318 | ||||
| LIABILITIES | ||||||||
| Long-term debt | $ | 171,577 | $ | 186,327 | ||||
| Other liabilities | 12,971 | 24,250 | ||||||
| Total liabilities | 184,548 | 210,577 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized; 165,214,770 and 164,604,072 shares issued in 2017 and 2016, respectively | 165 | 164 | ||||||
| Additional paid-in capital | 1,755,330 | 1,727,434 | ||||||
| Retained earnings | 2,576,302 | 2,187,676 | ||||||
| Treasury stock, at cost — 20,671,710 shares in 2017 and 20,436,621 shares in 2016 | (452,327 | ) | (439,387 | ) | ||||
| Accumulated other comprehensive loss, net of tax | (37,519 | ) | (48,146 | ) | ||||
| Total stockholders’ equity | 3,841,951 | 3,427,741 | ||||||
| TOTAL | $ | 4,026,499 | $ | 3,638,318 | ||||
CONDENSED STATEMENT OF INCOME
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Dividends from subsidiaries: | ||||||||||||||||||||
| Bank | $ | 511,000 | $ | 190,000 | $ | 160,000 | ||||||||||||||
| Nonbank | 109 | 189 | 175 | |||||||||||||||||
| Other income | 3 | 425 | 2 | |||||||||||||||||
| Total income | 511,112 | 190,614 | 160,177 | |||||||||||||||||
| Interest expense on long-term debt | 3,877 | 6,482 | 6,488 | |||||||||||||||||
| Compensation and employee benefits | 6,210 | 5,479 | 5,559 | |||||||||||||||||
| Amortization of tax credit and other investments | 1,248 | 8,437 | 413 | |||||||||||||||||
| Other expense | 1,184 | 1,487 | 1,490 | |||||||||||||||||
| Total expense | 12,519 | 21,885 | 13,950 | |||||||||||||||||
| Income before income tax benefit and equity in undistributed income of subsidiaries | 498,593 | 168,729 | 146,227 | |||||||||||||||||
| Income tax benefit | 4,158 | 6,737 | 3,404 | |||||||||||||||||
| Undistributed earnings of subsidiaries, primarily bank | 65,046 | 498,569 | 554,070 | |||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
167
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Dividends from subsidiaries: | ||||||||||||
| Bank | $ | 255,000 | $ | 100,000 | $ | — | ||||||
| Nonbank | 4,118 | 107 | 88 | |||||||||
| Other income | 721 | 610 | 625 | |||||||||
| Total income | 259,839 | 100,717 | 713 | |||||||||
| Interest expense | 5,429 | 5,017 | 4,636 | |||||||||
| Compensation and employee benefits | 5,065 | 5,001 | 5,350 | |||||||||
| Amortization of tax credit and other investments | 5,908 | 13,851 | 22,466 | |||||||||
| Other expense | 1,257 | 1,218 | 2,399 | |||||||||
| Total expense | 17,659 | 25,087 | 34,851 | |||||||||
| Income (loss) before income tax benefit and equity in undistributed income of subsidiaries | 242,180 | 75,630 | (34,138 | ) | ||||||||
| Income tax benefit | 18,182 | 26,041 | 30,849 | |||||||||
| Undistributed earnings of subsidiaries, primarily bank | 245,262 | 330,006 | 387,966 | |||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||
CONDENSED STATEMENT OF CASH FLOWS
| ($ in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||
| Net income | $ | 567,797 | $ | 674,035 | $ | 703,701 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Undistributed earnings of subsidiaries, principally bank | (65,046) | (498,569) | (554,070) | |||||||||||||||||
| Amortization expenses | 1,523 | 8,703 | 671 | |||||||||||||||||
| Deferred income tax expense (benefit) | 491 | (10,132) | 3,517 | |||||||||||||||||
| Net change in other assets | 40 | 10,246 | (595) | |||||||||||||||||
| Net change in other liabilities | 77,052 | (18) | (45) | |||||||||||||||||
| Net cash provided by operating activities | 581,857 | 184,265 | 153,179 | |||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||||
| Net increase in investments in tax credit investments | (172) | (292) | (1,049) | |||||||||||||||||
| Distributions received from equity method investees | 4,096 | 2,577 | 1,491 | |||||||||||||||||
| Net increase in investments in and advances to nonbank subsidiaries | (2,732) | (3,314) | 0 | |||||||||||||||||
| Other investing activities | 0 | (157) | 0 | |||||||||||||||||
| Net cash provided by (used in) investing activities | 1,192 | (1,186) | 442 | |||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||
| Repayment of long-term debt | 0 | 0 | (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) | |||||||||||||||||
| Repurchased of common stock pursuant to the Stock Repurchase Program | (145,966) | 0 | 0 | |||||||||||||||||
| Cash dividends paid | (158,222) | (155,107) | (125,988) | |||||||||||||||||
| Net cash used in financing activities | (310,115) | (166,359) | (163,776) | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 272,934 | 16,720 | (10,155) | |||||||||||||||||
| Cash and cash equivalents, beginning of year | 166,131 | 149,411 | 159,566 | |||||||||||||||||
| Cash and cash equivalents, end of year | $ | 439,065 | $ | 166,131 | $ | 149,411 | ||||||||||||||
| ($ in thousands) | Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 505,624 | $ | 431,677 | $ | 384,677 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Undistributed earnings of subsidiaries, principally bank | (245,262 | ) | (330,006 | ) | (387,966 | ) | ||||||
| Amortization expenses | 6,158 | 14,094 | 22,870 | |||||||||
| Deferred income tax expense | 940 | 6,349 | 17,555 | |||||||||
| Gains on sales of available-for-sale investment securities | (326 | ) | — | (20 | ) | |||||||
| Net change in other assets | (3,341 | ) | 39,929 | (42,292 | ) | |||||||
| Net change in other liabilities | (560 | ) | 794 | (15,887 | ) | |||||||
| Net cash provided by (used in) operating activities | 263,233 | 162,837 | (21,063 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Net increase in investments in tax credit and other investments, net | (9,777 | ) | (6,554 | ) | (35,633 | ) | ||||||
| Purchases of available-for-sale investment securities | (9,000 | ) | — | — | ||||||||
| Proceeds from the sale of available-for-sale investment securities | 18,326 | — | 20 | |||||||||
| Net cash used in investing activities | (451 | ) | (6,554 | ) | (35,613 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from issuance of common stock pursuant to various stock compensation plans and agreements | 2,280 | 2,081 | 2,835 | |||||||||
| Payments for: | ||||||||||||
| Repayment of long-term debt | (15,000 | ) | (20,000 | ) | (20,000 | ) | ||||||
| Repurchase of vested shares due to employee tax liability | (12,940 | ) | (3,225 | ) | (5,964 | ) | ||||||
| Cash dividends on common stock | (116,820 | ) | (115,828 | ) | (115,641 | ) | ||||||
| Other net financing activities | — | 1,055 | 3,291 | |||||||||
| Net cash used in financing activities | (142,480 | ) | (135,917 | ) | (135,479 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | 120,302 | 20,366 | (192,155 | ) | ||||||||
| Cash and cash equivalents, beginning of year | 39,264 | 18,898 | 211,053 | |||||||||
| Cash and cash equivalents, end of year | $ | 159,566 | $ | 39,264 | $ | 18,898 | ||||||
Note 21 — Quarterly Financial Information (Unaudited)
| Quarters Ended | ||||||||||||||||
| ($ and shares in thousands, except per share data) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
| 2017 | ||||||||||||||||
| Interest and dividend income | $ | 359,765 | $ | 339,910 | $ | 322,775 | $ | 302,669 | ||||||||
| Interest expense | 40,064 | 36,755 | 32,684 | 30,547 | ||||||||||||
| Net interest income before provision for credit losses | 319,701 | 303,155 | 290,091 | 272,122 | ||||||||||||
| Provision for credit losses | 15,517 | 12,996 | 10,685 | 7,068 | ||||||||||||
| Net interest income after provision for credit losses | 304,184 | 290,159 | 279,406 | 265,054 | ||||||||||||
| Noninterest income | 45,359 | 49,624 | 47,400 | 116,023 | ||||||||||||
| Noninterest expense | 175,416 | 164,499 | 169,121 | 153,073 | ||||||||||||
| Income before income taxes | 174,127 | 175,284 | 157,685 | 228,004 | ||||||||||||
| Income tax expense | 89,229 | 42,624 | 39,355 | 58,268 | ||||||||||||
| Net income | $ | 84,898 | $ | 132,660 | $ | 118,330 | $ | 169,736 | ||||||||
| EPS | ||||||||||||||||
| - Basic | $ | 0.59 | $ | 0.92 | $ | 0.82 | $ | 1.18 | ||||||||
| - Diluted | $ | 0.58 | $ | 0.91 | $ | 0.81 | $ | 1.16 | ||||||||
| Weighted-average number of shares outstanding | ||||||||||||||||
| - Basic | 144,542 | 144,498 | 144,485 | 144,249 | ||||||||||||
| - Diluted | 146,030 | 145,882 | 145,740 | 145,732 | ||||||||||||
| Cash dividends declared per common share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
| Quarters Ended | ||||||||||||||||
| ($ and shares in thousands, except per share data) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
| 2016 | ||||||||||||||||
| Interest and dividend income | $ | 302,127 | $ | 280,317 | $ | 278,865 | $ | 276,172 | ||||||||
| Interest expense | 29,425 | 26,169 | 25,281 | 23,968 | ||||||||||||
| Net interest income before provision for credit losses | 272,702 | 254,148 | 253,584 | 252,204 | ||||||||||||
| Provision for credit losses | 10,461 | 9,525 | 6,053 | 1,440 | ||||||||||||
| Net interest income after provision for credit losses | 262,241 | 244,623 | 247,531 | 250,764 | ||||||||||||
| Noninterest income | 48,800 | 49,341 | 44,264 | 40,513 | ||||||||||||
| Noninterest expense | 149,904 | 170,500 | 148,879 | 146,606 | ||||||||||||
| Income before income taxes | 161,137 | 123,464 | 142,916 | 144,671 | ||||||||||||
| Income tax expense | 50,403 | 13,321 | 39,632 | 37,155 | ||||||||||||
| Net income | $ | 110,734 | $ | 110,143 | $ | 103,284 | $ | 107,516 | ||||||||
| EPS | ||||||||||||||||
| - Basic | $ | 0.77 | $ | 0.76 | $ | 0.72 | $ | 0.75 | ||||||||
| - Diluted | $ | 0.76 | $ | 0.76 | $ | 0.71 | $ | 0.74 | ||||||||
| Weighted-average number of shares outstanding | ||||||||||||||||
| - Basic | 144,166 | 144,122 | 144,101 | 143,958 | ||||||||||||
| - Diluted | 145,428 | 145,238 | 145,078 | 144,803 | ||||||||||||
| Cash dividends declared per common share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
On January 25, 2018,28, 2021, the Company’s Board of Directors declared first quarter 20182021 cash dividends for the Company’s common stock. The common stock cash dividend of $0.20$0.33 per share was paid on February 15, 201823, 2021 to stockholders of record as of February 5, 2018.9, 2021.
168
Supplementary Data
Quarterly Financial Information (Unaudited)
| ($ and shares in thousands, except per share data) | 2020 Quarters | |||||||||||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||||||||||||
| Interest and dividend income | $ | 381,348 | $ | 365,728 | $ | 398,776 | $ | 449,190 | ||||||||||||||||||
| Interest expense | 34,767 | 41,598 | 55,001 | 86,483 | ||||||||||||||||||||||
| Net interest income before provision for credit losses | 346,581 | 324,130 | 343,775 | 362,707 | ||||||||||||||||||||||
| Provision for credit losses | 24,340 | 10,000 | 102,443 | 73,870 | ||||||||||||||||||||||
| Net interest income after provision for credit losses | 322,241 | 314,130 | 241,332 | 288,837 | ||||||||||||||||||||||
| Noninterest income | 69,832 | 54,503 | 55,707 | 55,505 | ||||||||||||||||||||||
| Noninterest expense | 178,651 | 172,573 | 184,766 | 180,332 | ||||||||||||||||||||||
| Income before income taxes | 213,422 | 196,060 | 112,273 | 164,010 | ||||||||||||||||||||||
| Income tax expense | 49,338 | 36,523 | 12,921 | 19,186 | ||||||||||||||||||||||
| Net income | $ | 164,084 | $ | 159,537 | $ | 99,352 | $ | 144,824 | ||||||||||||||||||
| EPS | ||||||||||||||||||||||||||
| - Basic | $ | 1.16 | $ | 1.13 | $ | 0.70 | $ | 1.00 | ||||||||||||||||||
| - Diluted | $ | 1.15 | $ | 1.12 | $ | 0.70 | $ | 1.00 | ||||||||||||||||||
| Weighted-average number of shares outstanding | ||||||||||||||||||||||||||
| - Basic | 141,564 | 141,498 | 141,486 | 144,814 | ||||||||||||||||||||||
| - Diluted | 142,529 | 142,043 | 141,827 | 145,285 | ||||||||||||||||||||||
| ($ and shares in thousands, except per share data) | 2019 Quarters | |||||||||||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||||||||||||
| Interest and dividend income | $ | 467,233 | $ | 476,912 | $ | 474,844 | $ | 463,311 | ||||||||||||||||||
| Interest expense | 99,014 | 107,105 | 107,518 | 100,850 | ||||||||||||||||||||||
| Net interest income before provision for credit losses | 368,219 | 369,807 | 367,326 | 362,461 | ||||||||||||||||||||||
| Provision for credit losses | 18,577 | 38,284 | 19,245 | 22,579 | ||||||||||||||||||||||
| Net interest income after provision for credit losses | 349,642 | 331,523 | 348,081 | 339,882 | ||||||||||||||||||||||
| Noninterest income | 65,797 | 55,349 | 56,519 | 44,580 | ||||||||||||||||||||||
| Noninterest expense | 196,157 | 180,505 | 181,423 | 189,371 | ||||||||||||||||||||||
| Income before income taxes | 219,282 | 206,367 | 223,177 | 195,091 | ||||||||||||||||||||||
| Income tax expense | 31,067 | 34,951 | 72,797 | 31,067 | ||||||||||||||||||||||
| Net income | $ | 188,215 | $ | 171,416 | $ | 150,380 | $ | 164,024 | ||||||||||||||||||
| EPS | ||||||||||||||||||||||||||
| - Basic | $ | 1.29 | $ | 1.18 | $ | 1.03 | $ | 1.13 | ||||||||||||||||||
| - Diluted | $ | 1.29 | $ | 1.17 | $ | 1.03 | $ | 1.12 | ||||||||||||||||||
| Weighted-average number of shares outstanding | ||||||||||||||||||||||||||
| - Basic | 145,624 | 145,559 | 145,546 | 145,256 | ||||||||||||||||||||||
| - Diluted | 146,318 | 146,120 | 146,052 | 145,921 | ||||||||||||||||||||||
169
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2017,2020, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.2020.
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (“SEC”). The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 20172020 using the criteria set forth in Internal Control — Integrated Framework2013 issued by the Committee of Sponsoring OrganizationsOrganization of the Treadway Commission (“COSO”).Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.2020.
Changes in Internal Control over Financial Reporting
There have beenwere no changes in the Company’s internal control over financial reporting during the yearquarter ended December 31, 2017,2020, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
KPMG LLP, the independent registered public accounting firm that audited the Company’s Consolidated Financial Statements, issued an audit report on the effectiveness of internal control over financial reporting as of December 31, 2017.2020. The audit report is presented on the following page.
170
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
East West Bancorp, Inc.:
Opinion on Internal Control overOver Financial Reporting
We have audited East West Bancorp, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 20172020 and 2016,2019, 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, 2017,2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 27, 201826, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMG LLP
Los Angeles, California
February 27, 201826, 2021
171
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our Executive Officers of the Registrant
The following table presents the Company’s executive officers’ names, ages, positions and offices, and business experience during the last five years as of February 27, 2018.26, 2021. There is no family relationship between any of the Company’s executive officers or directors. Each officer is appointed by the Board of Directors of the Company or the Bank and serves at their pleasure.
| Name | Age (1) | Positions and Offices, and Business Experience | ||||||||||||||||||
| Dominic Ng | Chairman and Chief Executive Officer of the Company and the Bank since 1992. | |||||||||||||||||||
| Douglas P. Krause | 64 | Vice Chairman and Chief | ||||||||||||||||||
| Irene H. Oh | Executive Vice President and Chief Financial Officer of the Company and the Bank since 2010. | |||||||||||||||||||
| Andy Yen | Executive Vice President and Head of International and Commercial Banking since | |||||||||||||||||||
| Gary Teo | 48 | Senior Vice President and | ||||||||||||||||||
(1)As of February 26, 2021.
Code of EthicsConduct
The Company has adopted a code of ethicsconduct that applies to its principal executive officer, principal financial and accounting officer, controller, and persons performing similar functions. The code of ethicsconduct is posted on the Company’s website at www.eastwestbank.com/govdocs.govdocs. Any amendments to, or waivers from, the Company’s Code of Conduct will be disclosed on the Company’s website at http://investor.eastwestbank.com.
The other information required by this item will be set forth in the following sections of the Company’s definitive proxy statement for its 20182021 Annual Meeting of Shareholders (the “2018“2021 Proxy Statement”), which will be filed with the SEC pursuant to Regulation 14A within 120 days of the Company’s fiscal year ended December 31, 20172020 and this information is incorporated herein by reference:
•Summary Information Aboutabout Director Nominees
•Board of Directors and Nominees
•Director Nominee Qualifications and Experience
•Director Independence, Financial Experts and Risk Management Experience
•Board Leadership Structure and
•Board Meetings and Committees under the heading “Proposal 1: Election of Directors”
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company’s executive compensation is included in the 2018 Proxy Statementwill be set forth in the following sections “Director Compensation” underof the heading “Proposal 1 : Election of Directors”2021 Proxy Statement and “this information is incorporated herein by reference:
•Director Compensation
•Compensation Discussion and Analysis” and “Report by Compensation Committee” under the heading “ Compensation of Executive Officers.” The information is incorporated into this item by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management not otherwise included herein is incorporated by reference towill be set forth in the 20182021 Proxy Statement under the heading “Stock Ownership of Principal Stockholders, Directors and Management.Management” and this information is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth the total number of shares available for issuance under the Company’s employee equity compensation plans as of December 31, 2017:2020:
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options | Weighted-Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans | ||||||||||||||||||||
| Equity compensation plans approved by security holders | — | $ | — | 2,767,391 | (1) | ||||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||||||||||||||
| Total | — | $ | — | 2,767,391 | |||||||||||||||||||
(1)Represents future shares available under the shareholder-approved 2016 Stock Incentive Plan effective May 24, 2016.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions is includedwill be set forth in the 2018following sections of the 2021 Proxy Statement under the section “and this information is incorporated herein by reference:
•Director Independence, Financial Experts and Risk Management Experience” with the heading “Proposal 1: Election of Directors.” The information is incorporated into this item by reference.Experience
•Certain Relationships and Related Transactions
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is includedwill be set forth in the 20182021 Proxy Statement inunder the following section heading “Proposal 3: Ratification of Auditors.” TheAuditors” and this information is incorporated into this itemherein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1)Financial Statements
The following financial statements of East West Bancorp, Inc. and its subsidiaries, and the auditor’s report thereon are filed as part of this report under Item 8. Financial Statements and Supplementary Data:
| Page | |||||
(2)Financial Statement Schedules
All financial statement schedules for East West Bancorp, Inc. and its subsidiaries have been included onin this Form 10-K in the Consolidated Financial Statements or the related footnotes, or they are either inapplicable or not required.
(3)Exhibits
A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated into this item by reference.
below.
| Exhibit Description | ||||||||
| 3.1 | ||||||||
| 3.1.1 | ||||||||
| 3.1.2 | ||||||||
| 3.1.3 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 10.1.1 | ||||||||
| 10.1.2 | ||||||||
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| 10.1.4 | ||||||||
| 10.1.5 | ||||||||
| 10.2.1 | ||||||||
| 10.2.2 | ||||||||
| 10.2.4 | ||||||||
| 10.2.5 | ||||||||
| 10.3 | ||||||||
| 10.4.1 | ||||||||
| 10.4.2 | ||||||||
| 10.4.3 | ||||||||
| 10.5.1 | ||||||||
| 10.5.2 | ||||||||
| 10.5.3 | ||||||||
| 10.6.1 | ||||||||
| 10.6.2 | ||||||||
| 10.6.3 | ||||||||
| 10.7.2 | ||||||||
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| 10.7.3 | ||||||||
| 10.7.4 | ||||||||
| 10.7.5 | ||||||||
| 10.7.6 | ||||||||
| 10.7.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 23.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. Filed herewith. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. | |||||||
| 104 | Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith). Filed herewith. | |||||||
| * Denotes management contract or compensatory plan or arrangement. | ||||||||
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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GLOSSARY OF ACRONYMS
| AFS | Available-for-sale | HELOC | Home equity line of credit | ||||||||
| ALCO | Asset/Liability Committee | IBA | ICE Benchmark Administration | ||||||||
| AML | Anti-money laundering | IRS | Internal Revenue Service | ||||||||
| AOCI | Accumulated other comprehensive income (loss) | ISDA | International Swaps and Derivatives Association, Inc. | ||||||||
| ARRC | Alternative Reference Rates Committee | KRX | Keefe, Bruyette and Woods Nasdaq Regional Banking Index | ||||||||
| ASC | Accounting Standards Codification | LCH | London Clearing House | ||||||||
| ASU | Accounting Standards Update | LGD | Loss given default | ||||||||
| BHC Act | Bank Holding Company Act of 1956, as amended | LIBOR | London Interbank Offered Rate | ||||||||
| BSA | Bank Secrecy Act | LTV | Loan-to-value | ||||||||
| C&I | Commercial and industrial | MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| CAA | Consolidated Appropriations Act, 2021 | MMBTU | Million British thermal unit | ||||||||
| CAP | Compliance Assurance Process | MMLF | Money Market Mutual Fund Liquidity Facility | ||||||||
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | Moody's | Moody’s Investors Service | ||||||||
| CCPA | California Consumer Privacy Act | MOU | Memorandum of Understanding | ||||||||
| CECL | Current expected credit losses | MSLP | Main Street Lending Program | ||||||||
| CET1 | Common Equity Tier 1 | NAV | Net asset value | ||||||||
| CFPB | Consumer Financial Protection Bureau | NOL | Net operating losses | ||||||||
| CLO | Collateralized loan obligation | OFAC | Office of Foreign Assets Control | ||||||||
| CME | Chicago Mercantile Exchange | OREO | Other real estate owned | ||||||||
| COVID-19 | Coronavirus Disease 2019 | OTTI | Other-than-temporary impairment | ||||||||
| CRA | Community Reinvestment Act | PCA | Prompt Corrective Action | ||||||||
| CRE | Commercial real estate | PCD | Purchased credit deteriorated | ||||||||
| DCB | Desert Community Bank | PCI | Purchased credit impaired | ||||||||
| DFPI | California Department of Financial Protection and Innovation | PD | Probability of default | ||||||||
| DIF | Deposit Insurance Fund | PPP | Paycheck Protection Program | ||||||||
| E&P | Exploration and production | PPPLF | Paycheck Protection Program Liquidity Facility | ||||||||
| EGRRCPA | Economic Growth, Regulatory Relief, and Consumer Protection Act | RMB | Chinese Renminbi | ||||||||
| EPS | Earnings per share | ROA | Return on average assets | ||||||||
| ERM | Enterprise risk management | ROE | Return on average equity | ||||||||
| EVE | Economic value of equity | RPA | Credit risk participation agreement | ||||||||
| FASB | Financial Accounting Standards Board | RSU | Restricted stock unit | ||||||||
| FBI | Federal Bureau of Investigation | S&P | Standard & Poor's | ||||||||
| FCA | Financial Conduct Authority | SBA | Small Business Administration | ||||||||
| FDIA | Federal Deposit Insurance Act | SBLC | Standby letter of credit | ||||||||
| FDIC | Federal Deposit Insurance Corporation | SEC | U.S. Securities and Exchange Commission | ||||||||
| FFIEC | Federal Financial Institutions Examination Council | SERP | Supplemental Executive Retirement Plan | ||||||||
| FHLB | Federal Home Loan Bank | SOFR | Secured Overnight Financing Rate | ||||||||
| FOMC | Federal Open Market Committee | TDR | Troubled debt restructuring | ||||||||
| FRBSF | Federal Reserve Bank of San Francisco | U.K. | United Kingdom | ||||||||
| FTP | Funds transfer pricing | U.S. | United States | ||||||||
| GAAP | United States Generally Accepted Accounting Principles | USD | U.S. Dollar | ||||||||
| GLBA | Gramm-Leach-Bliley Act of 1999 | VIE | Variable interest entity | ||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: | February 26, 2021 | |||||||||||||
| EAST WEST BANCORP, INC. (Registrant) | ||||||||||||||
| By | /s/ DOMINIC NG | |||||||||||||
| Dominic Ng | ||||||||||||||
| Chairman and Chief Executive Officer | ||||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ DOMINIC NG | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | February 26, 2021 | ||||||||||||
| Dominic Ng | ||||||||||||||
| /s/ IRENE H. OH | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February 26, 2021 | ||||||||||||
| Irene H. Oh | ||||||||||||||
| /s/ MOLLY CAMPBELL | Director | February 26, 2021 | ||||||||||||
| Molly Campbell | ||||||||||||||
| /s/ IRIS S. CHAN | Director | February 26, 2021 | ||||||||||||
| Iris S. Chan | ||||||||||||||
| /s/ ARCHANA DESKUS | Director | February 26, 2021 | ||||||||||||
| Archana Deskus | ||||||||||||||
| /s/ RUDOLPH I. ESTRADA | Lead Director | February 26, 2021 | ||||||||||||
| Rudolph I. Estrada | ||||||||||||||
| /s/ PAUL H. IRVING | Director | February 26, 2021 | ||||||||||||
| Paul H. Irving | ||||||||||||||
| /s/ JACK C. LIU | Director | February 26, 2021 | ||||||||||||
| Jack C. Liu | ||||||||||||||
| /s/ LESTER M. SUSSMAN | Director | February 26, 2021 | ||||||||||||
| Lester M. Sussman | ||||||||||||||
178